**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**




**FORM
      10-Q**




QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
      EXCHANGE ACT OF 1934






For
        the
        quarterly period ended **March
        31, 2006**





Commission
      file number: **1-32736**








**AMERICAN
      TELECOM SERVICES, INC.**


(Exact
      name of registrant as specified in its charter)





**Delaware**
            
            **77-0602480**(State
                of incorporation)
            
            (I.R.S.
                EmployerIdentification
                No.)**2466
                Peck Road**
              **City
                of Industry, California 90601**
              (Address
                of principal executive offices)





**(562)
      908-1287**


(Registrant’s
      telephone number, including area code)








Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange
      Act.


Large
      accelerated filer o    Accelerated
      filer o   Non-accelerated
      filer x




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





Indicate
      the number of shares outstanding of each of the registrant’s classes of common
      stock, as of the latest practicable date.





Class
            
            Outstanding
                at May 1, 2006Common
                Stock, par value $0.001 per share
            
            6,502,740
                shares

















**AMERICAN
      TELECOM SERVICES, INC.**





**FORM
      10-Q**


**FOR
      THE PERIOD ENDED MARCH 31, 2006**





**TABLE
      OF CONTENTS**








**Page****PART
                I.  FINANCIAL
                INFORMATION**Item 1. Financial Statements
                  (Unaudited)Condensed
                  Balance Sheets
              
              1Condensed Statements of Operations
              
              2Condensed
                  Statement of Stockholders’
                  Equity
                  (Deficit)
              
              3Condensed Statements of Cash Flows
              
              4Notes to Unaudited Condensed Financial Statements
              
              5Item
                  2.       Management’s Discussion and
                  Analysis of Financial Condition and Results of Operations
              
              16Item
                  3.       Quantitative and Qualitative
                  Disclosures About Market Risk
              
              19Item
                  4.       Controls and
                  Procedures
              
              19**PART
                  II.           OTHER
                  INFORMATION**Item
                  1.       Legal Proceedings
              
              20Item
                  1A.   Risk Factors
              
              20Item
                  2.      Unregistered Sales of Equity
                  Securities and Use of Proceeds
              
              20Item
                  3.       Defaults upon Senior
                  Securities
              
              20Item
                  4.       Submission of Matters to a Vote of
                  Security Holders
              
              20Item
                  5.       Other Information
              
              20Item
                  6.       Exhibits
              
              20Signatures
              
              21












You
      should carefully review the information contained in this Quarterly Report
      and
      in other reports or documents that we file from time to time with the Securities
      and Exchange Commission (the “SEC”). In this Quarterly 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; if we are unable to effectively manage the transition from
      development stage to commercial operations, our financial results will be
      negatively affected; 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 our Rule
      424(b) prospectus, dated February 1, 2006 and other reports or documents that
      we
      file from time to time with the SEC. Statements included in this Quarterly
      Report are based upon information known to us as of the date that this Quarterly
      Report is filed with the SEC, and we assume no obligation to update or alter
      our
      forward-looking statements made in this Quarterly Report, whether as a result
      of
      new information, future events or otherwise, except as otherwise required by
      applicable federal securities laws.







**PART
      I**





**ITEM
              1.**
            **FINANCIAL
                STATEMENTS**


**AMERICAN
      TELECOM SERVICES, INC.**


**(A
      DEVELOPMENT STAGE COMPANY)**


**CONDENSED
      BALANCE SHEETS**





**March
                  31, 2006 (Unaudited)**
              
              **June
                  30, 2005****ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              14,942,300
              
              $
              50,780Accounts
                  receivable
              
              
              164,703
              
              
              —Prepaid
                  expenses and other
              
              
              795,885
              
              
              —Inventory
              
              
              1,867,498
              
              
              —Total
                  current assets
              
              
              17,770,386
              
              
              50,780Property
                  and equipment, net
              
              
              103,635Deferred
                  financing costs
              
              
              —
              
              
              113,518Debt
                  issuance costs, net
              
              
              —
              
              
              10,000Other
                  assets
              
              
              28,170
              
              
              —Total
                  assets
              
              $
              17,902,191
              
              $
              174,298**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY (DEFICIT)**Current
                  liabilities:Accounts
                  payable
              
              $
              1,078,719
              
              $
              —Accrued
                  expenses
              
              
              245,212
              
              
              100,657Accrued
                  financing costs
              
              
              157,871
              
              
              123,518Deferred
                  revenue
              
              
              149,050
              
              
              —Total
                  current liabilities
              
              
              1,630,852
              
              
              224,175Convertible
                  notes, net including interest payable of $0 and $75 (Note
                  7)
              
              
              —
              
              
              1,000Total
                  liabilities
              
              
              1,630,852
              
              
              225,175Commitments
                  (Note 5)Stockholders’
                  equity (deficit):Preferred
                  stock, $.001 par value, authorized 5,000,000 shares, issued and
                  outstanding -0- shares
              
              
              —
              
              
              —Common
                  stock, $.001 par value, authorized 40,000,000 shares; issued and
                  outstanding 6,502,740 shares and 2,000,000 shares (Notes 3, 7)
              
