**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**




**FORM 10-Q**




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




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




Commission
      File Number: **001-32736**




**American
      Telecom Services, Inc.**


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




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




**2466
      Peck Road**


**City
      of Industry, California 90601**


(Address
      of Principal Executive Offices)




*(562) 692***-3869**


(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 October 31, 2006Common
                  Stock, par value $0.001 per share
              
              6,502,740
                  shares










**AMERICAN
        TELECOM SERVICES, INC.**
  **FORM
        10-Q**
  **FOR
        THE PERIOD ENDED SEPTEMBER 30, 2006**
  **TABLE
        OF CONTENTS**
  PART
                  IITEM
                  1
              FINANCIAL
                  STATEMENTS (UNAUDITED)
              1CONDENSED
                  CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2006 (UNAUDITED)
                  AND JUNE
                  30, 2006
              1CONDENSED
                  CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
              2FOR
                THE THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005CONDENSED
                  CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
                  (UNAUDITED)
              3FOR THE
                THREE MONTHS
                ENDED SEPTEMBER 30, 2006CONDENSED
                  CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
              4FOR THE
                THREE MONTHS
                ENDED SEPTEMBER 30, 2006 AND 2005NOTES
                  TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
              5ITEM
                  2
              MANAGEMENT’S
                  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                  OPERATIONS
              15ITEM
                  3
              QUANTITATIVE
                  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
              19ITEM
                  4
              CONTROLS
                  AND PROCEDURES
              19PART
                  IIITEM
                  1
              LEGAL
                  PROCEEDINGS
              20ITEM
                  1A.
              RISK
                  FACTORS
              20ITEM
                  2
              UNREGISTERED
                  SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
              20ITEM
                  3
              DEFAULTS
                  UPON SENIOR SECURITIES
              20ITEM
                  4
              SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY HOLDERS
              20ITEM
                  5
              OTHER
                  INFORMATION
              20ITEM
                  6
              EXHIBITS
              21




You
        should carefully review the information contained in this Quarterly Report
        and
        in other reports or documents that we file from time to time with the Securities
        and Exchange Commission (the “SEC”). In this Quarterly Report, we state our
        beliefs of future events and of our future financial performance. In some
        cases,
        you can identify those so-called “forward-looking statements” by words such as
“may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,”
“estimates,” “predicts,” “potential,” or “continue” or the negative of those
        words and other comparable words. You should be aware that those statements
        are
        only our predictions. Actual events or results may differ materially. Factors
        that could cause actual results to differ from those contained in the
        forward-looking statements include: we only recently commenced our commercial
        operations; the agreements with the strategic partners that provide the
        communications services accessible through our phones require us to meet
        certain
        minimum requirements, which, if not met, could lead to our loss of certain
        material rights; if we are unable to effectively manage the transition from
        development stage to commercial operations, our financial results will be
        negatively affected; our failure to quickly and positively distinguish our
        phone/service bundles from other available communications solutions could
        limit
        the adoption curve associated with their market acceptance and negatively
        affect
        our operations; and the other risks and uncertainties discussed in our 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**
 **September
                    30,**
                  **2006**
                  **(Unaudited)**
                
                **June
                    30, 2006****ASSETS**Current
                    assets:Cash
                    and cash equivalents
                
                $
                6,233,206
                
                $
                12,372,765Accounts
                    receivable, net
                
                
                4,389,963
                
                
                1,060,968Inventory
                
                
                3,330,925
                
                
                2,181,019Prepaid
                    expenses and other
                
                
                3,773,475
                
                
                808,523Total
                    current assets
                
                
                17,727,569
                
                
                16,423,275Property
                    and equipment, net
                
                
                207,685
                
                
                174,880Deposit
                    and other assets
                
                
                84,497
                
                
                75,391Total
                    assets
                
                $
                18,019,751
                
                $
                16,673,546**LIABILITIES
                    AND STOCKHOLDERS’ EQUITY**Current
                    liabilities:Accounts
                    payable
                
                $
                652,671
                
                $
                372,916Accrued
                    expenses
                
                
                3,648,522
                
                
                987,777Total
                    liabilities
                
                
                4,301,193
                
                
                1,360,693Commitments
                    (Note 5 )Stockholders’
                    equity (Notes 3 and 6) :Preferred
                      stock, $.001 par value, authorized 5,000,000 shares, issued
                      and
                      outstanding -0- shares
                
                
                —
                
                
                —Common
                    stock, $.001 par value, 40,000,000 shares authorized;6,502,740
                    shares issued and outstanding
                
                
                6,503
                
                
                6,503Additional
                    paid-in capital
                
                
                21,274,438
                
                
                21,239,702Accumulated
                    deficit
                
                
                (7,562,383
                )
                
