**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**




**FORM 10-K**




**Annual
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934**




***For
      the fiscal year ended June 30, 2006***




**Commission
      File Number:** **001-32736**




**American
      Telecom Services, Inc.**


***(Exact
      name of Registrant as specified in its charter)***




**Delaware**
            **77-0602480*****(State
                of incorporation***
            **(I.R.S.
                Employer**
              **Identification
                Number)**




**2466
      Peck Road**


**City
      of Industry, California 90601**


**(Address
      of Principal Executive Offices)**


***Registrant’s
      Telephone Number: (562) 692*** **-3869**




**Securities
      registered pursuant to Section 12(b) of the Exchange
      Act:**




**Title
                of Each Class**
            **Name
                of Each Exchange on Which Registered****Common
                Stock, par value $0.001 per share**
              **Redeemable
                common stock purchase warrants expiring January 31,
                2011**
            **American
                Stock Exchange**
              **American
                Stock Exchange**


**Securities
      registered pursuant to Section 12(g) of the Exchange Act:
      None**




Indicate
      by check mark if the Registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act of 1933.  Yes 
      o No 
      x




Indicate
      by check mark if the Registrant is not required to file pursuant to
      Section 13 or Section 15(d) of the Exchange Act.  Yes 
      o  No 
      x




Indicate
      by check mark whether the Registrant (1) has filed all reports required to
      be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
      months (or for such shorter period that the Registrant was required to file
      such
      reports), and (2) has been subject to such filing requirements for the past
      90 days.  Yes 
      x No 
      o




Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the
      best of the Registrant’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-K or any
      amendment to this Form 10-K.  o




Indicate
      by check mark whether the Registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer” in Rule 12b-2 of the Exchange Act. (Check one):




o  
Large
                accelerated filer
            o  
                Accelerated filer
            xNon-accelerated
                filer




Indicate
      by check mark whether the Registrant is a shell company (as defined in
      Rule 12b-2 of the Exchange Act).  Yes 
      o No 
      x




As
      of
      December 31, 2005, the aggregate market value of the common stock of the
      Registrant held by non-affiliates of the Registrant was: Not applicable as
      there
      was no market for the Registrant’s common stock as of December 31,
      2005.




As
      of
      September 21, 2006 there were outstanding 6,502,740 shares of common
      stock.










**TABLE
      OF CONTENTS**




PART
                  I
              
              1Item 1
              Business
              1Item 1A
              Risk
                  Factors
              10Item 1B.
              Unresolved
                  Staff Comments
              17Item 2.
              Properties
              17Item 3.
              Legal
                  Proceedings
              18Item 4.
              Submission
                  of Matters to a Vote of Security Holders
              18PART
                  II
              
              19Item 5.
              Market
                  for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                  Purchases of Equity Securities
              19Item 6.
              Selected
                  Financial Data:
              20Item 7.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operation
              21Item 8.
              Financial
                  Statements and Supplementary Data
              29Item 9.
              Changes
                  in and Disagreements With Accountants on Accounting and Financial
                  Disclosure
              30Item 9A.
              Controls
                  and Procedures
              30Item 9B.
              Other
                  Information
              30PART
                  III
              
              31Item 10.
              Directors
                  and Executive Officers of the Registrant
              31Item 11.
              Executive
                  Compensation
              34Item 12.
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters
              36Item 13.
              Certain
                  Relationships and Related Transactions
              37Item 14.
              Principal
                  Accounting Fees and Services
              39PART
                  IV
              
              41Item 15.
              Exhibits
                  and Financial Statement Schedules
              41




**Cautionary
      Statement Regarding Forward-Looking Statements**




You
      should carefully review the information contained in this Annual Report and
      in
      other reports or documents that we file from time to time with the Securities
      and Exchange Commission (the “SEC”). In this Annual Report, we state our beliefs
      of future events and of our future financial performance. In some cases, you
      can
      identify those so-called “forward-looking statements” by words such as “may,”
“will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,”
“predicts,” “potential,” or “continue” or the negative of those words and other
      comparable words. You should be aware that those statements are only our
      predictions. Actual events or results may differ materially. Factors that could
      cause actual results to differ from those contained in the forward-looking
      statements include: we only recently commenced our commercial operations; the
      agreements with the strategic partners that provide the communications services
      accessible through our phones require us to meet certain minimum requirements,
      which, if not met, could lead to our loss of certain material rights; our
      failure to quickly and positively distinguish our phone/service bundles from
      other available communications solutions could limit the adoption curve
      associated with their market acceptance and negatively affect our operations;
      and the other risks and uncertainties discussed in Annual Report and other
      reports or documents that we file from time to time with the SEC. Statements
      included in this Annual Report are based upon information known to us as of
      the
      date that this Annual Report is filed with the SEC, and we assume no obligation
      to update or alter our forward-looking statements made in this Annual Report,
      whether as a result of new information, future events or otherwise, except
      as
      otherwise required by applicable federal securities laws.




-i-


**PART
      I**




**Item
              1**
            **Business**




**General**




We
      currently offer broadband phone (Voice-over-Internet-Protocol or “VoIP”) and
      prepaid long distance communications services that are bundled with our digital,
      cordless multi-handset phones. We sell our phone/service bundles through major
      retailers under our “American Telecom”, “ATS”, “Pay N’ Talk” or “Digital Clear”
brand names. Our telecom platform is designed to enable seamless access to
      the
      communications services provided by our strategic partners. Our strategic
      partners include SunRocket, Inc., a growing provider of VoIP services, for
      our
      VoIP service offering, and IDT Corporation, an established communications
      carrier for our prepaid long distance service offerings. Under the agreements
      with each of these service providers, we receive a percentage of their monthly
      service revenues generated by users of our service offerings, in addition to
      the
      revenues we generate through the sale of our phone hardware. We are initially
      targeting the U.S. residential and small office/home office (“SOHO”)
      markets.




Since
      our
      formation in 2003, we devoted our resources to creating our initial
      phone/service bundles and establishing contractual relationships with our
      strategic communications services and manufacturing partners. We commenced
      our
      initial marketing efforts in 2005, focusing on securing approved vendor status
      with numerous national and regional retail channels. We received our initial
      purchase orders in September 2005 and shipments of our phones began arriving
      in
      retail stores in October 2005. Subsequent to September 2005 we received
      additional purchase orders and began fulfilling these orders in October
      2005.




On
      February 6, 2006 we completed our initial public offering of 3,350,000
      shares of common stock and 3,350,000 redeemable warrants. Additionally, in
      March
      2006 we issued an additional 402,500 shares of common stock and 502,500
      redeemable warrants upon the exercise of the over-allotment option by the
      underwriters. Each redeemable warrant entitles the holder to purchase one share
      of our common stock at a price of $5.05 per share. Our gross proceeds from
      our
      initial public offering totaled approximately $19.1 million. We incurred
      approximately $2.5 million in underwriting and other expenses in connection
      with
      the initial public offering, resulting in net proceeds of approximately $16.6
      million. We are utilizing the net proceeds of the initial public offering to
      continue and expand commercial distribution of our phone/service bundles,
      develop and enhance product and service features and expand our contract
      manufacturing, sales and marketing capabilities and to generally fund our
      operations.




We
      recognized net revenues of $3,100,177 and incurred cost of revenues of
      $1,801,565 during the year ended June 30, 2006, substantially all of which
      was attributable to the sale of our prepaid long distance phone/service bundles.
      Our selling, general and administrative expenses and other expenses during
      the
      year ended June 30, 2006 were $7,036,658 in the aggregate, inclusive of
      $2,326,519 of expenses related to interest, amortization of debt discounts
      and
      amortization of debt issuance costs.




We
      were
      incorporated under the laws of the State of Delaware on June 16, 2003. Our
      principal offices are located at 2466 Peck Road, City of Industry, California,
      90601 and our telephone number is (562) 908-1287.




**Industry
      Overview**




The
      residential and SOHO communications service markets are characterized by a
      demand for cost-efficient and feature-added communications services. We believe
      that consumers in this marketplace readily seek to avail themselves of
      technologies and solutions that:




·
            drive
                down and/or control their communications costs;
                and




·
            serve
                to enhance their quality of life and
                productivity.




*VoIP
      Services*




VoIP
      is a
      technology that can be used instead of the traditional phone network for the
      delivery of voice-based communications services. VoIP technology translates
      voice into data packets, transmits the packets over data




1




networks,
      including the Internet, and converts the data packets into voice at the
      destination. Unlike traditional phone networks, VoIP does not use dedicated
      circuits for each phone call; instead, the same VoIP network can be shared
      by
      multiple users for voice, data and video simultaneously.




The
      VoIP
      industry has grown dramatically from the early days of calls made through
      personal computers. We believe that the growth of VoIP will continue to be
      driven primarily by:




·
            increasing
                consumer demand worldwide for lower cost phone
                service;




·
            improving
                quality and reliability of VoIP calls fueled by technological advances,
                increased network development and greater bandwidth
                capacity;




·
            continuing
                domestic and international deregulation, opening new market opportunities
                for VoIP services;




·
            new
                product innovations that allow VoIP providers to offer services not
                currently offered by traditional phone service companies;
                and




·
            growing
                demand for long distance communication services driven by the increased
                mobility of the global workforce.




*Prepaid
      Long Distance Services*




Prepaid
      long distance services, such as those available via debit and rechargeable
      calling cards, are well established and used throughout the world. We believe
      consumers that typically use prepaid long distance services as their primary
      means of making long distance phone calls do so because of the competitive
      rates
      and reliable service afforded thereby and because such prepaid services afford
      easy monitoring and budgeting of long distance spending.




**Our
      Phones and Services**




*Our
      VoIP Offering*




Our
      broadband phone/service bundle provides customers with a multi-handset,
      plug-and-play, broadband phone, a phone number and VoIP-based communications
      services, including inbound and outbound local calling service, long distance
      service, enhanced 911 emergency calling (which routes calls directly to
      emergency operators along with caller address information and automatic phone
      number identification) and other standard and competitive services.




Our
      VoIP
      services in the United States are provided by SunRocket. SunRocket is a VoIP
      communications service provider founded by former executives of MCI, Inc. Under
      the terms of our agreement with SunRocket, purchasers of our broadband phones
      are offered an exclusive, low-cost rate plan. Our customers are offered low-cost
      rate plans marketed by SunRocket to its customers. We receive an agreed-upon
      percentage of SunRocket’s monthly service revenues generated by users of our
      broadband phones, whether our customers utilize the exclusive plan offered
      us by
      SunRocket or another SunRocket plan.




Most
      currently available VoIP services require a combination of an adapter, modem
      and/or router and often require cable companies and other service providers
      to
      engage in varying degrees of rewiring in the customer location in order for
      the
      VoIP service to be accessible throughout such location. However, our broadband
      phone, like other leading edge VoIP hardware, is plugged directly into a
      customer’s Internet router, without use of an adapter or additional hardware,
      and does not require any complex rewiring. Most models include a router
      eliminating the need for another device. Our broadband phone may be used in
      rooms other than those with an Internet connection by carrying the wireless
      handset from room to room in the same manner as traditional cordless phones.
      Our
      multi-handset design allows customers to add additional handsets to their system
      and situate extensions in other rooms without any rewiring.




2




Our
      VoIP
      phone/service bundle can easily be installed by customers, requires no
      installation appointments with the cable company or other service provider
      and
      provides services at what we believe are among the lowest rates currently
      available. In summary, our phones do not require peripheral computer equipment
      and are therefore simpler and typically cheaper. Since our phones do not require
      additional equipment, consumers can purchase our entire hardware package in
      the
      phone section of a department store rather than having to make purchases in
      multiple departments. In addition, we offer a specialized sub-$10 monthly
      service plan as well as a service plan with an annual or monthly fee.
      Accordingly, we believe our VoIP phone/service bundle represents one of the
      easiest and most cost-efficient means for customers to acquire VoIP
      service.




The
      multi-handset design allows customers to add additional handsets to their system
      with no additional wiring. The additional handsets communicate with the master
      handset’s base unit and only require an AC outlet for their base charger. In the
      future, we expect to have other broadband phones. We expect that these
      additional phones may include such features as an integrated router, additional
      ports for external phones and fax machines, Wi-Fi technologies and other
      technologies to simplify further the broadband phone experience of our
      customers.




*Our
      Prepaid Long-Distance Offering*




Our
      phones that are bundled with long distance service are marketed in the United
      States under the brand “Pay N’ Talk.” Prepaid long distance service on these
      phones is accessible, on demand, with the press of the LDS (Long Distance
      Service) auto-key on the handset dial pad. This process provides the user with
      an immediate and seamless connection to prepaid long distance services provided
      by IDT. As a promotion, we provide a specified number of initial minutes of
      long
      distance service at no additional charge to the customer as part of the
      phone/service bundle. Our LDS feature differentiates our phones from others
      on
      the market by providing a simplistic and specially designed process for making
      long distance calls at a low flat rate.




Under
      our
      agreement with IDT, prepaid long distance service is offered to our customers
      at
      a current rate of 3.9 cents per minute for domestic calls, inclusive of all
      fees
      and taxes. International calling is available at low, competitive per-minute
      rates under a rate plan that IDT created for our customers. Through IDT, our
      customers are able to purchase a specified number of minutes or create an
      automatic recharge account by which additional minutes are added whenever their
      account balance falls below pre-set limits.




Following
      activation, the customer is able to make long distance calls at no additional
      charge until the promotion balance reaches zero. The customer has the option
      of
      adding a cash value to their account using a credit card or checking account,
      and IDT gives the customer the ability to set an automatic recharge for their
      account at a pre-set value each time their account balance falls below a pre-set
      limit, in addition to pay-on-demand.




Each
      time
      the customer chooses to make a long distance call they simply press the LDS
      auto-key on our phone. When the customer presses the LDS auto-key, the phone
      goes off-hook producing a dial-tone and the customer is instantly and seamlessly
      connected to the IDT prepaid platform. At that point, the customer is able
      to
      make a call to the extent that the customer has a positive account balance.
      Whenever customer balances are low, they are prompted to recharge their account
      and directed to the platform or a live operator to process their payment. This
      is an optional service that does not require the users to change their long
      distance carriers.




**Strategic
      Service Providers**




*SunRocket*




We
      have
      an agreement with SunRocket under which SunRocket provides users of our
      broadband phones with VoIP communications services. Under our agreement with
      SunRocket, we design and configure our broadband phones to work with SunRocket’s
      VoIP communications services and have been granted the right to include, at
      our
      option, SunRocket’s marks and logos on our broadband phones and/or related
      packaging and marketing materials. These VoIP phone/service bundles are marketed
      and distributed by us through mass market retail channels. During the term
      of
      this agreement, subject to certain conditions, SunRocket will not provide these
      services to any other manufacturer or distributor for use with cordless landline
      phones sold in specified retail outlets where our broadband phones are available
      or for which we have contracted for our broadband phones to be available.
      SunRocket will offer purchasers of these VoIP phone/service bundles at least
      a
      prescribed minimum number of different service plans at set rates.




3




For
      each
      VoIP services account activated by users of our broadband phones who remain
      active for a period of 31 days, we receive an initial payment of between $50
      and
      $90 from SunRocket. In addition, we receive ongoing monthly commissions of
      up to
      25% of the net revenues received by SunRocket from end users of our broadband
      phones, as well as certain retail marketing co-op fees and contributions for
      consumer rebates in prescribed circumstances. We have the right to designate
      numerous identified retailers as “strategic accounts.” In the event we designate
      one or more retailers as “strategic accounts,” we and SunRocket may each be
      obligated to commit to fund certain prescribed amounts for marketing activities
      in connection with such strategic accounts that we select.




The
      initial term of this agreement expires on November 22, 2008, being the
      third anniversary of the date of activation of the first account of an end
      user
      using one of these phones, or earlier in certain circumstances. We have the
      option to extend the term of this agreement for an additional one year if we
      deliver prescribed minimum service account activations during the initial
      term.




*IDT*




We
      have
      an agreement with an affiliate of IDT Puerto Rico & Co. under which IDT
      provides users of our prepaid long distance phone/service bundles with prepaid
      long distance communications services. During the term of this agreement, IDT
      will not provide these services to any other manufacturer or distributor for
      use
      with cordless landline phones sold in retail outlets where our phones are
      available or for which we have contracted for our phones to be available. Under
      our agreement with IDT, we design and configure these phones to work with IDT’s
      prepaid long distance communications services platform designed to our
      specifications and have been granted the royalty-free right to use IDT’s marks
      on related packaging and marketing materials. These bundled phone/prepaid long
      distance service offerings will be marketed and distributed by us in such manner
      and through such channels as we determine in our discretion. IDT will offer
      purchasers of these bundled phone/prepaid long distance service offerings
      calling rates which we believe to be among the lowest generally
      available.




Under
      the
      terms of this agreement, we have upfront payment obligations that we must make
      to IDT for promotional minutes upon activation of each customer account equal
      to
      75% of the total value of promotional minutes. IDT handles all customer service
      interaction, billing the customer for all services and remitting a portion
      of
      the net revenues to us on a regular basis. IDT is restricted from marketing
      any
      other services to our customers without our consent and cooperation, and we
      would expect to negotiate similar commission arrangements with respect to such
      other services in connection with giving our consent. We also must deliver
      at
      least 150,000 account activations by December 31, 2006, otherwise IDT will
      be entitled to, among other things, renegotiate or terminate the agreement.
      We
      retain the right to bundle similar communications services provided by other
      service providers with our phones. We receive 25% of IDT’s net monthly service
      revenues generated by users of our telephones.




The
      initial term of this agreement expires on the second anniversary of the date
      of
      activation of the first account of an end user using one of these phones, or
      earlier in certain circumstances. The agreement will automatically and
      continually renew for additional one-year periods unless terminated by either
      party by written notice given at least 30 days prior to the end of the then
      current term.




**Our
      Strategy**




We
      believe that currently there are a limited number of providers of bundled
      communications phone/service offerings through mass market retail. Our objective
      is to expand and become a leader in the market for converged
      communications/hardware solutions by combining our phones with attractively
      priced service offerings, thereby creating a compelling proposition for value
      purchasers. Key elements of our strategy include:




·
            developing
                high-quality end user communications hardware that enhances the
                accessibility and utility of the communications services with which
                our
                hardware is bundled;




·
            expanding
                our existing relationships with SunRocket and IDT by expanding the
                communications services that are bundled with our hardware, expanding
                our
                joint marketing initiatives and increasing the retail distribution
                channels which we provide;




·
            establishing
                relationships with other providers of communications services inside
                and
                outside of the United States;




4




·
            obtaining
                retail shelf space and Internet presence for our bundled communications
                phone/service offerings by utilizing our management’s broad retail
                experience and providing retailers the opportunity to share in our
                service
                revenues; and




·
            utilizing
                our management’s extensive manufacturing and sourcing experience
                (particularly in China) to expand and diversify our supplier base
                for
                phone hardware, services and technology in order to maximize cost
                efficiency and support the diversification of our bundled communications
                phone/service offerings.




Since
      we
      are seeking to introduce new phone/service bundled offerings into a rapidly
      evolving communications market, we may not be successful in implementing some
      or
      all of the elements of our strategy.




**Design
      and development**




*Phones*




Value-priced
      consumer electronics, including phones, typically have common technical
      features. Competition in this segment is therefore more dependent on product
      design, visual appeal and price. As such, we recognize that superior product
      design provides an important competitive advantage. We believe that, in addition
      to our bundled telecommunications services, the superior design and style of
      our
      phones distinguish them from those of our competitors in the value-priced
      category and help drive consumer purchasing decisions.




We
      believe that the enhancement and extension of our existing phones and the
      development of new phones will contribute to our future growth and will be
      necessary for our success. In cooperation with our manufacturers, we will
      regularly focus on product design. We also will evaluate new ideas and seek
      to
      develop new phones and improvements to existing phones to satisfy industry
      requirements and changing consumer preferences.




Our
      phones incorporate design and manufacturing specifications that adapt and
      implement available technology features in order to satisfy anticipated
      customers’ requirements for quality, product mix and pricing. We will work
      closely with both retailers and suppliers to identify trends in consumer
      preferences and to generate new product ideas as needed.




We
      also
      highlight the design and style features of our phones with detailed descriptions
      and illustrations on packaging, which we believe further distinguishes our
      phones from those of our competitors. We believe that this packaging strategy
      makes our phones more attractive to consumers and facilitates an understanding
      of the product features in retail locations where salespersons may not be
      available to provide detailed explanations and demonstrations.




We
      currently offer twelve traditional and five Internet VoIP phone
      models.




*Services*




We
      have
      worked with SunRocket to develop new rate plans for VoIP service and enhance
      their service offering and capability to service our customers.




We
      have
      similarly worked with IDT to design our Pay N’ Talk prepaid long distance
      phone/service bundles. An important part of this joint effort was the
      development of a rate plan for our customers that offered a unique value
      proposition when bundled with our phones. We and IDT have taken IDT’s key
      expertise in customer service and back office services, and IDT’s low long
      distance and international calling rates, and used them as the foundation for
      the Pay N’ Talk offering. IDT’s back office systems provides refined payment and
      usage fraud control systems, bilingual and highly scalable call center
      infrastructure and economies of scale that allow us to offer our customers
      rates
      that, at this time, are among the lowest available in the industry.




We
      expect
      that as our relationships with SunRocket and IDT progress, we will work closely
      with these service providers to develop new service offerings and marketing
      programs based on our hardware bundles with their communications service
      offerings.




5




**Sales
      and distribution**




Our
      initial marketing efforts have focused on securing approved vendor status with
      numerous national and regional retail channels. A vendor must obtain approved
      status before retailers will purchase from such vendor. To date, we have
      obtained approved vendor status from retailers such as Staples, Brooks/Eckerd,
      Target.com, Sears, OfficeDepot, Staples, QVC and Tiger Direct. The achieving
      of
      approved vendor status does not create an obligation on the part of the retailer
      to purchase our phone/service bundles or open their distribution channels to
      us.
      Our current customers include Staples, CVS, Target, Brooks/Eckerd, Sears, QVC
      and Tiger Direct, which, collectively, offer our product bundles for sale at
      approximately 9,000 locations.




We
      seek
      to sell our phone/service bundles to retailers in the following
      categories:




·
            Office
                superstores;




·
            Electronics
                stores;




·
            Drugstore
                chains;




·
            Do-it-yourself
                retailers;




·
            Mass
                retailers and department stores;




·
            Internet-based
                retail distribution outlets;




·
            Live
                shopping networks; and




·
            Direct
                marketers.




We
      offer
      some retailers a percentage of the service revenue commission we receive from
      our communications service providers and a percentage of the subscriber
      placement fees that we will receive from our VoIP service provider in connection
      with the purchase of VoIP services by users of our broadband phones. These
      payments to retailers will be in addition to any revenue they receive solely
      from the sale of our phones.




We
      are
      equipped to receive orders from our major accounts electronically or by the
      conventional modes of facsimile, phone, email or mail. Phones imported by us
      are
      shipped by ocean freight and stored in, and subsequently shipped to customers
      from, facilities maintained by Databyte Technology, Inc., an unaffiliated
      entity, which provides us with warehousing, distribution, customer support
      services and our executive offices under an agreement that will expire in
      October 2007, in exchange for two percent of our net sales (defined as our
      gross
      sales shipped and collected during a period less returns and allowances,
      cooperative advertising, promotional allowances, sales commissions and cash
      discounts) and our reimbursement of Databyte’s pre-approved actual packaging,
      customs, freight and toll-free telephone costs. If required, we may contract
      with public warehouse facilities. All product received by us are automatically
      updated into our inventory system.




**Marketing**




Our
      strategy is to initially gain entrance to new retail accounts with one or more
      phone/service bundles and thereafter introduce such accounts to additional
      phone/service bundles that we develop. Our goal is to become the primary
      supplier to retailers of phone/service bundles for the residential and SOHO
      markets.




Our
      retail accounts place advertisements that generally promote our brand names
      in
      newspapers and other publications, catalogs and flyers and by displaying
      point-of-purchase advertising. Under such co-op advertising arrangements, we
      generally pay the retailer a percentage of the retailer’s sales of our product
      bundles featured in such advertising. We market our product bundles to retailers
      at trade shows, including the Consumer Electronics Show held in Las Vegas,
      Nevada in January of each year. We also market our product bundles to consumers
      by means of direct response television and radio commercials. We expect that
      our
      service providers will continue to invest heavily in their brands. The brands
      of
      our service providers will appear in our retailers’ ads for our bundles, through
      their purchase of television ads, radio ads, print ads, billboard ads and
      mailers. Each of our service providers




6




has
      granted us the royalty-free use of its brand name. Some of our service providers
      also contribute to one or several hardware rebates, co-op advertising
      arrangements, as well as key-city advertising funds.




Future
      Marketing, our affiliate, assists in the development and execution of our
      marketing plans, manages our accounts, assists in our product development and
      handles our back-office customer functions. In addition, a portion of our sales
      will also be made through independent sales representatives who will receive
      sales commissions and work closely with our sales personnel.




**Manufacturing**




We
      are
      responsible for the final design and specifications of all of our phones. Actual
      assembly is performed by one or more of our five current independent
      manufacturers in accordance with specifications mandated by us. Our primary
      independent manufacturer is Giant International, a subsidiary of the Elite
      Group, which is located in China and has been manufacturing telecommunications
      phones for more than 25 years. The Elite Group develops and manufactures phones
      for many companies, including British Telecom, Motorola and Avaya. We may change
      suppliers from time to time as market conditions require. We expect that our
      suppliers will assemble phones with components that they purchase from third
      parties who manufacture these types of components. We have no agreements or
      arrangements with component suppliers. We believe that this is the standard
      method of operating and contracting for the manufacture of phones in the
      consumer electronics industry. During production, our employees coordinate
      with
      the independent manufacturers’ facilities to monitor and facilitate timely
      manufacture and delivery of phones produced to our specifications. Through
      Bruce
      Hahn, our Chief Executive Officer, and Yu Wen Ching, our President of
      Manufacturing and Sourcing (who has more than 25 years of manufacturing
      experience in Asia), we believe we have established good relationships with
      our
      contract manufacturer and component suppliers and believe that, absent unusual
      circumstances affecting the supply of materials or the demand on manufacturing
      time, the supply of phones will be available. We do not currently maintain
      long-term purchase contracts with manufacturers and operate principally on
      a
      purchase order basis. We may, however, enter into such long-term contracts
      in
      the future. The loss of our primary supplier could, in the short-term,
      materially and adversely affect our business until alternative supply
      arrangements could be secured.