              
              6,503
              
              
              2,000Additional
                  paid-in capital (Notes 3,6,7,8)
              
              
              20,984,623
              
              
              142,429Deficit
                  accumulated during the development stage
              
              
              (4,719,787
              )
              
              (195,306
              )Total
                  stockholders’ equity (deficit)
              
              
              16,271,339
              
              
              (50,877
              )Total
                  liabilities and stockholders’ equity (deficit)
              
              $
              17,902,191
              
              $
              174,298






The
      accompanying notes are an integral part of these unaudited condensed financial
      statements


1


**AMERICAN
      TELECOM SERVICES, INC.**


**(A
      DEVELOPMENT STAGE COMPANY)**


**UNAUDITED
      CONDENSED STATEMENTS OF OPERATIONS**






**For the
                  three months ended March 31, 2006 (Unaudited)**
              
              **For the three
                  months ended March 31, 2005 (Unaudited)**
              
              **For the nine
                  months ended March 31, 2006 (Unaudited)**
              
              **For the nine
                  months ended March 31, 2005 (Unaudited)**
              
              **For the Period from
                  June 16, 2003 (inception) to**
                **March
                  31, 2006(Unaudited)**Revenues
              
              $
              117,891
              
              $
              —
              
              $
              426,260
              
              $
              —
              
              $
              426,260Costs
                  of sales
              
              
              105,778
              
              
              —
              
              
              337,375
              
              
              —
              
              
              337,375Gross
                  profit
              
              
              12,113
              
              
              —
              
              
              88,885
              
              
              —
              
              
              88,885Operating
                  Expenses:Selling,
                  marketing and development
              
              
              428,063
              
              
              13,014
              
              
              882,497
              
              
              18,330
              
              
              1,000,953General
                  and administrative
              
              
              605,363
              
              
              21,381
              
              
              1,277,445
              
              
              40,408
              
              
              1,351,423Total
                  expenses
              
              
              1,033,426
              
              
              34,395
              
              
              2,159,942
              
              
              58,738
              
              
              2,352,376Operating
                  loss
              
              
              (1,021,313
              )
              
              (34,395
              )
              
              (2,071,057
              )
              
              (58,738
              )
              
              (2,263,491
              )Other
                  expenses (income):Interest
                  and bank charges, net
              
              
              (62,828
              )
              
              —
              
              
              29,058
              
              
              —
              
              
              30,024Amortization
                  of debt discounts and debt issuance costs (Note 7)
              
              
              2,220,275
              
              
              —
              
              
              2,424,366
              
              
              —
              
              
              2,426,272Loss
                  before provision for income taxes
              
              
              (3,178,760
              )
              
              (34,395
              )
              
              (4,524,481
              )
              
              (58,738
              )
              
              (4,719,787
              )Provision
                  for income taxes
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Net
                  loss
              
              $
              (3,178,760
              )
              $
              (34,395
              )
              $
              (4,524,481
              )
              $
              (58,738
              )
              $
              (4,719,787
              )Net
                  loss per common share:Basic
                  and diluted
              
              
              (0.71
              )
              $
              (0.02
              )
              $
              (1.60
              )
              $
              (0.03
              )Weighted
                  average shares outstanding:Basic
                  and diluted
              
              
              4,495,002
              
              
              2,000,000
              
              
              2,819,526
              
              
              2,000,000






The
      accompanying notes are an integral part of these unaudited condensed financial
      statements


2


**AMERICAN
      TELECOM SERVICES, INC.**


**(A
      DEVELOPMENT STAGE COMPANY)**


**CONDENSED
      STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)**






**Common
                  stock****Shares**
              
              **Amount**
              
              **Additional
                  paid-in capital**
              
              **Deficit
                  accumulated during the development stage**
              
              **Total
                  stockholders’ equity (deficit)****Balance,
                June 16, 2003 (inception)**
              
              
              —
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              —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 (unaudited)
              
              
              —
              
              
              —
              
              
              2,080
              
              
              —
              
              
              2,080Value
                  allocated to warrants issued and beneficial conversion feature
                  of
                  convertible notes (unaudited)
              
              
              —
              
              
              —
              
              
              1,844,246
              
              
              —
              
              
              1,844,246Proceeds
                  from sale of underwriters’ purchase option (unaudited)
              
              
              —
              
              
              —
              
              
              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 (unaudited)
              
              
              3,752,500
              
              
              3,753
              
              
              16,620,280
              
              
              —
              
              
              16,624,033Conversion
                  of Notes and Senior Notes (unaudited)
              
              
              750,240
              
              
              750
              
              
              2,249,970
              
              
              —
              
              
              2,250,720Stock-based
                  compensation expense related to employee stock options
                  (unaudited)
              
              
              —
              
              
              —
              
              
              120,440
              
              
              —
              
              
              120,440Stock-based
                  compensation expense related to non-employee stock options
                  (unaudited)
              
              
              —
              
              
              —
              
              
              5,078
              
              
              —
              
              
              5,078Net
                  loss (unaudited)
              
              
              —
              
              
              —
              
              
              —
              
              
              (4,524,481
              )
              
              (4,524,481
              )**Balance,
                  March 31, 2006 (Unaudited)**
              
              
              6,502,740
              
              $
              6,503
              
              $
              20,984,623
              
              $
              (4,719,787
              )
              $
              16,271,339







The
      accompanying notes are an integral part of these unaudited condensed financial
      statements.