                (5,933,352
                )Total
                    stockholders’ equity
                
                
                13,718,558
                
                
                15,312,853Total
                    liabilities and stockholders’ equity
                
                $
                18,019,751
                
                $
                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****September
                      30,****2006**
                  
                  **2005**Revenues
                  
                  $
                  4,266,022
                  
                  $
                  —Costs
                      of sales
                  
                  
                  2,989,682
                  
                  
                  —Gross
                      profit
                  
                  
                  1,276,340
                  
                  
                  —Operating
                      Expenses:Selling,
                      marketing and development
                  
                  
                  2,012,409
                  
                  
                  116,703General
                      and administrative
                  
                  
                  965,866
                  
                  
                  188,563Total
                      expenses
                  
                  
                  2,978,275
                  
                  
                  305,266Operating
                      loss
                  
                  
                  (1,701,935
                  )
                  
                  (305,266
                  )Other
                      expenses (income):Interest
                      expense and bank charges
                  
                  
                  17,569
                  
                  
                  35,721Interest
                      income
                  
                  
                  (90,473
                  )
                  
                  —Amortization
                      of debt discounts and debt issuance costs
                  
                  
                  —
                  
                  
                  77,709Loss
                      before provision for income taxes
                  
                  
                  (1,629,031
                  )
                  
                  (418,696
                  )Provision
                      for income taxes
                  
                  
                  —
                  
                  
                  —Net
                      loss
                  
                  $
                  (1,629,031
                  )
                  $
                  (418,696
                  )Net
                      loss per common share:Basic
                      and diluted
                  
                  
                  (0.25
                  )
                  $
                  (0.21
                  )Weighted
                      average shares outstanding:Basic
                      and diluted
                  
                  
                  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,
                      June 30, 2006**
                  
                  
                  6,502,740
                  
                  $
                  6,503
                  
                  $
                  21,239,702
                  
                  $
                  (5,933,352
                  )
                  $
                  15,312,853Stock-based
                      compensation related to employee stock options (Notes 2 and
                      6)
                  
                  
                  —
                  
                  
                  —
                  
                  
                  35,464
                  
                  
                  —
                  
                  
                  35,464Stock-based
                      compensation related to non-employee stock options (Notes 2
                      and
                      6)
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (728
                  )
                  
                  —
                  
                  
                  (728
                  )Net
                      loss
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (1,629,031
                  )
                  
                  (1,629,031
                  )**Balance,
                      September 30, 2006**
                  
                  
                  6,502,740
                  
                  $
                  6,503
                  
                  $
                  21,274,438
                  
                  $
                  (7,562,383
                  )
                  $
                  13,718,558
  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 three months ended****September
                      30,****2006**
                  
                  **2005**Cash
                      flows from operating activities:Net
                      loss
                  
                  $
                  (1,629,031
                  )
                  $
                  (418,696
                  )Adjustment
                      to reconcile net loss to net cash used in operating activitiesDepreciation
                  
                  
                  15,404
                  
                  
                  —Common
                      stock and capital contributed for services
                  
                  
                  —
                  
                  
                  2,080Employee
                      and non-employee share based compensation
                  
                  
                  34,736
                  
                  
                  —Amortization
                      of debt discounts and issuance costs
                  
                  
                  —
                  
                  
                  77,709Changes
                      in operating assets and liabilities:Accounts
                      receivable
                  
                  
                  (3,328,995
                  )
                  
                  —Inventory
                  
                  
                  (1,149,906
                  )
                  
                  (201,629
                  )Prepaid
                      expenses and other
                  
                  
                  (2,964,952
                  )
                  
                  (156,616
                  )Deposit
                      and other assets
                  
                  
                  (9,106
                  )
                  
                  —Accounts
                      payable
                  
                  
                  279,755
                  
                  
                  207,317Accrued
                      expenses
                  
                  
                  2,660,745
                  
                  
                  27,497Accrued
                      interest payable
                  
                  
                  —
                  
                  
                  37,384Net
                      cash used in operating activities
                  
                  
                  (6,091,350
                  )
                  
                  (424,954
                  )Cash
                      flows from investing activities:Purchases
                      of property and equipment
                  
                  
                  (48,209
                  )
                  
                  —Net
                      cash used in investing activities
                  
                  
                  (48,209
                  )
                  
                  —Cash
                      flows from financing activities:Proceeds
                      from senior convertible notes
                  
                  
                  —
                  
                  
                  2,113,500Debt
                      issuance costs
                  
                  
                  —
                  
                  
                  (405,308
                  )Net
                      cash provided by financing activities
                  
                  
                  —
                  
                  
                  1,708,192Net
                      (decrease) increase in cash and cash equivalents
                  