**Quality
      Control**




We
      will
      employ and/or contract with a quality control inspector who inspects our phones
      before each shipment is sent from our manufacturers to ensure that such phones
      meet both our quality standards and industry standards. Additionally, our
      quality control team will randomly do a second quality control inspection when
      our phones arrive in the United States. If those persons conducting quality
      control for us believe that the tested phones do not meet our standards and
      industry standards, such phones will not be accepted by us for shipment to our
      customers and will be returned to the manufacturer.




**Product
      Returns and Warranty Claims**




We
      offer
      our customers a one-year warranty. We accept returns from our customers in
      accordance with customary industry practices. If an item is returned, we will
      generally not repair the item, but will generally return it to the manufacturer
      for either credit or exchange. We have the ability to return defective phones
      to
      the manufacturer for either credit or exchange.




**Backlog**




Orders
      on
      hand from customers at June 30, 2006 aggregated $2,382,396. We expect to
      ship substantially all of such orders by December 31, 2006. Management believes
      that if the proper funding is in place, backlog should not be a significant
      factor in our operations. Notwithstanding the foregoing, the ability of
      management to accurately estimate and provide for inventory requirements will
      be
      essential to the successful operation of our business.




**Intellectual
      property**




We
      have
      applied to register “Pay N’ Talk”, “Sweet Talk”, “Digital Clear” and “Digital
      Clear Voice” as trademarks. We have also applied for two patents for certain
      methodologies related to our prepaid long distance and broadband phone
      services.




7




**Regulation**




*Regulation
      of IP Telephony*




The
      use
      of the Internet and private Internet protocol (IP) networks to provide phone
      service is a relatively recent market development. While the provision of voice
      communication services over the Internet and private IP networks is currently
      permitted under United States law, some foreign countries have laws or
      regulations that may prohibit voice communications over the Internet or using
      private IP networks. Increased regulation of the Internet may slow its growth,
      particularly if many countries impose restrictive regulations. Increased
      regulation of the Internet and/or IP telephony providers or the prohibition
      of
      Internet and IP telephony in one or more countries, more aggressive enforcement
      of existing regulations in such countries or the failure of our network partners
      to comply with applicable regulations could materially adversely affect our
      business, financial condition, operating results and future
      prospects.




*United
      States Regulatory Environment*




We
      believe that, under United States law, based on specific regulatory
      classifications and recent regulatory decisions, the IP communications services
      that we will make available to purchasers of our broadband phones will
      constitute information services (as opposed to regulated telecommunications
      services). Therefore, such services are not currently regulated by the Federal
      Communications Commission (FCC) or state agencies charged with regulating
      telecommunications carriers. Nevertheless, aspects of the services we will
      make
      available may be subject to state or federal regulation, including regulation
      governing universal service funding, payment of access charges, disclosure
      of
      confidential communications and tax issues. We cannot assure you that such
      services will not be regulated in the future. Several efforts have been made
      or
      are currently being considered in the United States to enact federal legislation
      that would either regulate or exempt from regulation communications services
      provided over the Internet.




In
      addition, the FCC is currently considering reforms to universal service funding
      and may consider whether to impose various types of charges, other common
      carrier regulations and/or additional operational burdens upon some providers
      of
      Internet and IP telephony. On May 19, 2005, the FCC gave Internet phone
      companies four months to provide 911 service to their customers and ordered
      incumbent carriers to make emergency networks accessible to VoIP providers.
      The
      four-month period began from date of publication of the FCC’s order in the
      federal register in July 2005. SunRocket, our VoIP service provider, already
      provides such service to its customers. The FCC is also currently considering
      reforms to law-enforcement agency regulations and may consider whether to impose
      various types of charges, other common carrier regulations and/or additional
      operational burdens upon some providers of Internet and IP telephony. The FCC
      has stated that the development of new technologies, such as IP telephony,
      may
      increase the strain on universal service funding and emergency services
      provisioning and hinder law enforcement agencies activities. In that regard,
      the
      FCC is currently reviewing whether to extend universal service, emergency
      services provisioning, and/or law-enforcement agency assistance obligations
      to
      non-traditional providers such as facilities-based and non-facilities-based
      providers of broadband Internet services.




Several
      carriers have asked the FCC to make definitive rulings regarding the
      classification of their IP telephony services. In response to one of those
      requests, the FCC determined that a particular free, peer-to-peer IP application
      is an interstate information service. The FCC’s ruling applies only to that
      particular application and does not affect the regulatory classification of
      the
      services we offer. The FCC also has determined that IP-enabled services with
      certain characteristics are interstate services subject to federal jurisdiction,
      rather than state regulation. We cannot predict, however, that services we
      will
      make available to certain purchasers of our phones would be found by the FCC
      to
      meet the characteristics established by the FCC. In addition, the FCC has
      initiated a generic proceeding to investigate the legal and regulatory framework
      for all IP-enabled services, including IP telephony services. Thus, the
      regulatory classification issue is now before the FCC. Any ruling by the FCC
      on
      the regulatory considerations affecting Internet and IP telephony services
      will
      affect our operations and revenues.




If
      the
      FCC were to determine that certain services are subject to FCC regulations
      as
      telecommunications services, the FCC might require providers of Internet and
      IP
      telephony services to be subject to traditional common carrier regulation,
      make
      universal service contributions, implement new hardware and/or software to
      aid
      emergency services response and aid law enforcement agencies and/or pay access
      charges. It is also possible that the FCC may adopt a regulatory framework
      other
      than traditional common carrier regulation, which would apply to Internet and




8




IP
      telephony providers. Despite the FCC’s actions, state regulatory authorities may
      also retain jurisdiction to regulate the provision of, and impose charges on,
      intrastate Internet and IP telephony services. Several state regulatory
      authorities have initiated proceedings to examine the regulation of such. Many
      of the states that have looked at the regulation of IP telephony services have
      deferred consideration of the issue pending the outcome of the FCC’s
      proceedings.




However,
      at least one state has ordered that access charges apply to the termination
      of
      IP telephony calls provided by a particular carrier and another state has
      ordered an IP telephony provider to submit to state regulation. The latter
      decision later was overturned in federal district court and the district court’s
      decision was upheld by a federal court of appeals. Another federal district
      court also issued a preliminary injunction in response to another state’s
      attempt to force an IP telephony provider to submit to state regulation. A
      permanent injunction currently is being reviewed by the federal district court.
      In addition, several state commissions have participated in the FCC’s
      proceedings and have advocated imposing traditional common carrier regulation
      on
      Internet and IP telephony providers. Rulings by the state commissions on the
      regulatory considerations affecting Internet and IP telephony services could
      affect our operations and revenues.




*International
      Regulatory Environment*




The
      regulatory treatment of Internet and IP telephony outside of the United States
      varies widely from country to country. A number of countries that currently
      prohibit competition in the provision of voice telephony may also prohibit
      Internet and IP telephony. Other countries permit, but regulate, Internet and
      IP
      telephony. Some countries will evaluate proposed Internet and IP telephony
      service on a case-by-case basis and determine whether it should be regulated
      as
      a voice service or as another telecommunications service. Finally, in many
      countries Internet and IP telephony has not yet been addressed by legislation
      or
      regulatory action.




In
      2003,
      the European Commission adopted directives for a new framework for electronic
      communications regulation that, in part, attempt to harmonize the regulations
      that apply to services regardless of the technology used by the provider. Under
      the New Regulatory Framework, there is no distinction in regulation made based
      upon technology between switched or packet-based networks. As a result, some
      types of IP telephony services may be regulated like traditional telephony
      services while others may remain free from regulation. The European Commission
      currently is reviewing how IP telephony services fit into the New Regulatory
      Framework. Although it has been suggested that a “light touch” to regulation be
      taken, we cannot predict what future actions the European Commission and courts
      reviewing the New Regulatory Framework may take regarding IP telephony and
      related matters, or what impact, if any, such actions may have on our
      business.




We
      currently do not have any agreements to sell our phone/service bundles outside
      the United States.




*Electrical
      Safety Standards*




Most
      of
      our retailers (as well as several state and local authorities) will require
      that
      our phones meet the electrical safety standards of the Underwriters
      Laboratories, Inc. or ETL Testing Laboratories. We will ensure that all of
      our
      phones sold in the United States which require electrical safety approval are
      registered with the Underwriters Laboratories, Inc. or ETL Testing Laboratories.
      Our phones sold for use in the United States must be registered with and
      approved by the Federal Communications Commission. We do not anticipate
      experiencing any difficulty in satisfying such standards.




**Competition**




To
      our
      knowledge, we have no direct competitors that offer telephone equipment bundled
      with prepaid long distance service. We believe that providers of long distance
      telephone services, such as AT&T, MCI and Sprint, and providers of prepaid
      phone cards indirectly compete with our prepaid long distance phone/service
      bundles.




Through
      our phone/service bundles, we compete directly with providers of VoIP services,
      such as Vonage. Most currently available VoIP services require some combination
      of an adapter, modem and/or router and often require cable companies or other
      service providers to engage in varying degrees of rewiring in the customer
      location to establish VoIP service. Our cordless broadband phone, however,
      is
      plugged directly into a customer’s Internet




9




router
      or
      modem, without use of an adapter or additional hardware, and does not require
      any complex rewiring. Our VoIP phone/service bundle can easily be installed
      by
      customers and requires no installation appointments with the cable company
      or
      other service provider. Our broadband phone may be used in rooms other than
      those with an Internet connection by carrying the wireless handset from room
      to
      room in the same manner as traditional cordless phones. Our multi-handset design
      allows customers to add additional handsets to their system and place extensions
      in other rooms without any rewiring. SunRocket provides VoIP services at what
      we
      believe are among the lowest rates currently available. Accordingly, we believe
      our VoIP phone/service bundle represents one of the easiest and most
      cost-efficient means for customers to acquire VoIP service.




We
      seek
      to effectively compete on the basis of price, through the bundling of both
      phones and service and through our ability to secure access to retail sales
      and
      distribution channels. Accordingly, we have adopted a marketing strategy that
      targets the value-priced segment of the communications market, which is
      particularly price sensitive.




We
      believe that our ability to sell our phone/service bundles generally is
      dependent on our ability to secure shelf space at retailers, create and
      implement effective marketing plans, and manufacture and ship our phones at
      a
      cost that allows our phones to be offered to consumers at attractive retail
      prices. We compete with numerous other manufacturers and sellers of phone
      hardware for shelf space and consumer interest. Many of these competitors are
      well-established, have long-existing relationships with retailers and resources
      and brand recognition that is significantly greater than ours. Further, we
      believe that the quantity and breadth of phone choices has fueled and will
      continue to fuel downward pressure on phone prices. Many sellers of phones
      also
      will have the ability to subsidize pricing through their sales of other products
      and services. In addition, providers of communications services may elect to
      provide phone hardware free to users of their communications
      services.




We
      believe that our ability to sell our phone/service bundles also is dependent
      on
      the competitiveness of the services accessible through our phones. The
      communications services accessible through our phones will compete with the
      communications services offered by numerous other companies. Such other
      communications providers may offer better features, lower pricing or better
      quality services than ours. Many of the communications service providers with
      which we will compete control their own communications networks and over time
      will be able to reduce and control the costs of providing their services. Our
      VoIP service competes with both traditional phone services and VoIP services
      provided by other VoIP service providers. The companies currently offering
      or
      likely to offer VoIP services are cable companies, traditional phone companies
      and Internet service providers. These types of providers often will have the
      ability to subsidize the pricing of their services through their sales of other
      services. Some of these companies may offer their VoIP services free of charge
      in advertising-subsidized models or when packaged with other services they
      provide.




Many
      of
      our competitors in the industry have dominant market positions and are very
      well
      capitalized. Our competitors may introduce similar phone/service bundles. Our
      competitors may not rely on external financing or relationships with independent
      manufacturers or communications services providers to the same extent as our
      company, which could provide them with greater competitive flexibility.
      Furthermore, our competitors may have cost advantages depending on labor costs,
      currency exchange rates and other factors in the countries where their
      manufacturing operations take place, relative to the countries where our phones
      are manufactured.




**Employees**




As
      of
      June 30, 2006, we had 12 employees, including our executive officers. Of
      such 12 employees, 3, including one executive officer, reside in China.
      None of our employees are subject to collective bargaining agreements or
      represented by a union. We consider our relations with our employees to be
      good.


**Item
                1A**
              **Risk
                  Factors**




**Risks
      Related to our Business**




***We
      only recently commenced our commercial operations, have a very limited operating
      history.***




We
      were
      incorporated in June 2003 and only recently completed the development of
      our first phones and secured our initial strategic relationships with
      communications service and manufacturing service providers. We




10




have
      only
      recently received our first purchase orders and made initial shipments of our
      phones in September 2005. We generated revenues of $3,100,177 and $0,
      respectively, for the years ended June 30, 2006 and 2005. Revenue from the
      sales of our phones is recognized when title and risk of loss transfer to our
      retail customers in accordance with the terms of an agreement, assuming all
      other revenue recognition criteria are met based on our revenue policy. We
      have
      a very limited operating history upon which you can evaluate our business
      strategy or future prospects. Our ability to generate revenues going forward
      that are capable of supporting our operations without financing sources will
      depend on whether we can successfully commercialize our phones and make the
      transition from a development stage company to an operating company. We may not
      achieve and/or sustain profitability. As we operate in a rapidly evolving
      industry, we may encounter many expenses, delays, problems and difficulties
      that
      we have not anticipated and for which we have not planned.




***The
      agreement with one of our strategic partners that provide the communications
      services accessible through our phones require us to meet certain minimum
      requirements, which, if not met, could lead to our loss of certain material
      rights.***




Under
      our
      agreement with IDT, users of our phones must activate at least 150,000 accounts
      by December31, 2006. If we do not meet this requirement, IDT, in its discretion,
      may terminate our agreement or renegotiate its terms. Although arrangements
      similar to those we currently have with our strategic partners may be readily
      available from other communications providers, we cannot assure you that we
      would be able to secure such alternate arrangements on a timely basis or at
      all
      or efficiently configure our phones to work seamlessly with such services.
      Our
      failure to maintain our agreement with IDT or to secure alternate arrangements
      with other communications service providers if needed on substantially similar
      terms could materially adversely affect our ability to favorably price our
      offerings to customers and could harm our operating margins and financial
      results.




***If
      we are unable to effectively manage the transition from development stage to
      commercial operations, our financial results will be negatively
      affected.***




For
      the
      period from our inception in June 2003 through June 30, 2006, we have
      incurred aggregate net losses of $5,933,352, inclusive of a non-cash charges
      of
      $2,424,366 resulting from the amortization of the carrying value of the original
      issue discount due to the immediate conversion upon our initial public offering
      of the notes issued in our prior private placements into shares of common stock
      and the amortization of the carrying value of debt issuance costs. Our losses
      are expected to increase in the short term as we commence full scale
      manufacturing, marketing and deployment of our phone/service bundles and
      transition from a development stage company to an operating company. As we
      make
      such transition, we expect our business to grow significantly in size and
      complexity. This growth is expected to place significant additional demands
      on
      our management, systems, internal controls and financial and physical resources.
      As a result, we will need to expend additional funds to secure necessary assets
      and hire additional qualified personnel for our marketing activities, for the
      development of appropriate control systems and for the expansion of our
      information technology and operating infrastructures. Our inability to secure
      additional resources and personnel, as and when needed, or manage our growth
      effectively, if and when it occurs, would significantly hinder our transition
      to
      an operating company, as well as diminish our prospects of generating revenues
      and, ultimately, achieving profitability.




***Our
      failure to quickly and positively distinguish our phone/service bundles from
      other available communications solutions could limit the adoption curve
      associated with their market acceptance and negatively affect our
      operations.***




We
      may be
      slow to achieve, or may never achieve, market acceptance for our phone/service
      bundles. Failure to distinguish our phones and services from competing
      communications solutions would hinder market acceptance of our phone/service
      bundles. Meaningful numbers of customers may not be willing to adopt our phones
      and services until they have been proven, both initially and over time, to
      be
      viable communications solutions. There is also no way to determine the adoption
      curve that will be associated with our phone/service bundles. Non-acceptance
      or
      delayed acceptance of our phones and/or services could force reductions in
      contemplated sales prices of our phones, reduce our overall sales and gross
      margins and negatively affect our operations and prospects.




11




***We
      may not be able to meet our future capital requirements solely through revenues
      generated from our operations, and the cost of additional equity or debt capital
      could be prohibitive or result in dilution to existing
      securityholders.***




Our
      business model is capital intensive, requiring significant expenditures ahead
      of
      projected revenues. Based on our current operating plan, we anticipate that
      the
      net proceeds of our initial public offering, together with anticipated revenues
      from operations and accounts receivable financing that we believe will be
      available to us, will allow us to meet our cash requirements until at least
      December 2007. If revenues from operations are not sufficient to meet all of
      our
      capital needs after such time, we will need to obtain additional sources of
      capital. Further, if the assumptions currently underlying our business plan
      prove incorrect, we may need to seek additional financing prior to that time.
      In
      addition, if and when we achieve initial market acceptance for our initial
      phone/service bundles, we may desire to accelerate our growth to take advantage
      of increasing demand. Accordingly, we may wish to raise additional capital
      to
      offset increased capital expenditures and costs associated with accelerated
      growth. Any source of additional capital could be in the form of public or
      private equity or debt financing. Such financing may not be available to us
      on
      commercially reasonable terms, or at all. If additional capital is needed and
      is
      either unavailable or cost prohibitive, we may need to change our business
      strategy or reduce or curtail our operations. In addition, if we raise
      additional funds by issuing equity securities, our securityholders will
      experience dilution.




***Our
      business may be materially and adversely affected by our incurrence of
      debt.***




In
      order
      to finance the potential growth of our business, we may incur debt, including
      loans or convertible debt financing, in the future. A high level of debt,
      arduous or restrictive terms and conditions related to accessing certain sources
      of funding, poor business performance or lower than expected cash inflows could
      materially and adversely affect our ability to fund the operation of our
      business. Other effects of a high level of debt include the
      following:




·
            we
                may have difficulty borrowing money in the future or accessing other
                sources of funding;




·
            we
                may need to use a large portion of our cash flow from operations
                to pay
                principal and interest on our indebtedness, which would reduce the
                amount
                of cash available to finance our operations and other business
                activities;




·
            a
                high debt level, arduous or restrictive terms and conditions, or
                lower
                than expected cash flows would make us more vulnerable to economic
                downturns and adverse developments in our business;
                and




·
            if
                operating cash flows are not sufficient to meet our operating expenses,
                capital expenditures and debt service requirements as they become
                due, we
                may be required, in order to meet our debt service obligations, to
                delay
                or reduce capital expenditures or the introduction of new phones,
                sell
                assets and/or forego business
                opportunities.




***Our
      inability to establish cost-effective sales channels would negatively affect
      our
      revenue potential.***




While
      we
      have secured approved vendor status with numerous national and regional
      retailers, there is no obligation for these retailers to purchase our
      phone/service bundles or open their distribution channels to us. We currently
      have only limited internal sales, marketing and distribution capabilities.
      In
      order to commercialize our phones and services, we will have to develop a sales
      and marketing infrastructure and/or rely on third parties to perform these
      functions. To market directly, we will have to develop a marketing and sales
      force with technical expertise, which would require the dedication of
      significant capital, management resources and time. We could also be required
      to
      expend significant capital and other resources in developing third-party
      distribution channels. Further, any agreement to sell our phones and services
      through a third party could hamper our ability to sell our phones and services
      to that third party’s competitors. We may not be able to establish an
      appropriate sales force or make adequate third-party distribution arrangements.
      Our failure to do so would limit our ability to expand sales and would
      negatively affect our operations, financial results and long-term
      growth.




12




***Failure
      to obtain satisfactory performance from our strategic and contract manufacturing
      partners and other third party vendors on whom we will be dependent for our
      phones and services could cause us to lose sales, incur additional costs and
      lose credibility in the market place.***




We
      rely
      on third-party sources to manufacture our phones and on third-party
      communications service providers to provide users of our phones with
      communications services. The failure of any of these third party providers
      to
      perform satisfactorily or the loss of any of them could cause us to fail to
      meet
      customer expectations, lose sales and expose us to product and service quality
      issues. In turn, this could damage our relationships with customers and harm
      our
      reputation, business, financial condition and results of operations. If our
      third-party providers increase their prices and we do not have access to
      alternative providers, we could be required to raise the price of our
      phone/service bundles to customers to cover all or part of the increased costs.
      Our inability to obtain phones and services at the prices we desire could hurt
      our sales and lower our margins. Generally, we do not own or control the vast
      majority of the equipment, tools and molds used in the manufacturing process.
      As
      a result, difficulties encountered by our third-party manufacturers that result
      in product defects, production delays, cost overruns or the inability to fulfill
      orders on a timely basis could harm our operations. Our operations would be
      adversely affected if we were to lose our relationships with our primary
      suppliers, if our suppliers’ operations were interrupted or terminated, or if
      overseas or air transportation services were disrupted, even for a relatively
      short period of time. We do not expect to maintain a product inventory that
      is
      sufficient to provide protection for any significant period against an
      interruption of the supply of our hardware.




***We
      currently rely on a limited number of manufacturers for the production of our
      phone hardware and a limited number of service providers for the provision
      of
      the communications services accessible through our phones and the loss of any
      of
      their services could be disruptive to our operations.***




We
      currently rely substantially on one outside manufacturer to produce our phone
      hardware and on SunRocket and IDT for the provision of the communications
      services accessible through our phones. The loss of service of any of our
      suppliers would require us to find alternative suppliers. While we believe
      such
      alternative suppliers are readily available, securing relationships with
      alternative suppliers and integrating them into our business process would
      take
      time and could require us to make significant expenditures.




***Since
      our hardware is sourced from parties outside of the United States, we face
      certain risks inherent in conducting business in foreign
      countries.***




We
      produce our phones under manufacturing arrangements with third-party
      manufacturers, including those located in China. Our reliance on our third-party
      manufacturers to provide personnel and facilities in their country of operations
      and the potential imposition of quota limitations on imported goods from certain
      Asian countries expose us to certain economic and political risks, including
      transportation delays and interruptions, political instability, the business
      and
      financial condition of our third party manufacturer, the possibility of
      expropriation, supply disruption, currency controls, and currency exchange
      fluctuations, changes in tax laws, tariffs, and freight rates, as well as
      strikes, work slow downs, or lockouts at ports where our phones arrive in the
      United States. Protectionist trade legislation in either the United States
      or
      foreign countries, such as a change in the current tariff structures, export
      compliance laws, or other trade policies, could adversely affect our ability
      to
      purchase our phones from foreign suppliers at a price that will enable us to
      sell those phones profitably.




***We
      may not be successful if the Internet is not adopted by a significant number
      of
      users as a means of communications.***




If
      the
      market for IP-based communications and the related services that we will make
      available does not grow at the rate we anticipate or at all, we will not be
      able
      to realize our anticipated revenues with respect to our broadband phones. To
      be
      successful, IP-based communications require validation as an effective means
      of
      communication and as a viable alternative to traditional phone service. Demand
      and market acceptance for newly introduced services are subject to a high level
      of uncertainty. The Internet may not prove to be a viable alternative to
      traditional phone service for reasons including:




·
            inconsistent
                quality or speed of service;




·
            traffic
                congestion on the Internet;




13




·
            potentially
                inadequate development of the necessary
                infrastructure;




·
            lack
                of acceptable security
                technologies;




·
            lack
                of timely development and commercialization of performance improvements;
                and




·
            unavailability
                of cost-effective, high-speed access to the
                Internet.




***A
      significant number of the companies with which we compete have substantially
      greater resources and longer operating histories than we do, and we may not
      be
      able to compete with them effectively, even if our phones and services are
      technically superior.***




We
      engage
      in an intensely competitive business that has been characterized by price
      erosion, rapid technological change and foreign competition. We compete with
      major domestic and international companies. Many of our competitors have greater
      market recognition and substantially greater financial, technical, marketing,
      distribution, and other resources than we possess. Emerging companies also
      may
      increase their participation in the phone hardware or communications service
      markets. Our ability to compete successfully depends on a number of factors
      both
      within and outside our control, including:




·
            the
                quality, performance, reliability, features, ease of use, pricing,
                and
                diversity of our phones and the communications services accessed
                through
                them;




·
            our
                ability to address the evolving demands of our
                customers;




·
            our
                success in designing and manufacturing new phones, including those
                implementing new technologies and
                services;




·
            the
                availability of adequate sources of raw materials, finished components,
                and other supplies at acceptable
                prices;




·
            our
                suppliers’ efficiency of
                production;




·
            new
                product introductions by our
                competitors;




·
            the
                number, nature, and success of our competitors in a given market;
                and




·
            general
                market and economic conditions.




***Decreasing
      telecommunications rates may diminish or eliminate any competitive pricing
      advantage we may have previously established.***




International
      and domestic telecommunications rates have decreased significantly over the
      last
      few years in most of the markets in which we expect to operate, and we
      anticipate that rates will continue to be reduced in all of the markets in
      which
      we expect to do business. Decreasing telecommunications rates may diminish
      or
      eliminate any competitive pricing advantage we may have previously been able
      to
      establish for the communications services available to our hardware users.
      Purchasers who select our services to take advantage of the current pricing
      differential between our rates and rates otherwise available to them for the
      same service may not purchase our phones if such pricing differentials diminish
      or disappear. In addition, rate decreases would reduce our gross profit margin
      from the services we make available to purchasers of our phones and
      services.




