**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 **December 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.
                Employer
              Identification
                Number)




**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 December 31, 2006Common
                  Stock, par value $0.001 per share
              
              6,502,740
                  shares










**AMERICAN
        TELECOM SERVICES, INC.**
  **FORM
        10-Q**
  **FOR
        THE PERIOD ENDED DECEMBER 31, 2006**
  **TABLE
        OF CONTENTS**
  **PART
                  I**ITEM
                  1
              FINANCIAL
                  STATEMENTS
              1CONDENSED
                  CONSOLIDATED BALANCE SHEETS
              1CONDENSED
                  CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
              2CONDENSED
                  CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
                  (UNAUDITED)
              3CONDENSED
                  CONSOLIDATED STATEMENTS OF CASH FLOWS
              4NOTES
                  TO UNAUDITED CONDENSED CONSOLIDATED CONSOLIDATED FINANCIAL
                  STATEMENTS
              5ITEM
                  2
              MANAGEMENT’S
                  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                  OPERATIONS
              17ITEM
                  3
              QUANTITATIVE
                  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
              22ITEM
                  4
              CONTROLS
                  AND PROCEDURES
              22**PART
                  II**ITEM
                  1
              LEGAL
                  PROCEEDINGS
              23ITEM
                  1A.
              RISK
                  FACTORS
              23ITEM
                  2
              UNREGISTERED
                  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
              23ITEM
                  3
              DEFAULTS
                  UPON SENIOR SECURITIES
              23ITEM
                  4
              SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY HOLDERS
              23ITEM
                  5
              OTHER
                  INFORMATION
              24ITEM
                  6
              EXHIBITS
              24




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
          annual
          report on Form 10-K for the fiscal year ended June 30, 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.**
 **CONDENSED
          CONSOLIDATED BALANCE SHEETS**
  **December
                      31, 2006 (Unaudited)**
                  
                  **June
                      30, 2006****ASSETS**Current
                      assets:Cash
                      and cash equivalents
                  
                  $
                  1,429,043
                  
                  $
                  12,372,765Accounts
                      receivable, net
                  
                  
                  7,827,498
                  
                  
                  1,060,968Prepaid
                      expenses and other
                  
                  
                  859,056
                  
                  
                  808,523Inventory,
                      net
                  
                  
                  4,212,488
                  
                  
                  2,181,019Total
                      current assets
                  
                  
                  14,328,085
                  
                  
                  16,423,275Property
                      and equipment, net
                  
                  
                  275,124
                  
                  
                  174,880Deposit
                      and other assets
                  
                  
                  80,587
                  
                  
                  75,391Total
                      assets
                  
                  $
                  14,683,796
                  
                  $
                  16,673,546**LIABILITIES
                      AND STOCKHOLDERS’ EQUITY**Current
                      liabilities:Accounts
                      payable
                  
                  $
                  1,800,314
                  
                  $
                  372,916Accrued
                      expenses
                  
                  
                  2,759,377
                  
                  
                  987,777Total
                      current liabilities
                  
                  
                  4,559,691
                  
                  
                  1,360,693Commitments
                      (Note 5 )Stockholders’
                      equity (Notes 3 and 6) :Preferred
                      stock, $.001 par value, authorized 5,000,000shares,
                      issued and outstanding -0- shares
                  
                  
                  —
                  
                  
                  —Common
                      stock, $.001 par value, 40,000,000 shares authorized;6,502,740
                      shares issued andoutstanding
                  
                  
                  6,503
                  
                  
                  6,503Additional
                      paid-in capital
                  
                  
                  21,440,874
                  
                  
                  21,239,702Accumulated
                      deficit
                  
                  
                  (11,323,272
                  )
                  
                  (5,933,352
                  )Total
                      stockholders’ equity
                  
                  
                  10,124,105
                  
                  
                  15,312,853Total
                      liabilities and stockholders’ equity
                  
                  $
                  14,683,796
                  
                  $
                  16,673,546
  The
          accompanying notes are an integral part of these condensed consolidated
          financial statements.
  1
  **AMERICAN
          TELECOM SERVICES, INC.**
 **CONDENSED
          CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)**
 **For
                      the three**
                    **months
                      ended**
                    **December
                      31**
                    **2006**
                  
                  **For
                      the three**
                    **months
                      ended**
                    **December
                      31**
                    **2005**
                  
                  **For
                      the six**
                    **months
                      ended**
                    **December
                      31**
                    **2006**
                  
                  **For
                      the six**
                    **months
                      ended**
                    **December
                      31**
                    **2005**Gross
                      Revenues
                  
                  $
                  9,915,159
                  
                  $
                  317,869
                  
                  $
                  14,443,412
                  
                  $
                  317,869Promotional
                      rebates
                  
                  
                  (1,936,042
                  )
                  
                  (9,429
                  )
                  
                  (2,418,905
                  )
                  
                  (9,429
                  )Returns
                      and allowances
                  
                  
                  (605,196
                  )
                  
                  (9,500
                  )
                  
                  (867,429
                  )
                  
                  (9,500
                  )Net
                      Revenues
                  
                  
                  7,373,921
                  
                  
                  298,940
                  
                  
                  11,157,078
                  
                  
                  298,940Costs
                      of sales
                  
                  
                  6,833,334
                  
                  
                  231,597
                  
                  
                  9,823,016
                  
                  
                  231,597Gross
                      profit
                  
                  
                  540,587
                  
                  
                  67,343
                  
                  
                  1,334,062
                  
                  
                  67,343Operating
                      Expenses:Selling,
                      marketing and development
                  
                  
                  2,907,674
                  
                  
                  339,887
                  
                  
                  3,946,019
                  
                  
                  445,685General
                      and administrative
                  
                  
                  1,400,570
                  
                  
                  470,062
                  
                  
                  2,870,135
                  
                  
                  670,957Total
                      expenses
                  
                  
                  4,308,244
                  
                  
                  809,949
                  
                  
                  6,816,154
                  
                  
                  1,116,642Operating
                      loss
                  
                  
                  (3,767,657
                  )
                  
                  (742,606
                  )
                  
                  (5,482,092
                  )
                  
                  (1,049,299
                  )Other
                      expenses (income):Interest
                      expense and bank charges
                  
                  
                  19,464
                  
                  
                  57,056
                  
                  
                  24,533
                  
                  
                  92,450Interest
                      income
                  
                  
                  (26,232
                  )
                  
                  —
                  
                  
                  (116,705
                  )
                  
                  —Amortization
                      of debt discounts and debt issuance costs
                  
                  
                  —
                  
                  
                  127,482
                  
                  
                  —
                  
                  
                  204,091Loss
                      before provision for income taxes
                  
                  
                  (3,760,889
                  )
                  
                  (927,144
                  )
                  
                  (5,389,920
                  )
                  
                  (1,345,840
                  )Provision
                      for income taxes
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Net
                      loss
                  
                  $
                  (3,760,889
                  )
                  $
                  (927,144
                  )
                  $
                  (5,389,920
                  )
                  $
                  (1,345,840
                  )Net
                      loss per common share:Basic
                      and diluted
                  
                  $
                  (0.58
                  )
                  $
                  (0.46
                  )
                  $
                  (0.83
                  )
                  $
                  (0.67
                  )Weighted
                      average shares outstanding:Basic
                      and diluted
                  
                  
                  6,502,740
                  
                  
                  2,000,000
                  
                  
                  6,502,740
                  
                  
                  2,000,000
  
  
  The
          accompanying notes are an integral part of these condensed consolidated
          financial statements.
  2
 **AMERICAN
          TELECOM SERVICES, INC.**
 **CONDENSED
          CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
          (Unaudited)**
 **Common
                      stock****Shares**
                  
                  **Amount**
                  
                  **Additional**
                    **paid-in
                      capital**
                  
                  **Accumulated**
                    **deficit**
                  
                  **Total
                      stockholders' equity****Balance,
                      July 1, 2006**
                  
                  
                  6,502,740
                  
                  $
                  6,503
                  
                  $
                  21,239,702
                  
                  $
                  (5,933,352
                  )
                  $
                  15,312,853Stock-based
                      compensation expense related to employee stock options (Notes
                      2 and 6)
                  
                  
                  —
                  
                  
                  —
                  
                  
                  132,299
                  
                  
                  —
                  
                  
                  132,299Stock-based
                      compensation expense related to non-employee stock options
                      (Notes 2 and 6)
                  
                  
                  —
                  
                  
                  —
                  
                  
                  11,002
                  
                  
                  —
                  
                  
                  11,002Reduction
                      of IPO issuance cost
                  
                  
                  —
                  
                  
                  —
                  
                  
                  57,871
                  
                  
                  —
                  
                  
                  57,871Net
                      loss (unaudited)
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (5,389,920
                  )
                  