                  
                  (6,139,559
                  )
                  
                  1,283,238Cash
                      and cash equivalents — beginning of period
                  
                  
                  12,372,765
                  
                  
                  50,780Cash
                      and cash equivalents — end of period
                  
                  $
                  6,233,206
                  
                  $
                  1,334,018Supplementary
                      disclosure of cash flow information:Cash
                      paid for income taxes
                  
                  $
                  —
                  
                  $
                  —Cash
                      paid for interest
                  
                  $
                  —
                  
                  $
                  —Non-cash
                      financing activities:Deferred
                      financing costs
                  
                  $
                  —
                  
                  $
                  53,382Accrued
                      financing costs
                  
                  $
                  157,871
                  
                  $
                  180,220
 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 (“GAAP”) 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 months ended September 30, 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 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***
  During
        the three months ended September 30, 2006, the Company generated approximately
        $4.2 million of net revenues from the sale of the Company’s phone products to
        consumer retailers. No revenue was generated during the three months ended
        September 30, 2005.
  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
  5
 **AMERICAN
          TELECOM SERVICES, INC.**
 **NOTES
          TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
          STATEMENTS**
  fixed
        and
        determinable, collectibility is reasonably assured, contractual obligations
        have
        been satisfied, and title and risk of loss have been transferred to the
        customer.
  Phone
        Products
  The
        Company’s phone products are sold through Retail Partners to the end user
        customer. Revenues from sales of phones are recognized in the period when
        title
        and risk of loss are transferred to the Retail Partner in accordance with
        the
        terms of an agreement, provided all other revenue recognition criteria have
        been
        met. Retail Partners participate in various cooperative marketing and other
        programs, and the Company maintains estimated accruals and allowances for
        these
        programs once they commence 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 months ended September
        30,
        2006 the Company recorded a provision for warranty reserves of $45,113. As
        of
        September 30, 2006 the Company’s warranty liability reserve was $79,504 and is
        included in accrued expenses.
  Additionally,
        the Company accrues for sales returns, and other allowances based on estimates.
        Each estimate was 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
        months ended September 30, 2006 the Company recorded provisions for sales
        returns allowances totaling $225,566.  As of September 30, 2006 the
        Company’s provisions for sales returns was $408,615 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
        agreement with SunRocket, Inc. (“SunRocket”) the Company designs and configures
        its Internet phones to work with SunRocket’s communications services. SunRocket
        offers end-user purchasers of the Company’s Internet phones different service
        plans at set rates.
  The
        Company’s agreement with IDT Domestic, Inc. (“IDT”), as assigned by IDT Puerto
        Rico & Co., provides purchasers of the Company’s cordless landline phones
        with the ability to obtain prepaid long distance communications services.
        IDT
        will offer end-user purchasers of the Company’s cordless landline phones certain
        prepaid long distance calling rate plans and IDT will handle all customer
        service interaction, including billing the customer for all communications
        services. The Company has agreed to use its best efforts to deliver certain
        minimum account activations to IDT. In the event that the Company fails to
        achieve the minimum commitment level for the relevant time period, then IDT,
        at
        its sole discretion, shall have the right to (i) terminate the agreement
        without
        further obligation or (ii) renegotiate the agreement or specific terms on
        a
        going forward basis.
  In
        connection with the agreements with the carriers, the Company is entitled
        to
        earn certain commissions from the carriers. For each services account activated
        with SunRocket by end-users of the Company’s Internet phones, the Company
        receives a pre-defined commission amount from SunRocket once the account
        remains
        active for a certain period of time. The Company is also entitled to receive
        ongoing monthly commissions from both SunRocket and IDT equal to a percentage
        of
        the net service revenues received by the respective carrier from end-users
        of
        the Company’s phones. In addition, the Company receives certain retail marketing
        co-op fees and
  6
 **AMERICAN
          TELECOM SERVICES, INC.**
 **NOTES
          TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
          STATEMENTS**
  contributions
        for consumer rebates in certain circumstances from carriers. The Company’s
        obligations to end-users of the Company’s phones relate solely to the sales of
        the Company’s phones and the related warranties provided. Aside from marketing
        the carrier communication services with its phones, the Company has no
        obligations to the end-users related to the carrier communications services.
        Accordingly, commission revenues, based on a percentage of the monthly carrier
        net service revenue from the subscriber users of the Company’s phones, will be
        recognized in the period the usage occurs and commission revenue resulting
        from
        service account activation by users of the Company’s phones and marketing co-op
        fees will be recognized once the subscriber activates the phone on the carrier’s
        network and such account is active for the required period of time. During
        the
        three months ended September 30, 2006, $1,579 of commission revenue was
        recognized. No revenue was recognized during the three months ended September
        30, 2005.
  The
        Company offers some Retail Partners a percentage of the service revenue
        commissions it earns from carriers of communications service providers and
        a
        percentage of the subscriber activation fees the Company will receive from
        SunRocket in connection with the purchase of communications services by
        end-users of the Company’s Internet phones. Such fees will be recorded as a
        reduction of revenues. During the three months ended September 30, 2006, no
        commissions were earned by Retail Partners.
  ***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 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 months ended September 30,
        2006
        was $35,464, 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.
  Stock-based
        compensation expense recognized in the Company’s condensed consolidated
        statements of operations for the three months ended September 30, 2006 included
        compensation expense for share-based payment awards based on the grant date
        fair
        value estimated in accordance with the provisions of SFAS 123(R). 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
        months ended September 30, 2006 is based on awards ultimately expected to
        vest,
        it has been reduced
  7
 **AMERICAN
          TELECOM SERVICES, INC.**
 **NOTES
          TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 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 months ended
        September 30, 2006 and 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 months ended September 30, 2006 resulted in income of $728 due to the
        decline 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 September 30, 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.
  As
        of
        September 30, 2006, $3,037,603 of advances to manufacturers of the Company’s
        phone products is included in prepaid expenses and other on the accompanying
        condensed consolidated balances sheets related to payments made for inventory