3


**AMERICAN
      TELECOM SERVICES, INC.**


**(A
      DEVELOPMENT STAGE COMPANY)**


**UNAUDITED
      CONDENSED STATEMENTS OF CASH FLOWS**






**For the nine
                  months ended March 31, 2006 (Unaudited)**
              
              **For the nine
                  months ended March 31, 2005 (Unaudited)**
              
              **For the Period from
                  June 16, 2003 (inception) to March 31, 2006
                  (Unaudited)**Cash
                flows from operating activities:Net
                  loss
              
              $
              (4,524,481
              )
              $
              (58,738
              )
              $
              (4,719,787
              )Adjustment
                  to reconcile net loss to net cash used in operating activitiesDepreciation
              
              
              6,272
              
              
              —
              
              
              6,272Common
                  stock and capital contributed for services
              
              
              2,080
              
              
              40,738
              
              
              96,509Employee
                  share based compensation
              
              
              120,440
              
              
              —
              
              
              120,440Non-employee
                  share based compensation
              
              
              5,078
              
              
              —
              
              
              5,078Non-cash
                  interest expense
              
              
              87,220
              
              
              —
              
              
              87,220Amortization
                  of debt discounts and issuance costs
              
              
              2,424,366
              
              
              —
              
              
              2,425,366Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              (164,703
              )
              
              —
              
              
              (164,703
              )Prepaid
                  expenses and other
              
              
              (795,885
              )
              
              —
              
              
              (795,885
              )Inventory
              
              
              (1,867,498
              )
              
              —
              
              
              (1,867,498
              )Other
                  assets
              
              
              (28,170
              )
              
              —
              
              
              (28,170
              )Accounts
                  payable
              
              
              1,078,719
              
              
              18,000
              
              
              1,078,719Accrued
                  expenses
              
              
              144,555
              
              
              —
              
              
              245,212Deferred
                  revenue
              
              
              149,050
              
              
              —
              
              
              149,050Net
                  cash used in operating activities
              
              
              (3,362,957
              )
              
              —
              
              
              (3,362,177
              )Cash
                  flows from investing activities:Purchases
                  of property and equipment
              
              
              (109,907
              )
              
              —
              
              
              (109,907
              )Net
                  cash used in investing activities
              
              
              (109,907
              )
              
              —
              
              
              (109,907
              )Cash
                  flows from financing activities:Proceeds
                  from convertible notes
              
              
              —
              
              
              —
              
              
              50,000Proceeds
                  from senior convertible notes
              
              
              2,113,500
              
              
              —
              
              
              2,113,500Net
                  proceeds from public offering of securities
              
              
              16,781,904
              
              
              —
              
              
              16,781,904Proceeds
                  from underwriter purchase option
              
              
              100
              
              
              —
              
              
              100Debt
                  issuance costs
              
              
              (531,120
              )
              
              —
              
              
              (531,120
              )Net
                  cash provided by financing activities
              
              
              18,364,384
              
              
              —
              
              
              18,414,384Net
                  increase in cash and cash equivalents
              
              
              14,891,520
              
              
              —
              
              
              14,942,300Cash
                  and cash equivalents — beginning of period
              
              
              50,780
              
              
              —
              
              
              —Cash
                  and cash equivalents — end of period
              
              $
              14,942,300
              
              $
              —
              
              $
              14,942,300Supplementary
                  disclosure of cash flow information:Non-cash
                  financing activities:Capital
                  contribution
              
              $
              —
              
              $
              40,738
              
              $
              96,509Conversion
                  of Notes to equity
              
              $
              2,250,720
              
              $
              —
              
              $
              2,250,720Accrued
                  financing costs
              
              $
              157,871
              
              $
              —
              
              $
              157,871Fair
                  value of underwriter purchase option included in offering
                  costs
              
              $
              711,000
              
              $
              —
              
              $
              711,000





The
      accompanying notes are an integral part of these unaudited condensed financial
      statements


4


**AMERICAN
      TELECOM SERVICES, INC.**


**(A
      DEVELOPMENT STAGE COMPANY)**


**NOTES
      TO UNAUDITED CONDENSED FINANCIAL STATEMENTS**






**1.**
            **Description
                of the business, basis of presentation and management’s plans:**




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 expects to generate revenues through
      the sale of phones into the retail market and share 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 and initial sales and marketing. The Company consummated an initial
      public offering of its common shares and redeemable warrants in February 2006
      (Note 3).




The
      Company has generated nominal revenues to date and is considered to be a
      development stage company and as such the March 31, 2006 financial statements
      are presented in accordance with Statement of Financial Accounting Standards
      (“SFAS”) No. 7.