                  (5,389,920
                  )**Balance,
                      December 31, 2006**
                  
                  
                  6,502,740
                  
                  $
                  6,503
                  
                  $
                  21,440,874
                  
                  $
                  (11,323,272
                  )
                  $
                  10,124,105
   
  The
          accompanying notes are an integral part of these condensed consolidated
          financial statements.
  3
 **AMERICAN
          TELECOM SERVICES, INC.**
 **CONDENSED
          CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)**
  **For
                      the**
                    **six
                      months ended December 31, 2006**
                  
                  **For
                      the**
                    **six
                      months ended December 31, 2005**Cash
                      flows from operating activities:Net
                      loss
                  
                  $
                  (5,389,920
                  )
                  $
                  (1,345,840
                  )Adjustment
                      to reconcile net loss to net cash used in operating activitiesDepreciation
                  
                  
                  38,130
                  
                  
                  517Allowance
                      for doubtful accounts
                  
                  
                  13,071Common
                      stock and capital contributed for services
                  
                  
                  57,871
                  
                  
                  2,080Employee
                      and non-employee share based compensation
                  
                  
                  143,301
                  
                  
                  —Amortization
                      of debt discounts and issuance costs
                  
                  
                  —
                  
                  
                  204,212Changes
                      in operating assets and liabilities:Accounts
                      receivable
                  
                  
                  (6,779,601
                  )
                  
                  (113,258
                  )Prepaid
                      expenses and other
                  
                  
                  (50,533
                  )
                  
                  (305,027
                  )Inventory
                  
                  
                  (2,031,469
                  )
                  
                  (141,773
                  )Deposit
                      and other assets
                  
                  
                  (5,196
                  )
                  
                  (51,902
                  )Accounts
                      payable
                  
                  
                  1,427,398
                  
                  
                  526,116Accrued
                      expenses
                  
                  
                  1,771,600
                  
                  
                  213,412Accrued
                      interest payable
                  
                  
                  —
                  
                  
                  80,479Deferred
                      revenue
                  
                  
                  —
                  
                  
                  232,625Net
                      cash used in operating activities
                  
                  
                  (10,805,348
                  )
                  
                  (698,359
                  )Cash
                      flows from investing activities:Purchases
                      of property and equipment
                  
                  
                  (138,374
                  )
                  
                  (16,732
                  )Net
                      cash used in investing activities
                  
                  
                  (138,374
                  )
                  
                  (16,732
                  )Cash
                      flows from financing activities:Proceeds
                      from senior convertible notes
                  
                  
                  —
                  
                  
                  2,113,500Deferred
                      financing costs
                  
                  
                  —
                  
                  
                  (83,771
                  )Debt
                      issuance costs
                  
                  
                  
                  
                  
                  (531,120
                  )Net
                      cash provided by financing activities
                  
                  
                  —
                  
                  
                  1,498,609Net
                      (decrease) increase in cash and cash equivalents
                  
                  
                  (10,943,722
                  )
                  
                  783,518Cash
                      and cash equivalents — beginning of period
                  
                  
                  12,372,765
                  
                  
                  50,780Cash
                      and cash equivalents — end of period
                  
                  $
                  1,429,043
                  
                  $
                  834,298Supplementary
                      disclosure of cash flow information:Cash
                      paid for income taxes
                  
                  $
                  —
                  
                  $
                  —Cash
                      paid for interest
                  
                  $
                  —
                  
                  $
                  —Non-cash
                      financing activities:Capital
                      contribution
                  
                  $
                  —
                  
                  $
                  2,080Reduction
                      of accrued offering cost
                  