        purchases for which the Company had an obligation to make payment but had
        not
        yet taken title to such inventory as of September 30, 2006.
  The
        Company includes the expense of shipping and handling on shipments to customers
        in selling, marketing and development on the condensed consolidated statements
        of operations. During the three months ended September
        30, 2006 the Company incurred approximately $323,000 of shipping costs to
        customers of which approximately $254,000 represents expedited freight costs
        due
        to the initial distribution of certain products to retailers to ensure the
        Company’s phone products were on Retail Partners’ shelves for the holiday sales
        season. Included in revenues is $15,340 of fees earned from customers related
        to
        reimbursements of shipping costs.
  8
 **AMERICAN
          TELECOM SERVICES, INC.**
 **NOTES
          TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 ***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 three ended September
        30,
        2006 the company capitalized $23,200 of costs related to developing internal
        use
        software.
  ***Concentrations***
  Financial
        instruments that potentially subject the Company to concentrations of credit
        risk consist of cash and cash equivalents and accounts receivable. The Company
        reduces credit risk by placing its cash and cash equivalents with major
        financial institutions with high credit ratings. At times, such amounts may
        exceed federally insured limits. The Company reduces credit risk related
        to
        accounts receivable by routinely assessing the financial strength of its
        customers and maintaining an appropriate allowance for doubtful
        accounts.
  The
        Company's services have been provided primarily to a limited number of clients
        located in the United States. The Company had phone product revenues from
        two
        (2) customers representing 95% (65% and 30%, respectively) of the $4.2 million
        in net phone product revenues during the three months ended September 30,
        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 89% (58%
        and
        31%, respectively) of total gross accounts receivable as of September 30,
        2006.
        The Company had three (3) clients accounting for 95% (58%, 19% and 18%,
        respectively) of total 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 earnings
        and in
        which they have a dilutive effect, the effect of common shares issuable upon
        exercise of stock options and warrants. Diluted loss per share for the three
        months ended September 30, 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.
  9
 **AMERICAN
          TELECOM SERVICES, INC.**
 **NOTES
          TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 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 effective,
        accounting standards if currently adopted would have a material effect on
        the
        Company’s consolidated financials 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.
  *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 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 price
        of
        the UPO and the market prices of the Commons Stock and Warrants) 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 September 30, 2006,
        5,328,167 Redeemable Warrants were outstanding.
  10
 **AMERICAN
          TELECOM SERVICES, INC.**
 **NOTES
          TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 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
        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*
  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. 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 $46,200 and $36,000 of expenses
        during
        the three months ended September 30, 2006 and 2005 respectively, pursuant
        to
        this arrangement which are included in selling, marketing and development
        expense on the accompanying condensed consolidated statements 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 $7,652 and $0 of expenses during the three months
        ended
        September 30, 2006 and 2005 respectively, pursuant to this arrangement which
        are
        included in selling, marketing and development expense on the accompanying
        condensed consolidated statements of operations.
  The
        Company will also pay to Mr. Feuerstein five percent of all net revenues,
        as
        defined, collected by the Company from IDT during each year of the term of
        and
        directly attributable to the Company’s service agreement dated as of November
        25, 2003 with IDT (the “IDT Agreement”), subject to a maximum aggregate amount
        of $250,000 for each year. The Company recognized a nominal amount of expenses
        during the three months ended
  11
 **AMERICAN
          TELECOM SERVICES, INC.**
 **NOTES
          TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 September
        30, 2006 and 2005, pursuant to this arrangement which are included in selling,
        marketing and development expense on the accompanying condensed consolidated
        statements of operations.
  The
        Company will also pay to Mr. Feuerstein two percent of all net revenues,
        as
        defined, collected by the Company from SunRocket during each year of the
        term of
        and directly attributable to the Company’s June 7, 2005 service agreement with
        SunRocket, subject to a maximum aggregate amount of $250,000 for each year;
        provided, however, that any revenues attributable under the SunRocket agreement
        from the provision of Internet-based communications services relating to
        “subscriber bounty,” “advertising co-op” and “key-city funds” are excluded in
        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 months ended September 30, 2006 and 2005, pursuant to this
        arrangement which are included in selling, marketing and development expense
        on
        the accompanying condensed consolidated statements 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
        products. In connection with such services the Company pays CIT a fee of
        1.25%
        on the gross face amount of customer purchase order amount guaranteed. If
        the
        actual fees during a quarter are less than $12,500, CIT will charge the
        Company’s account for the difference. The agreement with CIT can be terminated
        by CIT or the Company by providing 60 days notice prior to the anniversary
        date.
        The Company recognized $12,500 and $0 of expense during the three months
        ended
        September 30, 2006 and 2005, respectively pursuant to this arrangement which
        are
        included in interest and bank charges on the accompanying condensed consolidated
        statements of operations.
  *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. No bonuses were earned or recognized during
        the
        three months ended September 30, 2006 and 2005.
  *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 $47,780 and $0 of expense during
        the
        three months ended September 30, 2006 and 2005, respectively, pursuant to
        this
        arrangement which is included in selling, marketing, and development on the
        accompanying condensed consolidated statements of operations.
  12
 **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 risk-free interest rates appropriate for the term of the Company’s
        employee stock options. The dividend yield assumption is based on the Company’s
        intent not to issue a dividend under its dividend policy. The expected holding
        period assumption was estimated based on management’s estimate.
  As
        stock-based compensation expense recognized in the condensed consolidated
        statement of operations for the three months ended September 30, 2006 is
        based
        on awards ultimately expected to vest, it had been reduced for estimated
        forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time
        of
        grant and revised, if necessary, in subsequent periods if actual forfeitures
        differ from those estimates. Forfeitures were estimated based management’s
        estimate.
  The
        fair
        value of each stock option grant to employees is estimated on the date of
        grant.
        The fair value of each stock option grant to non-employees is estimated on
        the
        applicable performance commitment date, performance completion date, or interim
        financial reporting date. No options were granted during the three months
        ended
        September 30, 2006. The following table summarizes information concerning
        options outstanding as of June 30, 2006 and for the three months ended September
        30, 2006:
 **Shares**
                  