**2.**
            **Summary
                of significant accounting policies:**




***Interim reporting***




The
      accompanying unaudited condensed financial statements have been prepared
      pursuant to the rules and regulations of the Securities and Exchange Commission
      (“SEC”). Certain information and footnote disclosures normally included in
      financial statements prepared in accordance with accounting principles generally
      accepted in the United States of America have been omitted pursuant to such
      rules and regulations. However the Company believes that the disclosures are
      adequate to make the information presented not misleading. The financial
      statements reflect all adjustments (consisting primarily of normal recurring
      adjustments) that are, in the opinion of management, necessary for a fair
      presentation of the Company’s financial position and results of operations. The
      operating results for the three and nine months ended March 31, 2006 and
      2005 are not necessarily indicative of the results to be expected for any other
      interim period or any future year. The accompanying unaudited financial
      statements should be read in conjunction with the Company’s audited
      June 30, 2005 financial statements, including the notes thereto, which are
      included in the Company’s definitive prospectus, dated February 1, 2006, filed
      on February 2, 2006.




***Revenue recognition***




The
      Company is a development stage enterprise and did not generate significant
      revenues through March 31, 2006. 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 three months and nine months ended
      March 31, 2006, the Company generated approximately $115,000 and $423,000,
      respectively of revenues from the sale of the Company’s phone products to
      consumer retailers.




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.







5


**AMERICAN
      TELECOM SERVICES, INC.**


**(A
      DEVELOPMENT STAGE COMPANY)**


**NOTES
      TO UNAUDITED CONDENSED FINANCIAL STATEMENTS —** ***(Continued)***






**2.**
            **Summary
                of significant accounting policies: —*****(Continued)***




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.




The
      Company generally warrants its phone products against defects to customers
      for a
      period of up to one year and accrues for warranty costs, sales returns, and
      other allowances based on estimates. As required, the Company accrues a
      provision for estimated future costs and estimated returns as a reduction of
      revenue and for reserves related to warranty as an expense at the time of
      revenue recognition. During the three and nine months ended March 31, 2006,
      the Company recorded a provision for warranty reserves of $1,672 and $4,900,
      respectively, and provision for sales returns allowances of $8,358 and $17,858,
      respectively. Each estimate was based on management’s consideration of
      comparable companies, the specific agreements with retail partners, and
      experience in the wholesale distribution industry.




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
      Rice & 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 three and nine months ended March 31,
      2006, a nominal amount of commission revenue was recognized.





6


**AMERICAN
      TELECOM SERVICES, INC.**


**(A
      DEVELOPMENT STAGE COMPANY)**


**NOTES
      TO UNAUDITED CONDENSED FINANCIAL STATEMENTS —** ***(Continued)***






**2.**
            **Summary
                of significant accounting policies: —*****(Continued)***




The
      Company will offer 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 will be recorded as a
      reduction of revenues. During the three and nine months ended March 31,
      2006, a nominal amount 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 recognized
      under SFAS 123(R) for the three and nine months ended March 31, 2006 was
      $120,440, 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 statements of operations. See Note
      6
      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 statement of
      operations.




Stock-based
      compensation expense recognized in the Company’s statements of operations for
      the three and nine months ended March 31, 2006 included compensation expense
      for
      share-based payment awards granted in February 2006 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 statement of operations
      for the three and nine months ended March 31, 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.













7


**AMERICAN
      TELECOM SERVICES, INC.**


**(A
      DEVELOPMENT STAGE COMPANY)**


**NOTES
      TO UNAUDITED CONDENSED FINANCIAL STATEMENTS —** ***(Continued)***






**2.**
            **Summary
                of significant accounting policies: —*****(Continued)***





Share-based
      compensation expense to employees and directors increased the Company’s losses
      as follows:




**Three months ended
                  March 31, 2006 (Unaudited)**
              
              **Nine
                  months ended**
                **March
                  31, 2006(Unaudited)**Loss
                  from operations
              
              $
              120,440
              
              $
              120,440Loss
                  from operations before income taxes
              
              $
              120,440
              
              $
              120,440Net
                  loss available to common stockholders
              
              $
              120,440
              
              $
              120,440Earnings
                  per Common Share—Basic and Diluted:Loss
                  from operations
              
              $
              (0.03
              )
              $
              (0.04
              )Net
                  loss
              
              $
              (0.03
              )
              $
              (0.04
              )






No
      share-based compensation awards were granted prior the consummation of the
      Company’s initial public offering on February 6, 2006.




***Allowance
      for doubtful accounts***




The
      Company will maintain allowances for doubtful accounts for estimated losses
      resulting from the inability of its customers to make required payments. These
      estimated losses will be based upon historical bad debt experiences, specific
      customer creditworthiness and current economic trends. If the financial
      condition of a customer deteriorates, resulting in the customer’s inability to
      make payments within approved credit terms, additional allowances may be
      required. The Company performs credit evaluations of its customers’ financial
      condition on a regular basis. The Company has not recorded any allowances for
      doubtful accounts to date.




***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 balance sheets
      at March 31, 2006 and June 30, 2005.




***Cash
      and Cash Equivalents***




The
      Company considers all highly liquid investments with an original maturity of
      three months or less when purchased to be cash equivalents.