                  $
                  57,871
                  
                  $
                  —Deferred
                      financing costs
                  
                  $
                  —
                  
                  $
                  624,167
  The
          accompanying notes are an integral part of these condensed consolidated
          financial statements.
  4
 **AMERICAN
          TELECOM SERVICES, INC.**
 **NOTES
          TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
  **1. Description
          of the business**
  American
          Telecom Services, Inc. (the “Company”) was incorporated in the state of Delaware
          on June 16, 2003. The Company’s fiscal year ends on June 30.
  The
          Company was formed to design, distribute and market product bundles that
          include
          multi-handset phones and low-cost, high value telecommunication services
          for
          sale through retail channels. The Company generates revenues through the
          sale of
          phones into the retail market and shares in a portion of revenues generated
          by
          communications service providers.
  **2.
          Summary of Significant Accounting policies:**
  ***Interim
          reporting***
  The
          accompanying unaudited condensed consolidated 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
          condensed consolidated 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 consolidated
          financial position and results of operations. The operating results for
          the
          three and six months ended December 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 condensed consolidated financial
          statements should be read in conjunction with the Company’s audited June 30,
          2006 financial statements, including the notes thereto, which are included
          in
          the Company’s Form 10K, filed on September 28, 2006.
  ***Basis
          of Presentation of Consolidated Financial Statements and Use of
          Estimates***
  The
          consolidated financial statements include the accounts of the Company and
          its
          wholly-owned subsidiary American Telecom Services, (Hong Kong) Limited.
          All
          significant intercompany transactions and balances have been eliminated.
          The
          preparation of the consolidated financial statements in conformity with
          generally accepted accounting principles in the United States of America
          requires management to make estimates and assumptions that affect the reported
          amounts of assets and liabilities and disclosure of contingent assets and
          liabilities at the date of the consolidated financial statements and the
          reported amounts of revenues and expenses during the reporting period.
          Significant accounting estimates to be made by management include or will
          include allowances for doubtful accounts, impairment of long-lived assets,
          the
          fair value of the Company’s common stock and warrants, estimated warranty
          reserves and other allowances, the allocation of proceeds from debt to
          equity
          instruments and expected volatility of common stock. Because of the uncertainty
          inherent in such estimates, actual results may differ from these estimates.
  ***Revenue
          recognition***
  The
            Company derives revenue from the sale of its phone products to consumer
            retailers (“Retail Partners”) and from certain arrangements with phone service
            carriers. In accordance with SEC Staff Accounting Bulletin (“SAB”) No. 104,
“Revenue Recognition,” revenue is recognized when persuasive evidence of an
            arrangement exists, delivery of the product or services has occurred
            in
            accordance with the terms of an agreement, the price is fixed and determinable,
            collectibility is reasonably assured, contractual obligations have been
            satisfied, and title and risk of loss have been transferred to the customer.
 From
            time
            to time, the Company initiates programs to promote the sales of its phone
            products and to motivate phone product customers to activate carrier
            service
            with the Company’s service partners, which, in most cases, will generate ongoing
            revenues for the Company. The Company accounts for such programs in accordance
            with Emerging Issues Task Force Issue 01-09 (“EITF 01-09”). Accordingly,
            consideration given to a customer is characterized as a reduction of
            revenue
            when recognized in the Company’s income statement, unless certain conditions are
            met, in which case such consideration would be accounted for as
            selling expense. The Company recognizes expenditures associated with
            rebate
            program expenses as a reduction of revenues in the accompanying condensed
            consolidated financial statements. Certain reclassifications of these
            expenses
            have been made to prior periods for comparative purposes.
   5
 **AMERICAN
            TELECOM SERVICES, INC.**
 **NOTES
            TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
            STATEMENTS**
  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 and records related charges either as a reduction
          of
          revenue or an expense depending on the facts and circumstances.
  The
          Company generally warrants its phone products against defects to customers
          for a
          period of up to one year. Factors that affect the Company's warranty liability
          include the number of units sold, historical and anticipated rates of warranty
          claims and cost per claim. The Company periodically assesses the adequacy
          of its
          recorded warranty liabilities and adjusts the amounts as necessary.  As
          required, the Company accrues a provision for warranty reserves as a selling
          expense at the time of revenue recognition. During the three and six months
          ended December 31, 2006 the Company recorded a provision for warranty reserves
          of $49,394 and $94,507 respectively. As of December 31, 2006, the Company’s
          warranty liability reserve was $89,917 and is included in accrued expenses.
  The
          Company accrues for sales returns and other allowances based on estimates.
          Each
          estimate are based on the Company’s historical experience, management’s
          consideration of comparable companies, the specific agreements with retail
          partners, and experience in the wholesale distribution industry. As required,
          the Company accrues a provision for estimated future costs and estimated
          returns
          as a reduction of revenue at the time of revenue recognition. During the
          three
          and six months ended December 31, 2006, the Company recorded provisions
          for
          sales returns allowances of $493,946 and $719,513 respectively. During
          the three
          and six months ended December 31, 2005 the Company recorded provisions
          for sales
          returns allowances totaling $9,500 and $9,500, respectively. As of December
          31,
          2006, the Company’s provision for sales returns was approximately $208,140,
          which is included in accrued expenses.
  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
          agreements with SunRocket, Inc. (“SunRocket”) and Lingo, Inc. (“Lingo”), the
          Company designs and configures its Internet phones to work with each carriers’
communications services. The carriers offers end-user purchasers of the
          Company’s Internet phones different service plans at set rates.
  The
          Company’s agreement with IDT Domestic, Inc. (“IDT”), as assigned by IDT Puerto
          Rico & Co., provides purchasers of the Company’s cordless landline phones
          with the ability to obtain prepaid long distance communications services.
          IDT
          will offer end-user purchasers of the Company’s cordless landline phones certain
          prepaid long distance calling rate plans and IDT will handle all customer
          service interaction, including billing the customer for all communications
          services. The Company has agreed to use its best efforts to deliver certain
          minimum account activations to IDT. In the event that the Company fails
          to
          achieve the minimum commitment level for the relevant time period, then
          IDT, at
          its sole discretion, shall have the right to (i) terminate the agreement
          without further obligation or (ii) renegotiate the agreement or specific
          terms on a going forward basis.
  In
          connection with the agreements with the carriers, the Company is entitled
          to
          earn certain commissions from the carriers. For each services account activated
          with SunRocket by end-users of the Company’s Internet phones, the Company
          receives a pre-defined commission amount from SunRocket once the account
          remains
          active for a certain period of time. The Company is also entitled to receive
          ongoing monthly commissions from both SunRocket and
  6
 **AMERICAN
            TELECOM SERVICES, INC.**
 **NOTES
            TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
            STATEMENTS**
  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, are 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 are 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 six month
          periods
          ended December 31, 2006, the company recorded $2,568 and $4,147 respectively,
          of
          such commission revenue. During the three and six month periods ended December
          31, 2005, no such commission revenue was recognized.
  The
          Company offers some Retail Partners a percentage of the service revenue
          commissions it earns from carriers of communications service providers
          and a
          percentage of the subscriber activation fees the Company will receive from
          SunRocket and Lingo in connection with the purchase of communications services
          by end-users of the Company’s Internet phones. Such fees are recorded as sales
          and marketing expenses. During the three and six months ended December
          31, 2006,
          nominal commission revenue was recognized.
  ***Allowance
          for doubtful accounts***
  The
          Company maintains allowances for doubtful accounts for estimated losses
          resulting from the inability of its customers to make required payments.
          The
          Company determines its allowance by considering a number of factors, including
          the length of time trade receivables are past due, the Company’s previous loss
          history, the customer’s current ability to pay its obligation to the Company,
          and the condition of the general economy and the industry as a whole. Specific
          reserves are also established on a case-by-case basis by management. The
          Company
          writes-off accounts receivable when they become uncollectible. The Company
          performs credit evaluations of its customers’ financial condition on a regular
          basis.
  ***Share-Based
          Compensation***
  On
          July
          1, 2005, the Company adopted Statement of Financial Accounting Standards
          (“SFAS”) No. 123 (revised 2005), “Share-Based Payment,” (“SFAS 123(R)”) which
          requires the measurement and recognition of compensation expense for all
          share-based payment awards made to employees and directors based on estimated
          fair values. In March 2005, the Securities and Exchange Commission issued
          Staff
          Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123(R). The Company has
          applied the provisions of SAB 107 in its adoption of SFAS 123(R).
  The
          Company adopted SFAS 123(R) prospectively as no share-based compensation
          awards
          were granted prior to February 2006. Share-based compensation expense for
          employees recognized under SFAS 123(R) for three and six months ended December
          31, 2006 was $35,464 and $132,299 respectively, 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
          condensed consolidated 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 condensed
          consolidated statement of operations.
  7
 **AMERICAN
            TELECOM SERVICES, INC.**
 **NOTES
            TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 Stock-based
          compensation expense recognized in the Company’s condensed consolidated
          statements of operations for the three and six months ended December 31,
          2006
          included compensation expense for share-based payment awards based on the
          grant
          date fair value estimated in accordance with the provisions of SFAS 123(R).
          The
          Company follows the straight-line single option method of attributing the
          value
          of stock-based compensation to expense. As stock-based compensation expense
          recognized in the condensed consolidated statement of operations for the
          three
          and six months ended December 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. The Company’s determination of fair value of share-based payment awards
          on the date of grant using an option-pricing model is affected by the Company’s
          stock price as well as assumptions regarding a number of highly complex
          and
          subjective variables. These variables include, but are not limited to,
          the
          Company’s expected stock price volatility over the term of the awards and the
          expected term of the awards.
  No
          share-based compensation awards were granted during the three and six months
          ended December 31, 2005.
  The
          Company has accounted for non-employee compensation expense in accordance
          with
          Emerging Issues Task Force (“EITF”) Issue No. 96-18, Accounting for Equity
          Instruments That Are Issued to Other Than Employees for Acquiring, or in
          Conjunction with Selling, Goods or Services (“EITF 96-18”), which requires
          non-employee stock options to be measured at their fair value as of the
          earlier
          of the date at which a commitment for performance to earn the equity instruments
          is reached (“performance commitment date”) or the date at which performance is
          complete (“performance completion date”). Accounting for non-employee stock
          options which involve only performance conditions when no performance commitment
          date or performance completion date has occurred as of an interim financial
          reporting date requires measurement at the instruments then-current fair
          value.
  The
          Company has followed the guidance outlined in FASB Interpretations (“FIN”) No.
          28, Accounting for Stock Appreciation Rights and Other Variable Stock Option
          or
          Award Plans (“FIN 28”) as it relates to computing expense when appreciation
          rights vest over time. Share-based compensation for non-employees during
          the
          three and six months ended December 31, 2006 resulted in expense
          of $11,730
          and $11,002 respectively, due to the increase in the Company’s stock price and
          is included in general and administrative expense on the accompanying condensed
          consolidated statements of operations.
  ***Cash
          and Cash Equivalents***
  The
          Company considers all investments purchased with an original maturity of
          three
          months or less at the time of purchase to be cash equivalents.
  ***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 condensed
          consolidated balance sheets at December 31, 2006 and June 30, 2006.
  ***Inventory
          and Shipping***
  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
          and includes the shipping costs to acquire inventory.
  8
 **AMERICAN
            TELECOM SERVICES, INC.**
 **NOTES
            TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 As
          of
          December 31, 2006, $644,207 of advances to manufacturers of the Company’s phone
          products is included in prepaid expenses and other on the accompany condensed
          consolidated balance sheet related to payments made or accrued for inventory
          purchases for which the Company had an obligation to make payment but had
          not
          yet taken title to such inventory as of December 31, 2006.
  The
          Company includes the expense of shipping and handling on products to customers
          in selling, marketing and development on the condensed consolidated statements
          of operations. During the three months ended December 31, 2006 and 2005
          the
          Company incurred approximately $740,300 and $71,000 respectively of shipping
          costs to customers. During the six months ended December 31, 2006 and 2005
          the
          Company incurred approximately $1,063,500 and $71,100 respectively of shipping
          costs to customers. Included in revenue for the three months ended December
          31,
          2006 and 2005 approximately $33,670 and $500 respectively, of fees earned
          from
          customers related to reimbursements of shipping costs. Included in revenue
          for
          the six months ended December 31, 2006 and 2005 approximately $49,000 and
          $500
          respectively, of fees earned from customers related to reimbursements of
          shipping costs.
  ***Internal
          Use Software***
  The
          Company has adopted statement of Position 98-1, *Accounting
          for the Costs of Computer Software Developed or Obtained for Internal
          Use* .
          This
          statement requires that certain costs incurred in purchasing or developing
          software for internal use be capitalized as internal use software development
          costs and included in fixed assets. Amortization of the software will begin
          when
          the software is ready for its intended use. During the six months ended
          December
          31, 2006 the company capitalized $23,200 of costs related to developing
          internal
          use software. Substantially all of these capitalized costs were recognized
          as
          expenses in the three month period ending December 31, 2006 as these projects
          were completed and deployed in that period.
  ***Concentrations***
  Financial
          instruments that potentially subject the Company to concentrations of credit
          risk consist of cash and cash equivalents and accounts receivable. The
          Company
          reduces credit risk by placing its cash and cash equivalents with major
          financial institutions with high credit ratings. At times, such amounts
          may
          exceed federally insured limits. The Company reduces credit risk related
          to
          accounts receivable by routinely assessing the financial strength of its
          customers and maintaining an appropriate allowance for doubtful
          accounts.
  The
          Company's products have been provided primarily to a limited number of
          clients
          located in the United States. The Company had phone product revenues from
          two
          (2) customers representing approximately 90% (50% and 40%, respectively)
          of the
          $9.3 million in net phone product revenues (excluding promotional rebates
          expenses) during the three months ended December 31, 2006. The Company
          had phone
          product revenues from two (2) customers representing approximately 90%
          (54% and
          36%, respectively) of the $13.6 million in net phone product
          revenues (excluding promotional rebates expenses) during the six months
          ended December 31, 2006.
  Additionally,
          the Company is subject to a concentration of credit risk with respect to
          its
          accounts receivable. The Company had two (2) customers represent 95% (47%
          and
          48%, respectively) of total gross accounts receivable as of December 31,
          2006.
          The Company had three (3) customers accounting for 95% (58%, 19% and 18%,
          respectively) of gross accounts receivable as of June 30, 2006.
  ***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
  9
 **AMERICAN
            TELECOM SERVICES, INC.**
 **NOTES
            TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
            STATEMENTS**
  earnings
          and in which they have a dilutive effect, includes the effect of common
          shares
          issuable upon exercise of stock options and warrants. Diluted loss per
          share for
          the three months ended December 31, 2006 and 2005 exclude potentially issuable
          common shares of 5,623,167 and 2,196,834, respectively, primarily related
          to the
          Company's outstanding stock options, warrants and convertible debt, because
          the
          assumed issuance of such potential common shares is antidilutive.
  ***Recent
          accounting pronouncements***
  In
          June
          2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
          No.48, *Accounting
          For Uncertainty in Income Taxes* (“FIN
          48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized
          in an enterprise's financial statements in accordance with SFAS Statement
          No.
          109, *Accounting
          For Income Taxes* and
          prescribes a recognition threshold and measurement attribute for the financial
          statement recognition and measurement of a tax position taken or expected
          to be
          taken in a tax return. FIN 48 also provides guidance on derecognition,
          classification, interest and penalties, accounting in interim periods,
          disclosure and transition. FIN 48 will be effective for the Company beginning
          July 1, 2007. The Company will evaluate the effect FIN 48 will have on
          its
          financial statements and related disclosures.
  In
          September 2006, the FASB issued FASB Statement No. 157, *Fair
          Value Measurements* (“SFAS
          No. 157”), which defines fair value, establishes a framework for measuring fair
          value under GAAP, and expands disclosures about fair value measurements.
          SFAS
          No. 157 applies to other accounting pronouncements that require or permit
          fair
          value measurements. The new guidance is effective for financial statements
          issued for fiscal years beginning after November 15, 2007, and for interim
          periods within those fiscal years. The Company will evaluate the potential
          impact, if any, of the adoption of SFAS No. 157 on its consolidated financial
          position, results of operations and cash flows.
  Management
          does not believe that any other recently issued, but not yet effected,
          accounting standards if currently adopted would have a material effect
          on the
          Company’s consolidated financial statements.
 