                  **Weighted Average
                      Exercise Price**
                  
                  **Weighted Average**
                    **Fair
                      Value**Options
                      Outstanding as of June 30, 2006
                  
                  
                  240,000
                  
                  $
                  4.79
                  
                  $
                  2.11Granted
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Exercised
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Forfeited
                      and Expired
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Options
                      Outstanding, September 30, 2006
                  
                  
                  240,000
                  
                  $
                  4.79
                  
                  $
                  2.11Exercisable,
                      September 30, 2006
                  
                  
                  90,000
                  
                  $
                  4.37
                  
                  $
                  1.94
 The
        following table summarizes the status of the Company’s stock options as of
        September 30, 2006:
 **Stock Options Outstanding**
                  
                  **Stock Options Exercisable****Weighted
                      Average**
                  
                  **Weighted**
                  
                  
                  
                  
                  
                  **Weighted
                      Average**
                  
                  **Weighted****Remaining**
                  
                  **Average**
                  
                  **Aggregate**
                  
                  
                  
                  **Remaining**
                  
                  **Average**
                  
                  **Aggregate****Contractual**
                  
                  **Exercise**
                  
                  **Intrinsic**
                  
                  
                  
                  **Contractual**
                  
                  **Exercise**
                  
                  **Intrinsic****Exercise Prices**
                  
                  **Shares**
                  
                  **Life (Years)**
                  
                  **Price**
                  
                  **Value**
                  
                  **Shares**
                  
                  **Life (Years)**
                  
                  **Price**
                  
                  **Value**$
                  5.05
                  
                  
                  195,000
                  
                  
                  4.35
                  
                  $
                  5.05
                  
                  $
                  —
                  
                  
                  45,000
                  
                  
                  4.35
                  
                  $
                  5.05
                  
                  $
                  —$
                  3.95
                  
                  
                  25,000
                  
                  
                  4.58
                  
                  $
                  3.95
                  
                  $
                  —
                  
                  
                  25,000
                  
                  
                  4.58
                  
                  $
                  3.95
                  
                  $
                  —$
                  3.35
                  
                  
                  20,000
                  
                  
                  4.75
                  
                  $
                  3.35
                  
                  $
                  —
                  
                  
                  20,000
                  
                  
                  4.75
                  
                  $
                  3.35
                  
                  $
                  —Total
                  
                  
                  240,000
                  
                  
                  