***Government
      regulation and legal uncertainties relating to VoIP telephony could harm our
      business.***




Historically,
      voice communications services have been provided by regulated telecommunications
      common carriers. For some of our phones, we will offer voice communications
      to
      the public for international and domestic calls using VoIP telephony. Based
      on
      specific regulatory classifications and recent regulatory decisions, we believe
      such services qualify for certain exemptions from telecommunications common
      carrier regulation in many of our markets. However, the growth of VoIP telephony
      has led to close examination of its regulatory treatment in many




14




jurisdictions,
      making the legal status of such services uncertain and subject to change as
      a
      result of future regulatory action, judicial decisions or legislation in the
      jurisdictions in which we expect to operate. Established regulated
      telecommunications carriers have sought and may continue to seek regulatory
      actions to restrict the ability of companies such as our communications service
      providers to provide services or to increase the cost of providing such
      services. In addition, such services may be subject to regulation if regulators
      distinguish between phone-to-phone telephony service using VoIP and other
      technologies over privately-managed networks, such as our services, and
      integrated PC-to-PC and PC-originated voice services over the Internet. Some
      regulators may decide to treat the former as regulated common carrier services
      and the latter as unregulated enhanced or information services. Application
      of
      new regulatory restrictions or requirements to our service providers could
      increase our cost of doing business or otherwise prevent or restrict us from
      delivering our services through our current arrangements. Such regulations
      could
      limit our service phone/service bundles, raise our costs and restrict our
      pricing flexibility, and potentially limit our ability to compete
      effectively.




***If
      we don’t enhance our phone/service bundles and develop new phones and services
      to keep pace with rapid technological and consumer demand changes in the
      communications industry, we may lose any market share we were previously able
      to
      establish.***




Our
      industry is subject to rapid changes in technology and consumer demand. We
      cannot predict the effect of technological changes or the changes of consumer
      demand on our business. In addition, widely accepted standards have not yet
      developed for the technologies we use, such as VoIP. We expect that new services
      and technologies will emerge over time in the markets in which we compete.
      These
      new services and technologies may be superior to the services and technologies
      that we make available, or these new services may render the services and
      technologies that we make available obsolete or less attractive to consumers.
      To
      be successful, we must adapt to our rapidly changing market by continually
      improving and expanding the scope of services we make available and by
      developing new services and technologies to meet consumer needs.




***The
      loss of any of the members of our management or certain other key personnel
      could harm our business.***




Our
      development and operations to date have been, and our proposed operations will
      be, substantially dependent upon the efforts and abilities of our senior
      management and technical personnel. Although we have acquired $3,000,000 of
      key-person life insurance on the life of Bruce Hahn, our Chief Executive
      Officer, the loss of his services or the services of other existing key
      personnel or the failure to recruit and retain necessary additional personnel
      would adversely affect our business prospects. We cannot provide assurance
      that
      we will be able to retain our current personnel or that we will be able to
      attract and retain necessary additional personnel. Our internal growth and
      the
      expansion of our product lines will require additional expertise in such areas
      as product design, operational management, and sales and marketing. Such growth
      and expansion activities will increase further the demand on our resources
      and
      require the addition of new personnel and the development of additional
      expertise by existing personnel. Our failure to attract and retain personnel
      possessing the requisite expertise or to develop such expertise internally
      could
      adversely affect the prospects for our success.




***Our
      business may suffer if it is alleged or found that our phones infringe the
      intellectual property rights of others.***




Although
      we attempt to avoid infringing known proprietary rights of third parties in
      our
      product development efforts, from time to time we may receive notice that a
      third party believes that our phones may be infringing certain trademarks,
      patents or other intellectual property rights of that third party. We may also
      be contractually obligated to indemnify our customers or other third parties
      associated with our phones in the event they are alleged to infringe a third
      party’s intellectual property rights in connection with our phones. Responding
      to those claims, regardless of their merit, can be time consuming, result in
      costly litigation, divert management’s attention and resources and cause us to
      incur significant expenses. Thus, even if our phones do not infringe, we may
      elect to take a license or settle to avoid incurring such costs. In the event
      our phones are infringing upon the intellectual property rights of others,
      we
      may elect or be required to redesign our phones so that they do not incorporate
      any intellectual property to which the third party has or claims rights. As
      a
      result, some of our phone/service bundles could be delayed, or we could be
      required to cease distributing some of our phones. Alternatively, we could
      seek
      a license for the third party’s intellectual property, but it is possible that
      we would not be able to obtain such a license on reasonable terms, or at all.
      Any delays that we might then suffer or additional expenses that we might then
      incur could adversely affect our revenues, operating results and financial
      condition.




15




**Risks
      Related** **our
      Common Stock**




***The
      American Stock Exchange may delist our securities from quotation on its exchange
      which could limit investors’ ability to make transactions in our securities and
      subject us to additional trading restrictions.***




Our
      common stock and redeemable warrants are listed on the American Stock Exchange.
      We cannot assure you that our securities will continue to be listed on the
      American Stock Exchange in the future. If the American Stock Exchange delists
      our securities from trading on its exchange, we could face significant material
      adverse consequences including:




·
            a
                limited availability of market quotations for our
                securities;




·
            a
                determination that our common stock is a “penny stock” which will require
                brokers trading in our common stock to adhere to more stringent rules
                and
                possibly resulting in a reduced level of trading activity in the
                secondary
                trading market for our common
                stock;




·
            a
                limited amount of analyst coverage for our company,
                and




·
            a
                decreased ability to issue additional securities or obtain additional
                financing in the future.




***If
      our common stock becomes subject to the SEC’s penny stock rules, broker-dealers
      may experience difficulty in completing customer transactions and trading
      activity in our securities may be severely limited.***




If
      at any
      time we have net tangible assets of $5,000,000 or less and our common stock
      has
      a market price per share of less than $5.00, transactions in our common stock
      may be subject to the “penny stock” rules promulgated under the Securities
      Exchange Act of 1934. Under these rules, broker-dealers who recommend such
      securities to persons other than institutional investors:




·
            must
                make a special written suitability determination for the
                purchaser;




·
            receive
                the purchaser’s written agreement to a transaction prior to
                sale;




·
            provide
                the purchaser with risk disclosure documents which identify risks
                associated with investing in “penny stocks” and which describe the market
                for these “penny stocks” as well as a purchaser’s legal remedies;
                and




·
            obtain
                a signed and dated acknowledgment from the purchaser demonstrating
                that
                the purchaser has actually received the required risk disclosure
                document
                before a transaction in a “penny stock” can be
                completed.




As
      a
      result of these requirements, broker-dealers may find it difficult to effectuate
      customer transactions and trading activity in our stock will be significantly
      limited. Accordingly, the market price of our stock may be depressed, and you
      may find it more difficult to sell your shares.




***Future
      sales of our common stock may cause the prevailing market price to decrease
      and
      impair our capital raising abilities.***




As
      of
      June 30, 2006, 5,328,167 shares of our common stock were issuable upon
      exercise of outstanding redeemable warrants at an exercise price of $5.05 per
      share, 240,000 shares of our common stock were issuable upon exercise of
      outstanding stock options at a weighted average exercise price of $4.79 per
      share, 55,000 shares of common stock were issuable upon exercise of warrants
      issued to non-employees at a weighted average exercise price of $4.20 per share, and
      670,000 shares of our common stock were issuable upon full exercise of the
      purchase option issued to the representative of our initial public offering
      (including exercise of the redeemable warrants underlying the purchase option)
      at an exercise price of $6.31 per share and $0.0625 per redeemable warrant.
      As
      of June 30, 2006, 325,000 shares of performance accelerated restricted
      stock (“PARS”)were also outstanding. An aggregate of 2,225,907 shares of common
      stock and 1,475,667 redeemable warrants have been registered for resale. Except
      for 79,926 shares and 58,333 redeemable warrants beneficially owned by Lawrence
      Burstein, our Chairman, which shares and warrants are subject to the lock-up
      agreement described in the following sentence, such shares and warrants are
      currently




16




saleable
      into the market. Our officers, directors and principal securityholders and
      certain of their family members have entered into lock-up agreements with the
      representative by which they have agreed not to sell or otherwise dispose of
      any
      shares of our common stock (other than an aggregate of 200,000 shares as a
      group) until January 31, 2007. After this lock-up period, however, these
      securityholders may sell their shares. We cannot predict whether substantial
      amounts of our common stock and/or warrants will be sold in the open market
      in
      anticipation of, or following, any future divestiture of our shares by these
      or
      other of our officers, directors or principal securityholders. In addition,
      we
      have more than 26,879,093 million shares of our common stock authorized and
      not
      yet issued or reserved against. In general, we may issue all of these shares,
      as
      well as 5,000 shares of preferred stock which may have rights and preferences
      superior to that of our common stock, without any action or approval by our
      securityholders. If a large number of shares of our common stock are sold in
      the
      open market, or if the market perceives that such sales will occur as a result
      of any of the foregoing, the trading price of our common stock could decrease.
      In addition, the sale of these shares could impair our ability to raise capital
      through the sale of additional common stock.




***Failure
      to maintain a current prospectus relating to the common stock underlying the
      redeemable warrants may deprive the redeemable warrants of any value and the
      market for the redeemable warrants may be limited.***




No
      redeemable warrants will be exercisable unless at the time of exercise a
      prospectus relating to common stock issuable upon exercise of the redeemable
      warrants is current and the common stock has been registered or qualified or
      deemed to be exempt under the securities laws of the state of residence of
      the
      holder of the redeemable warrants. Under the terms of the warrant agreement,
      we
      have agreed to meet these conditions and to maintain a current prospectus
      relating to common stock issuable upon exercise of the redeemable warrants
      until
      the expiration of the redeemable warrants. However, we cannot assure you that
      we
      will be able to do so. The redeemable warrants may be deprived of any value
      and
      the market for the redeemable warrants may be limited if the prospectus relating
      to the common stock issuable upon the exercise of the redeemable warrants is
      not
      current or if the common stock is not qualified or exempt from qualification
      in
      the jurisdictions in which the holders of the redeemable warrants reside.
      However, in no event (whether in the case of a registration statement not being
      effective or otherwise) are we required to net cash settle a redeemable warrant
      exercise.




***Our
      officers, directors and affiliated entities own a large percentage of our
      company, and they could make business decisions with which you disagree that
      will affect the value of your investment.***




Our
      executive officers and directors, in total, beneficially own approximately
      19.1%
      of our outstanding common stock. These securityholders will be able to influence
      significantly all matters requiring approval by our securityholders, including
      the election of directors. Thus, actions might be taken even if other
      securityholders oppose them. This concentration of ownership might also have
      the
      effect of delaying or preventing a change of control of our company, which
      could
      cause our stock price to decline.




***Provisions
      in our corporate documents and our certificate of incorporation and bylaws,
      as
      well as Delaware General Corporation Law, may hinder a change of
      control.***




Provisions
      of our certificate of incorporation and bylaws, as well as provisions of the
      Delaware General Corporation Law, could discourage unsolicited proposals to
      acquire us, even though such proposals may be beneficial to you. These
      provisions include:




·
            a
                classified board of directors that cannot be replaced without cause
                by a
                majority vote of our
                securityholders;




·
            our
                board of director’s authorization to issue shares of preferred stock, on
                terms as the board of directors may determine, including terms superior
                to
                those provided by our common stock, without securityholder approval;
                and




·
            provisions
                of Delaware General Corporation Law that restrict many business
                combinations.




17




We
      are
      also subject to the provisions of Section 203 of the Delaware General
      Corporation Law, which could prevent us from engaging in a business combination
      with a 15% or greater securityholder for a period of three years from the date
      it acquired that status unless appropriate board or securityholder approvals
      are
      obtained.


**Item
                1B.**
              **Unresolved
                  Staff Comments**




Not
      Applicable




**Item
                2.**
              **Properties**




Pursuant
      to an agreement that will expire in October 2007, Databyte Technology, Inc.,
      an
      unaffiliated entity, provides us with warehousing, distribution, customer
      support services and our executive offices located at 2466 Peck Road, City
      of
      Industry, California, comprising approximately 25,000 square feet, in exchange
      for two percent of our net revenues. We believe this space is sufficient to
      meet
      our current and anticipated warehousing needs.




We
      occupy
      approximately 2,500 square feet of leased office space at Six Concourse Parkway,
      Atlanta, Georgia at an annual rental of approximately $56,000 through
      June 2009. We also occupy approximately 3,400 square feet of leased office
      space at DongGuan City, GuangDong, China at an annual rental of approximately
      $19,000 through June 2010.




**Item
                3.**
              **Legal
                  Proceedings**




We
      are
      not currently involved in any legal proceedings, nor have we been involved
      in
      any such proceedings since our inception.




**Item
                4.**
              **Submission
                  of Matters to a Vote of Security
                  Holders**




No
      matters were submitted to a vote of security holders during the fourth quarter
      of our fiscal year ended June 30, 2006.




18




**PART
      II**




**Item
                5.**
              **Market
                  for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                  Purchases of Equity
                  Securities**




Our
      common stock and redeemable warrants are traded on the American Stock Exchange
      under the symbols “TES” and TES.WS”, respectively. The following table sets
      forth, for the periods indicated, the high and low closing sales prices for
      our
      common stock and redeemable warrants as reported by the American Stock
      Exchange:




**Common
                Stock**
            
            **Redeemable
                Warrants****For
                the quarter
                ended**
            
            **High**
            
            **Low**
            
            **High**
            
            **Low**March
                31, 2006 *
            
            $4.80
            
            $4.20
            
            $1.50
            
            $0.76June 30,
                2006
            
            $4.40
            
            $3.30
            
            $1.53
            
            $0.90







*
            Trading
                of the securities commenced on February 1,
                2006




As
      of
      September 21, 2006, there were approximately 34 holders of record of our common
      stock and three holders of record of our redeemable warrants. The number of
      holders of our common stock and redeemable warrants does not include beneficial
      owners holding shares and warrants through nominee names.




We
      have
      never declared or paid any dividends on our common stock. We currently
      anticipate that we will retain all of our future earnings for use in the
      expansion and operation of our business. Thus, we do not anticipate paying
      any
      cash dividends on our common stock in the foreseeable future. Our future
      dividend policy will be determined by our board of directors and will depend
      on
      various factors, including our results of operations, financial condition,
      capital requirements and investment opportunities.




19




**Item
                  6.**
                **Selected
                    Financial
                    Data:**




The
      following tables should be read in conjunction with our financial statements
      and
      the notes thereto appearing elsewhere in this Annual Report on Form 10-K.
      The selected financial data has been derived from our audited financial
      statements included elsewhere herein.




**Statements
                of Operations Data:****For
                the fiscal years ended June 30,****2006**
            
            **2005**
            
            **2004**Revenues
            
            $
            3,100,177
            
            $
            —
            
            $
            —Cost
                of revenues
            
            
            1,801,565
            
            
            —
            
            
            —Gross
                profit
            
            
            1,298,612
            
            
            —
            
            
            —Expenses:Selling,
                marketing and development
            
            
            2,556,011
            
            
            84,813
            
            
            22,058General
                and administrative
            
            
            2,154,128
            
            
            84,435
            
            
            3,000Total
                expenses
            
            
            4,710,139
            
            
            169,248
            
            
            25,058Other
                expenses (income):Interest
                income
            
            
            (223,033
            )
            
            —
            
            
            —Interest
                expense and bank charges
            
            
            125,186
            
            
            75
            
            
            —Amortization
                of debt discounts and debt issuance costs
            
            
            2,424,366
            
            
            925
            
            
            —Net
                loss
            
            $
            (5,738,046
            )
            $
            (170,248
            )
            $
            (25,058
            )Earnings
                per Share Data:Net
                loss per common share:Basic
                and diluted
            
            $
            (1.54
            )
            $
            (0.09
            )
            $
            (0.01
            )Weighted
                average shares outstanding:Basic
                and diluted
            
            
            3,737,806
            
            
            1,996,261
            
            
            1,740,490Other
                Financial Data:Net
                cash (used in) provided by operating activities
            
            $
            (5,847,855
            )
            $
            780
            
            $
            —Net
                cash used in investing activities
            
            
            (194,544
            )
            
            —
            
            
            —Net
                cash provided by financing activities
            
            
            18,364,384
            
            
            50,000
            
            
            —





**Balance
                Sheet Data:****As
                of****June
                30, 2006**
            
            **June
                30, 2005**Working
                capital (deficit)
            
            $
            15,062,582
            
            $
            (173,395
            )Cash
                and cash equivalents
            
            $
            12,372,765
            
            $
            50,780Current
                assets
            
            $
            16,423,275
            
            $
            50,780Total
                assets
            
            $
            16,673,546
            
            $
            174,298Current
                liabilities
            
            $
            1,360,693
            
            $
            224,175Total
                liabilities
            
            $
            1,360,693
            
            $
            225,175Shareholders’
                equity (deficit)
            
            $
            15,312,853
            
            $
            (50,877
            )




20




**Item
                  7.**
                **Management’s
                    Discussion and Analysis of Financial Condition and Results of
                    Operation**




“Management’s
      Discussion and Analysis of Financial Condition and Results of Operations” should
      be read in conjunction with the Consolidated Financial Statements and the notes
      included elsewhere in this annual report. The matters discussed in “Management’s
      Discussion and Analysis of Financial Condition and Results of Operations”
contain certain forward-looking statements within the meaning of the Private
      Securities Litigation Reform Act of 1995.




**Overview**




We
      were
      incorporated in Delaware in June 2003. Our primary business is the
      marketing and sale of Internet phone communications
      (Voice-over-Internet-Protocol or “VoIP”) services and/or prepaid long distance
      services that are bundled with our digital, cordless multi-handset phones.
      We
      sell our communications phone/service bundles under our “American Telecom”,
“ATS” or “Pay N’ Talk” brand names. Our telecom platform is designed to enable
      seamless access to the communications services provided by our strategic
      partners. We are marketing our phone/service bundles to the retail mass market
      and will expand through a variety of distribution channels, including office
      superstores, electronics stores, mass retailers, department stores and
      Internet-based retail distribution outlets.




Since
      our
      inception, we have focused on development activities, principally in connection
      with creating customized communications services to be provided by our strategic
      partners to users of our phones, developing new products, securing relationships
      with the third-party suppliers that will manufacture our phones to our
      specifications and developing retail and other distribution
      channels.




During
      the year ended June 30, 2006 we had our supplier begin the manufacturing of
      our initial VoIP and prepaid residential long distance service phones and funded
      these initial manufacturing efforts from the proceeds of our initial public
      offering and from the net proceeds of our private placements of notes (the
      “Notes”) and private warrants conducted during the period from June 2005
      through September 2005. We received our initial purchase orders in September
      2005 and shipments of our phones began arriving in retail stores in October
      2005. Both our prepaid long distance and Internet phone/service bundles are
      available through our retail customers.




**Results
      of Operations**




*Years
      ended June 30, 2006 and 2005*




*Revenues—* Revenue
      was $3,100,177 for the year ended June 30, 2006 and $0 for the year ended
      June 30, 2005. Our revenue in fiscal 2006 was composed of $3,098,004 form
      the sale of phone products and $2,173 of carrier revenues. In September 2005
      we
      shipped our initial phone products which began arriving in retail outlets in
      October 2005. Since we only began generating significant revenues during our
      fourth fiscal quarter, our historical financial information is not necessarily
      indicative of our future financial performance.




We
      market
      our phone/service bundles through major retail distribution outlets and expect
      to generate revenues through the sale of our phones and the receipt of a portion
      of the ongoing revenues generated by our customers’ use of the communications
      services bundled with our phones. As part of our relationship with our retail
      distribution channels, we will typically share with them a portion of our
      service revenues.




*Cost
      of Revenues* —Cost
      of
      sales was $1,801,565 for the year ended June 30, 2006 and $0 for the year
      ended June 30, 2005. Cost of sales consists primarily of cost of phone
      inventory sold, and landing charges.




*Gross
      Margin* —Gross
      margin on the sales of phone products was $1,298,612 or 41.89% and $0 or 0.00%
      during the year ended June 30, 2006 and 2005, respectively. The gross
      margin is a result of our net revenues less the cost of the phones, including
      transportation costs to acquire the phone.




*Selling,
      Marketing and Development—* Selling,
      marketing and development expense was $2,556,011 for the year ended
      June 30, 2006 and $84,813 for the year ended June 30, 2005, an
      increase of $2,471,198.  Selling, marketing and development expenses are
      sales and marketing expenses directly associated with the development of sales
      channels. These costs consist primarily of commissions, rebates, promotional
      minutes, package design costs, shipping to customers and advertising as well
      as
      certain non-recurring expenses for new business




21




development.
      Additionally selling, marketing and development expenses includes share-based
      compensation expense of $8,556 for the year ended June 30, 2006, which
      related to stock option grants to a consultant.




We
      have
      concentrated our efforts on establishing retail sales channels through which
      we
      sell our phones upon their commercial introduction. During the year ended
      June 30, 2006 we incurred $2,556,011 of expenses in connection with these
      efforts and will continue to incur additional, material expenses in this regard.
      We expect, however, that if our phones are successfully sold through our
      distribution channels, we will increase the allocation of our available funds
      in
      order to accelerate and enhance our marketing and sales efforts.




*General
      and Administrative Support—* General
      and administrative expense was $2,154,128 for the year ended June 30, 2006
      and $84,435 for the year ended June 30, 2005, an increase of $2,069,693 or
      2,451.23%. General and administrative expenses consist primarily of personnel
      costs, corporate overhead and professional fees. Additionally general and
      administrative expenses includes share-based compensation expense of $230,349
      for the year ended June 30, 2006, which related to stock option grants to
      employees and directors and $141,602 which related to share-based compensation
      to non-employees.




During
      the year ended June 30, 2006 we hired our Chief Operating Officer, began
      recruiting key operating and customer service positions, and continued planning
      the development of our systems and infrastructure needs. Although we were formed
      in June 2003, we only began to compensate our executives in June 2005
      and have incurred nominal costs for administrative support. We did not incur
      any
      expenses for leased space prior to October 2005.




*Interest
      and Bank Charges, net* —Interest
      and bank charges, net were income of $97,847 for the year ended June 30,
      2006 and $75 of expense for the year ended June 30, 2005, an increase of
      $97,922 or 130,562.67%. Interest income of $223,033 during the year ended
      June 30, 2006 relates to income earned on cash deposits maintained at
      financial institutions. Interest expense of $125,186 during the year ended
      June 30, 2006 consists primarily of interest payable on our convertible
      notes and banking fees.




*Amortization
      of Debt Discounts and Issuance Costs* — *-* Amortization
      of debt discounts and debt issuance costs relate to debt discounts and issuance
      costs associated with our convertible notes which were issued in June 2005
      and July 2005. Such costs were amortized over the life of the related debt.
      Amortization of debt discount and debt issuance cost were $2,424,366 and $925
      for the year ended June 30, 2006 and 2005, respectively. Upon consummation
      of the IPO, the principal amount of the Notes and accrued interest payable
      thereon of $87,220 automatically converted into 750,240 shares of our common
      stock at a conversion price of $3.00 per share. As a result of the conversion
      of
      the Notes into shares of common stock, a non-cash interest expense of $1,686,042
      resulting from the amortization of the balance of the original issue discount
      as
      compared to the principal amount of the Notes was incurred at the consummation
      of the IPO and was charged to amortization of debt discounts at the consummation
      of the IPO. Additionally, the carrying value of the debt issuance costs of
      $472,267 as of the date of the IPO was immediately amortized and charged to
      amortization of debt issuance costs at the consummation of the IPO.




*Net
      loss—* Net loss
      was $5,738,046 ($1.54 per share) and $170,248 ($.09 per share) for the year
      ended June 30, 2006 and 2005, an increase of $5,567,798 or 3,270.40%. In
      addition to our revenues and operating expenses discussed above, a significant
      component of our net loss is attributable to the amortization of approximately
      $2.4 million of debt discounts and debt issuance costs during the year ended
      June 30, 2006. We expect our losses may increase during the short term as
      we initiate greater distribution of our phone/service bundles.




*Years
      ended* *June 30,
      2005 and 2004*




We
      did
      not generate any revenues through June 30, 2005.




During
      our fiscal years ended June 30, 2005 and 2004 we concentrated our efforts
      on establishing retail sales channels through which we would sell our phones
      upon their commercial introduction. We incurred expenses of $84,813 and $22,058
      during the years ended June 30, 2005 and 2004, respectively, in connection
      with these efforts.




22




Although
      we were formed in June 2003, we only began to compensate our executives in
      June 2005 and incurred nominal costs for administrative support during the
      year ended June 30, 2005. During the years ended June 30, 2005 and
      2004, we incurred $84,435 and $3,000, respectively in general and administrative
      expenses. We did not incur any expenses for leased space.




During
      the years ended June 30, 2005 and 2004, we incurred net losses of $170,248
      and $25,058, respectively.






**Liquidity
      and Capital Resources**




At
      June 30, 2006, our working capital was $15,062,582 compared to a working
      capital deficiency of $(173,395) at June 30, 2005. The principal components
      of working capital at June 30, 2006 were cash and cash equivalents and
      inventory, offset by an increase in our accounts payable and accrued expenses
      associated with the commencement of commercial activities. The increase in
      cash
      and cash equivalents was due to the net proceeds from our initial public
      offering and from the issuance of convertible notes. Our customers are primarily
      large, United States based retail companies and, as a result, we seldom
      experience issues with the reliability or timing of customer receipts. However,
      vendors’ payment terms vary and are tightly managed to maximize the working
      capital gap between receivable and payables.




*Cash
      Flows from Financing Activities.*




During
      the year ended June 30, 2006, cash provided by financing activities was
      $18,364,384, compared to $50,000 provided by financing activities during the
      year ended June 30, 2005.




In
      June 2005, we issued and sold an aggregate of $50,000 in principal amount
      of our 6% notes. During the period July 2005 through September 2005, we issued
      and sold in a series of private transactions an aggregate of $2,113,500 in
      principal amount of our 8% notes. The purchasers of the 6% notes received at
      no
      additional cost an aggregate of 66,666 private warrants and the purchasers
      of
      the 8% notes received at no additional cost an aggregate of 1,409,001 private
      warrants in connection with their purchase of the notes.




On
      February 6, 2006 we completed our initial public offering (“IPO”) of 3,350,000
      shares of Common Stock, $.001 par value per share (“Common Stock”), and
      3,350,000 Redeemable Warrants (“Redeemable Warrants”). Additionally, in March
      2006 we issued an additional 402,500 shares of Common Stock and 502,500
      Redeemable Warrants upon the exercise of the over-allotment option by the
      underwriters. Each Redeemable Warrant entitles the holder to purchase one share
      of our common stock at a price of $5.05 per share.