 **3. Stockholders’
          Equity:**
  *Initial
          Public Offering*
  On
          February 6, 2006, the Company consummated an initial public offering (the
          “Offering”) comprised of 3,350,000 shares of common stock and 3,350,000
          Redeemable Warrants to purchase shares of common stock. Additionally, in
          March
          2006, the Company issued an additional 402,500 shares of Common Stock and
          502,500 Redeemable Warrants upon the exercise of the over-allotment option
          by
          the underwriters.
  The
          Common Stock was sold at an offering price of $5.05 per share and the Redeemable
          Warrants were sold at an offering price of $0.05 per warrant, generating
          gross
          proceeds $19,142,750 to the Company. The Company incurred $1,762,695 in
          underwriting discounts and expense allowances and $756,022 of other expenses
          in
          connection with the Offering, resulting in net proceeds of $16,624,033.
  We
          realized a reduction of deferred IPO related costs of $57,871 in three
          month
          period ending December 31, 2006. The reduction was recognized as in increase
          to
          additional paid in capital in the period. The nature of this reduction
          was the
          settlement of printing related costs for documents produced in our
          offering.
  *Purchase
          Option*
  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
  10
 **AMERICAN
            TELECOM SERVICES, INC.**
 **NOTES
            TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
            STATEMENTS**
  HCFP’s
          discretion, during the five-year period commencing on the date of the Offering.
          The Company accounted for the fair value of the UPO, inclusive of the receipt
          of
          the $100 cash payment, as an expense of the public offering resulting in
          a
          charge directly to stockholder’s equity with a corresponding increase in paid-in
          capital. The UPO may be exercised for cash or on a “cashless” basis, at the
          holder’s option, such that the holder may use the appreciated value of the UPO
          (the difference between the exercise prices of the UPO and the underlying
          warrants and the market price of the units and underlying securities) to
          exercise the UPO without the payment of any cash. Although the UPO and
          its
          underlying securities were registered under the registration statement
          related
          the Offering, the option grants to holders demand and “piggy back” rights with
          respect to the registration under the Securities Act of the securities
          directly
          and indirectly issuable upon exercise of the UPO. The Company is only required
          to use its best efforts to cause the registration statement for the Units
          and
          securities underlying the UPO to be come effective and once effective to
          use its
          best efforts to maintain the effectiveness of such registration statement.
          The
          Company has no obligation to net cash settle the exercise of the UPO or
          the
          securities underlying the UPO **.**
  *Redeemable
          Warrants*
  In
          connection with the Offering in February 2006, the Company sold 3,852,500
          redeemable warrants to purchase shares of the Company’s common stock (the
“Redeemable Warrants”). In addition, upon consummation of the Offering,
          1,475,667 of warrants previously issued in connection with debt were
          automatically exchanged into a like number of 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. As of December 31, 2006,
          5,328,167 Redeemable Warrants were outstanding.
  The
          Company may call the Redeemable Warrants, with HCFP’s prior consent, for
          redemption at a price of $0.05 per warrant upon a minimum of 30 days’ prior
          written notice of redemption if and only if, the Company then has an effective
          registration statement covering the shares issuable upon exercise of the
          Redeemable Warrants. However the Company may not initiate its call right
          unless
          the last sales price per share of the Company’s common stock equals or exceeds
          190% (currently $9.60) during the first three months after the consummation
          of
          the Offering, or 150% (currently $7.58) thereafter, of the then effective
          exercise price of the Redeemable Warrants for all 15 of the trading days
          ending
          within three business days before the Company sends the notice of redemption.
  The
          Redeemable Warrants may be exercised on or prior to the expiration date
          by
          payment of the exercise price in cash for the number of Redeemable Warrants
          being exercised. The Redeemable Warrants will not be exercisable unless
          at the
          time of exercise a prospectus relating to common stock issuable upon exercise
          of
          the Redeemable Warrants is current and the common stock has been registered
          or
          qualified or deemed to be exempt under the applicable securities laws.
          The
          Company has agreed to use its best efforts to maintain a current prospectus
          relating to common stock issuable upon exercise of the Redeemable Warrants
          until
          the expiration of the Redeemable Warrants. The Company will not be obligated
          to
          deliver registered securities, and there are no contractual penalties for
          failure to deliver such securities, if a registration statement is not
          effective
          at the time of exercise. However, upon exercise of the Redeemable Warrants,
          the
          Company may satisfy the obligation to issue shares in unregistered stock
          and
          then continue to use its best efforts to register the shares of stock issued.
          In
          no event (whether in the case of a registration statement not being effective
          or
          otherwise) will the Company be required to net cash settle a Redeemable
          Warrant
          exercise. Holders of Redeemable Warrants do not have the rights or privileges
          of
          holders of the Company’s common stock or any voting rights until such holders
          exercise their respective warrants and receive shares of the Company’s common
          stock.
  **4. Related
          party transactions:**
  *Marketing*
  11
 **AMERICAN
            TELECOM SERVICES, INC.**
 **NOTES
            TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 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
          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 $102,979
          and
          $46,200 of expenses during the three months ended December 31, 2006 and
          2005
          respectively, and $148,451 and $87,300 during the six months ended December
          31,
          2006 and 2005 respectively, pursuant to this arrangement which are included
          in
          selling, marketing and development expense on the accompanying condensed
          consolidated statement of operations.
  *Carrier
          Relations*
  The
          Company has entered into a five-year agreement with David Feuerstein (a
          principal stockholder of the Company) pursuant to which, in consideration
          for
          helping to establish its service provider relationship with IDT and, going
          forward, maintaining and expanding its relationship with each of IDT and
          SunRocket, the Company will pay Mr. Feuerstein one quarter of one percent
          of all
          net revenues, as defined, collected by the Company during each year of
          the term
          of the agreement directly attributable to the sale of (i) digital cordless
          multi-handset phone systems, (ii) multi-handset Internet telephones and
          (iii) related telephone hardware components ((i), (ii) and (iii),
          collectively, “Hardware”), subject to a maximum aggregate amount of $250,000 for
          each year. The Company recognized approximately $7,660 and $25,062 of expenses
          during the three month and six month period ended December 31, 2006. No
          expenses
          pursuant to this arrangement were recognized in the three and six month
          period
          ended December 31, 2005. These expenses are included in selling, marketing
          and
          development expense on the accompanying condensed consolidated statement
          of
          operations.
  The
          Company will also pay to Mr. Feuerstein five percent of all net revenues,
          as defined, collected by the Company from IDT during each year of the term
          of
          and directly attributable to the Company’s service agreement dated as of
          November 25, 2003 with IDT (the “IDT Agreement”), subject to a maximum
          aggregate amount of $250,000 for each year. The Company recognized a nominal
          amount of expenses during the three and six month periods ending December
          31,
          2006 and no such expenses in the three and six month periods ending December
          31,
          2005. These expenses are included in selling, marketing and development
          expense
          on the accompanying condensed consolidated statement of operations.
  The
          Company will also pay to Mr. Feuerstein two percent of all net revenues, as
          defined, collected by the Company from SunRocket during each year of the
          term of
          and directly attributable to the Company’s June 7, 2005 service agreement
          with SunRocket, subject to a maximum aggregate amount of $250,000 for each
          year;
          provided, however, that any revenues attributable under the SunRocket agreement
          from the provision of Internet-based communications services relating to
          “subscriber bounty,” “advertising co-op” and “key-city funds” are excluded in
          any computation of such net revenues. The agreement may be extended for
          an
          additional five-year term if the Company is profitable for three of the
          first
          five years of the initial term. If so extended, Mr. Feuerstein will be
          entitled to a reduced revenue sharing allocation. The agreement also provides
          for certain revenue sharing allocation reductions if certain conditions
          are not
          satisfied during the initial term. The Company recognized a nominal amount
          of
          expenses during the three and six month periods ending December 31, 2006
          and no
          such expenses in the three and six month periods ending December 31, 2005.
          These
          expenses are included in selling, marketing and development expense on
          the
          accompanying condensed consolidated statement of operations.
  **5. Commitments:**
  *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
  12
 **AMERICAN
            TELECOM SERVICES, INC.**
 **NOTES
            TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
            STATEMENTS**
  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.
          This
          agreement was terminated in August of 2006 and no such fees have been assessed
          subsequent to the termination. Accordingly, the Company recognized a credit
          to
          expense of $13,690 and $1,190 during the three and six months ended December
          31,
          2006, respectively, all of which is included in interest and bank charges
          on the
          accompanying statements of operations. The credit to expense was related
          to the
          refunding of certain reserves associated with the termination of the agreement.
          The Company recognized $16,030 of expense during the three and six months
          ended
          December 31, 2005 pursuant to this arrangement of which $6,648 is included
          in
          selling, marketing and development expense and $9,382 is included in interest
          and bank charges on the accompanying statements of operations.
  On
          January 18, 2007, we announced that we had secured an open ended asset-based
          financing facility from CIT Commercial Services, a division of CIT Group.
          This
          is an accounts receivable based financing arrangement with a 3 year term.
          In
          connection with this arrangement, the Company pays CIT a factoring commission
          of
          not less than $25,000 per quarter. Interest on the borrowings associated
          with
          this facility is tiered based on the amount of sales factored in a period
          and is
          based on prime plus a margin.
  *Employment
          Agreements*
  Prior
          to
          the Offering employees were employed at will by the Company and were compensated
          on a monthly basis. Subsequent to the Offering certain members of management
          have entered into employment agreements with the Company. Each of the employment
          agreements an initial term through December 31, 2007 and provide for certain
          base salaries. In addition such individuals are entitled to bonuses based
          on the
          Company’s net sales (defined as the Company’s revenues collected during a period
          less allowances granted to retailers, markdowns, discounts, commissions,
          reserves for service outages, customer hold backs and expenses). Such bonuses
          are limited to an amount no greater than 75% of the recipient’s then current
          base annual salary. Such individuals are also entitled to bonuses based
          on net
          profits (defined as net income, after taxes, as determined in accordance
          with
          GAAP):
  The
          employment agreements further provide for certain limits (as a percentage
          of
          base salary) on the aggregate bonuses from net sales and net profits for
          any
          bonus period. The company accrued $250,555 for such bonus expense in the
          three
          and six month periods ended December 31, 2006.
  *Other*
  Pursuant
          to an agreement between the Company and UTAM, Inc. (“UTAM”) related to Federal
          Communications Commission equipment authorization for certain of the Company’s
          phone products, the Company is obligated to make certain payment to UTAM
          based
          on the quantity of parts meeting certain criteria shipped by the Company
          to its
          retail partners. The Company recognized $79,529 and $127,309 of expense
          during
          the three month and six month periods ended December 31, 2006. The company
          recognized no such expenses in the three and six month periods ended December
          31, 2005.
 