                  
                  $
                  —
                  
                  $
                  —
                  
                  
                  90,000
                  
                  
                  
                  
                  
                  
                  
                  $
                  —
  13
 **AMERICAN
          TELECOM SERVICES, INC.**
 **NOTES
          TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
  The
        Company recognized compensation expense of $35,464 during the three months
        ended
        September 30, 2006 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 statements of operations.
  As
        of
        September 30, 2006, the unvested portion of share-based compensation expense
        attributable to employees and directors stock options and the period in which
        such expense is expected vest and be recognized is as follows:
 Year
                      ending June 30, 2007
                  
                  $
                  105,234Year
                      ending June 30, 2008
                  
                  
                  85,190$
                  190,424
  *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 September 30, 2006, 325,000 PARS awards are outstanding and none have
        vested as of September 30, 2006.
  14
 **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 prospectus. The matters discussed in “Management’s
        Discussion and Analysis of Financial Condition and Results of Operations”
contain certain forward-looking statements within the meaning of the Private
        Securities Litigation Reform Act of 1995.
  **Overview**
  We
        were
        incorporated in Delaware in June 2003. Our primary business is the marketing
        and
        sale of Internet phone communications (Voice-over-Internet-Protocol or “VoIP”)
        services and/or prepaid long distance services that are bundled with our
        digital, cordless multi-handset phones. We sell our communications phone/service
        bundles under our “American Telecom”, “ATS” or “Pay N’ Talk” brand names. Our
        telecom platform is designed to enable seamless access to the communications
        services provided by our strategic partners. We are marketing our phone/service
        bundles to the retail mass market and will expand through a variety of
        distribution channels, including office superstores, electronics stores,
        mass
        retailers, department stores and Internet-based retail distribution outlets.
        We
        are initially targeting the U.S. residential and small office/home office
        (“SOHO”) markets. Our strategic partners include SunRocket, Inc., a growing
        provider of VoIP services, for our VoIP service offering, and IDT Corporation,
        an established communications carrier for our prepaid long distance service
        offerings. Under the agreements with each of these service providers, we
        receive
        a percentage of their monthly service revenues generated by users of our
        service
        offerings, in addition to the revenues we generate through the sale of our
        phone
        hardware.
  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 three months ended September 30, 2006, our suppliers continued the
        manufacturing of our VoIP and prepaid residential long distance service phones
        and we funded these manufacturing efforts primarily from the proceeds of
        our
        initial public offering. We received our initial purchase orders in September
        2005 and limited shipments of our phones began arriving in retail stores
        in
        October 2005. Both our prepaid long distance and Internet phone/service bundles
        are available through our retail customers.
  **Results
        of Operations**
  ***Three
        months ended September 30, 2006 and 2005***
  *Revenues* —Revenue
        was $4,266,022 for the three months ended September 30, 2006 and $0 for the
        three months ended September 30, 2005. Our revenue for the three months ended
        September 30, 2006 was comprised of $4,249,102 net sales from phone products,
        $1,580 of carrier revenues and shipping and handling income of $15,340. Our
        phone product revenues during the three months ended September 30, 2006 were
        earned from a limited amount of customers, with two (2) customers representing
        95% of our phone product revenues during the period.
  We
        did
        not generate any revenues through September 30, 2005. In September 2005 we
        shipped our initial phone products which began arriving in retail outlets
        in
        October 2005. Since we only began generating significant revenues during
        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.
  We
        market
        our phone/service bundles through major retail distribution outlets and expect
        to generate revenues through the sale of our phones and the receipt of a
        portion
        of the ongoing revenues generated by our customers’ use of the communications
        services bundled with our phones. As part of our relationship with our retail
        distribution channels, we will typically share with them a portion of our
        service revenues.
  15
 *Cost
        of Revenues* —Cost
        of
        sales was $2,989,682 for the three months ended September 30, 2006 and $0
        for
        the three months ended September 30, 2005. Cost of sales consists primarily
        of
        cost of phone inventory sold including landing charges.
  *Gross
        Margin* —Gross
        margin during the three months ended September 30, 2006 was $1,276,340 or
        29.9%.
        The gross margin is a result of our net revenues less the cost of the phones,
        including transportation costs to acquire the phone. Gross margin percentage
        declined during the first quarter of fiscal 2007 compared to the fourth quarter
        of our fiscal year ended June 30, 2006 primarily due to the substitution of
        our custom chipset with a more costly off-the-shelf chipset which allowed
        us to accelerate the manufacturing of phones to meet deadlines for the holiday
        season.
  *Selling,
        Marketing and Development* —Selling,
        marketing and development expense was $2,012,409 for the three months ended