23




Our
      gross
      proceeds from the IPO totaled approximately $19.1 million. We incurred
      approximately $2.5 million in underwriting and other expenses in connection
      with
      the IPO, resulting in net proceeds of approximately $16.6 million. We will
      utilize the net proceeds of the IPO to continue and expand commercial
      distribution of our phone/service bundles, develop and enhance product and
      service features and expand our contract manufacturing, sales and marketing
      capabilities and to generally fund our operations.




Upon
      consummation of the IPO the principal amount of the notes and accrued interest
      payable thereon automatically converted into 750,240 shares of our common stock
      at a conversion price of $3.00 per share. As a result of the conversion of
      the
      notes into shares of common stock, a non-cash interest expense of approximately
      $2.2 million resulting from the amortization of the original issue discount
      and
      debt issuance costs was incurred at the consummation of the IPO. Additionally,
      upon consummation of the IPO, all of the private warrants were automatically
      converted into a like number of warrants of the same class as the redeemable
      warrants sold in the IPO.




*Cash
      Flows from Investing Activities.*




During
      the year ended June 30, 2006, cash used in investing activities was
      $194,544, compared to $0 used in investing activities during the year ended
      June 30, 2005.




Since
      our
      suppliers manufacture our phone products and we pay suppliers for warehouse
      space, we typically have very low levels of capital expenditures. Our capital
      expenditures have been low over the years 2003 to 2006. We do not anticipate
      any
      material increases in capital expenditure and do not currently have any plans
      or
      proposed projects which would require any additional significant capital
      expenditure. Our capital expenditures are predominantly related to office
      fixtures and furnishings, computer equipment, software and software development.
      There are no known timing elements where our capital expenditure would be
      materially significant or differ from other periods. Capital expenditure during
      the year ended June 30, 2006 were $194,544 and due primarily to the fitting
      and furnishing of our new headquarters and the initial purchase of computer
      equipment and software.




*Operating
      Cash Flows*




During
      the year ended June 30, 2006, we utilized cash from our operating
      activities of $5,847,855, compared to $780 provided by operating activities
      during the year ended June 30, 2005.




Net
      cash
      used in operating activities can be attributed to adverse movements in operating
      assets and liabilities, in particular, changes in accounts receivable, accounts
      payable, deferred revenue and accrued expenses and other current liabilities.
      Depreciation has been relatively low since our inception.




*Accounts
      Receivable*




During
      the year ended June 30, 2006, we commenced sales of our phone products,
      which resulted in an increase in accounts receivable in the amount of
      $1,060,968, and a corresponding negative operating cash flow impact of
      $(1,080,968) for the year.




*Prepaid
      and other a* *ssets*




During
      the year ended June 30, 2006 we made payments to suppliers and vendors in
      advance of services being rendered. At June 30, 2006 the increase in
      prepaid expenses had a negative operating cash flow impact of
      $(808,523).




*Inventory*




During
      the year ended June 30, 2006 we built up our inventory in order to be able
      to fulfill customer purchase orders. At June 30, 2006 the increase in
      inventory had a negative operating cash flow impact of
      $(2,181,019).




24




*Accounts
      P* *ayable
      and Accrued Expenses*




The
      increase in our accounts payable and accrued expenses during the year ended
      June 30, 2005 was commensurate with the increase in our commercial
      operations. Our increase in accounts payable and accrued expenses, had a
      positive operating cash flow impact of $1,044,902.




We
      will
      require the net proceeds from our IPO to continue and expand commercial
      distribution of our phone/service bundles, develop and enhance product and
      service features and expand our contract manufacturing, sales and marketing
      capabilities and to generally fund our operations. We believe that the proceeds
      of our prior private placements and the IPO, together with certain minimum
      levels of anticipated revenues and accounts receivable financing that we believe
      will be available to us, will be sufficient to fund our capital requirements
      for
      approximately 12 months. However, in light of the competitive nature of the
      telecommunications industry and the evolution of new phones and services from
      time to time, any estimate as to our liquidity and overall financial condition
      may change over time. Some factors that could affect our liquidity and overall
      financial condition are the timing of our introduction of our phone/service
      bundles, customer acceptance and usage of our phone/service bundles and
      competition from existing service providers and other telecommunications
      companies. To the extent that circumstances evolve in an unfavorable manner,
      we
      may generate lower revenues then we currently anticipate and, as a result,
      we
      would experience reduced cash flow and our ability to obtain sufficient accounts
      receivable financing would be hampered. In such event, we may be required to
      seek additional equity and/or debt financing. There is no assurance that we
      would be able to secure additional financing on satisfactory terms or that
      the
      price of our common stock will be at a price level to permit us to call our
      warrants, in which case we would be forced to curtail operations.




In
      order
      to facilitate the purchase and financing of our inventory, in June and July
      2005 we entered into arrangements with Gain Star International Limited, a Hong
      Kong-based lender, and CIT Commercial Services, respectively. Under these
      arrangements, Gain Star acts as our agent for the purchase of our phones from
      manufacturers in China. Gain Star fully finances these purchases if they are
      backed by retailer purchase order that are approved and guaranteed by CIT.
      Under
      this arrangement, CIT does not advance funds to us or Gain Star. Instead, it
      makes payments to us and Gain Star only upon collection of the applicable
      accounts receivable. CIT guarantees payment to us and Gain Star only after
      a
      customer’s failure and inability to pay after the longest applicable maturity
      date.




For
      purchases that are not backed by CIT approved and guaranteed accounts
      receivable, the factory requires us to pay a 20% deposit to them in the form
      of
      a standby letter of credit or cash deposit towards the purchase price and
      requires us to pay the remaining amounts due and owing typically on shipment
      of
      our phones.




In
      addition to its direct costs for the purchase of our inventory, Gain Star also
      requires us to pay certain fees, commissions and charges and to reimburse it
      for
      certain of its expenses as compensation for its services as our agent. As
      compensation for its services, CIT requires us to pay certain factoring fees
      and
      charges and to provide it with certain credits, allowances, trade discounts
      and
      cash discounts on the face value of the accounts receivable it guarantees.
      Fees
      paid to Gain Star and CIT during the year ended were $50,309. The arrangement
      with Gain Star was terminated in April 2006.




**Significant
      Accounting Policies**




Our
      discussion and analysis of our financial condition and results of operations
      is
      based on our consolidated financial statements, which have been prepared in
      accordance with accounting principles generally accepted in the United States.
      Our significant accounting policies are described in Note 2 to our
      June 30, 2006 Consolidated Financial Statements. The application of these
      policies requires us to make estimates and judgments that affect the reported
      amounts of assets, liabilities, revenues and expenses, and related disclosures
      of contingent assets and liabilities. On an ongoing basis we will evaluate
      our
      estimates including those related to revenue recognition, engineering and
      development, bad debts.




***Basis
      of Presentation of Consolidated Financial Statements and*** **Use
      of Estimates**




The
      consolidated financial statements include the accounts of us and our
      wholly-owned subsidiary American Telecom Services (Hong Kong) Limited. All
      significant intercompany transactions and balances have




25




been
      eliminated. The preparation of the consolidated financial statements in
      conformity with generally accepted accounting principles in the United States
      of
      America requires management to make estimates and assumptions that affect the
      reported amounts of assets and liabilities and disclosure of contingent assets
      and liabilities at the date of the consolidated financial statements and the
      reported amounts of revenues and expenses during the reporting period.
      Significant accounting estimates to be made by management include or will
      include allowances for doubtful accounts, impairment of long-lived assets,
      the
      fair value of our common stock and warrants, estimated warranty reserves and
      other allowances, the allocation of proceeds from debt to equity instruments
      and
      expected volatility of common stock. Because of the uncertainty inherent in
      such
      estimates, actual results may differ from these estimates.




***Revenue
      recognition***




We
      derive
      revenue from the sale of its phone products to consumer retailers (“Retail
      Partners”) and from certain arrangements with phone service carriers. In
      accordance with SEC Staff Accounting Bulletin (“SAB”) No. 104, “Revenue
      Recognition,” revenue is recognized when persuasive evidence of an arrangement
      exists, delivery of the product or services has occurred in accordance with
      the
      terms of an agreement, the price is fixed and determinable, collectibility
      is
      reasonably assured, contractual obligations have been satisfied, and title
      and
      risk of loss have been transferred to the customer.




Phone
      Products




Our
      phone
      products are sold through Retail Partners to the end user customer. Revenues
      from sales of phones are recognized in the period when title and risk of loss
      are transferred to the Retail Partner in accordance with the terms of an
      agreement, provided all other revenue recognition criteria have been met. Retail
      Partners participate in various cooperative marketing and other programs, and
      we
      maintain estimated accruals and allowances for these programs once they commence
      and such expenses are included in selling expenses.




We
      generally warrant our phone products against defects to customers for a period
      of up to one year. Factors that affect our warranty liability include the number
      of units sold, historical and anticipated rates of warranty claims and cost
      per
      claim. We periodically assess the adequacy of its recorded warranty liabilities
      and adjust the amounts as necessary. As required, we accrue a provision for
      warranty reserves as a selling expense at the time of revenue
      recognition.




Additionally,
      we accrue for sales returns, and other allowances based on estimates. Each
      estimate was based on our management’s consideration of comparable
      companies, the specific agreements with retail partners, and experience in
      the
      wholesale distribution industry. As required, we accrue a provision for
      estimated future costs and estimated returns as a reduction of revenue at the
      time of revenue recognition.




Carrier
      Agreements




We
      have
      agreements with certain phone service carriers who, if requested by the phone
      purchaser user, may provide users of our cordless landline phones and Internet
      phones with phone communications services. The agreements with the carriers
      grant us the right to include, at its option, certain marks and logos of the
      carriers on our phones and/or related packaging and marketing
      materials.




Under
      the
      agreement with SunRocket, Inc. (“SunRocket”) we design and configure our
      Internet phones to work with SunRocket’s communications services. SunRocket
      offers end-user purchasers of our Internet phones different service plans at
      set
      rates.




Our
      agreements with IDT Domestic, Inc. (“IDT”), as assigned by IDT Puerto Rico &
Co., provides purchasers of our cordless landline phones with the ability to
      obtain prepaid long distance communications services. IDT will offer end-user
      purchasers of our cordless landline phones certain prepaid long distance calling
      rate plans and IDT will handle all customer service interaction, including
      billing the customer for all communications services. We have agreed to use
      our
      best efforts to deliver certain minimum account activations to IDT. In the
      event
      that we fail to achieve the minimum commitment level for the relevant time
      period, then IDT, at its sole discretion, shall have the right to
      (i) terminate the agreement without further obligation or
      (ii) renegotiate the agreement or specific terms on a going forward
      basis.




26




In
      connection with the agreements with the carriers, we are entitled to earn
      certain commissions from the carriers. For each services account activated
      with
      SunRocket by end-users of our Internet phones, we receive a pre-defined
      commission amount from SunRocket once the account remains active for a certain
      period of time. We are also entitled to receive ongoing monthly commissions
      from
      both SunRocket and IDT equal to a percentage of the net service revenues
      received by the respective carrier from end-users of our phones. In addition,
      we
      receive certain retail marketing co-op fees and contributions for consumer
      rebates in certain circumstances from carriers. Our obligations to end-users
      of
      our phones relate solely to the sales of our phones and the related warranties
      provided. Aside from marketing the carrier communication services with its
      phones, we have no obligations to the end-users related to the carrier
      communications services. Accordingly, commission revenues, based on a percentage
      of the monthly carrier net service revenue from the subscriber users of the
      our
      phones, will be recognized in the period the usage occurs and commission revenue
      resulting from service account activation by users of the our phones and
      marketing co-op fees will be recognized once the subscriber activates the phone
      on the carrier’s network and such account is active for the required period of
      time.




We
      offer
      some Retail Partners a percentage of the service revenue commissions we earn
      from carriers of communications service providers and a percentage of the
      subscriber activation fees that we receive from SunRocket in connection with
      the
      purchase of communications services by end-users of our Internet phones. Such
      fees are recorded as a reduction of revenues.




***Share-Based
      Compensation***




On
      July
      1, 2005, we adopted Statement of Financial Accounting Standards (“SFAS”)
      No. 123 (revised 2005), “Share-Based Payment,” (“SFAS 123(R)”) which
      requires the measurement and recognition of compensation expense for all
      share-based payment awards made to employees and directors based on estimated
      fair values. In March 2005, the Securities and Exchange Commission issued Staff
      Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123(R).
      We applied the provisions of SAB 107 in our adoption of
      SFAS 123(R).




We
      adopted SFAS 123(R) prospectively as no share-based compensation awards
      were granted prior to February 2006. SFAS 123(R) requires companies to
      estimate the fair value of share-based payment awards on the date of grant
      using
      an option-pricing model. The value of the portion of the award that is
      ultimately expected to vest is recognized as expense over the requisite service
      periods in our consolidated statement of operations.




Stock-based
      compensation expense recognized in our consolidated statements of operations
      for
      the year ended June 30, 2006 included compensation expense for share-based
      payment awards based on the grant date fair value estimated in accordance with
      the provisions of SFAS 123(R). In conjunction with the adoption of
      SFAS 123(R), we elected the straight-line single option method of
      attributing the value of stock-based compensation to expense. As stock-based
      compensation expense recognized in the consolidated statement of operations
      for
      the year ended June 30, 2006 is based on awards ultimately expected to
      vest, it has been reduced for estimated forfeitures. SFAS 123(R) requires
      forfeitures to be estimated at the time of grant and revised, if necessary,
      in
      subsequent periods if actual forfeitures differ from those
      estimates.




Upon
      adoption of SFAS 123(R), we elected the Black-Scholes option-pricing model
      (“Black-Scholes model”) as its method of valuation for share-based awards
      granted beginning in fiscal 2006. Our determination of fair value of share-based
      payment awards on the date of grant using an option-pricing model is affected
      by
      our stock price as well as assumptions regarding a number of highly complex
      and
      subjective variables. These variables include, but are not limited to, our
      expected stock price volatility over the term of the awards and the expected
      term of the awards.




We
      account for non-employee compensation expense in accordance with Emerging Issues
      Task Force (“EITF”) Issue No. 96-18, Accounting for Equity Instruments That
      Are Issued to Other Than Employees for Acquiring, or in Conjunction with
      Selling, Goods or Services (“EITF 96-18”), which requires non-employee
      stock options to be measured at their fair value as of the earlier of the date
      at which a commitment for performance to earn the equity instruments is reached
      (“performance commitment date”) or the date at which performance is complete
      (“performance completion date”). Accounting for non-employee stock options which
      involve only performance conditions when no performance commitment date or
      performance completion date has occurred as of an interim financial reporting
      date requires measurement at the instruments then-current fair
      value.




27




We
      follow
      the guidance outlined in FASB Interpretations (“FIN”) No. 28, Accounting
      for Stock Appreciation Rights and Other Variable Stock Option or Award Plans
      (“FIN 28”) as it relates to computing expense when appreciation rights vest over
      time.




***Cash
      and Cash Equivalents***




We
      consider all investments purchased with an original maturity of three months
      or
      less at the time of purchase to be cash equivalents.




***Allowance
      for doubtful accounts***




We
      maintain allowances for doubtful accounts for estimated losses resulting from
      the inability of its customers to make required payments. We determine our
      allowance by considering a number of factors, including the length of time
      trade
      receivables are past due, our previous loss history, the customer’s current
      ability to pay its obligation to us, and the condition of the general economy
      and the industry as a whole. Specific reserves are also established on a
      case-by-case basis by management. We write-off accounts receivable when they
      become uncollectible and perform credit evaluations of its customers’ financial
      condition on a regular basis.




***Inventory***




Inventory
      consists of finished goods on hand and in transit which are stated at the lower
      of cost or market. All direct costs incurred in purchasing inventory, such
      as
      freight in, duties and taxes, are included in inventory. Cost is determined
      by
      using the first-in, first-out method. We include the expense of shipping and
      handling on shipments to customers in selling, marketing and development on
      our
      consolidated statements of operations.




***Income
      taxes***




Deferred
      income tax assets and liabilities are recognized for the future tax consequences
      attributable to temporary differences between the financial statement carrying
      amounts of existing assets and liabilities and their respective tax bases and
      operating loss and tax credit carryforwards. Deferred tax assets and liabilities
      are measured using enacted tax rates expected to apply to taxable income in
      the
      years in which those temporary differences are expected to be recovered or
      settled. Deferred tax assets are reduced by a valuation allowance if it is
      more
      likely than not that the tax benefits will not be realized. The ultimate
      realization of deferred tax assets depends upon the generation of future taxable
      income during the periods in which those temporary differences become
      deductible.




***Net
      loss per share***




Basic
      loss per share includes no dilution and is computed by dividing loss available
      to common shareholders by the weighted average number of common shares
      outstanding. Diluted earnings per share reflect, in periods with earnings and
      in
      which they have a dilutive effect, includes the effect of common shares issuable
      upon exercise of stock options and warrants.




***Recent
      accounting pronouncements***




In
      May
      2005, the FASB issued SFAS No. 154, *Accounting
      Changes and Error Corrections* ,
      a
      replacement of APB Opinion No. 20 and FASB statement No. 3
      (“SFAS No. 154”), which changes the requirements for the accounting
      for and reporting of voluntary changes in accounting principles.
      SFAS No. 154 requires retrospective application to prior periods’
consolidated financial statements of changes in accounting principles, unless
      impracticable. SFAS No. 154 supersedes APB Opinion No. 20, *Accounting
      Changes* ,
      which
      previously required that most voluntary changes in accounting principles be
      recognized by including in the current period’s net income the cumulative effect
      of changing to the new accounting principle. SFAS No. 154 also makes a
      distinction between retrospective application of an accounting principle and
      the
      restatement of consolidated financial statements to reflect the correction
      of an
      error. SFAS No. 154 carries forward without changing the guidance
      contained in APB Opinion No. 20 for reporting the correction of an error in
      previously issued consolidated financial statements and a change in accounting
      estimate. SFAS No. 154 applies to voluntary changes in accounting
      principles that are made in




28




fiscal
      years beginning after December 15, 2005. We do not expect the adoption of
      SFAS No. 154 to have a material impact on its consolidated financial
      statements.




On
      July
      13, 2006, the Financial Accounting Standards Board (“FASB”) issued FASB
      Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—An
      Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48
      clarifies the accounting for uncertainty in income taxes recognized in an
      enterprise’s financial statements in accordance with FASB Statement
      No. 109, “Accounting for Income Taxes.” FIN 48 also prescribes a
      recognition threshold and measurement attribute for the financial statement
      recognition and measurement of a tax position taken or expected to be taken
      in a
      tax return. In addition, FIN 48 provides guidance on derecognition,
      classification, interest and penalties, accounting in interim periods,
      disclosure and transition.




The
      provisions of FIN 48 are effective for fiscal years beginning after
      December 15, 2006. Earlier application is permitted as long as the enterprise
      has not yet issued financial statements, including interim financial statements,
      in the period of adoption. The provisions of FIN 48 are to be applied to
      all tax positions upon initial adoption of this standard. Only tax positions
      that meet the more-likely-than-not recognition threshold at the effective date
      may be recognized or continue to be recognized upon adoption of FIN 48. The
      cumulative effect of applying the provisions of FIN 48 should be reported
      as an adjustment to the opening balance of retained earnings (or other
      appropriate components of equity) for that fiscal year. We believe the adoption
      of FIN 48 will not have a material effect on our consolidated financial
      statements.




*Contractual
      Obligations*




**Payments
                due by
                period****Contractual
                obligations as of**
              **June 30,
                2006**
            
            **Total**
            
            **Less
                than**
              **1 year**
            
            **1-3 years**
            
            **3-5 years**
            
            **More
                than**
              **5 years**Operating
                Lease Obligation
            
            $
            230,700
            
            $
            72,300
            
            $
            155,300
            
            $
            3,100
            
            $Total
            
            $
            230,700
            
            $
            72,300
            
            $
            155,300
            
            $
            3,100
            
            $




As
      of
      June 30, 2006, we had total contractual obligations of $230,700 consisting
      entirely of operating leases. Such leases consist of building leases, including
      the rental of our headquarters, which is contracted until
      June 2009.




We
      do not
      have any off balance sheet financings and there have been no material trends
      in
      our capital resources.




**Quantitative
      and Qualitative Disclosures about Market Risk**




*Interest
      Rate Sensitivity*




Interest
      on lease agreements is based on the applicable lender’s base rates and cost of
      funds. We believe that our results of operation are not materially affected
      by
      changes in interest rates.




*Exchange
      Rate Sensitivity*




Although
      we operate a portion of our operations through our subsidiary in Hong Kong
      all
      of our revenues are earned in the United States and denominated in US dollars.
      It is our general policy to pay our underlying suppliers in the same currency
      that we receive customer revenue. Additionally, overhead expenditures associated
      with our Hong Kong office will appreciate or depreciate with any foreign
      exchange movements.


**Item
                  8.**
                **Financial
                    Statements and Supplementary
                    Data**




Our
      financial statements begin on page F-1 of this Annual Report, and are
      hereby incorporated by reference. Financial statement schedules have been
      omitted because they are not applicable or the required information is included
      in the financial statements or notes thereto.




29


**Item
                  9.**
                **Changes
                    in and Disagreements With Accountants on Accounting and Financial
                    Disclosure**




Not
      Applicable


**Item
                  9A.**
                **Controls
                    and Procedures**




Our
      management carried out an evaluation, with the participation of our Chief
      Executive Officer and Chief Financial Officer, of the effectiveness of our
      disclosure controls and procedures as of June 30, 2006. Based upon that
      evaluation, our Chief Executive Officer and Chief Financial Officer concluded
      that (i) our disclosure controls and procedures were effective to ensure
      that information required to be disclosed by us in reports that we file or
      submit under the Securities Exchange Act of 1934 is recorded, processed,
      summarized and reported, within the time periods specified in the rules and
      forms of the Securities and Exchange Commission, and (ii) our disclosure
      controls and procedures were designed to ensure that information required to
      be
      disclosed by us in reports that we file or submit under the Securities Exchange
      Act of 1934 is accumulated and communicated to our management, including our
      Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
      timely decisions regarding required disclosure.




There
      has
      not been any change in our internal control over financial reporting in
      connection with the evaluation required by Rule 13a-15(d) or
      15d-15(d) under the Exchange Act that occurred during the quarter ended
      June 30, 2006 that has materially affected, or is reasonably likely to
      materially affect, our internal control over financial reporting.


**Item
                  9B.**
                **Other
                    Information**




Not
      Applicable




30




**PART
      III**


**Item
                  10.**
                **Directors
                    and Executive Officers of the
                    Registrant**




**Directors
      and Executive Officers**




Set
      forth
      below is information concerning each of our directors and executive
      officers:




**Name**
            **Age**
            **Position**Lawrence
                Burstein
            63
            Chairman
                of the BoardBruce
                Hahn
            56
            Chief
                Executive Officer and DirectorBruce
                Layman
            45
            Chief
                Operating Officer and Chief Financial OfficerAdam
                Somer
            34
            President
                of Communications Services and SecretaryYu
                Wen Ching
            52
            President
                of Manufacturing and SourcingRobert
                F. Doherty
            42
            DirectorElliott
                J. Kerbis
            54
            DirectorDonald
                G. Norris
            67
            DirectorRobert
                S. Picow
            51
            Director




*Lawrence
      Burstein* .
      Mr.
      Burstein has been our Chairman of the Board since June 2005. Mr. Burstein
      has many years’ experience managing and financing public and private companies.
      From April 2004 thru December 15, 2005, Mr. Burstein was President, Treasurer
      and a member of the board of directors of Trinity Partners Acquisition Company
      Inc. (“Trinity”), an OTC Bulletin Board-listed company that was formed for the
      purpose of affecting a business combination with an attractive target business.
      On December 15, 2005, Trinity merged with and into FreeSeas Inc., an owner
      and
      operator of dry bulk ocean carriers. Since March 1996, Mr. Burstein has been
      President and a principal securityholder of Unity Venture Capital Associates
      Ltd., a private investment company. For approximately ten years prior to 1996,
      Mr. Burstein was the President, a member of the board of directors and principal
      securityholder of Trinity Capital Corporation (“TCC”), a private investment
      company. TCC ceased operations prior to the formation of Unity Venture in 1996.
      Mr. Burstein is also a member of the board of directors of I.D. Systems, Inc.,
      a
      Nasdaq National Market-listed designer, developer and producer of a wireless
      monitoring and tracking system that uses radio frequency technology; THQ, Inc.,
      a Nasdaq National Market-listed developer and publisher of interactive
      entertainment software for the major hardware platforms in the home video
      industry; Traffix, Inc., a Nasdaq National Market-listed developer and operator
      of Internet-based marketing programs as well as direct marketing programs;
      CAS
      Medical Systems, Inc., an OTC Bulletin Board-listed manufacturer and marketer
      of
      blood pressure monitors and other disposable products principally for the
      neonatal market; and Millennium India Acquisition Company Inc., an American
      Stock Exchange-listed blank check company that is seeking to effectuate a
      business combination with an attractive target business that has operations
      primarily in India. Mr. Burstein received a BA from the University of Wisconsin
      and an LLB from Columbia Law School.




*Bruce
      Hahn* .
      Mr.
      Hahn is our founder and has been our Chief Executive Officer since our inception
      in June 2003. Mr. Hahn has more than twenty-five years’ experience in
      leading consumer product companies in the development and expansion of their
      product offerings and related distribution channels. From November 1999 to
      June 2005, Mr. Hahn served as President of SMMI, a management consulting
      company, where he worked with leading communications and consumer products
      companies in securing and expanding distribution channels for their phones.
      From
      1991 to 1999, he served as Chief Executive Officer of USCI, a cellular carrier
      which he built into the first consumer-focused, national one-rate cellular
      carrier in the United States using retail accounts such as Radio Shack and
      Wal-Mart. From 1985 to 1991, he served as Chief Executive Officer of
      International Consumer Brands (“ICB”), a consumer product development and
      distribution company and a leader in the rechargeable tool and kitchen aid
      industries. His efforts with ICB included building and diversifying that
      company’s product offerings,




31




developing
      a personal care appliances company in partnership with Candies, Inc., a leading
      footwear and apparel provider, and launching a rechargeable power tools
      division, for which he secured distribution channels through major retail
      outlets, such as Home Depot. From 1984 to 1985, he served as an Executive Vice
      President of Cosmo Communications, a manufacturer of diversified products,
      including telecommunications hardware. From 1980 to 1984, he was Senior Vice
      President and General Manager at Conair Corporation, a manufacturer and
      distributor of diversified products, and one of the first companies to introduce
      phones into the marketplace following the divestiture of AT&T. At Conair,
      Mr. Hahn managed and directed their telecommunications, personal care appliances
      and healthcare phones businesses. Mr. Hahn received a BA from the University
      of
      Tennessee.