 13
 **AMERICAN
            TELECOM SERVICES, INC.**
 **NOTES
            TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **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.
  The
          Plan
          permits the granting of stock options to employees (including employee
          directors
          and officers) and consultants of the Company, and non-employee directors
          of the
          Company. Options granted under the Plan have an exercise price of at least
          100%
          of the fair market value of the underlying stock on the grant date and
          expire no
          later than five years from the grant date. The options generally become
          exercisable for 50% of the option shares one year from the date of grant
          and
          then 50% over the following 12 months. The Compensation Committee of the
          Board
          of Directors has the discretion to use a different vesting schedule.
  Due
          to
          the Company’s limited history as a public company, the Company has 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.
  Stock-based
          compensation expense recognized in the condensed consolidated statement
          of
          operations for the three and six months ended December 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 stock option grant to employees is estimated on the date
          of grant.
          The fair value of each stock option grant to non-employees is estimated
          on the
          applicable performance commitment date, performance completion date, or
          interim
          financial reporting date. No options were granted during the three and
          six
          months ended December 31, 2006.
  During
          the six months ended December 31, 2006 85,000 options were granted to employees
          or non-employees. The following table summarizes information concerning
          options
          outstanding as of June 30, 2006 and for the six months ended December 31,
          2006:
 **Shares**
                  
                  **Weighted Average
                      Exercise Price**
                  
                  **Weighted Average**
                    **Fair
                      Value**Options
                      Outstanding as of June 30, 2006
                  
                  
                  240,000
                  
                  $
                  4.79
                  
                  $
                  2.11Granted
                  
                  
                  85,000
                  
                  
                  4.84
                  
                  
                  0.94Exercised
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Forfeited
                      and Expired
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Options
                      Outstanding, December 30, 2006
                  
                  
                  325,000
                  
                  $
                  4.39
                  
                  $
                  1.79Exercisable,
                      December 31, 2006
                  
                  
                  130,000
                  
                  $
                  3.97
                  
                  $
                  1.94
  The
          following table summarizes the status of the Company’s stock options as of
          December 31, 2006:
  14
 **AMERICAN
            TELECOM SERVICES, INC.**
 **NOTES
            TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
            STATEMENTS**
 **Stock Options Outstanding**
                  
                  **Stock Options Exercisable****Weighted
                      Average**
                  
                  **Weighted**
                  
                  
                  
                  
                  
                  **Weighted
                      Average**
                  
                  **Weighted****Remaining**
                  
                  **Average**
                  
                  **Aggregate**
                  
                  
                  
                  **Remaining**
                  
                  **Average**
                  
                  **Aggregate****Contractual**
                  
                  **Exercise**
                  
                  **Intrinsic**
                  
                  
                  
                  **Contractual**
                  
                  **Exercise**
                  
                  **Intrinsic****Exercise Prices**
                  
                  **Shares**
                  
                  **Life (Years)**
                  
                  **Price**
                  
                  **Value**
                  
                  **Shares**
                  
                  **Life (Years)**
                  
                  **Price**
                  
                  **Value**$5.05
                  
                  
                  195,000
                  
                  
                  4.10
                  
                  $
                  5.05
                  
                  $
                  —
                  
                  
                  45,000
                  
                  
                  4.35
                  
                  $
                  5.05
                  
                  $
                  —$3.35
                      - $3.95
                  
                  
                  105,000
                  
                  
                  4.67
                  
                  $
                  3.54
                  
                  $
                  —
                  
                  
                  65,000
                  
                  
                  4.58
                  
                  $
                  3.95
                  
                  $
                  —$2.25
                      - $2.80
                  
                  
                  25,000
                  
                  
                  4.72
                  
                  $
                  2.69
                  
                  $
                  15,750
                  
                  
                  20,000
                  
                  
                  4.75
                  
                  $
                  2.80
                  
                  $
                  10,400Total
                  
                  
                  325,000
                  
                  
                  
                  
                  
                  
                  
                  $
                  15,750
                  
                  
                  130,000
                  
                  
                  
                  
                  
                  
                  
                  $
                  10,400
   There
          were 20,000 in-the-money options exercisable on December 31, 2006.
  During
          the three and six months ended December 31, 2006, the Company recognized
          compensation expense of $96,835 and $132,299, respectively as a result
          of the
          continued vesting of options previously issued to employees which is included
          in
          general and administrative expense on the accompanying condensed consolidated
          statement of operations.
  As
          of
          December 31, 2006, the unvested portion of share-based compensation expense
          attributable to employees and directors stock options and the period in
          which
          such expense is expected vest and be recognized is as follows:
 Year
                      ending June 30, 2007
                  