        September 30, 2006 and $116,703 for the three months ended September 30,
        2005,
        an increase of $1,895,706. The increase is attributable to the increase in
        our
        selling and marketing efforts related to sales of our phone products compared
        to
        minimal activities during the three months ended September 30, 2005. Selling,
        marketing and development expenses are sales and marketing expenses directly
        associated with the development of sales channels. These costs consist primarily
        of commissions, rebates, co-op marketing, promotional minutes, package design
        costs, shipping to customers and advertising as well as certain non-recurring
        expenses for new business development. During the three months ended September
        30, 2006 approximately $323,000 is included in selling expense related to
        shipping and handling charges incurred of which approximately $254,000
        represents expedited freight costs due to the initial distribution of certain
        products to retailers and to ensure our phone products were on retailer’s
        shelves for the holiday sales season.
  *General
        and Administrative Support* —General
        and administrative expense was $965,866 for the three months ended September
        30,
        2006 and $188,563 for the three months ended September 30, 2005, an increase
        of
        $777,303. General and administrative expenses consist primarily of personnel
        costs, corporate overhead, travel and professional fees. Additionally general
        and administrative expenses includes share-based compensation expense of
        $34,736
        for the three months ended September 30, 2006, which related to stock option
        grants to employees and directors.
  During
        the three months ended September 30, 2005 we had limited operations however
        we
        began hiring our officers, began recruiting key operating and customer service
        positions, and continued planning the development of our systems and
        infrastructure needs. We did not incur any expenses for leased space prior
        to
        October 2005.
  *Interest
        and Bank Charges, net* —Interest
        and bank charges were $17,569 for the three months ended September 30, 2006
        and $35,721 for the three months ended September 30, 2005, a decrease of
        $18,152. The decrease is due to no longer incurring interest expense on debt
        which was outstanding until our IPO. Interest expense of $17,569 during the
        three months ended September 30, 2006 consists primarily of banking fees.
        Interest income of $90,473 during the three months ended September 30, 2006
        relates to income earned on cash deposits maintained at financial
        institutions.
  *Amortization
        of Debt Discounts and Issuance Costs* —-Amortization
        of debt discounts and debt issuance costs relate to debt discounts and issuance
        costs associated with our convertible notes which were issued in 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 and 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 $77,709
        for the
        three months ended September 30, 2006 and 2005, respectively.
  *Net
        loss* —
Net
        loss was $1,629,031 ($0.25 per share) and $418,696 ($0.21 per share) for
        the
        three months ended September 30, 2006 and 2005, an increase in loss of
        $1,210,335.
  16
 **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 proceeds from
        the
        IPO totaled approximately $19.1 million. We incurred approximately $2.5 million
        in underwriting and other expenses in connection with the IPO, resulting
        in net
        proceeds of approximately $16.6 million. We will utilize the net proceeds
        of the
        IPO to continue and expand commercial distribution of our phone/service bundles,
        develop and enhance product and service features and expand our contract
        manufacturing, sales and marketing capabilities and to generally fund our
        operations.
  At
        September 30, 2006, our working capital was $13,426,376 compared to working
        capital of $15,062,582 at June 30, 2006. Cash and cash equivalents was
        $6,223,206 at September 30, 2006 compared to $12,372,765 at June 30, 2006.
        The
        principal components of working capital at September 30, 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 cash used to purchase
        inventory and for our operations. Our customers are primarily large, United
        States based retail companies and, as a result, we seldom experience issues
        with
        the reliability or timing of customer receipts. However, vendors’ payment terms
        vary and are tightly managed to minimize the working capital gap between
        receivable and payables.
  ***Operating
        Cash Flows***
  During
        the three months ended September 30, 2006, we utilized cash from our operating
        activities of $6,091,350, compared to $424,954 used in operating activities
        during the three months ended September 30, 2005.
  Net
        cash
        used in operating activities during the three months ended September 30,
        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
        low since our inception. Cash flows from operations during the three months
        ended September 30, 2005 related primarily to the commencement of our commercial
        operations and initial purchases of inventory.
  *Accounts
        Receivable*
  During
        the three months ended September 30, 2006, we generated sales of our phone
        products, which resulted in an increase in accounts receivable in the amount
        of
        $3,328,995 from June 30, 2006, and a corresponding negative operating cash
        flow
        impact for the three months.
  *Prepaid
        and other assets*
  During
        the three months ended September 30, 2006 we made payments to suppliers and
        vendors in advance of services being rendered. At September 30, 2006 the
        increase in prepaid expenses from June 30, 2006 had a negative operating
        cash
        flow impact of $(2,964,952).
  *Inventory*
  During
        the three months ended September 30, 2006 we built up our inventory in order
        to