*Bruce
      Layman* .
      Mr.
      Layman has been our Chief Operating Officer and Chief Financial Officer since
      September 2005. Mr. Layman has more than 15 years’ experience leading the
      operating and financial functions of communications and technology firms,
      including building and managing the systems and infrastructure to support
      operations including billing, customer service, carrier operations and inventory
      management. From March 2005 to September 2005, Mr. Layman was Vice-President
      of
      Account Management for Raptor Communications, Inc., a supplier of VoIP hardware.
      From January 2000 through February 2005, Mr. Layman served as Chief Financial
      Officer of Navigauge Inc., a telematics and radio ratings company. Mr. Layman
      served as Chief Operating Officer of USCI from 1998 to 1999, and as that
      company’s Director of Corporate Development from 1996 to 1998. Mr. Layman served
      as Controller of Communications Central Inc., one of the country’s largest
      prison-phone and payphone operators from 1992 to 1996 and as that company’s
      Director of Corporate Development from 1990 to 1992. Mr. Layman received a
      BBA
      from the University of Georgia.




*Adam
      Somer* .
      Mr.
      Somer has been our President of Communications Services since June 2003.
      Mr. Somer has approximately ten years’ experience in the development, deployment
      and management of communications and technology products and services. From
      March 2001 to June 2005, Mr. Somer was the Chief Executive Officer of
      Madison Strategic Partners, LLC, a consulting firm that assists established
      and
      new communications and technology companies, including providers of VoIP and
      other communications services, in developing strategies for their business
      growth. Mr. Somer continues as a member of Madison Strategic Partners. From
      November 1997 to March 2001, he was at deltathree, Inc. (“deltathree”), a Nasdaq
      Capital Market-listed pioneer in VoIP and hosted broadband services and a
      provider of private label VoIP services to Verizon, SBC and other
      telecommunications companies. Mr. Somer’s final position at deltathree was
      Director of Strategic Development, in which capacity he oversaw the deployment
      of consumer VoIP services. From 1996 to 1997, Mr. Somer was at Net2Phone, a
      division of IDT Corporation, Inc., a New York Stock Exchange-listed
      communications company, where he developed and managed an operational support
      system for dealing with resellers and consumers for that company’s VoIP
      services. His final position at Net2Phone was Director of Operations. IDT’s VoIP
      division was taken public as Net2Phone in 1999 and is listed on the Nasdaq
      National Market. Mr. Somer received a BA from Yeshiva University.




*Yu
      Wen Ching* .
      Mr.
      Ching has been our President of Manufacturing and Sourcing since June 2003.
      He has more than 25 years’ experience in the areas of product development,
      manufacturing and sourcing in Asia. From January 2003 until June 2003, Mr.
      Ching was involved in the development of our company. From 1999 to December
      2002, he was the Managing Director of Yu’s Electronics, a manufacturer of
      satellite transceiver boxes for European communications companies. From 1995
      to
      June 2001, he was the Managing Director of Yu’s Trading, a manufacturer of
      motorbikes for markets in Germany and Ireland. From 1993 to 1999, he was the
      Executive Vice President of Mobile Power of Taiwan, a manufacturer of cellular
      phone power accessories, including batteries and rechargers. In 1990, Mr. Ching
      founded Aztec Cellular (“Aztec”) and served as its Chief Executive Officer from
      1990 until its sale in 1995. Aztec developed, manufactured and distributed
      cellular phones in China. From 1973 to 1990, he was the Chief Executive Officer
      of Yu’s Coop, a textile group that manufactured raw materials and finished goods
      for the apparel industry and distributed its products to leading brand
      manufacturers, including Healthtex and Gerber. From 1980 to 1989, he was the
      Chief Executive Officer of Yu’s Tool, a subsidiary of Yu’s Coop. Yu’s Tool
      developed and manufactured nickel cadmium-based rechargeable tools and other
      products distributed through Home Depot, Wal-Mart, Lowes and other major
      retailers.




*Robert
      F. Doherty* .
      Mr.
      Doherty has served as a member of our board of directors since February 2006.
      Since April 2006, he has been a partner in Redwood Capital Group, an investment
      banking firm. From May 2005 to April 2006, he was a financial consultant and
      President of Great Blue Consulting LLC, a corporate finance consulting firm
      he
      founded in October 2002. From February 2004 to May 2005, Mr. Doherty served
      as a
      Managing Director in the Investment Banking Division of Jefferies & Company.
      From October 2002 to February 2004, he was




32




a
      financial consultant and President of Great Blue Consulting. From March 2002
      to
      September 2002, he was Executive Vice President and Chief Financial Officer
      of
      Abovenet, Inc. (formerly Metromedia Fiber Network, Inc.), a provider of fiber
      connectivity solutions for businesses, having been hired as a financial
      restructuring expert. In May 2002, Metromedia Fiber Network initiated a
      voluntary insolvency proceeding under Chapter 11 of the Federal Bankruptcy
      Code.
      Mr. Doherty previously served as a Managing Director in the Investment Banking
      Division of Salomon Smith Barney Inc. from October 1996 to January 2002, and
      as
      a Vice President in the Investment Banking Division of PaineWebber Incorporated
      from March 1989 to October 1996. Mr. Doherty received a BA from the University
      of Pennsylvania and an MBA from the Stern School of Business of New York
      University.




*Elliott
      J. Kerbis* .
      Mr.
      Kerbis has served as a member of our board of directors since February 2006.
      Since June 2004, Mr. Kerbis has served as an independent retail consultant.
      From January 2002 to June 2004, Mr. Kerbis was President and Chief
      Merchandising Officer for The Sports Authority, a New York Stock Exchange-listed
      operator of sporting goods retail stores. He joined The Sports Authority in
      October 2000 as Executive Vice President-Merchandising and Sales Promotion
      and
      was promoted to President and Chief Merchandising Officer in January 2002.
      He
      previously served as Senior Vice President of Merchandise at Filene’s, a
      department store owned by The May Department Store Company, from May 1999 to
      August 2000, and as Executive Vice President of Merchandise for Hardlines of
      The
      Caldor Corporation, a discount retailer, from 1987 to 1999. Prior to joining
      The
      Caldor Corporation, Mr. Kerbis served in various capacities with R.H. Macy
&
Co. from 1977 to 1987. Mr. Kerbis received a BS from Baruch
      College.




*Donald
      G. Norris* .
      Mr.
      Norris has served as a member of our board of directors since February 2006.
      Since November 2003, Mr. Norris has served as President of Norrismen Sales
      and
      Marketing and has been a partner of Corporate Identity Network, Inc., each
      a
      marketing consulting firm. From January 2000 to November 2003, Mr. Norris was
      Director of OEM Sales for Earthlink, Inc., a Nasdaq National Market-listed
      Internet service provider. He previously served as President of Norris and
      Associates, a consulting firm, from January 1993 to January 2000, and as
      Director of Subscriber Marketing for Prodigy Services Company, an Internet
      service provider that was the first consumer online service, from July 1984
      to
      January 1993. Mr. Norris received a BS from Oklahoma State
      University.




*Robert
      S. Picow.* Mr.
      Picow has served as a member of our board of directors since May 2006. Mr.
      Picow
      has served as Chairman of Cenuco Inc., a publicly traded company engaged in
      wireless application development and software solutions, since April 2004,
      and
      as a director of Cenuco since July 2003. Mr. Picow has served as a director
      of
      InfoSonics Corporation, a distributor of wireless handsets and accessories
      in
      the United States and Latin America, since December 2003, as a director of
      Streicher Mobile Fueling, a fuel distribution company, since March 2001 and
      as a
      director of Fundamental Management Corporation, a private fund management
      company, since May 2001. Mr. Picow served as Vice Chairman and a director of
      BrightPoint from 1996 until 1997. Subsequent to his last position with
      BrightPoint in 1997, Mr. Picow was not employed until accepting the directorship
      in Fundamental Management Corporation in 2001. Mr. Picow was chief executive
      officer of Allied Communications, a cellular telephone and accessory
      distribution company, from its formation in 1986 until it merged with
      BrightPoint in 1996.




Our
      board
      of directors has established an audit committee consisting of three directors,
      all of whom are independent as defined by the listing standards of the American
      Stock Exchange. The current members of the audit committee are Robert F.
      Doherty, Donald G. Norris and Robert S. Picow. Our board has determined that
      Mr.
      Doherty meets the SEC’s definition of an audit committee financial
      expert.




All
      executive officers serve at the discretion of our board.




**Code
      of Ethics**




Our
      board
      of directors has adopted a code of ethics applicable to all of our employees,
      including our chief executive officer, chief financial officer and chief
      operating officer, and our directors. The code of ethics has been filed as
      an
      exhibit to this Annual Report.




33




**Compliance
      with Section 16(a) of the Exchange Act**




Section 16(a)
      of the Exchange Act requires our directors and executive officers and persons
      who own beneficially more than 10% of our common stock to file reports of
      ownership and changes in ownership of such common stock with the SEC, and to
      file copies of such reports with us.




Based
      solely upon a review of the copies of such reports filed with us, we believe
      that during the year ended June 30, 2006 such reporting persons complied
      with the filing requirements of said Section 16(a) , except
      that each of Bruce Hahn; Bruce Layman; Adam Somer; Yu Wen Ching; Robert F.
      Doherty; Elliott J. Kerbis; Donald G. Norris; I NET Financial Management, Ltd.
      and The Future, LLC did not file on a timely basis his or its respective
      Form 3.




Each
      of
      the delinquent Form 3s were subsequently filed with the SEC.


**Item
                  11.**
                **Executive
                    Compensation**




**Summary
      Compensation**




No
      cash
      compensation was paid, or accrued to or for the benefit of, our executive
      officers prior to June 1, 2005. Accruals for compensation of our executive
      officers began on June 1, 2005.




The
      following table sets forth information for the fiscal year ended June 30,
      2006 concerning compensation we paid to our Chief Executive Officer and our
      other executive officers whose total annual salary and bonus exceeded $100,000
      for the year ended June 30, 2006.




**Annual
                Compensation**
            
            
            **Long-Term
                Compensation
                Awards****Name
                and**
              **Principal
                Position**
            
            
            **Fiscal**
              **Year**
            
            
            **Salary($)**
            
            
            **Bonus($)**
            
            
            **Other
                Annual
                Compensation($)**
            
            
            **Restricted**
              **Stock
                Awards($)(a)**
            
            
            **Number
                of Shares Underlying
                Options(#)**
            
            
            **LTIP**
              **Payouts($)(a**)
            
            
            **All
                Other
                Compensation($)**Bruce
                Hahn
            
            
            2006
            
            $
            170,830
            
            $
            —
            
            $
            26,464
            
            $
            75,000
            
            
            25,000
            
            $
            —
            
            $
            —Chief
                  Executive
                Officer
            
            
            2005
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —
            
            
            —
            
            $
            —
            
            $
            —Bruce
                Layman
            
            
            2006
            
            $
            100,655
            
            $
            —
            
            $
            4,900
            
            $
            50,000
            
            
            25,000
            
            $
            —
            
            $
            —Chief
                Operating
              Officer
                and Chief
              Financial
                Officer
            
            
            2005
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —
            
            
            —
            
            $
            —
            
            $
            —Adam
                Somer
            
            
            2006
            
            $
            116,246
            
            $
            —
            
            $
            6,000
            
            $
            50,000
            
            
            25,000
            
            $
            —
            
            $
            —President
                of
              Communications
              Services
            
            
            2005
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —
            
            
            —
            
            $
            —
            
            $
            —Yu
                Wen Ching
            
            
            2006
            
            $
            130,000
            
            $
            —
            
            $
            —
            
            $
            50,000
            
            
            25,000
            
            $
            —
            
            $
            —President
                of
              Manufacturing
                and
              Sourcing
            
            
            2005
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —
            
            
            —
            
            $
            —
            
            $
            —




(a)
        As of
        June 30, 2006 an aggregate of 225,000 shares of performance based accelerate
        stock (“PARS”) were outstanding to the executive officers included herein. The
        aggregate value of such awards was $1,057,000 as of the date of grant and
        $753,750 as of June 30, 2006. The PARS will vest upon the achievement, if
        ever,
        of certain performance targets.


**Option
        Grants in Last Fiscal Year**
  The
        following table shows the stock option grants made to the executive officers
        named in the Summary Compensation Table during the fiscal year ended June
        30,
        2006:
  **Name**
              **Number
                  of Shares**
                **of****Common
                  Stock**
                **Underlying****Options**
                **Granted**
              **Percent
                  of**
                **Total
                  Options**
                **Granted
                  to**
                **Employees**
                **In
                  Fiscal Year**
              **Exercise**
                **Price
                  (1)**
              **Expiration**
                **Date****Grant
                  Date**
                **Present
                  Value $**Bruce
                  Hahn
              25,000
              18.5%
              $5.05
              2/6/11
              $62,618Bruce
                  Layman
              25,000
              18.5%
              $5.05
              2/6/11
              $62,618Adam
                  Somer
              25,000
              18.5%
              $5.05
              2/6/11
              $62,618Yu
                  Wen Ching
              25,000
              18.5%
              $5.05
              2/6/11
              $62,618
 _______________
  (1) Options
        were granted at an exercise price equal to the fair market value of our common
        stock, as determined by the closing sales price.
   **Fiscal
        Year-End Option Values**
  The
        following table shows information with respect to unexercised stock options
        held
        by the executive officers named in the Summary Compensation Table as of June
        30,
        2006. No options held by such individuals were exercised during the fiscal
        year
        ended June 30, 2006.
  **Number
                  of Securities Underlying**
                **Unexercised
                  Options**
                **at
                  Fiscal Year-End**
              
              **Value
                  of Unexercised In-The-Money**
                **Options
                  at Fiscal Year-End****Name**
              
              **Exercisable**
              
              **Unexercisable**
              
              **Exercisable**
              
              **Unexercisable**Bruce
                  Hahn
              
              —
              
              25,000
              
              $   
                  —
              
              $   
                  —Bruce
                  Layman
              
              —
              
              25,000
              
              $   
                  —
              
              $   
                  —Adam
                  Somer
              
              —
              
              25,000
              
              $   
                  —
              
              $   
                  —Yu
                  Wen Ching
              
              —
              
              25,000
              
              $   
                  —
              
              $   
                  —


**Employment
      Agreements**




Upon
      consummation of our initial public offering on February 6, 2006, Messrs. Hahn,
      Layman, Somer and Ching entered into employment agreements, each of which
      expires on December 31, 2007. Messrs. Hahn, Layman, Somer and Ching are paid
      monthly for the periods indicated in table below on the basis of the following
      annualized base salaries:




34




**Period
                Ended**
              **June 30,
                2006**
            
            **Period
                Ended December 31,2007**Bruce
                Hahn
            
            
            $
                200,000
            
            
            $
                230,000Bruce
                Layman
            
            
            $
                125,000
            
            
            $
                137,500Adam
                Somer
            
            
            $
                125,000
            
            
            $
                137,500Yu
                Wen Ching
            
            
            $
                144,000
            
            
            $
                158,400





Messrs.
      Hahn, Layman, Somer and Ching are entitled to the following bonuses based on
      our
      net sales (defined as our revenues collected during a period less allowances
      granted to retailers, markdowns, discounts, commissions, reserves for service
      outages, customer hold backs and expenses):




·
            one
                percent of the amount by which our net sales during our fiscal year
                ended
                June 30, 2006 exceed
                $5,000,000;




·
            one
                percent of the amount by which our net sales for the fiscal year
                ended
                June 30, 2007 exceed our net sales during our fiscal year ended
                June 30, 2006; and




·
            one
                percent of the amount by which our net sales for the six-month period
                ended December 31, 2007 exceed our net sales during the six-month
                period
                ended June 30, 2007.




The
      bonus
      described above will be limited to an amount no greater than 75% of the
      recipient’s then current annual base salary or, in the case of the six-month
      period ending December 31, 2007, the base salary during such
      period.




Messrs.
      Hahn, Layman, Somer and Ching will also be entitled to the following bonuses
      based on our net profits (defined as our net income, after taxes, as determined
      in accordance with GAAP):




·
            one
                percent of our net profits for each of our fiscal years ended
                June 30, 2006 and June 30, 2007, respectively;
                and




·
            one
                percent of our net profits for the six-month period ended December
                31,
                2007.




The
      employment agreements will further provide that Mr. Hahn’s aggregate bonuses
      from net sales and net profits for any bonus period will in no event exceed
      150%
      of his base salary during such period and each of Messrs. Layman, Somer and
      Ching’s aggregate bonuses from net sales and net profits for any bonus period
      will in no event exceed 112% of his base salary during such period.




**Compensation
      of Directors**




Effective
      February 6, 2006, Mr. Burstein is paid $80,000 per year in his capacity as
      chairman of the board of directors.




Directors
      who are not employees receive $1,250 (plus reimbursement for travel expenses)
      for each board of directors meeting attended in person and $500 for each board
      of directors meeting attended telephonically. Upon the commencement of their
      term, each such director received a grant of options to purchase 15,000 shares
      of our common stock at an exercise price equal to not less than the fair market
      value per share of our common stock at the time of grant. Thereafter, each
      such
      director will receive quarterly during their term as a director grants of
      options to purchase 5,000 shares of our common stock at an exercise price per
      share equal to not less than the fair market value per share of our common
      stock
      at the time of grant. All directors’ options will vest in their entirety on the
      first anniversary of their respective grant dates.




35




**Item 12.****Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters**




The
      following table sets forth certain information, as of September 21, 2006, with
      respect to the beneficial ownership of shares of our common stock held by:
      (i) each director; (ii) each person known by us to beneficially own 5%
      or more of our common stock; (iii) each named executive officer; and
      (iv) all directors and executive officers as a group. Unless otherwise
      indicated, the address for each securityholder is c/o American Telecom Services
      Inc., 2466 Peck Road, City of Industry, California 90601.




**Name
                and Address of Beneficial Owner**
            
            **Number
                of Shares of Common Stock Beneficially**
              **Owned
                (1)**
            
            **Percent
                of Class**Lawrence
                Burstein
            
            
            206,565(2
            )
            
            3.1
            %Bruce
                Hahn
            
            
            797,900(3
            )
            
            12.3
            %Adam
                Somer
            
            
            220,000(4
            )
            
            3.4
            %Yu
                Wen Ching
            
            
            674,000(5
            )
            
            10.4
            %Robert
                F. Doherty
            
            
            5,000(6
            )
            
            *Elliott
                J. Kerbis
            
            
            5,000(6
            )
            
            *Donald
                G. Norris
            
            
            5,000(6
            )
            
            *Robert
                S. Picow
            
            
            21,000(7
            )
            
            *I
                NET Financial Management, Ltd.
              No. 17-1,
                Alley 3, Lane 217
              Chung
                Hsiao E. Road
              Sec.
                3, Taipei, Taiwan, R.O.C.
            
            
            674,000(8
            )
            
            10.4
            %Jack
                Silver
              660
                Madison Avenue
              New
                York, New York 10021
            
            
            580,000(9
            )
            
            8.5
            %The
                Future, LLC
              417
                Lucy Street
              Henderson,
                Nevada 89015
            
            
            361,000(10
            )
            
            5.6
            %All
                current executive officers,
              directors
                as a group (9 persons)
            
            
            1,260,465(11
            )
            
            19.1
            %





*
            Less
                than 1%.




(1)
            As
                used in this table, beneficial ownership means the sole or shared
                power to
                vote, or direct the voting of, a security, or the sole or shared
                power to
                invest or dispose, or direct the investment or disposition, of a
                security.
                Except as otherwise indicated, based on information provided by the
                named
                individuals, all persons named herein have sole voting power and
                investment power with respect to their respective shares of our common
                stock, except to the extent that authority is shared by spouses under
                applicable law, and record and beneficial ownership with respect
                to their
                respective shares of our common stock. With respect to each
                securityholder, any shares issuable upon exercise of options and
                warrants
                held by such securityholder that are currently exercisable or will
                become
                exercisable within 60 days of August 31, 2006 are deemed outstanding
                for
                computing the percentage of the person holding such options, but
                are not
                deemed outstanding for computing the percentage of any other
                person.




36




(2)
            Includes
                38,000 shares of common stock owned by Unity Venture Capital Associates
                Ltd., of which Mr. Burstein is President. Also includes 58,333 shares
                of
                common stock issuable upon exercise of warrants. Does not include
                25,000
                shares of common stock issuable upon exercise of options and 50,000
                shares
                of common stock that are the subject of PARS, which options and common
                stock will not vest within 60 days of September 21,
                2006.




(3)
            Includes
                674,000 shares of common stock owned by I NET Financial Management,
                Ltd.,
                which is 51% owned by Mr. Ching and 49% owned by Mr. Hahn. Each disclaims
                beneficial ownership of the other’s interest. Also includes 120,000 shares
                held by BLA Opportunities LLC, which is controlled by Bruce Hahn’s wife
                for the benefit of Mr. Hahn’s adult and minor children. Mr. Hahn disclaims
                any beneficial ownership in these shares. Does not include 25,000
                shares
                of common stock issuable upon exercise of options and 75,000 shares
                of
                common stock that are the subject of PARS, which options and common
                stock
                will not vest within 60 days of September 21,
                2006.




(4)
            Does
                not include 25,000 shares of common stock issuable upon exercise
                of
                options and 50,000 shares of common stock that are the subject of
                PARS,
                which options and common stock will not vest within 60 days of September
                21, 2006.




(5)
            Includes
                674,000 shares of common stock owned by I NET Financial Management,
                Ltd.,
                which is 51% owned by Mr. Ching and 49% owned by Mr. Hahn. Each disclaims
                beneficial ownership of the other’s interest. Does not include 25,000
                shares of common stock issuable upon exercise of options and 50,000
                shares
                of common stock that are the subject of PARS, which options and common
                stock will not vest within 60 days of September 21,
                2006.




(6)
            Reflects
                5,000 shares of common stock issuable upon exercise of options. Does
                not
                include 15,000 shares of common stock issuable upon exercise of options,
                which will not vest within 60 days of August 31,
                2006.




(7)
            Includes
                5,000 shares of common stock issuable upon exercise of options and
                8,000
                shares of common stock issuable upon exercise of warrants. Does not
                include 15,000 shares of common stock issuable upon exercise of options,
                which will not vest within 60 days of August 31,
                2006.




(8)
            I
                NET Financial Management, Ltd. is 51% owned by Yu Wen Ching, our
                President
                of Manufacturing and Sourcing, and 49% owned by Bruce Hahn, our Chief
                Executive Officer. Each disclaims beneficial ownership of the other’s
                interest.




(9)
            Based
                on information contained in a Schedule 13G filed by Jack Silver on
                February 10, 2006, such shares of common stock include (i) 290,000
                shares held by Sherleigh Associates Inc. Defined Benefit Pension
                Plan, a
                trust of which Mr. Silver is the trustee, and (ii) warrants to
                purchase 290,000 shares held by Sherleigh. The Schedule 13G states
                that
                Mr. Silver has the sole voting and dispositive power with respect
                to all
                580,000 shares.




(10)
            Does
                not include 25,000 shares of common stock issuable upon exercise
                of
                options and 50,000 shares of common stock that are the subject of
                PARS,
                which options and common stock will not vest within 60 days of September
                21, 2006. The Future, LLC is wholly-owned by Tonda
                Mullis.




(11)
            Includes
                20,000 shares of common stock issuable upon exercise of options and
                66,333
                shares of common stock issuable upon exercise of warrants. Does not
                include 185,000 shares of common stock issuable upon exercise of
                options
                and 275,000 shares of common stock that are the subject of PARS,
                which
                options and common stock will not vest within 60 days of September
                21,
                2006.




**Item
                  13.**
                **C****ertain
                    Relationships and Related
                    Transactions**




Upon
      our
      inception in June 2003, we issued a total of 9,600 shares of our common
      stock, all at $0.001 per share, as follows:




·
            5,280
                shares to I NET Financial Management Ltd, which is 51% owned by Yu
                Wen
                Ching, President of Manufacturing and Sourcing of our company, and
                49%
                owned by Bruce Hahn, a director and Chief Executive Officer of our
                company;




37




·
            2,400
                shares to a to be formed entity that was to be 50% owned by Adam
                Somer,
                President of Communications Services and Secretary of our company,
                and 50%
                by David Feuerstein, a principal stockholder of our company;
                and




·
            1,920
                shares to The Future, LLC, a principal stockholder of our
                company.




On
      June 22, 2004, we effected a stock split in the form of a stock dividend at
      the rate of 91.9271 shares of our common stock for each then issued and
      outstanding share of our common stock. On July 7, 2004, we issued 60,000 shares
      of our common stock to Lawrence Burstein, our Chairman of the Board, at $0.001
      per share. On March 22, 2005, we effected a stock split in the form of a stock
      dividend at the rate of two shares of our common stock for each then issued
      and
      outstanding share of our common stock.




Mr.
      Burstein, our Chairman of the Board, purchased $25,000 principal amount of
      our
      6% notes and $37,500 principal amount of our 8% notes in our 2005 private
      placements, and also received an aggregate of 58,333 private warrants in
      connection with such purchases. Mr. Burstein paid the same purchase price as
      all
      other investors in the private placements and received identical registration
      rights with respect to his securities.




Certain
      marketing services are being provided to us by Future Marketing, whose sole
      stockholder is also the sole stockholder of The Future, LLC, which owns 18.1%
      of
      our stock. Future Marketing, among other things, assists in the development
      and
      execution of our marketing plans, manages our accounts, assists in our product
      development and handles our back-office vendor functions.