                  $
                  86,928Year
                      ending June 30, 2008
                  
                  
                  119,882Year
                      ending June 30, 2009
                  
                  
                  13,558$
                  220,368
  *Performance
          Accelerated Restricted Stock (“PARS”)*
  PARS
          vest
          upon the achievement of certain targets, and are payable in shares of the
          Company’s common stock upon vesting. Upon consummation of the Offering, certain
          officers and directors and a consultant received PARS under the Plan. Of
          the
          total PARS granted to each executive officer or director and consultant,
          25%
          will vest only if net sales equal or exceed $20 million during fiscal 2006
          and
          another 25% will vest only if net profits equal or exceed $1 million during
          fiscal 2006. An additional 25% will vest only if net sales equal or exceed
          $50
          million in fiscal 2007 and the final 25% will vest only if net profits
          equal or
          exceed $5 million during fiscal 2007. If the performance conditions are
          not met
          in the first year, no PARS will vest in such year. If the performance conditions
          are not met in the second year but cumulative amounts are achieved by the
          second
          year representing 80% or more of the cumulative target amounts for both
          years
          for a respective condition, then a percentage of the unvested PARS for
          both
          years will nevertheless vest in the second year in respect of such condition.
          In
          such event, the percentage of unvested PARS that will vest in the second
          year in
          respect of a particular performance condition will equal the percentage
          that
          such aggregate amount achieved in the first and second years represents
          of the
          aggregate amount required to be met by the respective condition for both
          years.
          The fair value is based on the market price of the Company’s stock on the
          grant-date and assumes that the target payout level will be achieved.
          Compensation cost will be adjusted for subsequent changes in the expected
          outcome of performance-related conditions until the vesting date. The Company
          will record stock based compensation expense equal to the fair value of
          the PARS
          once the likelihood of achievement of the performance targets becomes probable.
          As of December 31, 2006, 325,000 PARS awards are outstanding and none have
          vested as of December 31, 2006.
  15
 
 **AMERICAN
              TELECOM SERVICES, INC.**
 **NOTES
              TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
              STATEMENTS**
 **6. Subsequent
          Events:**
  On
          January 30, 2007, the Company sold (i) 5,000 shares of its 8% Series A
          Cumulative Convertible Preferred Stock (“Preferred Stock”) and (ii) warrants to
          purchase an aggregate of 1,176,471 shares of its common stock (the
“Warrants”) for an aggregate purchase price of $12.5 million to
          certain investors, including $325,000 from certain of the Company’s directors.
          Each share of Preferred Stock is convertible at the holder’s option at a rate of
          588.2353 shares of the Company’s common stock per share of Preferred Stock, or
          an aggregate of 2,941,176 shares of common stock, which is equivalent to
          an
          initial conversion price of $4.25 per share. The Warrants are exercisable
          at an
          exercise price of $4.25 per share and expire on January 30, 2012.
  In
          connection with the sale of the Preferred Stock and Warrants, the Company
          has
          agreed to use its best efforts to file a resale registration statement
          with the
          SEC covering the shares issuable upon conversion the Preferred Stock and
          upon
          exercise of the Warrants and to use its best efforts to cause such registration
          statement to become effective and once effective to continue to use its
          best
          efforts to maintain effectiveness.
  The
          Company paid the placement agent for this private offering $689,925 for its
          services and $30,000 for its costs. In addition the Company
          issued Warrants to the placement agent to purchase 196,847 shares of the
          Company’s common stock containing the same terms and conditions as those issued
          to the participants in the private offering.
 
 
 