        be able to fulfill customer purchase orders in our second quarter. At September
        30, 2006 the increase in inventory had a negative operating cash flow impact
        of
        $(1,149,906).
  17
 *Accounts
        Payable and Accrued Expenses*
  The
        increase in our accounts payable and accrued expenses during the three months
        ended September 30, 2006 from June 30, 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. Our increase in accounts
        payable and accrued expenses had a positive operating cash flow impact of
        $2,940,500.
  ***Cash
        Flows from Investing Activities.***
  During
        the three months ended September 30, 2006, cash used in investing activities
        was
        $48,209, compared to $0 used in investing activities during the three months
        ended September 30, 2005.
  Since
        our
        suppliers manufacture our phone products and we pay suppliers for warehouse
        space, we typically have very low levels of capital expenditures. Our capital
        expenditures have been low since our inception. We do not anticipate any
        material increases in capital expenditure and do not currently have any plans
        or
        proposed projects which would require any additional significant capital
        expenditure. Our capital expenditures are predominantly related to office
        fixtures and furnishings, computer equipment, software and software development.
        There are no known timing elements where our capital expenditure would be
        materially significant or differ from other periods. Capital expenditure
        during
        the three months ended September 30, 2006 were $48,209 and due primarily
        to the
        development of software to be used internally in our operations.
  ***Cash
        Flows from Financing Activities.***
  During
        the three months ended September 30, 2006, cash provided by financing activities
        was $0, compared to $1,708,192 provided by financing activities during the
        three
        months ended September 30, 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
        require 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. We believe that the proceeds of our prior private placements
        and
        the IPO, together with certain minimum levels of anticipated revenues and
        accounts receivable financing that we believe will be available to us, will
        be
        sufficient to fund our capital requirements for the remainder of fiscal 2007.
        However, in light of the competitive nature of the telecommunications industry
        and the evolution of new phones and services from time to time, any estimate
        as
        to our liquidity and overall financial condition may change over time. Some
        factors that could affect our liquidity and overall financial condition are
        the
        timing of our introduction of our phone/service bundles, customer acceptance
        and
        usage of our phone/service bundles and competition from existing service
        providers and other telecommunications companies. To the extent that
        circumstances evolve in an unfavorable manner, we may generate lower revenues
        then we currently anticipate and, as a result, we would experience reduced
        cash
        flow and our ability to obtain sufficient accounts receivable financing would
        be
        hampered. Accordingly in such event, we may be required to complete additional
        equity and/or debt financing. In that regard, we are currently exploring
        financing alternatives of which we believe at least one will be available
        to us
        should we require capital in order to continue with our growth plans. However,
        there is no assurance that we would be able to secure such additional financing
        or that such financing will be on satisfactory terms to us or that the price
        of
        our common stock will be at a price level to permit us to call our warrants,
        in
        which case we would be forced to curtail operations.
  18
 **ITEM
                3**
              **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 September 30, 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 September 30, 2006 that has materially
        affected, or is reasonably likely to materially affect, our internal control
        over financial reporting.
  19
 **PART
        II**
  **ITEM
                1**
              **LEGAL
                  PROCEEDINGS**
  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 September 30, 2006, we have primarily used
        the
        net proceeds from the offering as follows:
  **Purpose**
              
              **Use
                  of Proceeds through September 30, 2006**Contract
                  manufacturing of phones and related components
              
              $7,500,000Sales
                  and marketing, including salaries of personnel
              
              2,300,000Product
                  enhancement and new product development
              
              400,000Purchase
                  and/or lease of office equipment
              
              200,000Working
                  capital and general corporate purposes
              
              3,000,000
  **ITEM
                3**
              **DEFAULTS
                  UPON SENIOR SECURITIES**
  Not
        Applicable
  **ITEM
                4**
              **SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY
                  HOLDERS**
  Not
        Applicable
  **ITEM
                5**
              **OTHER
                  INFORMATION**
  Not
        Applicable
  20
 **ITEM
                6**
              **EXHIBITS******
  Exhibit
                  Number
              Description31.1
              Rule
                  13a-14(a) Certifications32.1
              Section
                  1350 Certifications
 **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: November
                10, 2006
              By:
              /s/ Bruce
                Hahn**Bruce
                  Hahn**
                Chief
                      Executive Officer
 By:
                /s/ Bruce
                  Layman**Bruce
                      Layman**
                    Chief
                      Operating Officer and Chief Financial Officer
  21