***Inventory***




Inventory
      consists of finished goods on hand and in transit which are stated at the lower
      of cost or market. Cost is determined by using the first-in, first-out method.




***Property
      and Equipment, net***




Property
      and equipment consist of furniture and computer hardware and software which
      are
      stated at cost, less accumulated depreciation. Depreciation is computed using
      the straight-line method over the estimated useful life of the furniture and
      equipment, generally 3 to 5 years. The cost of maintenance and repairs are
      charged to expenses as incurred.




***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.




8


**AMERICAN
      TELECOM SERVICES, INC.**


**(A
      DEVELOPMENT STAGE COMPANY)**


**NOTES
      TO UNAUDITED CONDENSED FINANCIAL STATEMENTS —** ***(Continued)***






**2.**
            **Summary
                of significant accounting policies: —*****(Continued)***




***Income
      taxes***




The
      Company follows the liability approach under which deferred income taxes are
      determined upon the differences between the financial statement and tax bases
      of
      assets and liabilities using enacted rates in effect in the year in which the
      differences are expected to reverse. Valuation allowances are provided against
      deferred tax assets when management is uncertain as to the ultimate realization
      of the assets.




***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.




***Use
      of estimates***




The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States 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 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.




***Recent
      accounting pronouncements***




The
      Company does not believe that any recently issued, but not yet effective,
      accounting standards if currently adopted would have a material effect on the
      accompanying condensed financial statements.






**3.**
            **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 and a
      corresponding increase in additional 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




9


**AMERICAN
      TELECOM SERVICES, INC.**


**(A
      DEVELOPMENT STAGE COMPANY)**


**NOTES
      TO UNAUDITED CONDENSED FINANCIAL STATEMENTS —** ***(Continued)***






**3.**
            **Initial
                Public Offering: —*****(Continued)***




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.






**4.**
            **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 7).




*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. The Company recognized $41,000 and
      $118,000 of expenses during the three and nine months ended March 31, 2006,
      respectively, pursuant to this arrangement which is included in selling,
      marketing and development expense on the accompanying statements of operations.
      In addition, the Company granted stock options to Future Marketing (Note 6)
      which resulted in a charge of $5,078, which is included in selling, marketing
      and development expense during the three and nine months ended March 31, 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 a nominal amount of expenses during the three
      and nine months ended March 31, 2006, pursuant to this arrangement. Such
      expenses are included in selling, marketing and development expense on the
      accompanying statements 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 a nominal
      amount of expenses during the three and nine months ended March 31, 2006,
      pursuant to this arrangement. Such expenses are included in selling, marketing
      and development expense on the accompanying statements 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




10


**AMERICAN
      TELECOM SERVICES, INC.**


**(A
      DEVELOPMENT STAGE COMPANY)**


**NOTES
      TO UNAUDITED CONDENSED FINANCIAL STATEMENTS —** ***(Continued)***






**4.**
            **Related
                party transactions: —*****(Continued)***




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 a nominal amount
      of
      expenses during the three and nine months ended March 31, 2006, pursuant to
      this
      arrangement. Such expenses are included in selling, marketing and development
      expense on the accompanying statements of operations.






**5.**
            **Commitments:**




*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 engaged 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.




*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 $13,220 of expense during the three months ended March
      31, 2006 pursuant to this arrangement, which is included in interest and bank
      charges on the accompanying statements of operations. The Company recognized
      $29,489 of expense during the nine months ended March 31, 2006 pursuant to
      this
      arrangement of which $6,648 is included in selling, marketing and development
      expense and $22,841 is included in interest and bank charges on the accompanying
      statements of operations.




*Lease*




The
      Company is subject to a noncancelable operating lease for its office space
      commencing on March 22, 2006 which expires in June 2009.  Minimum annual
      payments under such lease are approximately $56,000.




**6.**
            **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.




*Employee
      Stock Options*




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 granted to employees
      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
      options granted to members of the board of directors through March 31, 2006
      were
      fully vested on the date of grant. 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.




11


**AMERICAN
      TELECOM SERVICES, INC.**


**(A
      DEVELOPMENT STAGE COMPANY)**


**NOTES
      TO UNAUDITED CONDENSED FINANCIAL STATEMENTS —** ***(Continued)***






**6.**
            **Stock
                Based Compensation Plan: —*****(Continued)***





As
      stock-based compensation expense recognized in the statement of operations
      for
      the three and nine months ended March 31, 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 option grant was estimated on the grant-date using the
      Black-Scholes option pricing model with the following weighted average
      assumptions:




**Three and
                  nine months ended March 31, 2006
                  (Unaudited)**Weighted
                  Average Assumptions:Expected
                  volatility
              
              
              77.5
              %Dividend
                  yield
              
              
              —Risk-free
                  interest rate
              
              
              4.56
              %Annual
                  forfeiture rate
              
              
              10.0
              %Expected
                  holding period (in years)
              
              
              3.05








Upon
      consummation of the Offering, certain members of management and the board of
      directors received options under the Plan. The following table summarizes
      information concerning options outstanding under the Plan for the nine months
      ended March 31, 2006:




**Shares**
                
                **Weighted Average
                    Exercise Price**Options
                    Outstanding as of June 30, 2005
                
                
                —
                
                $
                —Granted
                
                
                195,000
                
                
                5.05Exercised
                
                
                —
                
                
                —Forfeited
                    and Expired
                
                
                —
                
                
                —Options
                    Outstanding as of March 31, 2006 (unaudited)
                
                
                195,000
                
                $
                5.05








The
      following table summarizes the status of the Company’s stock options as of March
      31, 2006:




**Stock Options Outstanding**
              
              **Stock Options Exercisable****Average**
              
              **Weighted**
              
              
              
              
              
              **Weighted****Remaining**
              
              **Average**
              
              **Aggregate**
              
              
              
              **Average**
              
              **Aggregate****Range of**
              
              
              
              **Contractual**
              
              **Exercise**
              
              **Intrinsic**
              
              
              
              **Exercise**
              
              **Intrinsic****Exercise Prices**
              
              **Shares**
              
              **Life (Years)**
              
              **Price**
              
              **Value**
              
              **Shares**
              
              **Price**
              
              **Value**$
              5.05
              
              
              195,000
              
              
              4.86
              
              $
              5.05
              
              $
              —
              
              
              45,000
              
              $
              5.05
              
              $
              —Total
              
              
              195,000
              
              
              
              
              $
              5.05
              
              $
              —
              
              
              45,000
              
              $
              5.05
              
              $
              —






The
      aggregate intrinsic value in the preceding table represents the total pretax
      intrinsic value, based on the Company’s average stock price on March 31, 2006,
      which would have been received by the option holders had all option holders
      exercised their options as of that date. There were no in-the-money options
      outstanding or exercisable on March 31, 2006. The weighted average remaining
      contractual life on March for outstanding and exercisable options is 4.86 and
      4.86 years respectively.





12


**AMERICAN
      TELECOM SERVICES, INC.**


**(A
      DEVELOPMENT STAGE COMPANY)**


**NOTES
      TO UNAUDITED CONDENSED FINANCIAL STATEMENTS —** ***(Continued)***






**6.**
            **Stock
                Based Compensation Plan: —*****(Continued)***





*Non-employee
      Stock Options*




In
      addition the Company granted 25,000 options to a non-employee consultant upon
      consummation of the Offering, 12,500 of which will vest on the first anniversary
      of the consulting relationship with the Company and the remaining 12,500 of
      which will vest on the second anniversary of its consulting relationship with
      us. The options are exercisable at $5.05 per share. 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 $5,078 of expense during the three
      and nine months ended March 31, 2006 pursuant to this arrangement.





*Performance
      Accelerated Restricted Stock*




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 March 31, 2006, 325,000 PARS awards are outstanding.






**7.**
            **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 4),
      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 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.





13


**AMERICAN
      TELECOM SERVICES, INC.**


**(A
      DEVELOPMENT STAGE COMPANY)**


**NOTES
      TO UNAUDITED CONDENSED FINANCIAL STATEMENTS —** ***(Continued)***






**7.**
            **Debt:
                —*****(Continued)***




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 4),
      principal amount of its 8% senior convertible notes (the “Senior Convertible
      Notes”), 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
      “Conversion
      Price”). The
      Senior Convertible Notes 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
      8) 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.




Prior
      to
      the Offering, the principal amount of the Senior Convertible Notes and the
      accrued interest thereon were convertible, at any time, at the option of the
      holder, into shares of the Company’s common stock.  In the event that the
      Company consummated a public offering at a price that exceeded $3.00 per share
      or the then applicable Conversion Price by at least 130%, then the principal
      amount of the 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 Senior Convertible Notes automatically
      converted to common stock upon consumation of the offering.




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 three and nine months ended March 31, 2006, $61,966 and $266,057,
      respectively, of discount on the Convertible Notes and Senior Convertible Notes
      (collectively the “Notes”) has been accreted and recorded in accretion of debt
      discounts on the accompanying statements 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 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 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.






**8.**
            **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, the Private Warrants were automatically exchanged into a like number
      of Redeemable Warrants described below.




14


**AMERICAN
      TELECOM SERVICES, INC.**


**(A
      DEVELOPMENT STAGE COMPANY)**


**NOTES
      TO UNAUDITED CONDENSED FINANCIAL STATEMENTS —** ***(Continued)***






**8.**
            **Warrants:
                —*****(Continued)***




*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 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 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, there can be no assurance that the Company
      will be able to do so.




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. Upon exercise of the Redeemable Warrants, the Company may
      satisfy the obligation to issue shares in either unregistered or registered
      stock. The 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
      March 31, 2006, 5,328,167 Redeemable Warrants were outstanding.





























15


ITEM
                **2.**
            **MANAGEMENT’S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                OPERATIONS**




“Management’s
      Discussion and Analysis of Financial Condition and Results of Operations” should
      be read in conjunction with the Financial Statements and the notes included
      elsewhere in this quarterly 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. See “Forward Looking Statements” at
      the beginning of this Quarterly Report.