As
      compensation for its services, effective as of February 6, 2006, Future
      Marketing will be paid monthly for the periods indicated on the basis of the
      following annualized base fee schedule for the periods indicated:




Period
                ended June 30, 2006:
            
            $
            164,000July
                1, 2006 through December 31, 2007:
            
            $
            184,800




In
      addition to such monthly fees, Future Marketing will be entitled to the
      following fees based on our net sales (defined as our revenues collected during
      a period less allowances granted to retailers, markdowns, discounts,
      commissions, reserves for service outages, customer hold backs and
      expenses):




·
            one
                percent of the amount by which our net sales during our fiscal year
                ended
                June 30, 2006 exceed
                $5,000,000;




·
            one
                percent of the amount by which our net sales for our fiscal year
                ended
                June 30, 2007 exceed our net sales for our fiscal year ended
                June 30, 2006; and




·
            one
                percent of the amount by which our net sales for the six-month period
                ended December 31, 2007 exceed our net sales during the six-month
                period
                ended June 30, 2007.




The
      fees
      described above for any period will be limited to an amount no greater than
      75%
      of Future Marketing’s base fees paid during such period.




Future
      Marketing will also be entitled to the following fees based on our net profits
      (defined as our net income, after taxes, as determined in accordance with
      GAAP):




·
            one
                percent of our net profits for each of our fiscal years ended
                June 30, 2006 and June 30, 2007, respectively;
                and




·
            one
                percent of our net profits for the six-month period ended December
                31,
                2007.




In
      no
      event may the aggregate supplemental fees paid to Future Marketing from net
      sales and net profits during any period described above exceed 112% of the
      base
      fees paid during such period.




Future
      Marketing will receive 25,000 options and 50,000 PARS pursuant to our 2005
      stock
      option plan.




38




We
      have
      entered into a five-year agreement with David Feuerstein, a stockholder of
      our
      company, pursuant to which, in consideration for helping to establish our
      service provider relationship with IDT and, going forward, maintaining and
      expanding our relationships with each of IDT and SunRocket, we will pay him
      one
      quarter of one percent of all net revenues collected by us during each year
      of
      the term of the agreement directly attributable to the sale of (i) digital
      cordless multi-handset phone systems, (ii) multi-handset VOIP telephones
      and (iii) related telephone hardware components ((i), (ii) and (iii),
      collectively, “Hardware”), subject to a maximum aggregate amount of $250,000 for
      such year. Under our agreement, such net revenues mean our gross amounts of
      billing on Hardware sold to retailers less (I) sales and other taxes,
      postage, cost of freight and disbursements included in such bills and
      (II) allowances granted to such retailers including, without limitation,
      advertising and promotional allowances, markdowns, discounts, returns and
      commissions.




We
      will
      also pay to Mr. Feuerstein five percent of all net revenues collected by us
      from
      IDT Puerto Rico & Co (“IDT”) during each year of the term of and directly
      attributable to our service agreement dated as of November 25, 2003 with IDT
      (the “IDT Agreement”), subject to a maximum aggregate amount of $250,000 for
      such year. Under our agreement, such net revenues mean payments to which we
      are
      entitled and collect under the IDT Agreement less service provider deductions
      provided under our agreement including, without limitation, reserves for service
      outages, customer hold backs and expenses.




We
      will
      also pay to Mr. Feuerstein two percent of all net revenues collected by us
      from
      SunRocket during each year of the term of and directly attributable to our
      June 7, 2005 service agreement with SunRocket, subject to a maximum
      aggregate amount of $250,000 for such year; provided, however, that any revenues
      attributable under the SunRocket agreement from the provision of Internet-based
      communications services relating to “subscriber bounty,” “advertising co-op” and
“key-city funds” are excluded in any computation of such net revenues. Under our
      agreement, such net revenues mean payments to us to which we are entitled from
      SunRocket less service provider deductions provided under the SunRocket
      agreement including, without limitation, reserves for service outages, customer
      hold backs and expenses.




Pursuant
      to our agreement with Mr. Feuerstein, approximately $4,600 and $0 fees were
      paid
      to him during of the fiscal years ended June 30, 2006 and
      2005.




Our
      agreement may be extended for an additional five-year term if we are profitable
      for three of the first five years of the initial term. If so extended, Mr.
      Feuerstein will be entitled to a reduced revenue sharing allocation. Our
      agreement also provides for certain revenue sharing allocation reductions if
      certain conditions are not satisfied during the initial term.




Messrs.
      Somer and Feuerstein are each 50% owners of a communications industry consulting
      firm.




All
      of
      the foregoing transactions were negotiated and entered into on an arms-length
      basis. We believe that the terms of these transactions are fair and reasonable
      to our company and no less favorable to us than could have been obtained in
      an
      arms-length transaction with non-affiliates.




39


**Item
                  14.**
                **Principal
                    Accounting Fees and
                    Services**




Fees
      for
      professional services provided by our independent auditors in each of the last
      two fiscal years, in each of the following categories are as
      follows:




**Year
                Ended June 30,****2006**
            
            
            **2005**Audit
                fees
            
            $
            247,000
            
            $
            38,000Audit-related
                fees
            
            
            —
            
            
            —Tax
                fees
            
            
            —
            
            
            —All
                other fees
            
            
            —
            
            
            —Total
            
            $
            247,000
            
            $
            38,000





Audit
      fees include fees associated with the annual audit, the reviews of our quarterly
      reports on Form 10-Q, assistance with and review of documents filed with
      the Securities and Exchange Commission and comfort letters.




The
      audit
      committee has adopted a policy that requires advance approval of all audit,
      audit-related, tax and other services performed by the independent auditor.
      The
      policy provides for pre-approval by the audit committee of specifically defined
      audit and non-audit services. Unless the specific service has been previously
      pre-approved with respect to that year, the audit committee must approve the
      permitted service before the independent auditor is engaged to perform
      it.




40




**PART
      IV**




**Item
                  15.**
                **Exhibits
                    and Financial Statement
                    Schedules**




**Exhibits**




**Exhibit**
              **Number**
            
            **Description**3.1
            
            Amended
                and Restated Certificate of Incorporation of Registrant (1)3.2
            
            Bylaws
                of Registrant (1)3.3
            
            Audit
                Committee Charter (1)4.1
            
            Specimen
                of Common Stock Certificate (1)4.2
            
            Specimen
                of Redeemable Warrant Certificate (1)4.3
            
            Form
                of Securities Purchase Option granted to the Representative
                (1)4.4
            
            Form
                of Warrant Agreement between Continental Stock Transfer & Trust
                Company and Registrant (1)10.1
                *
            
            2005
                Stock Option Plan of Registrant (1)10.2
                *
            
            Employment
                Agreement between Bruce Hahn and Registrant10.3
                *
            
            Employment
                Agreement between Bruce Layman and Registrant10.4
                *
            
            Employment
                Agreement between Adam Somer and Registrant10.5
                *
            
            Employment
                Agreement between Yu Wen Ching and Registrant10.6
            
            Marketing
                and Consulting Agreement between Future Marketing, LLC and Registrant
                (1)10.7
                (a) **
            
            Letter
                Agreement between IDT Puerto Rico & Co. and Registrant, dated November
                25, 2003 (1)10.7
                (b) **
            
            Amendment,
                dated January 4, 2006, to the Letter Agreement between IDT Puerto
                Rico
                & Co and Registrant, dated November 25, 2003 (1)10.7(c)
            
            Notice
                of Assignment dated April 28, 2006, by IDT Puerto Rico & Co. to
                IDT Domestic Telecom of Letter Agreement between IDT Puerto Rico
& Co.
                and Registrant, dated November 25, 200310.8
                **
            
            Letter
                Agreement between SunRocket, Inc. and Registrant, dated September
                28, 2005
                (1)10.9
            
            Agreement
                between Gain Star International Limited and Registrant, dated
                June 22, 200510.10
            
            Trust
                Account Agreement between Gain Star International Limited and Registrant,
                dated June 27, 2005 (1)10.11
            
            Sales
                Contract between Gain Star International Limited and Registrant,
                dated
                June 27, 2005 (1)10.12
            
            Factoring
                Agreement between CIT Commercial Services and Registrant, dated July
                6,
                2005 (1)10.13
            
            Assignment
                Agreement among The CIT Group, Commercial Services, Inc., Gain Star
                International Limited and Registrant, dated July 7, 2005 (1)10.14
            
            Agreement
                between David Feuerstein and Registrant, dated October 22, 2005
                (1)




41




10.15
            
            Form
                of Financial Advisory Agreement between HCFP/Brenner Securities,
                LLC and
                Registrant (1)10.16
            
            Form
                of Merger, Acquisition and other Business Arrangement Agreement between
                HCFP/Brenner Securities, LLC and Registrant (1)10.17
            
            Services
                and Distribution Agreement between Databyte Technology, Inc. and
                Registrant, dated October 24, 2003, inclusive of Amendments dated
                October
                12, 2004 and September 6, 2005 (1)10.18
            
            Form
                of Indemnification Agreement between Registrant and each of Future
                Marketing, LLC and the executive officers and directors of Registrant
                (1)10.19
            
            Lease
                between 485 Properties LLC and Registrant, dated December 21, 2005,
                with respect to premises situated at Six Concourse Parkway, Suite
                1525,
                Atlanta, Georgia14.1
            
            Code
                of Ethics (1)21.1
            
            Subsidiaries
                of the Registrant31.1
            
            Rule 13a-14(a)
                Certification of Chief Executive Officer31.2
            
            Rule 13a-14(a)
                Certification of Chief Financial Officer32.1
            
            Section 1350
                Certifications







*
            Management
                contract or compensatory plan or
                arrangement




**
            Confidential
                treatment requested for certain portions of this Exhibit pursuant
                to
                Rule 406 under the Securities Exchange Act of 1934, as amended, which
                portions are omitted and filed separately with the Securities and
                Exchange
                Commission.




(1)
            Filed
                as an exhibit to Registrant’s Registration Statement on Form S-1
                (File Number 333-129361) andincorporatedherein by reference.




42




**Financial
        Statements**
  Our
        financial statements, as indicated by the Index to Financial Statements set
        forth below, begin on page F-1 of this Annual Report, and are incorporated
        herein by reference.
    **INDEX
        TO FINANCIAL STATEMENTS**
   Report
                of Independent Registered Public Accounting Firm
              
              F-2Consolidated
                  Financial Statements:Consolidated
                  Balance Sheets, June 30, 2006 and 2005
              
              F-3Consolidated
                  Statements of Operations, for the years ended June 30, 2006, 2005 and
                  2004
              
              F-4Consolidated
                  Statements of Stockholders’ Equity (deficit), for the years ended
                  June 30, 2006, 2005 and 2004
              
              F-5Consolidated
                  Statements of Cash Flows, for the years ended June 30, 2006, 2005 and
                  2004
              
              F-6Notes
                  to Consolidated Financial Statements
              
              F-7
                —
                F-22
     
 
     
 F-1
 **Report
        of Independent Registered Public Accounting Firm**
  Board
        of
        Directors and Stockholders
  American
        Telecom Services, Inc.
  City
        of
        Industry, California
  We
        have
        audited the accompanying consolidated balance sheets of American Telecom
        Services, Inc. (the “Company”) as of June 30, 2006 and 2005, and the
        related consolidated statements of operations, stockholders’ equity (deficit)
        and cash flows for each of the three years in the period ended June 30,
        2006. These financial statements are the responsibility of the Company’s
        management. Our responsibility is to express an opinion on these financial
        statements based on our audits.
  We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. The Company is not required
        to
        have, nor were we engaged to perform, an audit of its internal control over
        financial reporting. Our audits included consideration of internal control
        over
        financial reporting as a basis for designing audit procedures that are
        appropriate in the circumstances, but not for the purpose of expressing an
        opinion on the effectiveness of the Company’s internal control over financial
        reporting. Accordingly, we express no such opinion. An audit also includes
        examining, on a test basis, evidence supporting the amounts and disclosures
        in
        the financial statements, assessing the accounting principles used and
        significant estimates made by management, as well as evaluating the overall
        financial statement presentation. We believe that our audits provide a
        reasonable basis for our opinion.
  In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the financial position of American Telecom Services,
        Inc. as of June 30, 2006 and 2005, and the results of its operations and
        its cash flows for each of the three years in the period ended June 30,
        2006, in conformity with accounting principles generally accepted in the
        United
        States of America.
   BDO
        Seidman, LLP
  New
        York,
        New York
  September
        15, 2006
  
 
 F-2
 **AMERICAN
        TELECOM SERVICES, INC.**
 **CONSOLIDATED
        BALANCE SHEETS**
  **June
                    30, 2006**
                
                **June
                    30, 2005****ASSETS**Current
                    assets:Cash
                    and cash equivalents
                
                $
                12,372,765
                
                $
                50,780Accounts
                    receivable, net of allowance for doubtful accounts
                
                
                1,060,968
                
                
                —Inventory
                
                
                2,181,019
                
                
                —Prepaid
                    expenses and other
                
                
                808,523
                
                
                —Total
                    current assets
                
                
                16,423,275
                
                
                50,780Property
                    and equipment, net (Note 4)
                
                
                174,880Deposit
                    and other assets
                
                
                75,391
                
                
                —Deferred
                    financing costs
                
                
                —
                
                
                113,518Debt
                    issuance costs, net
                
                
                —
                
                
                10,000Total
                    assets
                
                $
                16,673,546
                
                $
                174,298**LIABILITIES
                    AND STOCKHOLDERS’ EQUITY (DEFICIT)**Current
                    liabilities:Accounts
                    payable
                
                $
                372,916
                
                $
                —Accrued
                    expenses (Note 5)
                
                
                772,643
                
                
                100,657Accrued
                    financing costs
                
                
                157,871
                
                
                123,518Deferred
                    revenue
                
                
                57,263
                
                
                —Total
                    current liabilities
                
                
                1,360,693
                
                
                224,175Convertible
                    notes, net including interest payable of $0 and $75(Note
                    9)
                
                
                —
                
                
                1,000Total
                    liabilities
                
                
                1,360,693
                
                
                225,175Commitments
                    (Note 7)Stockholders’
                    equity (deficit) (Notes 3, 8, 9, and 10) :Preferred
                    stock, $.001 par value, authorized 5,000,000shares,
                    issued and outstanding -0- sharesCommon
                    stock, $.001 par value, 40,000,000 shares authorized;6,502,740
                      shares and 2,000,000 shares issued andoutstanding,
                      respectively
                
                
                6,503
                
                
                2,000Additional
                    paid-in capital
                
                
                21,239,702
                
                
                142,429Accumulated
                    deficit
                
                
                (5,933,352
                )
                
                (195,306
                )Total
                    stockholders’ equity (deficit)
                
                
                15,312,853
                
                
                (50,877
                )Total
                    liabilities and stockholders’ equity (deficit)
                
                $
                16,673,546
                
                $
                174,298
    The
        accompanying notes are an integral part of these consolidated financial
        statements
  
 F-3
 **AMERICAN
        TELECOM SERVICES, INC.**
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
   **For
                    the Years Ended****June
                    30,****2006**
                
                **2005**
                
                **2004**Revenues
                    (Note 1)
                
                $
                3,100,177
                
                $
                —
                
                $
                —Cost
                    of revenues
                
                
                1,801,565
                
                
                —
                
                
                —Gross
                    profit
                
                
                1,298,612
                
                
                —
                
                
                —Operating
                    Expenses:Selling,
                    marketing and development
                
                
                2,556,011
                
                
                84,813
                
                
                22,058General
                    and administrative
                
                
                2,154,128
                
                
                84,435
                
                
                3,000Total
                    expenses
                
                
                4,710,139
                
                
                169,248
                
                
                25,058Operating
                    loss
                
                
                (3,411,527
                )
                
                (169,248
                )
                
                (25,058
                )Other
                    expenses (income):Interest
                    expense and bank charges
                
                
                125,186
                
                
                75
                
                
                —Interest
                    income
                
                
                (223,033
                )
                
                —
                
                
                —Amortization
                    of debt discounts anddebt
                    issuance costs (Note 9)
                
                
                2,424,366
                
                
                925
                
                
                ——
                
                
                
                
                
                —Loss
                    before provision for income taxes
                
                
                (5,738,046
                )
                
                (170,248
                )
                
                (25,058
                )Provision
                    for income taxes
                
                
                —
                
                
                —
                
                
                —Net
                    loss
                
                $
                (5,738,046
                )
                $
                (170,248
                )
                $
                (25,058
                )Net
                    loss per common share:Basic
                    and diluted
                
                
                (1.54
                )
                $
                (0.09
                )
                $
                (0.01
                )Weighted
                    average shares outstanding:Basic
                    and diluted
                
                
                3,737,806
                
                
                1,996,261
                
                
                1,740,490
     The
        accompanying notes are an integral part of these consolidated financial
        statements
  
 F-4
 **AMERICAN
        TELECOM SERVICES, INC.**
 **CONSOLIDATED
        STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)**
   **Common
                    stock****Shares**
                
                **Amount**
                
                **Additional
                    paid-in capital**
                
                **Accumulated**
                  **deficit**
                
                **Total
                    stockholders’ equity (deficit)****Balance,
                    July 1, 2003**
                
                
                —
                
                $
                —
                
                $
                —
                
                $
                —
                
                $
                —Issuance
                    of common stock, June 16, 2004
                
                
                1,765,000
                
                
                1,765
                
                
                —
                
                
                —
                
                
                1,765Issuance
                    of common stock, June 22, 2004
                
                
                40,000
                
                
                40
                
                
                —
                
                
                —
                
                
                40Capital
                    contribution
                
                
                —
                
                
                —
                
                
                23,253
                
                
                —
                
                
                23,253Net
                    loss
                
                
                
                
                
                
                
                
                
                
                
                (25,058
                )
                
                (25,058
                )**Balance,
                    June 30, 2004**
                
                
                1,805,000
                
                
                1,805
                
                
                23,253
                
                
                (25,058
                )
                
                —Issuance
                    of common stock, July 7, 2004
                
                
                195,000
                
                
                195
                
                
                —
                
                
                —
                
                
                195Capital
                    contribution
                
                
                —
                
                
                —
                
                
                69,176
                
                
                —
                
                
                69,176Value
                      allocated to warrants issued and beneficial conversionfeature of
                      convertible notes
                
                
                —
                
                
                —
                
                
                50,000
                
                
                —
                
                
                50,000Net
                    loss
                
                
                
                
                
                
                
                
                
                
                
                (170,248
                )
                
                (170,248
                )**Balance,
                    June 30, 2005**
                
                
                2,000,000
                
                
                2,000
                
                
                142,429
                
                
                (195,306
                )
                
                (50,877
                )Capital
                    contribution
                
                
                —
                
                
                —
                
                
                2,080
                
                
                —
                
                
                2,080Value
                    allocated to warrants issued and beneficial conversion feature
                    of
                    convertible notes
                
                
                —
                
                
                —
                
                
                1,844,246
                
                
                —
                
                
                1,844,246Proceeds
                    from sale of underwriters’ purchase option
                
                
                —
                
                
                —
                
                
                100
                
                
                —
                
                
                100Proceeds
                      from sale of common stock and warrants through publicoffering,
                      including exercise of over allotment, net of underwriter discount
                      and
                      offering costs of $2,518,717 February and March 2006
                
                
                3,752,500
                
                
                3,753
                
                
                16,620,280
                
                
                —
                
                
                16,624,033Conversion
                    of Notes and Senior Notes
                
                
                750,240
                
                
                750
                
                
                2,249,970
                
                
                —
                
                
                2,250,720Stock-based
                    compensation expense related to employee stock options (Notes
                    2 and
                    8)
                
                
                —
                
                
                —
                
                
                230,439
                
                
                —
                
                
                230,439Stock-based
                    compensation expense related to non-employee stock options (Notes
                    2 and
                    8)
                
                
                —
                
                
                —
                
                
                150,158
                
                
                —
                
                
                150,158Net
                    loss
                
                
                —
                
                
                —
                
                
                —
                
                
                (5,738,046
                )
                
                (5,738,046
                )**Balance,
                    June 30, 2006**
                
                
                6,502,740
                
                $
                6,503
                
                $
                21,239,702
                
                $
                (5,933,352
                )
                $
                15,312,853
     The
        accompanying notes are an integral part of these consolidated financial
        statements
  F-5
 **AMERICAN
        TELECOM SERVICES, INC.**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
  ****
                
                **For
                    the Years Ended******
                
                **June
                    30,******
                
                **2006**
                
                **2005**
                
                **2004******
                
                ****
                
                ****
                
                ****Cash
                    flows from operating activities:Net
                    loss
                
                $
                (5,738,046
                )
                $
                (170,248
                )
                $
                (25,058
                )Adjustment
                    to reconcile net loss to net cash used in operating activitiesDepreciation
                
                
                19,664
                
                
                —
                
                
                —Allowance
                    for doubtful accounts
                
                
                20,000Common
                    stock and capital contributed for services
                
                
                2,080
                
                
                69,371
                
                
                25,058Employee
                    share based compensation
                
                
                230,439
                
                
                —
                
                
                —Non-employee
                    share based compensation
                
                
                150,158
                
                
                —
                
                
                —Non-cash
                    interest expense
                
                
                87,220
                
                
                —
                
                
                —Amortization
                    of debt discounts and issuance costs
                
                
                2,424,366
                
                
                925
                
                
                ——Changes
                    in operating assets and liabilities:Accounts
                    receivable
                
                
                (1,080,968
                )
                
                —
                
                
                —Prepaid
                    expenses and other
                
                
                (808,523
                )
                
                —
                
                
                —Inventory
                
                
                (2,181,019
                )
                
                —
                
                
                —Deposit
                    and other assets
                
                
                (75,391
                )
                
                —
                
                
                —Accounts
                    payable
                
                
                372,916
                
                
                —
                
                
                —Accrued
                    expenses
                
                
                671,986
                
                
                100,732
                
                
                —Deferred
                    revenue
                
                
                57,263
                
                
                —
                
                
                —Net
                    cash (used in) provided by operating activities
                
                
                (5,847,855
                )
                
                780
                
                
                —Cash
                    flows from investing activities:Purchases
                    of property and equipment
                
                
                (194,544
                )
                
                —
                
                
                —Net
                    cash used in investing activities
                
                
                (194,544
                )
                
                —
                
                
                —Cash
                    flows from financing activities:Proceeds
                    from convertible notes
                
                
                —
                
                
                50,000
                
                
                —Proceeds
                    from senior convertible notes
                
                
                2,113,500
                
                
                —
                
                
                —Net
                    proceeds from public offering of securities
                
                
                16,781,904
                
                
                —
                
                
                —Proceeds
                    from underwriter purchase option
                
                
                100
                
                
                —
                
                
                —Debt
                    issuance costs
                
                
                (531,120
                )
                
                —
                
                
                —Net
                    cash provided by financing activities
                
                
                18,364,384
                
                
                50,000
                
                
                —Net
                    increase in cash and cash equivalents
                
                
                12,321,985
                
                
                —
                
                
                —Cash
                    and cash equivalents — beginning of year
                
                
                50,780
                
                
                —
                
                
                —Cash
                    and cash equivalents — end of year
                
                $
                12,372,765
                
                $
                50,780
                
                $
                —Supplementary
                    disclosure of cash flow information:Cash
                    paid for taxes
                
                $
                —
                
                $
                —
                
                $
                —Cash
                    paid for interest
                
                $
                —
                
                $
                —
                
                $
                —Non-cash
                    financing activities:Capital
                    contribution
                
                $
                2,080
                
                $
                69,176
                
                $
                23,253Deferred
                    financing costs
                
                $
                —
                
                $
                113,518
                
                $
                —Conversion
                    of Notes to equity
                
                $
                2,250,720
                
                $
                —
                
                $
                —Accrued
                    financing costs
                
                $
                157,871
                
                $
                10,000
                
                $
                —Fair
                    value of underwriter purchase option included in offering
                    costs
                
                $
                711,000
                
                $
                —
                
                $
                —
  The
        accompanying notes are an integral part of these consolidated financial
        statements
 