  
 16
 
  **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 Consolidated Financial Statements and the
          notes
          included elsewhere in this report. The matters discussed in “Management’s
          Discussion and Analysis of Financial Condition and Results of Operations”
contain certain forward-looking statements within the meaning of the Private
          Securities Litigation Reform Act of 1995.
  **OVERVIEW**
  We
          were
          incorporated in Delaware in June 2003. Our primary business is the
          marketing and sale of our custom-designed digital cordless multi-handset
          phones
          bundled with Internet phone communications (Voice-over-Internet-Protocol
          or
“VoIP”) services and/or prepaid long distance services. We sell our
          communications phone/service bundles under our “American Telecom”, “ATS”,
“Digital Clear”, and “Pay N’ Talk” brand names. Our telecom platform is designed
          to enable seamless access to the communications services provided by our
          strategic partners. We are marketing our phone/service bundles to the retail
          mass market and anticipate expanding through a diversified group of retail
          channels. The channels include office superstores, electronics stores,
          mass
          retailers, department stores and Internet-based retail distribution outlets.
          We
          also are targeting the U.S. residential and small office/home office (“SOHO”)
          markets through the office superstore contract divisions. Our strategic
          telecom
          service partners include IDT Corporation, SunRocket, Inc. and Lingo, Inc.
          IDT is
          an established communications carrier for our prepaid long distance
          product/service offerings. SunRocket and Lingo are established and growing
          service providers for our VoIP offerings. In addition to the revenues we
          generate through the sales of our phone hardware, we receive a percentage
          of the
          monthly service revenues generated by users of our product/service offerings
          with our strategic partners. As part of our agreements with our retail
          partners
          in our retail distribution channels, we will typically share with them
          a portion
          of our service revenues.
  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 six months ended December 31, 2006 we continued production of our initial
          VoIP and prepaid residential long distance service phones and funded these
          initial manufacturing efforts from the proceeds of our initial public offering
          in February 2006 and from the net proceeds of our private placements of
          notes
          (the “Notes”) and private warrants conducted in September 2005. We received our
          initial purchase orders in September 2005 and shipments of our phones began
          arriving in retail stores in October 2005. Both our prepaid long distance
          and
          Internet phone/service bundles are available through our retail customers,
          catalogs, and online retail outlets.
  **RESULTS
          OF OPERATIONS**
  **Three
          and six months ended December 31, 2006 and 2005**
  *Revenues**—*
            In accordance with our revenue recognition policy which is outlined in
            the
            accompanying notes to unaudited condensed consolidated financial statements,
            we
            recognize expenses relating to rebate promotions as a reduction of
            revenues.
  Gross
            revenue in the three month periods ending December 31, 2006 and 2005
            was
            $9,915,159 and $317,869, respectively. Net revenue in the same periods
            was
            $7,373,921 and $298,940, respectively. In the three month periods ending
            December 31, 2006 and 2005, we recognized rebate promotion expenses of
            $1,936,042 and $9,429, respectively.
  Gross
            revenue in the six month periods ending December 31, 2006 and 2005 was
            $14,443,412 and $317,869. Net revenue in the same periods was $11,157,708
            and
            $298,940, respectively. In the six month periods ending December 31,
            2006 and
            2005, we recognized rebate promotion expenses of $2,418,905 and $9,429,
            respectively.
  The
            growth in revenues over the prior periods reflects our increase in distribution
            compared to periods with limited commercial activity.
  Our
            phone
            product revenues during the six months ended December 31, 2006 were earned
            from
            a limited amount of customers, with two (2) customers representing 90%
            of our
            phone product revenues during the period.
  We
          did
          not generate any revenues through September 30, 2005. Since we only began
          generating significant revenues during the fourth fiscal quarter of our
          fiscal
          year ended June 30, 2006, our historical financial information is not
          necessarily indicative of our future financial performance.
  17
 *Cost
          of Revenues* —Cost
          of
          sales was $6,833,334 for the three months ended December 31, 2006 and $231,597
          for the three months ended December 31, 2005. Cost of sales was $9,823,015
          for
          the six months ended December 31, 2006 and $231,597 for the six months
          ended
          December 31, 2005. Cost of sales consists primarily of cost of phone inventory
          sold, including landing charges.
  *Gross
          Margin* —Gross
          margin during the three months ended December 31, 2006 was $540,587 or
          7.3%. The
          gross margin is a result of our net revenues less the cost of the phones,
          including transportation costs to acquire the phones. Gross margin in the
          six
          month period ending December 31, 2006 was $1,334,062, or 12%. Our gross
          margins
          have been adversely impacted by two key factors. First is the limited
          availability of our custom built microchips. As our growth and diversity
          in
          sales has accelerated at a higher rate than our original product development
          timeline, we have had to substitute open market chips for our custom built
          chips
          at a higher rate than originally anticipated in order to satisfy the increased
          demand for our products. These substitute open market chips require additional
          costs to customize and program in the production process. This increased
          use of
          the open market chips resulted in a cost differential that represented
          a 2.1
          percentage points reduction to our gross margin for the three month period
          ended
          December 31, 2006. We do not expect any significant recurrence of our need
          to
          purchase open market chips for normal production of developed phones for
          ongoing
          sales, although we do anticipate that from time to time we may require
          limited
          numbers of open market chips to help speed the development and launch of
          new
          products. We do not expect this to be a persistent issue on fully developed
          and
          launched products. Accordingly, we do expect the gross margin to improve
          as
          production of our custom microchips rises to meet demand and as the sales
          from
          units sold during this quarter contribute service revenues in future quarters.
          The
          second and most material, was the increase in rebate promotion related
          expenses.
          We are required to recognize these expenses as a reduction of sales. In
          the
          three month period ending December 31, 2006, these charges totaled $1,936,042,
          compared to $9,429 in the three month period ending December 31, 2005.
          We chose
          to participate in key rebate promotions at our retailers in order to take
          advantage of promotional programs during the holiday shopping season. We
          used
          these promotions to increase consumers’ awareness of our brand and product
          offering and to incentive those consumers who do purchase our phones to
          activate
          service, which we anticipate will drive ongoing service commission revenue
          for
          us. Our expenditures for rebate promotions increased from $9,429 in the
          three
          month period ending December 31, 2005 to $1,936,042 in the three month
          period
          ending December 31, 2006. In the six month period ending December 31, 2006,
          promotional expense relating to rebates was $2,418,905.  Management
            evaluates gross margin by excluding the charges for rebates from revenue.
            This
            is a non GAAP measurement, however, we believe it is an important metric
            in our
            analyses on the growth trends in the core business. Under this perspective,
            adjusted to remove these rebate charges, gross margins in the three month
            periods ending December 31, 2006 and 2005 would be 26.6% and 24.9%,
            respectively. For the six month periods ending December 31, 2006 and
            2005, the
            adjusted gross margin would be 27.6% and 24.9%.
  *Selling,
          Marketing and Development—* Selling,
          marketing and development expense was $2,907,674 for the three months ended
          December 31, 2006 and $339,887 for the three months ended December 31,
          2005, an
          increase of $2,567,787. Selling, marketing and development expense was
          $3,946,019 for the six months ended December 31, 2006 and $445,685 for
          the six
          months ended December 31, 2005, an increase of $3,500,334. This increase
          is
          attributable to the increase in our selling and marketing efforts related
          to
          sales of our phone products and the development of an extensive line of
          new
          products and services compared to minimal sales activities during the three
          and
          six months ended December 31, 2005. Selling, marketing and development
          expenses
          are directly associated with the development of products, recurring service
          revenue, distribution to sales channels and stimulating subscriber growth.
          These
          costs consist primarily of commissions, co-op marketing, promotional
          minutes, package design costs, collateral design costs, shipping to customers,
          advertising and certain non-recurring expenses for new business development.
          In
          the six month period ended December 31, we introduced and shipped 11 new
          Pay ‘N
          Talk® phones, which include masters, extensions, and multi handset packaging
          sets and began shipping our VoIP product offering. On January 8, 2007,
          we
          announced the introduction of over 30 new phone models, for which the expenses
          of product development in Asia, product packaging and collateral development
          were mainly incurred in this quarter. Additionally, we expanded our distribution
          which grew from approximately 9,000 outlets at June 30, 2006 to approximately
          12,000 outlets as of December 31, 2006.
  During
          the three months ended December 31, 2006 and 2005, $740,296 and $70,959,
          respectively, related to freight is included in selling expense. Of the
          $740,296
          incurred in the three month period ended December 31, 2006, $448,153 is
          related
          to the incremental cost of air freight incurred by us to meet the accelerated
          demand from our retailers for our products for promotional events in the
          holiday
          shopping season. We chose to incur these additional costs to take advantage
          of
          the seasonal promotional events at our retail partners and to prevent damaging
          our relationships with retail partners. We made this decision in order
          to
          increase the penetration of our product and expose a greater number of
          consumers
          to our service offering. During the six months ended December 31, 2006
          and 2005
          approximately $1,063,458 and $71,124 respectively represent the expense
          related
          to our incurrence of shipping charges.. Of the $1,063,458 incurred in the
          six
          months ended December, 31, 2006, $702,153 resulted from expedited air freight
          charges mainly to meet the increasing demand for our products and to take
          advantage of key promotional events.
  In
          connection with our participation in the above-mentioned key marketing
          and
          promotional activities at our retail partners during the holiday season,
          we
          participated in cooperative advertising with our retail partners. This
          advertising was focused on increasing the consumer awareness of our brand
          and
          products as well as increasing the desire to purchase our phones and activate
          service with our service providers, which we anticipate will drive recurring
          service revenues for us. Accordingly, our expenditures in these areas increased
          substantially when compared to the expenditures in the comparitive periods
          in
  18
 the
          last
          fiscal year when our sales and promotional activity was limited. We did
          not have
          any cooperative advertising expenditures in the three and six month periods
          ending December 31, 2005. Our cooperative advertising expenditures in the
          three
          month period ending December 31, 2006 was $495,176 and $650,176 in the
          six month
          period ending December 31, 2006. Overall, these increases in promotional
          expenditures are related to the expansion in our distribution and the growth
          in
          our business over the prior periods.
  On
          a non
          GAAP basis, including the costs of rebate promotions expenses, selling,
          marketing and development expense for the three month periods ended December
          31,
          2006 and 2005 were $4,843,712 and $349,312, respectively, and under the
          same
          basis for the six month periods ended December 31, 2006 and 2005 were $6,364,926
          and $455,114, respectively.
  *General
          and Administrative —* General
          and administrative expense was $1,400,570 for the three months ended December
          31, 2006 and $470,062 for the three months ended December 31, 2005, an
          increase
          of $930,508. General and administrative expense was $2,870,135 for the
          six
          months ended December 31, 2006 and $670,957 for the six months ended December
          31, 2005, an increase of $2,199,178. General and administrative expenses
          consist
          primarily of personnel costs, corporate overhead, travel and professional
          fees.
          The above increases reflect the growth in our operations to support increasing
          production, development and selling activities. General and administrative
          expenses also include share-based compensation expense of $34,736 and $143,301,
          respectively, for the three and six month periods ended December 31, 2006,
          respectively. No share based compensation awards were granted prior to
          our IPO
          in February 2006; therefore we recognized no share-based compensation expenses
          in the three and six month periods ending December 31, 2005.
  *Interest
          and Bank Charges, net* —Interest
          and bank charges, net were an income of $6,768 for the three months ended
          December 31, 2006 compared to $57,056 of expense for the three months ended
          December 31, 2005, an increase in income of $63,824. The increase in income
          is
          due to no longer incurring interest expense on notes which were outstanding
          until the consummation of our IPO. Interest expense of $19,464 during the
          three
          months ended December 31, 2006 consists primarily of banking fees. Interest
          income of $26,232 during the three months ended December 31, 2006 relates
          to
          income earned on cash deposits maintained at financial institutions. Net
          interest resulted in an income of $92,172 for the six month period ended
          December 31, 2006 and was comprised of $116,705 in interest income and
          $24,533
          of expense. Net interest resulted in an expense of $92,450 in the six month
          period ended December 31, 2005.
  *Amortization
          of Debt Discounts and Issuance Costs* — *-* Amortization
          of debt discounts and debt issuance costs are associated with our convertible
          notes which were issued in September 2005 and July 2005. Such costs
          were amortized over the life of the related debt. Upon consummation of
          our IPO
          in February 2006, 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. Accordingly, there has been no
          amortization of debt issuance costs and discounts after our IPO. Amortization
          of
          debt discount and debt issuance cost were $0 and $127,482 for the three
          months
          ended December 31, 2006 and 2005, respectively. Amortization of debt discount
          and debt issuance cost were $0 and $204,091 for the six months ended December
          31, 2006 and 2005, respectively.
  *Net
          loss—* Net loss
          was $(3,760,889), or $(0.58) per share, and $(927,144), or $(0.46) per
          share,
          for the three months ended December 31, 2006 and 2005, respectively, which
          was
          an increase of $2,833,755. Net loss was $(5,389,920), or $(0.83) per share,
          and
          $(1,345,840), or $(0.67) per share, for the six months ended December 31,
          2006
          and 2005 respectively, an increase of $4,044,080. We expect our losses
          may
          increase during the short term as we continue to develop our phone products
          and
          expand distribution of our phone/service bundles. However, we do anticipate
          that, as our business matures, we should trend toward profitability as
          we
          improve our hardware margins through increased utilization of our custom
          chips,
          take advantage of our increasing scale with our suppliers, manage our costs
          and
          leverage them against our planned recurring revenue base.
  **LIQUIDITY
          AND CAPITAL RESOURCES**
  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
  19
 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 utilized 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.
  At
          December 31, 2006, our working capital was $9,768,394 compared to a working
          capital of $13,426,376 at September 30, 2006. Cash and cash equivalents was
          $1,429,043 at December 31, 2006 compared to $6,223,206 at September 30,
          2006. As
          of June 30, 2006, working capital was $15,062,582. The principal components
          of
          working capital at December 31, 2006 were cash and cash equivalents, accounts
          receivable, advances to suppliers and inventory, offset by an increase
          in our
          accounts payable and accrued expenses associated with the increase in activity
          associated with purchase and sales of our products. The decrease in cash
          and
          cash equivalents was due primarily to the consumption of cash to purchase
          inventory, to support our marketing and development efforts and to fund
          operations. Our customers are primarily large, United States based retail
          companies and, as a result, we have seldom experienced issues with the
          reliability or timing of customer receipts. However, vendors’ payment terms vary
          and are tightly managed to maximize working capital.
  **Operating
          Cash Flows**
  During
          the six months ended December 31, 2006, we utilized cash from our operating
          activities of $10,805,348, compared to $698,359 used in operating activities
          during the six months ended December 31, 2005.
  Net
          cash
          used in operating activities during the six months ended December 31, 2006
          can
          be attributed to increases in accounts receivable, prepaid assets and inventory,
          and to cash used to fund our operating activities, offset by customer
          collections and increases in accrued expenses. Depreciation has been relatively
          minimal since our inception. Net cash used in operating activities during
          the
          six months ended December 31, 2005 related primarily to the commencement
          of our
          commercial operations and initial purchases of inventory.
  ***Accounts
          Receivable***
  During
          the six months ended December 31, 2006, sales of our phone products resulted
          in
          an increase in accounts receivable in the amount of $6,779,601 from June
          30,
          2006, and a corresponding reduction in operating cash flow for the
          period.
  ***Prepaid
          Expenses and Inventory***
  During
          the six months ended December 31, 2006 we made payments to suppliers and
          vendors
          in advance of services being rendered. At December 31, 2006 prepaid expenses
          increased from June 30, 2006 which decreased operating cash flow by $50,533
          in
          the period.
  During
          the six months ended December 31, 2006 we built up our inventory in order
          to
          fulfill customer demand orders in our second and third quarter. At December
          31,
          2006 the increase in inventory decreased operating cash flow by
          $2,031,469.
  ***Accounts
          Payable and Accrued Expenses***
  The
          increase in our accounts payable and accrued expenses during the six months
          ended December 31, 2006 was commensurate with the increase in our commercial
          operations, including purchases of our phone products and reserves associated
          with the increase in our revenues. This increase in accounts payable and
          accrued
          expenses improved operating cash flow by $1,427,398.
  **Cash
          Flows from Investing Activities.**
  During
          the six months ended December 31, 2006, cash used in investing activities
          was
          $138,374 compared to $16,732 used in investing activities during the six
          months
          ended December 31, 2005.
  20
 Since
          our
          suppliers manufacture our phone products and we pay suppliers for warehouse
          space, we typically have very low levels of capital expenditures. We incur
          relatively minimal capital expenditures. We do not anticipate any material
          increases in capital expenditures and do not currently have any plans or
          proposed projects which would require any additional significant capital
          expenditures. Our capital expenditures are predominantly related to office
          fixtures and furnishings, computer equipment, software and software development.
          There are no known timing elements where our capital expenditure would
          be
          materially significant or differ from other periods.
  **Cash
          Flows from Financing Activities.**
  During
          the six months ended December 31, 2006, cash provided by financing activities
          was $0, compared to $1,498,609 provided by financing activities during
          the six
          months ended December 31, 2005.
  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. Such notes were converted to common stock upon consummation of our
          IPO.
  We
          will
          utilize the remaining 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 during the
          current
          fiscal year.
  On
          January 18, 2007, we announced that we had secured an open ended asset-based
          financing facility from CIT Commercial Services, a division of CIT Group.
          CIT
          Commercial Services is one of the nation’s largest providers of factoring and
          commercial finance services.
  On
          January 31, 2007, we announced the completion of a $12,500,000 private
          equity
          placement. Investors in this offering included, among others, Credit Suisse,
          SIAR Capital, and Benchmark Capital, as well as members of management and
          the
          board of directors. The private placement consisted of 5,000 shares of
          Series A
          Convertible Preferred Stock, which is convertible into a total of 2,941,175
          common shares, in addition to 1,176,471 5-year warrants, which carry an
          exercise
          price of $4.25. An 8% annual cash dividend will be paid semi-annually to
          holders
          of the preferred. The net proceeds of this offering contributed to an
          improvement in working capital.
  We
          believe that the remaining proceeds of our prior private placements, the
          IPO,
          the recently secured asset based financing arrangement and the proceeds
          from our
          preferred stock offering, combined with certain minimum levels of anticipated
          revenues, will be sufficient to fund our capital requirements for at least
          the
          next 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. In such a series of events, we may
          be
          required to seek additional equity and/or debt financing.
  21
 **ITEM3**
                **QUANTITATIVE
                    AND QUALITATIVE DISCLOSURES ABOUT MARKET
                    RISK**
  *Interest
          Rate Sensitivity*
  Interest
          on lease agreements is based on the applicable lender’s base rates and cost of
          funds. We believe that our results of operation are not materially affected
          by
          changes in interest rates.
  *Exchange
          Rate Sensitivity*
  Although
          we operate a portion of our operations through our subsidiary in Hong Kong
          all
          of our revenues are earned in the United States and denominated in US dollars.
          It is our general policy to pay our underlying suppliers in the same currency
          that we receive customer revenue. Additionally, overhead expenditures associated
          with our Hong Kong office will appreciate or depreciate with any foreign
          exchange movements.
  **ITEM
                  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 December 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 December 31, 2006 that has materially
          affected, or is reasonably likely to materially affect, our internal control
          over financial reporting.
  22
 **PART
          II**
  **ITEM
                  1**
                **LEGAL
                    PROCEEDINGS**
  We
          are
          not currently involved in any legal proceedings, nor have we been involved
          in
          any such proceedings since our inception.
  **ITEM
                  1A.**
                **RISK
                    FACTORS**
  There
          have been no material changes in the risk factors from those disclosed
          in the
          risk factors section in Item 1A of our annual report on Form 10-K for our
          fiscal
          year ended June 30, 2006.
  **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 December 31, 2006, we have primarily used
          the
          net proceeds from the offering as follows:
  **Purpose**
                