Our
      accompanying unaudited Financial Statements as of March 31, 2006 and for
      the three and nine months ended March 31, 2006 and 2005, have been prepared
      in
      accordance with accounting principles generally accepted in the United States
      of
      America for interim financial statements and the rules and regulations of
      the Securities and Exchange Commission, or the SEC, for interim financial
      statements, and should be read in conjunction with our Financial Statements
      and
      other financial information for the fiscal year ended June 30, 2005, which
      were included in our definitive prospectus, dated February 1, 2006, filed on
      February 2, 2006. In our opinion, the unaudited interim Financial Statements
      reflect all adjustments, consisting primarily of normal recurring adjustments,
      necessary for a fair presentation of the financial condition, results of
      operations and cash flows for the periods indicated. The results of operations
      for the interim periods reported are not necessarily indicative of the results
      to be experienced for the entire fiscal year or in future periods.




*Public
      Offering*




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.




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.




**Overview**




We
      are a
      development stage company that was 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 digital spread spectrum (“DSS”) 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 nine months ended March 31, 2006 we had our supplier begin the manufacturing
      of our initial VoIP and prepaid residential long distance service phones and
      prior to the IPO funded these initial manufacturing efforts through our lender
      relationships 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.




16


Both
      our
      prepaid long distance and Internet phone/service bundles are available through
      our retail customers. Since we only recently commenced sales and marketing
      activities, we have not yet generated significant revenues.




**Results
      of Operations**




*Revenues—* Revenues
      were $117,891 for the three months ended March 31, 2006 and $0 for the three
      months ended March 31, 2005. Revenues were $426,260 for the nine months ended
      March 31, 2006 and $0 for the nine months ended March 31, 2005. Revenues during
      the three and nine months ended March 31, 2006 related primarily to the sale
      of
      our phone products.   Revenues related to carrier commissions were
      nominal.  In September 2005 we shipped our initial phone products which
      began arriving in retail outlets in October 2005. Since we did not generate
      significant revenues through March 31, 2006, 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 Sales* —Cost
      of
      sales was $105,778 for the three months ended March 31, 2006 and $0 for the
      three months ended March 31, 2005. Cost of sales was $337,375 for the nine
      months ended March 31, 2006 and $0 for the nine months ended March 31, 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 $12,113 or 10.3% and $88,885 or 20.9%
      during the three and nine months ended March 31, 2006, 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 $428,063 and $13,014 for the three months
      ended March 31, 2006 and 2005. Selling, marketing and development expense was
      $882,497 and $18,330 for the nine months ended March 31, 2006 and 2005. 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 development. Additionally selling, marketing and development expenses
      includes share-based compensation expense of $5,078 for the three and nine
      months ended March 31, 2006, which related to stock option grants to a
      consultant.




Since
      our
      inception, we have concentrated our efforts on establishing retail sales
      channels through which we will sell our phones upon their commercial
      introduction. We have incurred aggregate expenses of $1,000,953 in connection
      with these efforts from our inception through March 31, 2006, and have continued
      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.




Since
      our
      inception through March 31, 2006, we have incurred $93,800 of expenses in
      connection with the design, engineering and development of our initial phones.
      We intend to continue these product enhancement and development activities.




*General
      and Administrative Support—* General
      and administrative expense was $605,363 and $21,381 for the three months ended
      March 31, 2006 and 2005. General and administrative expense was $1,277,445
      and
      $40,408 for the nine months ended March 31, 2006 and 2005. 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 $120,440 for the three and nine months
      ended
      March 31, 2006, which related to stock option grants to employees and
      directors.  Shared-based compensation to employees and directors has been
      accounted for in accordance with Statement of Financial Accounting
      Standards No. 123 (revised 2005), “Share-Based Payment”.




During
      the nine months ended March 31, 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. For the period from our
      inception (June 16, 2003) through March 31, 2006, we incurred $1,351,423 in
      general and administrative expenses. We did not incur any expenses for leased
      space prior to October 2005.




17


*Interest
      and Bank Charges, net* —Interest
      income earned, net was $62,828 and $0 for the three months ended March 31,
      2006 and 2005 respectively. Interest expense and Bank Charges were $29,058
      and
      $0 for the nine months ended March 31, 2006 and 2005, respectively. Interest
      income relates to income earned on cash deposits maintained at financial
      institutions. Interest expense consists primarily of coupon debt interest and
      banking fees.




*Amortization
      of Debt Discounts and Debt Issuance Cost-* Amortization
      of debt discounts and debt issuance costs relate to the Company’s debt discount
      and debt issuance cost and are amortized over the life of the related debt.
      Amortization of debt discount and debt issuance cost were $2,220,275 and $0
      for
      the three months ended March 31, 2006 and 2005, respectively. Amortization
      of
      debt discount and debt issuance cost were $2,424,366 and $0 for the nine months
      ended March 31, 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 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 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 $3,178,760 and $34,395 for the three months ended March 31, 2006 and 2005.
      Net loss was $4,524,481 and $58,738 for the nine months ended March 31, 2006
      and
      2005. For the period from our inception through March 31, 2006, we have incurred
      aggregate net losses in our development stage, and had an accumulated deficit
      of
      $4,719,787 as of March 31, 2006. In addition to our revenues and operating
      expenses discussed above, a significant component of our net loss is
      attributable to the amortization of approximately $2.2 million and $2.4 million
      of debt discounts and debt issuance costs during the three and nine months
      ended
      March 31, 2006, respectively. We expect our losses may increase during the
      short
      term as we emerge from the development stage and initiate greater distribution
      of our phone/service bundles.