 F-6
 **AMERICAN
          TELECOM SERVICES, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **1.  Description
        of the business**
  American
        Telecom Services, Inc. (the “Company”) was incorporated in the state of Delaware
        on June 16, 2003. The Company’s fiscal year ends on
        June 30.
  The
        Company was formed to design, distribute and market product bundles that
        include
        multi-handset phones and low-cost, high value telecommunication services
        for
        sale through retail channels. The Company generates revenues through the
        sale of
        phones into the retail market and shares in a portion of revenues generated
        by
        communications service providers.
  Primary
        activities to date have consisted of securing financing, developing strategic
        alliances associated with the development of its technology, design and
        development initial sales and marketing during the year ended June 30,
        2006. The Company consummated an initial public offering of its common shares
        and redeemable warrants in February 2006 (Note 3).
  The
        Company received initial purchase orders in September 2005 and shipments
        of its
        phone products began arriving in retail stores in October 2005. During the
        year
        ended June 30, 2006, the Company generated $3,098,004 from the sale of its
        phone products and $2,174 from carrier service fees.
  The
        Company emerged from the development stage during fiscal 2006 due to the
        recognition of revenues.
  **2.            
        Summary of Significant Accounting policies:**
  ***Basis
        of Presentation of Consolidated Financial Statements and*** **Use
        of Estimates**
  The
        consolidated financial statements include the accounts of the Company and
        its
        wholly-owned subsidiary American Telecom Services, (Hong Kong) Limited. All
        significant intercompany transactions and balances have been eliminated.
        The
        preparation of the consolidated financial statements in conformity with
        generally accepted accounting principles in the United States of America
        requires management to make estimates and assumptions that affect the reported
        amounts of assets and liabilities and disclosure of contingent assets and
        liabilities at the date of the consolidated financial statements and the
        reported amounts of revenues and expenses during the reporting period.
        Significant accounting estimates to be made by management include or will
        include allowances for doubtful accounts, impairment of long-lived assets,
        the
        fair value of the Company’s common stock and warrants, estimated warranty
        reserves and other allowances, the allocation of proceeds from debt to equity
        instruments and expected volatility of common stock. Because of the uncertainty
        inherent in such estimates, actual results may differ from these
        estimates.
  ***Revenue
        recognition***
  The
        Company derives revenue from the sale of its phone products to consumer
        retailers (“Retail Partners”) and from certain arrangements with phone service
        carriers. In accordance with SEC Staff Accounting Bulletin (“SAB”) No. 104,
“Revenue Recognition,” revenue is recognized when persuasive evidence of an
        arrangement exists, delivery of the product or services has occurred in
        accordance with the terms of an agreement, the price is fixed and determinable,
        collectibility is reasonably assured, contractual obligations have been
        satisfied, and title and risk of loss have been transferred to the
        customer.
  Phone
        Products
  The
        Company’s phone products are sold through Retail Partners to the end user
        customer. Revenues from sales of phones are recognized in the period when
        title
        and risk of loss are transferred to the Retail Partner in accordance with
        the
        terms of an agreement, provided all other revenue recognition criteria have
        been
        met. Retail Partners participate in various cooperative marketing and other
        programs, and the Company maintains estimated accruals and allowances for
        these
        programs once they commence.
  F-7
 **AMERICAN
            TELECOM SERVICES, INC.**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **2.            
          Accounting policies: —*(Continued)***
  The
        Company generally warrants its phone products against defects to customers
        for a
        period of up to one year. Factors that affect the Company’s warranty liability
        include the number of units sold, historical and anticipated rates of warranty
        claims and cost per claim. The Company periodically assesses the adequacy
        of its
        recorded warranty liabilities and adjusts the amounts as necessary. The Company
        accrues a provision for warranty reserves as a selling expense at the time
        of
        revenue recognition. During the year ended June 30, 2006 the Company
        recorded a provision for warranty reserves of $31,000. As of June 30, 2006
        the Company’s warranty liability reserve was $31,000 and is included in other
        accrued expenses (see Note 5).
  Additionally,
        the Company accrues for sales returns, and other allowances based on estimates.
        Each estimate was based on management’s consideration of comparable companies,
        the specific agreements with retail partners, and experience in the wholesale
        distribution industry. As required, the Company accrues a provision for
        estimated future costs and estimated returns as a reduction of revenue at
        the
        time of revenue recognition. During the year ended June 30, 2006 the
        Company recorded provisions for sales returns allowances totaling $154,000
        (see
        Note 5). During the year ended June 30, 2006, the Company recorded
        $183,000 of provisions for estimated rebates payable to end-user customers
        which
        are included in selling expenses on the accompanying consolidated statement
        of
        operations.
  Carrier
        Agreements
  The
        Company has agreements with certain phone service carriers who, if requested
        by
        the phone purchaser user, may provide users of the Company’s cordless landline
        phones and Internet phones with phone communications services. The agreements
        with the carriers grant the Company the right to include, at its option,
        certain
        marks and logos of the carriers on the Company’s phones and/or related packaging
        and marketing materials.
  Under
        the
        agreement with SunRocket, Inc. (“SunRocket”) the Company designs and configures
        its Internet phones to work with SunRocket’s communications services. SunRocket
        offers end-user purchasers of the Company’s Internet phones different service
        plans at set rates.
  The
        Company’s agreement with IDT Domestic, Inc. (“IDT”), as assigned by IDT Puerto
        Rico & Co., provides purchasers of the Company’s cordless landline phones
        with the ability to obtain prepaid long distance communications services.
        IDT
        will offer end-user purchasers of the Company’s cordless landline phones certain
        prepaid long distance calling rate plans and IDT will handle all customer
        service interaction, including billing the customer for all communications
        services. The Company has agreed to use its best efforts to deliver certain
        minimum account activations to IDT. In the event that the Company fails to
        achieve the minimum commitment level for the relevant time period, then IDT,
        at
        its sole discretion, shall have the right to (i) terminate the agreement
        without further obligation or (ii) renegotiate the agreement or specific
        terms on a going forward basis.
  In
        connection with the agreements with the carriers, the Company is entitled
        to
        earn certain commissions from the carriers. For each services account activated
        with SunRocket by end-users of the Company’s Internet phones, the Company
        receives a pre-defined commission amount from SunRocket once the account
        remains
        active for a certain period of time. The Company is also entitled to receive
        ongoing monthly commissions from both SunRocket and IDT equal to a percentage
        of
        the net service revenues received by the respective carrier from end-users
        of
        the Company’s phones. In addition, the Company receives certain retail marketing
        co-op fees and contributions for consumer rebates in certain circumstances
        from
        carriers. The Company’s obligations to end-users of the Company’s phones relate
        solely to the sales of the Company’s phones and the related warranties provided.
        Aside from marketing the carrier communication services with its phones,
        the
        Company has no obligations to the end-users related to the carrier
        communications services. Accordingly, commission revenues, based on a percentage
        of the monthly carrier net service revenue from the subscriber users of the
        Company’s phones, will be recognized in the period the usage occurs and
        commission revenue resulting from service account activation by users of
        the
        Company’s phones and marketing co-op fees will be recognized once the subscriber
        activates the phone on the carrier’s network and such account is active for the
        required period of time. During the year ended June 30, 2006, $2,173 of
        commission revenue was recognized.
  F-8
 **AMERICAN
          TELECOM SERVICES, INC.**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **2.            
        Accounting policies: —*(Continued)***
  The
        Company offers some Retail Partners a percentage of the service revenue
        commissions it earns from carriers of communications service providers and
        a
        percentage of the subscriber activation fees the Company will receive from
        SunRocket in connection with the purchase of communications services by
        end-users of the Company’s Internet phones. Such fees are recorded as a
        reduction of revenues. During the year ended June 30, 2006, $463 of
        commissions were earned by Retail Partners.
  ***Share-Based
        Compensation***
  On
        July
        1, 2005, the Company adopted Statement of Financial Accounting Standards
        (“SFAS”) No. 123 (revised 2005), “Share-Based Payment,”
(“SFAS 123(R)”) which requires the measurement and recognition of
        compensation expense for all share-based payment awards made to employees
        and
        directors based on estimated fair values. In March 2005, the Securities and
        Exchange Commission issued Staff Accounting Bulletin No. 107
        (“SAB 107”) relating to SFAS 123(R). The Company has applied the
        provisions of SAB 107 in its adoption of SFAS 123(R).
  The
        Company adopted SFAS 123(R) prospectively as no share-based compensation
        awards were granted prior to February 2006. Share-based compensation expense
        for
        employees recognized under SFAS 123(R) for year ended June 30, 2006
        was $230,439, which consisted of share-based compensation expense related
        to
        stock option grants to employees and directors and is included in general
        and
        administrative expense on the accompanying consolidated statements of
        operations. See Note 8 for additional information.
  SFAS 123(R)
        requires companies to estimate the fair value of share-based payment awards
        on
        the date of grant using an option-pricing model. The value of the portion
        of the
        award that is ultimately expected to vest is recognized as expense over the
        requisite service periods in the Company’s consolidated statement of
        operations.
  Stock-based
        compensation expense recognized in the Company’s consolidated statements of
        operations for the year ended June 30, 2006 included compensation expense
        for share-based payment awards based on the grant date fair value estimated
        in
        accordance with the provisions of SFAS 123(R). In conjunction with the
        adoption of SFAS 123(R), the Company elected the straight-line single
        option method of attributing the value of stock-based compensation to expense.
        As stock-based compensation expense recognized in the consolidated statement
        of
        operations for the year ended June 30, 2006 is based on awards ultimately
        expected to vest, it has been reduced for estimated forfeitures.
        SFAS 123(R) requires forfeitures to be estimated at the time of grant and
        revised, if necessary, in subsequent periods if actual forfeitures differ
        from
        those estimates.
  Upon
        adoption of SFAS 123(R), the Company elected the Black-Scholes
        option-pricing model (“Black-Scholes model”) as its method of valuation for
        share-based awards granted beginning in fiscal 2006. The Company’s determination
        of fair value of share-based payment awards on the date of grant using an
        option-pricing model is affected by the Company’s stock price as well as
        assumptions regarding a number of highly complex and subjective variables.
        These
        variables include, but are not limited to, the Company’s expected stock price
        volatility over the term of the awards and the expected term of the
        awards.
  No
        share-based compensation awards were granted prior the consummation of the
        Company’s initial public offering on February 6, 2006.
  The
        Company has accounted for non-employee compensation expense in accordance
        with
        Emerging Issues Task Force (“EITF”) Issue No. 96-18, Accounting for Equity
        Instruments That Are Issued to Other Than Employees for Acquiring, or in
        Conjunction with Selling, Goods or Services (“EITF 96-18”), which requires
        non-employee stock options to be measured at their fair value as of the earlier
        of the date at which a commitment for performance to earn the equity instruments
        is reached (“performance commitment date”) or the date at which performance is
        complete (“performance completion date”). Accounting for non-employee stock
        options which involve only performance conditions when no performance commitment
        date or performance completion date has occurred as of an interim financial
        reporting date requires measurement at the instruments then-current fair
        value.
  F-9
 **AMERICAN
            TELECOM SERVICES, INC.**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **2.            
          Accounting policies: —*(Continued)***
  For
        the
        year ended June 30, 2006 the Company accounted for 80,000 options and
        warrants under the guidance of EITF 96-18. Share-based compensation expense
        for non-employees during the year ended June 30, 2006 was $150,158, which
        is included in general and administrative expense on the accompanying
        consolidated statements of operations.
  ***Cash
        and Cash Equivalents***
  The
        Company considers all investments purchased with an original maturity of
        three
        months or less at the time of purchase to be cash equivalents. Cash equivalents
        consist primarily of money market instruments.
  ***Allowance
        for doubtful accounts***
  The
        Company maintains allowances for doubtful accounts for estimated losses
        resulting from the inability of its customers to make required payments.
        The
        Company determines its allowance by considering a number of factors, including
        the length of time trade receivables are past due, the Company’s previous loss
        history, the customer’s current ability to pay its obligation to the Company,
        and the condition of the general economy and the industry as a whole. Specific
        reserves are also established on a case-by-case basis by management. The
        Company
        writes-off accounts receivable when they become uncollectible. The Company
        performs credit evaluations of its customers’ financial condition on a regular
        basis. Information related to the activity of the allowance for doubtful
        accounts is as follows:
 
 **2006**Beginning
                    Balance
                
                $
                —Provision
                    for bad debt
                
                
                20,000Reversals
                
                
                —Specific
                    charges against allowance
                
                
                —**$**
                **20,000**
   ***Fair
        value of financial instruments***
  The
        fair
        value of the Company’s assets and liabilities that qualify as financial
        instruments under Statement of Financial Accounting Standards (“SFAS”)
        No. 107 approximate their carrying amounts presented in the consolidated
        balance sheets at June 30, 2006 and 2005.
  ***Inventory***
  Inventory
        consists of finished goods on hand and in transit which are stated at the
        lower
        of cost or market. All direct costs incurred in the purchasing of inventory,
        such as freight in, duties and taxes are included in inventory. Cost is
        determined by using the first-in, first-out method.
  The
        Company includes the expense of shipping and handling on shipments to customers
        in selling, marketing and development on its consolidated statements of
        operations. Such expense was $139,582 during the year ended June 30,
        2006.
  F-10
 **AMERICAN
        TELECOM SERVICES, INC.** **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **2.            
          Accounting policies: —*(Continued)***
  ***Property
        and Equipment, net***
  Property
        and equipment consist of furniture and computer hardware and software which
        are
        stated at cost.
  Depreciation
        and amortization are provided for on a straight line basis over the following
        useful lives:
  Computer
                  hardware
              3
                  yearsPurchased
                  software
              3
                  yearsInternal
                  use software
              3
                  yearsFurniture
                  and fixtures
              3
                  yearsLeasehold
                  improvements
              Lesser
                  of life of lease or useful life
 The
        cost
        of maintenance and repairs are charged to expenses as incurred.
  The
        Company has adopted statement of Position 98-1, *Accounting
        for the Costs of Computer Software Developed or Obtained for Internal
        Use* .
        This
        statement requires that certain costs incurred in purchasing or developing
        software for internal use be capitalized as internal use software development
        costs and included in fixed assets. Amortization of the software will begin
        when
        the software is ready for its intended use. During the year ended June 30,
        2006 the company capitalized $15,750 of costs related to developing internal
        use
        software.
  ***Impairment
        of Long-Lived Assets***
  The
        Company periodically assesses the likelihood of recovering the cost of
        long-lived assets based on its expectations of future profitability and
        undiscounted cash flows. These factors, along with management’s plans with
        respect to the operations, are considered in assessing the recoverability
        of
        property and equipment and other long-lived assets. There are no impairments as
        of June 30, 2006.
  ***Concentrations***
  Financial
        instruments that potentially subject the Company to concentrations of credit
        risk consist of cash and cash equivalents and accounts receivable. The Company
        reduces credit risk by placing its cash and cash equivalents with major
        financial institutions with high credit ratings. At times, such amounts may
        exceed federally insured limits. The Company reduces credit risk related
        to
        accounts receivable by routinely assessing the financial strength of its
        customers and maintaining an appropriate allowance for doubtful
        accounts.
  The
        Company’s services have been provided primarily to a limited number of clients
        located in the United States. The Company had revenues from two clients
        representing 87% (73% and 14%, respectively) of revenues during the year
        ended
        June 30, 2006. Further,
        the Company utilizes a limited number of suppliers in the manufacturing of
        its
        phone products. Accordingly the Company is subject to a concentration risk
        with
        respect to purchases of inventory and the Company’s ability to purchase
        inventory and in turn generate sales of its phone products could be impacted
        if
        any of the Company’s suppliers were unable to meet the Company’s manufacturing
        requirements.  During the year ended June 30, 2006 two suppliers provided
        88.4% (75.3% and 13.1%, respectively) of the Company’s phone
        products.
  Additionally,
        the Company is subject to a concentration of credit risk with respect to
        its
        accounts receivable. The Company had three clients accounting for 95% (58%,
        19%
        and 18%, respectively) of total gross accounts receivable as of June 30,
        2006.
  ***Advertising***
  Costs
        of
        advertising are expensed as incurred, and recorded as marketing and development
        expenses.
  F-11
 **AMERICAN
        TELECOM SERVICES, INC.** **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **2.            
          Accounting policies: —*(Continued)***
  ***Income
        taxes***
  Deferred
        income tax assets and liabilities are recognized for the future tax consequences
        attributable to temporary differences between the financial statement carrying
        amounts of existing assets and liabilities and their respective tax bases
        and
        operating loss and tax credit carryforwards. Deferred tax assets and liabilities
        are measured using enacted tax rates expected to apply to taxable income
        in the
        years in which those temporary differences are expected to be recovered or
        settled. Deferred tax assets are reduced by a valuation allowance if it is
        more
        likely than not that the tax benefits will not be realized. The ultimate
        realization of deferred tax assets depends upon the generation of future
        taxable
        income during the periods in which those temporary differences become
        deductible.
  ***Net
        loss per share***
  Basic
        loss per share includes no dilution and is computed by dividing loss available
        to common shareholders by the weighted average number of common shares
        outstanding. Diluted earnings per share reflect, in periods with earnings
        and in
        which they have a dilutive effect, the effect of common shares issuable upon
        exercise of stock options and warrants. Diluted loss per share for the years
        ended June 30, 2006 and 2005 exclude potentially issuable common shares of
        5,623,167 and 83,333, respectively, primarily related to the Company’s
        outstanding stock options, warrants and convertible debt, because the assumed
        issuance of such potential common shares is antidilutive. Potentially dilutive
        common shares are also issuable upon exercise of an option issued to the
        underwriters in our initial public offering (Note 3) and upon the
        achievement of certain trusts pursuant to performance accelerated restricted
        stock awards granted to certain members of management (Note 8).
  ***Recent
        accounting pronouncements***
  In
        May
        2005, the FASB issued SFAS No. 154, *Accounting
        Changes and Error Corrections* ,
        a
        replacement of APB Opinion No. 20 and FASB statement No. 3
        (“SFAS No. 154”), which changes the requirements for the accounting
        for and reporting of voluntary changes in accounting principles.
        SFAS No. 154 requires retrospective application to prior periods’
consolidated financial statements of changes in accounting principles, unless
        impracticable. SFAS No. 154 supersedes APB Opinion No. 20, *Accounting
        Changes* ,
        which
        previously required that most voluntary changes in accounting principles
        be
        recognized by including in the current period’s net income the cumulative effect
        of changing to the new accounting principle. SFAS No. 154 also makes a
        distinction between retrospective application of an accounting principle
        and the
        restatement of consolidated financial statements to reflect the correction
        of an
        error. SFAS No. 154 carries forward without changing the guidance
        contained in APB Opinion No. 20 for reporting the correction of an error in
        previously issued consolidated financial statements and a change in accounting
        estimate. SFAS No. 154 applies to voluntary changes in accounting
        principles that are made in fiscal years beginning after December 15, 2005.
        The Company does not expect the adoption of SFAS No. 154 to have a
        material impact on its consolidated financial statements.
  On
        July
        13, 2006, FASB issued FASB Interpretation No. 48, “ *Accounting
        for Uncertainty in Income Taxes—An Interpretation of FASB Statement
        No. 109* ”
        (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income
        taxes recognized in an enterprise’s financial statements in accordance with FASB
        Statement No. 109, “Accounting for Income Taxes.” FIN 48 also
        prescribes a recognition threshold and measurement attribute for the financial
        statement recognition and measurement of a tax position taken or expected
        to be
        taken in a tax return. In addition, FIN 48 provides guidance on
        derecognition, classification, interest and penalties, accounting in interim
        periods, disclosure and transition. The
        provisions of FIN 48 are effective for fiscal years beginning after
        December 15, 2006. Earlier application is permitted as long as the enterprise
        has not yet issued financial statements, including interim financial statements,
        in the period of adoption. The provisions of FIN 48 are to be applied to
        all tax positions upon initial adoption of this standard. Only tax positions
        that meet the more-likely-than-not recognition threshold at the effective
        date
        may be recognized or continue to be recognized upon adoption of FIN 48. The
        cumulative effect of applying the provisions of FIN 48 should be reported
        as an adjustment to the opening balance of retained earnings (or other
  F-12
 **AMERICAN
        TELECOM SERVICES, INC.** **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **2.            
          Accounting policies: —*(Continued)***
  appropriate
        components of equity) for that fiscal year. The Company believes the adoption
        of
        FIN 48 will not have a material effect on its consolidated financial
        statements.
  **3.  Stockholders’
        Equity:**
  *Initial
        Public Offering*
  On
        February 6, 2006, the Company consummated an initial public offering (the
        “Offering”) comprised of 3,350,000 shares of common stock and 3,350,000
        Redeemable Warrants to purchase shares of common stock. Additionally, in
        March
        2006, the Company issued an additional 402,500 shares of Common Stock and
        502,500 Redeemable Warrants upon the exercise of the over-allotment option
        by
        the underwriters.
  The
        Common Stock was sold at an offering price of $5.05 per share and the Redeemable
        Warrants were sold at an offering price of $0.05 per warrant, generating
        gross
        proceeds $19,142,750 to the Company. The Company incurred $1,762,695 in
        underwriting discounts and expense allowances and $756,022 of other expenses
        in
        connection with the Offering, resulting in net proceeds of
        $16,624,033.
  Upon
        closing of the Offering, the Company sold and issued an option (“UPO”) for $100
        to HCFP/Brenner Securities LLC (“HCFP”), the representative of the underwriters
        in the Offering, to purchase up to 335,000 shares of the Company’s common stock
        and/or up to 335,000 Redeemable Warrants at an exercise price of $6.3125
        per
        share of common stock and $0.0625 per Redeemable Warrant. The UPO is exercisable
        in whole or in part, solely at HCFP’s discretion, during the five-year period
        commencing on the date of the Offering. The Company accounted for the fair
        value
        of the UPO, inclusive of the receipt of the $100 cash payment, as an expense
        of
        the public offering resulting in a charge directly to stockholder’s equity with
        a corresponding increase in paid-in capital. The Company determined the fair
        value of the common stock and Redeemable Warrants underlying the UPO to be
        approximately $711,000 at the date of sale and issuance, which was calculated
        using a Black-Scholes option-pricing model. The fair value of the UPO was
        estimated using the following assumptions: (1) fair value of common stock
        and warrants of $5.10 in aggregate at the date of issuance (2) expected
        volatility of 50%, (3) risk-free interest rate of 3.96%,
        (4) contractual life of 5 years and (5) no dividend. The UPO may be
        exercised for cash or on a “cashless” basis, at the holder’s option, such that
        the holder may use the appreciated value of the UPO (the difference between
        the
        exercise prices of the UPO and the underlying warrants and the market price
        of
        the units and underlying securities) to exercise the UPO without the payment
        of
        any cash. Although the UPO and its underlying securities were registered
        under
        the registration statement related the Offering, the option grants to holders
        demand and “piggy back” rights with respect to the registration under the
        Securities Act of the securities directly and indirectly issuable upon exercise
        of the UPO. The Company is only required to use its best efforts to cause
        the
        registration statement for the Units and securities underlying the UPO to
        be
        come effective and once effective to use its best efforts to maintain the
        effectiveness of such registration statement. The Company has no obligation
        to
        net cash settle the exercise of the UPO or the securities underlying the
        UPO **.**
  
 
   
 F-13
 **AMERICAN
        TELECOM SERVICES, INC.** **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
  **4.  Property
        and
        Equipment, net**
  Property
        and equipment, net, consists of the following at June 30, 2006 and
        2005:
  2006
                
                2005Computer
                    hardware
                
                $
                38,055
                
                $
                —Leasehold
                    improvements
                
                
                8,691
                
                
                —Furniture
                    and fixtures
                
                
                52,943
                
                
                —Purchased
                    software
                
                
                79,105
                
                
                —Internal
                    use software
                
                
                15,750
                
                
                —194,544
                
                
                —Less:
                    Accumulated depreciation and amortization
                
                
                (19,664
                )
                
                —$
                174,880
                
                $
                —
   Depreciation
        and amortization expenses was $19,664 and $0 and $0 for the years ended
        June 30, 2006, 2005 and 2004, respectively.
  **5.** **Accrued
        expenses**
  Accrued
        expenses consist of the following at June 30, 2006 and 2005:
  2006
                
                2005Accrued
                    promotional minutes
                
                $
                165,167
                
                $
                —Accrued
                    sales rebates to end-user customers
                
                
                183,362
                
                
                —Insurance
                    payable
                
                
                78,790Accrued
                    sales return allowance
                
                
                153,597
                
                
                —Other
                    accrued expenses
                
                
                191,727
                
                
                100,657$
                772,643
                
                $
                100,657
   **6. 
Related
        party transactions:**
  *Financing*
  A
        related
        party purchased $25,000 principal amount of 6% notes on June 20, 2005 and
        $37,500 principal amount of 8% notes in July 2005 in the private placement,
        and
        also received an aggregate of 58,333 private warrants in connection with
        such
        purchases for the same purchase price as all other investors in the private
        placements and received identical registration rights with respect to his
        securities (Note 9).
  *Marketing*
  Certain
        marketing services are being provided to the Company by Future Marketing
        whose
        sole stockholder is also the sole stockholder of The Future, LLC, which owned
        approximately 18.1% of the Company’s common stock prior to the Offering and owns
        approximately 5.5% of the Company’s stock subsequent to the Offering. Future
        Marketing, among other things, assists in the development and execution of
        the
        Company’s marketing plans, manages the accounts, assists in product development
        and handles back-office vendor functions. As compensation for its services
        Future Marketing is paid a monthly fee and in addition is entitled to certain
        fees
  F-14
 **AMERICAN
        TELECOM SERVICES, INC.** **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
  **6.  Related
        party
        transactions: — *(Continued)***
 based
        on
        a percentage of net sales and net profits, as defined, with certain maximum
        fees. The Company recognized $159,000 of expenses during the year ended
        June 30, 2006 pursuant to this arrangement which is included in selling,
        marketing and development expense on the accompanying consolidated statement
        of
        operations. In addition, the Company granted stock options to Future Marketing
        which resulted in a charge of $8,555, which is included in selling, marketing
        and development expense on the accompanying consolidated statement of operations
        during the year ended June 30, 2006.
  *Carrier
        Relations*
  The
        Company has entered into a five-year agreement with David Feuerstein (a
        principal stockholder of the Company) pursuant to which, in consideration
        for
        helping to establish its service provider relationship with IDT and, going
        forward, maintaining and expanding its relationship with each of IDT and
        SunRocket, the Company will pay Mr. Feuerstein one quarter of one percent
        of all
        net revenues, as defined, collected by the Company during each year of the
        term
        of the agreement directly attributable to the sale of (i) digital cordless
        multi-handset phone systems, (ii) multi-handset Internet telephones and
        (iii) related telephone hardware components ((i), (ii) and (iii),
        collectively, “Hardware”), subject to a maximum aggregate amount of $250,000 for
        each year. The Company recognized approximately $4,573 of expenses during
        the
        year ended June 30, 2006, pursuant to this arrangement which are included
        in selling, marketing and development expense on the accompanying consolidated
        statement of operations.
  The
        Company will also pay to Mr. Feuerstein five percent of all net revenues,
        as defined, collected by the Company from IDT during each year of the term
        of
        and directly attributable to the Company’s service agreement dated as of
        November 25, 2003 with IDT (the “IDT Agreement”), subject to a maximum
        aggregate amount of $250,000 for each year. The Company recognized $5 of
        expenses during the year ended June 30, 2006, pursuant to this arrangement
        which are included in selling, marketing and development expense on the
        accompanying consolidated statement of operations.
  The
        Company will also pay to Mr. Feuerstein two percent of all net revenues, as
        defined, collected by the Company from SunRocket during each year of the
        term of
        and directly attributable to the Company’s June 7, 2005 service agreement
        with SunRocket, subject to a maximum aggregate amount of $250,000 for each
        year;
        provided, however, that any revenues attributable under the SunRocket agreement
        from the provision of Internet-based communications services relating to
        “subscriber bounty,” “advertising co-op” and “key-city funds” are excluded in
        any computation of such net revenues. The agreement may be extended for an
        additional five-year term if the Company is profitable for three of the first
        five years of the initial term. If so extended, Mr. Feuerstein will be
        entitled to a reduced revenue sharing allocation. The agreement also provides
        for certain revenue sharing allocation reductions if certain conditions are
        not
        satisfied during the initial term. The Company recognized $5 of expenses
        during
        the year ended June 30, 2006, pursuant to this arrangement which are
        included in selling, marketing and development expense on the accompanying
        consolidated statement of operations.
  **7.  Commitments:**
  *Carrier
        Agreements*
  The
        Company is party to certain agreements with phone service carriers which
        provide
        for certain payments and account activations (See Note 2).
  *Underwriting
        Agreement*
  In
        connection with the Offering, the Company entered into an underwriting agreement
        (the “Underwriting Agreement”) with HCFP. In accordance with the terms of the
        Underwriting Agreement, the Company will engage HCFP, on a non-exclusive
        basis,
        to act as its agent for the solicitation of the exercise of the Company’s
        Warrants. In consideration for solicitation services, the Company will pay
        HCFP
        a commission equal to 5% of the exercise price for each Warrant exercised
        more
        than one year after the date of the Offering if the exercise is solicited
        by
        HCFP.
  F-15
 **AMERICAN
            TELECOM SERVICES, INC.** **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS**
  **7.  Commitments:
            — *(Continued)***
  *Guarantee
        to Supplier*
  The
        Company entered into an agreement with CIT Commercial Services (“CIT”) in July
        2005 to facilitate the purchase of inventory. Under this agreement, CIT approves
        purchase orders from the Company’s customers and then indirectly guarantees
        payment by the Company to the manufacturer and supplier of the Company’s phone
        products. In connection with such services the Company pays CIT a fee of
        1.25%
        on the gross face amount of customer purchase order amount guaranteed. If
        the
        actual fees during a quarter are less than $12,500, CIT will charge the
        Company’s account for the difference. The agreement with CIT can be terminated
        by CIT or the Company by providing 60 days notice prior to the anniversary
        date.
        The Company recognized $64,502 of expense during the year ended June 30,
        2006 pursuant to this arrangement of which $42,036 is included in selling,
        marketing and development expense and $22,466 is included in interest and
        bank
        charges on the accompanying consolidated statement of operations. No expense
        was
        incurred in prior fiscal years.
  *Operating
        Leases*
  The
        Company leases certain office space under operating leases. The future minimum
        cash commitments as of June 30, 2006 under such operating leases are
        approximately as follows:
  Fiscal
                    2007
                