                **Use
                    of Proceeds through December 31, 2006**Contract
                    manufacturing of phones and related components
                
                $9,800,000Sales
                    and marketing, including salaries of personnel
                
                $2,700,000Product
                    enhancement and new product development
                
                $ 
                     600,000Purchase
                    and/or lease of office equipment
                
                $  
                    220,000Working
                    capital and general corporate purposes
                
                $3,300,000
  **ITEM
                  3**
                **DEFAULTS
                    UPON SENIOR SECURITIES**
  Not
          Applicable
  **ITEM
                  4**
                **SUBMISSION
                    OF MATTERS TO A VOTE OF SECURITY
                    HOLDERS**
  Our
          Annual Meeting of Stockholders was held on December 14, 2006.
  At
          that
          meeting, all of our then-current directors were elected. The vote was as
          follows:
  23
 
  For
                    AgainstLawrence
                        Burstein
                    4,768,547
                    0Bruce
                        Hahn
                    4,709,847
                    58,700Robert
                        F. Doherty
                    4,768,547
                    0Elliot
                        J. Kerbis
                    4,768,547
                    0Donald
                        G. Norris
                    4,768,547
                    0Robert
                        S. Picow
                    4,768,547
                    0
 At
          that
          meeting, our shareholders ratified the appointment of BDO Seidman, LLP
          as our
          independent auditors for the fiscal year ending June 30, 2007. The vote
          was as
          follows:
  For:
                  4,760,547
                  Against:
                  0
                  Abstain:
                  8,000
  **ITEM
                  5**
                **OTHER
                    INFORMATION**
  Not
          Applicable
  **ITEM
                  6**
                **EXHIBITS******
  Exhibit
                    Number
                Description10.1
                Agreement
                    between SunRocket, Inc. and Registrant, dated November 14, 2006
                    *31.1
                Rule
                    13a-14(a) Certifications32.1
                Section
                    1350 Certifications
 **______________**
  *****  Confidential
          treatment requested for certain portions of this Exhibit pursuant to Rule
          24b-2
          under the Securities Exchange Act of 1934, which portions are omitted and
          filed
          separately with the Securities and Exchange Commission. ****
  24
 **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.**Date: February
                15, 2007
              By:
              /s/ Bruce
                Hahn**Bruce
                  Hahn**
                Chief
                  Executive Officer
 By:
                /s/ Edward
                  James**Edward
                      James**
                    Chief
                      Financial Officer
  25