**Liquidity
      and Capital Resources**




At
        March
        31, 2006, our working capital was $16,139,534 compared to a working capital
        deficiency of $173,395 at June 30, 2005. The principal components of working
        capital at March 31, 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. During the nine months ended March 31, 2006,
        we
        utilized cash from our operating activities of $3,362,957, compared to $0
        utilized during the nine months ended March 31, 2005.




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 the Company to
      call
      its warrants, in which case we would be forced to curtail operations.




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.




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.




18


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 three and nine months ended March 31,
      2006
      were a nominal amount. 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 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 March 31, 2006 unaudited
      financial statements included in Part I, Item I on this Form 10-Q and in Note
      2
      to our June 30, 2005 audited financial statements included in our
      definitive prospectus, dated February 1, 2006, filed on February 2, 2006. 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,
      reserves for warrants and sales returns, research, engineering and development,
      bad debts.






**ITEM
              3.**
            **QUANTITATIVE
                AND QUALITATIVE DISCLOSURES ABOUT MARKET
                RISK**





Market
      risk is the exposure to loss resulting from changes in interest rates, foreign
      currency exchange rates, commodity prices and equity prices. See our definitive
      prospectus, dated February 1, 2006 (Registration Nos. 333-129361 333-131437)
      filed on February 2, 2006. There has been no material change in this
      information.








**ITEM
              4.**
            **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 March 31, 2006. Based upon that
      evaluation, our Chief Executive Officer and Chief Financial Officer concluded
      that 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. Disclosure controls and procedures include,
      without limitation, controls and procedures designed to ensure that information
      required to be disclosed by an issuer in the reports that it files or submits
      under the Exchange Act are accumulated and communicated to the issuer’s
      management, including its principal executive and principal financial officers,
      or persons performing similar functions, 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) under the Exchange
      Act
      that occurred during the quarter ended March 31, 2006 that has materially
      affected, or is reasonably likely to materially affect, our internal control
      over financial reporting.





19


**PART
      II**








**ITEM
              1.**
            **LEGAL
                PROCEEDINGS**





Not
      Applicable








**ITEM
              1A.**
            **RISK
                FACTORS**





See
      our
      definitive prospectus, dated February 1, 2006, filed on February 2, 2006. There
      has been no material change in this information.








**ITEM
              2.**
            **UNREGISTERED
                SALES OF EQUITY SECURITIES AND USE OF
                PROCEEDS**





The
      effective date of our registration statements, filed on From S-1 under the
      Securities Act (File No’s. 333-129361 and 333-131437) relating to the
      initial public offering of our Common Stock and Redeemable Warrants, was
      February 1, 2006. A total of 3,350,000 shares of Common Stock and 3,350,000
      Redeemable Warrants were registered and sold in the offering which commenced
      on
      February 1, 2006 and closed on February 6, 2006. 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. The managing underwriter for the public offering was HCFP/Brenner
      Securities LLC.




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. The aggregate
      offering price was $19,142,750. We incurred approximately $2.5 million in
      underwriting and other expenses in connection with the offering, resulting
      in
      net proceeds of approximately $16.6 million. Since the consummation of our
      initial public offering through March 31, 2006, we have primary used the net
      proceeds from the offering to purchase and build up our inventory base by
      approximately $1.7 million in order to meet customer orders, to provide
      approximately $400,000 of advances to suppliers, to purchase approximately
      $100,000 of property and equipment and generally for working capital purposes.
      We will continue to use the net proceeds from the offering as well as the
      proceeds from the exercise of the over-allotment option for contract
      manufacturing of phones and related components; for sales and marketing,
      including salaries of personnel; for product enhancement and new product
      development; for tooling; for the purchase and/or lease of office equipment;
      and
      for working capital and general corporate purposes.






**ITEM
              3.**
            **DEFAULTS
                UPON SENIOR SECURITIES**





Not
      Applicable






**ITEM
              4.**
            **SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY
                HOLDERS**





Not
      Applicable






**ITEM
              5.**
            **OTHER
                INFORMATION**





Not
      Applicable







**ITEM
              6.**
            **EXHIBITS**





**Exhibit
                Number**
            
            **Description**31.1
            
            Rule
                13a-14(a) Certifications32.1
            
            Section
                1350 Certifications





20


**SIGNATURES**




Pursuant
      to the requirements 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.****May
                15, 2006**
            By:
            /s/ Bruce
              Hahn**Bruce
              Hahn**Chief
                Executive Officer




/s/ Bruce
                Layman**Bruce
                Layman**Chief
                    Operating Officer and
                  Chief
                    Financial Officer







21