                $
                72,300Fiscal
                    2008
                
                
                77,200Fiscal
                    2009
                
                
                78,100Fiscal
                    2010
                
                
                3,100$
                230,700
   Rent
        expense was $34,493 for the year ended June 30, 2006. There was no rent for
        the years ended June 30, 2005 and 2004.
  *Employment
        Agreements*
  Prior
        to
        the Offering employees were employed at will by the Company and were compensated
        on a monthly basis. Subsequent to the Offering certain members of management
        have entered into employment agreements with the Company. Each of the employment
        agreements has an initial term through December 31, 2007 and provides for
        certain base salary. In addition, such individuals are entitled to bonuses
        based
        on the Company’s net sales (defined as the Company’s revenues collected during a
        period less allowances granted to retailers, markdowns, discounts, commissions,
        reserves for service outages, customer hold backs and expenses):
  ·
              one
                  percent of the amount by which net sales during fiscal year ended
                  June 30, 2006 exceed
                  $5,000,000;
  ·
              one
                  percent of the amount by which net sales for the fiscal year ended
                  June 30, 2007 exceed net sales during the Company’s fiscal year ended
                  June 30, 2006; and
  ·
              one
                  percent of the amount by which net sales for the six-month period
                  ended
                  December 31, 2007 exceed net sales during the six-month period
                  ended
                  June 30, 2007.
  The
        bonus
        described above is limited to an amount not greater than 75% of the recipient’s
        then current base annual salary. Such individuals are also entitled to the
        following bonuses based on net profits (defined as net income, after taxes,
        as
        determined in accordance with GAAP):
  ·
              one
                  percent of net profits for each of fiscal years ended June 30, 2006
                  and June 30, 2007, respectively;
                  and
  F-16
 
 **AMERICAN
              TELECOM SERVICES, INC.** **NOTES
                  TO CONSOLIDATED FINANCIAL STATEMENTS**
  **7.  Commitments:
              — *(Continued)***
 ·
              one
                  percent of net profits for the six-month period ended December
                  31,
                  2007.
  The
        employment agreements further provide for certain limits (as a percentage
        of
        base salary) on the aggregate bonuses from net sales and net profits for
        any
        bonus period. No bonuses were earned during the year ended June 30,
        2006.
  *Other*
  Pursuant
        to an agreement between the Company and UTAM, Inc. (“UTAM”) related to Federal
        Communications Commission equipment authorization for certain of the Company’s
        phone products, the Company is obligated to make certain payment to UTAM
        based
        on the quantity of parts meeting certain criteria shipped by the Company
        to its
        retail partners. The Company recognized $2,778 of expense during the year
        ended
        June 30, 2006 pursuant to this arrangement.
  **8. 
Stock
        Based
        Compensation Plan:**
  The
        Company adopted the 2005 stock option plan (the “Plan”) in October 2005. In
        addition to stock options, the Company may also grant performance accelerated
        restricted stock (“PARS”) under the Plan. The maximum number of shares issuable
        over the term of the Plan is limited to 600,000 shares.
  The
        Plan
        permits the granting of stock options to employees (including employee directors
        and officers) and consultants of the Company, and non-employee directors
        of the
        Company. Options granted under the Plan have an exercise price of at least
        100%
        of the fair market value of the underlying stock on the grant date and expire
        no
        later than five years from the grant date. The options generally become
        exercisable for 50% of the option shares one year from the date of grant
        and
        then 50% over the following 12 months. The Compensation Committee of the
        Board
        of Directors has the discretion to use a different vesting
        schedule.
  Due
        to
        the Company’s limited history as a public company, the Company estimated
        expected volatility based on the historical volatility of certain comparable
        companies as determined by management. The risk-free interest rate assumption
        is
        based upon observed interest rate appropriate for the term of the Company’s
        employee stock options. The dividend yield assumption is based on the Company’s
        intent not to issue a dividend under its dividend policy. The expected holding
        period assumption was estimated based on management’s estimate.
  As
        stock-based compensation expense recognized in the consolidated statement
        of
        operations for the year ended June 30, 2006 is based on awards ultimately
        expected to vest, it had been reduced for estimated forfeitures.
        SFAS 123(R) requires forfeitures to be estimated at the time of grant
        and revised, if necessary, in subsequent periods if actual forfeitures differ
        from those estimates. Forfeitures were estimated based management’s
        estimate.
  The
        fair
        value of each stock option grant to employees is estimated on the date of
        grant.
        The fair value of each stock option grant to non-employees is estimated on
        the
        applicable performance commitment date, performance completion date, or interim
        financial reporting date. A Black-Scholes option-pricing model, applying
        the
        following weighted average assumptions, was used to estimate the fair value
        for
        employee and non-employee stock options issued:
  F-17
 **AMERICAN
          TELECOM SERVICES, INC.** **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS**
  **8.  Stock
          Based
          Compensation Plan: — *(Continued)***
  **Year
                    ended**
                  **June
                    30, 2006**Weighted
                    Average Assumptions:Expected
                    volatility
                75.9%Dividend
                    yield
                —Risk-free
                    interest rate
                4.57%Annual
                    forfeiture rate
                10.0%Expected
                    holding period (in years)
                3.15
  During
          the year ended June 30, 2006 certain members of management, the board of
          directors and non-employees received options. The following table summarizes
          information concerning options outstanding under for the year ended
          June 30, 2006:
 **Shares**
                
                **Weighted Average
                    Exercise Price**
                
                **Weighted Average**
                  **Fair
                    Value**Options
                    Outstanding as of June 30, 2005
                
                
                —
                
                $
                —
                
                $
                —Granted
                
                
                240,000
                
                
                4.79
                
                
                2.11Exercised
                
                
                —
                
                
                —
                
                
                —Forfeited
                    and Expired
                
                
                —
                
                
                —
                
                
                —Options
                    Outstanding, June 30, 2006
                
                
                240,000
                
                $
                4.79
                
                $
                2.11Exercisable,
                    June 30, 2006
                
                
                90,000
                
                $
                4.37
                
                $
                1.94
  The
          following table summarizes the status of the Company’s stock options as of
          June 30, 2006:
 **Stock Options Outstanding**
                    
                    **Stock Options Exercisable****Weighted**
                      **Average**
                    
                    **Weighted**
                    
                    
                    
                    
                    
                    **Weighted**
                      **Average**
                    
                    **Weighted****Remaining**
                    
                    **Average**
                    
                    **Aggregate**
                    
                    
                    
                    **Remaining**
                    
                    **Average**
                    
                    **Aggregate****Contractual**
                    
                    **Exercise**
                    
                    **Intrinsic**
                    
                    
                    
                    **Contractual**
                    
                    **Exercise**
                    
                    **Intrinsic****Exercise Prices**
                    
                    **Shares**
                    
                    **Life (Years)**
                    
                    **Price**
                    
                    **Value**
                    
                    **Shares**
                    
                    **Life (Years)**
                    
                    **Price**
                    
                    **Value**$              
                        5.05
                    
                    
                    195,000
                    
                    
                    4.61
                    
                    $
                    5.05
                    
                    $
                    —
                    
                    
                    45,000
                    
                    
                    4.61
                    
                    $
                    5.05
                    
                    $
                    —$              
                        3.95
                    
                    
                    25,000
                    
                    
                    4.84
                    
                    $
                    3.95
                    
                    $
                    —
                    
                    
                    25,000
                    
                    
                    4.84
                    
                    $
                    3.95
                    
                    $
                    —$              
                        3.35
                    
                    
                    20,000
                    
                    
                    5.00
                    
                    $
                    3.35
                    
                    $
                    —
                    
                    
                    20,000
                    
                    
                    5.00
                    
                    $
                    3.35
                    
                    $
                    —Total
                    
                    
                    240,000
                    
                    
                    
                    
                    $
                    —
                    
                    $
                    —
                    
                    
                    90,000
                    
                    
                    
                    
                    
                    
                    
                    $
                    —
  There
        were no in-the-money options exercisable on June 30, 2006.
  The
        Company recognized compensation expense of $230,439 for the year ended
        June 30, 2006 as a result of issuing options to employees and directors
        which is included in general and administrative expense on the accompanying
        consolidated statement of operations for the year ended June 30, 2006. As
        of June 30, 2006, the unvested portion of share-based compensation expense
        attributable to employees and directors stock options and the period in which
        such expense is expected vest and be recognized is as follows:
  Year
                    ending June 30, 2007
                
                $
                140,698Year
                    ending June 30, 2008
                
                
                85,190$
                225,888
 
  F-18
 **AMERICAN
          TELECOM SERVICES, INC.** **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS**
  **8.  Stock
          Based
          Compensation Plan: — *(Continued)***
  *Non-employees*
  The
        Company has granted 25,000 options and 55,000 warrants to non-employees under
        various terms. Grants to non-employees are not subject to SFAS 123(R) but
        continue to be subject to SFAS 123 and other applicable guidance for such
        arrangements. Accordingly the fair value of the options granted to non-employees
        is re-measured at the end of each reporting period and the pro rata portion
        of
        the fair value is charged to operations over the vesting period. The Company
        recognized compensation expense of $150,158 during the year ended June 30,
        2006, as a result of issuing options and warrants to non-employees, of which
        $64,365 is included in general and administrative expense and $85,793 is
        included in selling, marketing and development on the accompanying consolidated
        statement of operations.
  *P* *erformance
        Accelerated Restricted Stock (“PARS”)*
  PARS
        vest
        upon the achievement of certain targets, and are payable in shares of the
        Company’s common stock upon vesting. Upon consummation of the Offering, certain
        officers and directors and a consultant received PARS under the Plan. Of
        the
        total PARS granted to each executive officer or director and consultant,
        25%
        will vest only if net sales equal or exceed $20 million during fiscal 2006
        and
        another 25% will vest only if net profits equal or exceed $1 million during
        fiscal 2006. An additional 25% will vest only if net sales equal or exceed
        $50
        million in fiscal 2007 and the final 25% will vest only if net profits equal
        or
        exceed $5 million during fiscal 2007. If the performance conditions are not
        met
        in the first year, no PARS will vest in such year. If the performance conditions
        are not met in the second year but cumulative amounts are achieved by the
        second
        year representing 80% or more of the cumulative target amounts for both years
        for a respective condition, then a percentage of the unvested PARS for both
        years will nevertheless vest in the second year in respect of such condition.
        In
        such event, the percentage of unvested PARS that will vest in the second
        year in
        respect of a particular performance condition will equal the percentage that
        such aggregate amount achieved in the first and second years represents of
        the
        aggregate amount required to be met by the respective condition for both
        years.
        The fair value is based on the market price of the Company’s stock on the
        grant-date and assumes that the target payout level will be achieved.
        Compensation cost will be adjusted for subsequent changes in the expected
        outcome of performance-related conditions until the vesting date. The Company
        will record stock based compensation expense equal to the fair value of the
        PARS
        once the likelihood of achievement of the performance targets becomes probable.
        As of June 30, 2006, 325,000 PARS awards are outstanding and none have
        vested as of June 30, 2006.
  **9.  Debt:**
  *Convertible
        Notes*
  On
        June 20, 2005, the Company issued convertible notes (the “Convertible
        Notes”) aggregating $50,000, including $25,000 to a related party (Note 6),
        which were convertible, at the holder’s discretion, into common stock at the
        lower of $3.00 or the IPO (as defined below) price in the Offering (the “Note
        Conversion Price”). The Convertible Notes were payable in cash in July 2007 and
        accrued interest at a rate of 6% per annum. As additional consideration,
        the Convertible Notes included 1.3334 Private Warrants (Note 8) for each
        dollar of principal. The Company incurred $10,000 of direct costs in connection
        with the issuance of the Convertible Notes which were recorded in debt issuance
        costs.
  Prior
        to
        the Offering, the principal amount of the Convertible Notes and the accrued
        interest thereon were convertible at any time, in whole or part, at the option
        of the holder into shares of Common Stock. In the event that
  F-19
 **AMERICAN
            TELECOM SERVICES, INC.** **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS**
 **9.  Debt:
—
*(Continued)***
 the
        Company consummated a public offering at a price per share that exceeded
        $3.00
        per share or the then Note Conversion Price, by at least 130%, then the
        principal amount of the Convertible Notes and accrued interest thereon were
        automatically convertible into shares of the Company’s common stock at $3.00 per
        share (Note 3). As described below, the Convertible Notes automatically
        converted to common stock upon the consummation of the Offering.
  The
        Company allocated the $50,000 of proceeds received from the Convertible Notes
        based on the computed relative fair values of the debt and warrants issued
        and
        the inherent beneficial conversion feature. The aggregate amounts allocated
        to
        the warrants and beneficial conversion feature, of $50,000 were recorded
        as a
        debt discount at the date of issuance of the Convertible Notes and prior
        to the
        Offering were being amortized to interest expense using the interest method
        over
        the stated term of the Convertible Notes as described below.
  *Senior
        Convertible Notes*
  During
        the period from July 2005 through September 2005, the Company issued and
        sold an
        aggregate of $2,113,500, including $37,500 to a related party (Note 6),
        principal amount of its 8% senior convertible notes (the “Senior Convertible
        Notes”). The Senior Convertible Notes mature and were payable in cash on
        July 14, 2007, accrued interest at the rate of 8% per annum, and were
        ranked senior to all indebtedness of the Company, other than permitted
        indebtedness, as defined. The purchasers of the Senior Convertible Notes
        received Private Warrants (See Note 10) at a rate of 0.667 of a Private
        Warrant for each $1.00 in principal amount of the convertible notes, covering
        an
        aggregate total of 1,409,000 shares of the Company’s common stock. The Company
        incurred approximately $521,000 of direct costs in connection with the issuance
        of the Senior Convertible Notes which were recorded as debt issuance
        costs.
  The
        Senior Convertible Notes were convertible, at any time, at the option of
        the
        holder, into shares of the Company’s common stock at a conversion price equal to
        the lower of (i) $3.00 per share or (ii) the per share price at which
        the common stock is sold to the public a public offering (the “Conversion
        Price”). In the event that the Company consummated an offering at a price that
        exceeded the then applicable Conversion Price by at least 130%, then the
        principal amount of the notes and accrued interest thereon shall have
        automatically convert into shares of the Company’s common stock at the
        conversion price (Note 3).
  The
        Company allocated the $2,113,500 of proceeds received from the Senior
        Convertible Notes based on the computed relative fair values of the debt
        and
        warrants issued and the inherent beneficial conversion feature. The aggregate
        amounts allocated to the warrants and beneficial conversion feature, of
        $1,844,246 were recorded as a debt discount at the date of issuance of the
        Senior Convertible Notes and prior to the Offering were being amortized to
        interest expense using the interest method over the stated term of the Senior
        Convertible Notes as described below.
  During
        the year ended June 30, 2006 $266,057 of discount on the Convertible Notes
        and Senior Convertible Notes (collectively the “Notes”) had been accreted and
        recorded in accretion of debt discounts on the accompanying consolidated
        statement of operations. Upon consummation of the Offering the principal
        amount
        of the Notes and accrued interest payable thereon of $87,220 automatically
        converted into 750,240 shares of the Company’s common stock at a conversion
        price of $3.00 per share. As a result of the conversion of the Notes into
        shares
        of common stock, a non-cash interest expense of $1,686,042 resulting from
        the
        amortization of the balance of the original issue discount as compared to
        the
        principal amount of the Notes was incurred at the consummation of the Offering
        and was charged to amortization of debt discounts on the accompanying
        consolidated statement of operations at the consummation of the Offering.
        Additionally, the carrying value of the debt issuance costs of $472,267 as
        of
        the date of the Offering was immediately amortized and charged to amortization
        of debt issuance costs on the accompanying consolidated statement of operations
        at the consummation of the Offering. As of February 6, 2006 the Notes were
        settled in full and no further amounts are payable.
  
 F-20
 AMERICAN
        TELECOM SERVICES, INC.
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
   **10.          Warrants:**
  *Private
        Warrants*
  The
        Company’s Private Warrants entitled the holder to purchase one share of the
        Company’s common stock at an exercise price equal to the lower of (i) $5.05
        and (ii) the price per share at which the Company’s common stock is sold in
        the Offering, subject to adjustment. As a result of the Offering in February
        2006, the exercise price was fixed at $5.05 per share. Upon consummation
        of the
        Offering, all the Private Warrants were automatically exchanged into a like
        number of Redeemable Warrants described below. As of June 30, 2006, no
        Private Warrants are outstanding.
  *Redeemable
        Warrants*
  In
        connection with the Offering in February 2006, the Company sold redeemable
        warrants to purchase shares of the Company’s common stock (the “Redeemable
        Warrants”). The Company’s Redeemable Warrants entitle the holder to purchase one
        share of the Company’s common stock at a price of $5.05 per share, at any time
        commencing on the date of the Offering and expiring on January 31,
        2011.
  The
        Company may call the Redeemable Warrants, with HCFP’s prior consent, for
        redemption at a price of $0.05 per warrant upon a minimum of 30 days’ prior
        written notice of redemption if and only if, the Company then has an effective
        registration statement covering the shares issuable upon exercise of the
        Redeemable Warrants. However the Company may not initiate its call right
        unless
        the last sales price per share of the Company’s common stock equals or exceeds
        190% (currently $9.60) during the first three months after the consummation
        of
        the Offering, or 150% (currently $7.58) thereafter, of the then effective
        exercise price of the Redeemable Warrants for all 15 of the trading days
        ending
        within three business days before the Company sends the notice of
        redemption.
  The
        Redeemable Warrants may be exercised on or prior to the expiration date by
        payment of the exercise price in cash for the number of Redeemable Warrants
        being exercised. The Redeemable Warrants will not be exercisable unless at
        the
        time of exercise a prospectus relating to common stock issuable upon exercise
        of
        the Redeemable Warrants is current and the common stock has been registered
        or
        qualified or deemed to be exempt under the applicable securities laws. The
        Company has agreed to use its best efforts to maintain a current prospectus
        relating to common stock issuable upon exercise of the Redeemable Warrants
        until
        the expiration of the Redeemable Warrants. The Company will not be obligated
        to
        deliver registered securities, and there are no contractual penalties for
        failure to deliver such securities, if a registration statement is not effective
        at the time of exercise. However, upon exercise of the Redeemable Warrants,
        the
        Company may satisfy the obligation to issue shares in unregistered stock
        and
        then continue to use its best efforts to register the shares of stock issued.
        In
        no event (whether in the case of a registration statement not being effective
        or
        otherwise) will the Company be required to net cash settle a Redeemable Warrant
        exercise. Holders of Redeemable Warrants do not have the rights or privileges
        of
        holders of the Company’s common stock or any voting rights until such holders
        exercise their respective warrants and receive shares of the Company’s common
        stock. As of June 30, 2006, 5,328,167 Redeemable Warrants are outstanding.
        An additional 335,000 Redeemable Warrants are issuable upon exercise of the
        UPO
        (Note 3).
     F-21
 AMERICAN
          TELECOM SERVICES, INC.
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **11** **.          Income
        Taxes:**
  A
        reconciliation of the statutory U.S. federal income tax rate to the Company’s
        effective tax was as follows:
  **2006**
                
                **2005**Statutory
                    U.S. rate
                
                
                34.0
                %
                
                34.0
                %State
                    income taxes, net of federal benefit
                
                
                4.0
                %
                
                4.0
                %Non
                    deductible expenses and other
                
                
                1.3
                %
                
                0.0
                %39.3
                %
                
                38.0
                %Effect
                    of valuation allowance
                
                
                (39.3
                %)
                
                (38.0
                %)0.0
                %
                
                0.0
                %
   Significant
        components of the Company’s future tax assets at June 30, 2006 and 2005 are
        as follows:
  **2006**
                
                **2005**Tax
                    effect of operating loss carryforwards
                
                $
                2,230,000
                
                $
                78,122Other
                
                
                14,900
                
                
                —Effect
                    of valuation allowance
                
                
                (2,244,900
                )
                
                (78,122
                )Net
                    deferred tax assets
                
                $
                —
                
                $
                —
   At
        June 30, 2006, the Company had net operating loss (“NOL”) carry-forwards of
        approximately $5.9 million which expire through 2026, subject to certain
        limitations. Pursuant to Section 382 of the Internal Revenue Code, the
        usage of a portion of these net operating loss carryforwards may be limited
        due
        to changes in ownership which have occurred. A full valuation allowance has
        been
        established because of the uncertainty regarding the Company’s ability to
        generate income sufficient to utilize the tax losses during the carry-forward
        period.
  **12.         
        Quarterly financial data (Unaudited)**
  The
        Company’s unaudited condensed quarterly financial data is as follows for the
        interim quarters ended:
  **Quarter
                      Ended**
                  
                  **Sept
                      30,**
                    **2004**
                  
                  **Dec
                      31,**
                    **2004**
                  
                  **Mar
                      31,**
                    **2005**
                  
                  **June
                      30,**
                    **2005**
                  
                  **Sept
                      30,**
                    **2005**
                  
                  **Dec
                      31,**
                    **2005**
                  
                  **Mar
                      31,**
                    **2006**
                  
                  **Jun
                      30,**
                    **2006**Revenues
                  
                  $
                  —
                  
                  $
                  —
                  
                  $
                  —
                  
                  $
                  —
                  
                  $
                  —
                  
                  $
                  308,369
                  
                  $
                  117,891
                  
                  $
                  2,673,917Gross
                      Profit
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  76,772
                  
                  
                  12,113
                  
                  
                  1,209,727Income
                      (loss) from operations
                  
                  
                  (9,260
                  )
                  
                  (15,083
                  )
                  
                  (34,395
                  )
                  
                  (111,510
                  )
                  
                  (418,696
                  )
                  
                  (927,144
                  )
                  
                  (3,178,760
                  )
                  
                  (1,213,446
                  )Income
                        (loss) before extraordinary items andcumulative effect of changes
                        on accounting
                  
                  
                  (9,260
                  )
                  
                  (15,083
                  )
                  
                  (34,395
                  )
                  
                  (111,510
                  )
                  
                  (418,696
                  )
                  
                  (927,144
                  )
                  
                  (3,178,760
                  )
                  
                  (1,213,446
                  )Net
                      income (loss)
                  
                  
                  (9,260
                  )
                  
                  (15,083
                  )
                  
                  (34,395
                  )
                  
                  (111,510
                  )
                  
                  (418,696
                  )
                  
                  (927,144
                  )
                  
                  (3,178,760
                  )
                  
                  (1,213,446
                  )Net
                      income (loss) per share, basic and diluted
                  
                  $
                  —
                  
                  $
                  (0.01
                  )
                  $
                  (0.02
                  )
                  $
                  (0.06
                  )
                  $
                  (0.21
                  )
                  $
                  (0.46
                  )
                  $
                  (0.71
                  )
                  $
                  (0.19
                  )
  F-22
 **SIGNATURES**
  Pursuant
        to the requirements of Section 13 or 15(d) of the Securities Exchange Act
        of 1934, the Registrant has duly caused this report to be signed on its behalf
        by the undersigned, thereunto duly authorized.
   American
                  Telecom Services, Inc.Dated:    
                September
                28, 2006
              By:
              /s/ Bruce
                HahnBruce
                Hahn, Chief Executive Officer
     Pursuant
        to the requirements of the Securities Exchange Act of 1934, this report has
        been
        signed below by the following persons on behalf of the Registrant and in
        the
        capacities and on the dates indicated:
  **SIGNATURE**
              
              **TITLE**
              
              **DATE**/s/
                  Lawrence Burstein
              
              Chairman
                  of the Board of Directors
              
              September
                  28, 2006Lawrence
                  Burstein
                
                
                /s/
                  Bruce Hahn
              
              Chief
                  Executive Officer and Director (Principal Executive
                  Officer)
              
              September
                  28, 2006Bruce
                  Hahn
                
                
                /s/
                  Bruce Layman
              
              Chief
                  Operating Officer and Chief Financial Officer
              
              September
                  28, 2006Bruce
                Layman
              
              (Principal
                Financial Officer and Principal Accounting Officer)/s/
                  Robert F. Doherty
              
              Director
              
              September
                  28, 2006Robert
                  F. Doherty
              
              DirectorElliott
                  J. Kerbis
                
                
                /s/
                  Donald G. Norris
              
              Director
              
              September
                  28, 2006Donald
                  G. Norris
                
                
                /s/
                  Robert S. Picow
              
              Director
              
              September
                  28, 2006Robert
                S. Picow
     E-1