10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended December 31, 2006

Commission File Number: 1-32736

American Telecom Services, Inc.

(Exact name of Registrant as specified in its charter)

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

2466 Peck Road

City of Industry, California 90601

(Address of Principal Executive Offices)

(562) 908-1287

(Registrant’s telephone number, including area code) 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes xNo 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 oNo x

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

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

AMERICAN TELECOM SERVICES, INC.

FORM 10-Q

FOR THE PERIOD ENDED DECEMBER 31, 2006

TABLE OF CONTENTS

PART I
ITEM 1	FINANCIAL STATEMENTS	1
	CONDENSED CONSOLIDATED BALANCE SHEETS	1
	CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)	2
	CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)	3
	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS	4
	NOTES TO UNAUDITED CONDENSED CONSOLIDATED CONSOLIDATED FINANCIAL STATEMENTS	5
ITEM 2	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	17
ITEM 3	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	22
ITEM 4	CONTROLS AND PROCEDURES	22
PART II
ITEM 1	LEGAL PROCEEDINGS	23
ITEM 1A.	RISK FACTORS	23
ITEM 2	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	23
ITEM 3	DEFAULTS UPON SENIOR SECURITIES	23
ITEM 4	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	23
ITEM 5	OTHER INFORMATION	24
ITEM 6	EXHIBITS	24

You should carefully review the information contained in this Quarterly Report and in other reports or documents that we file from time to time with the Securities and Exchange Commission (the “SEC”). In this Quarterly Report, we state our beliefs of future events and of our future financial performance. In some cases, you can identify those so-called “forward-looking statements” by words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of those words and other comparable words. You should be aware that those statements are only our predictions. Actual events or results may differ materially. Factors that could cause actual results to differ from those contained in the forward-looking statements include: we only recently commenced our commercial operations; the agreements with the strategic partners that provide the communications services accessible through our phones require us to meet certain minimum requirements, which, if not met, could lead to our loss of certain material rights; if we are unable to effectively manage the transition from development stage to commercial operations, our financial results will be negatively affected; our failure to quickly and positively distinguish our phone/service bundles from other available communications solutions could limit the adoption curve associated with their market acceptance and negatively affect our operations; and the other risks and uncertainties discussed in our annual report on Form 10-K for the fiscal year ended June 30, 2006 and other reports or documents that we file from time to time with the SEC. Statements included in this Quarterly Report are based upon information known to us as of the date that this Quarterly Report is filed with the SEC, and we assume no obligation to update or alter our forward-looking statements made in this Quarterly Report, whether as a result of new information, future events or otherwise, except as otherwise required by applicable federal securities laws.

PART I

ITEM 1 FINANCIAL STATEMENTS

AMERICAN TELECOM SERVICES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	December 31, 2006 (Unaudited)			June 30, 2006
ASSETS
Current assets:
Cash and cash equivalents	$	1,429,043		$	12,372,765
Accounts receivable, net		7,827,498			1,060,968
Prepaid expenses and other		859,056			808,523
Inventory, net		4,212,488			2,181,019
Total current assets		14,328,085			16,423,275
Property and equipment, net		275,124			174,880
Deposit and other assets		80,587			75,391
Total assets	$	14,683,796		$	16,673,546
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,800,314		$	372,916
Accrued expenses		2,759,377			987,777
Total current liabilities		4,559,691			1,360,693
Commitments (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			6,503
Additional paid-in capital		21,440,874			21,239,702
Accumulated deficit		(11,323,272	)		(5,933,352	)
Total stockholders’ equity		10,124,105			15,312,853
Total liabilities and stockholders’ equity	$	14,683,796		$	16,673,546

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

1

AMERICAN TELECOM SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

	For the three months ended December 31 2006			For the three months ended December 31 2005			For the six months ended December 31 2006			For the six months ended December 31 2005
Gross Revenues	$	9,915,159		$	317,869		$	14,443,412		$	317,869
Promotional rebates		(1,936,042	)		(9,429	)		(2,418,905	)		(9,429	)
Returns and allowances		(605,196	)		(9,500	)		(867,429	)		(9,500	)
Net Revenues		7,373,921			298,940			11,157,078			298,940
Costs of sales		6,833,334			231,597			9,823,016			231,597
Gross profit		540,587			67,343			1,334,062			67,343
Operating Expenses:
Selling, marketing and development		2,907,674			339,887			3,946,019			445,685
General and administrative		1,400,570			470,062			2,870,135			670,957
Total expenses		4,308,244			809,949			6,816,154			1,116,642
Operating loss		(3,767,657	)		(742,606	)		(5,482,092	)		(1,049,299	)
Other expenses (income):
Interest expense and bank charges		19,464			57,056			24,533			92,450
Interest income		(26,232	)		—			(116,705	)		—
Amortization of debt discounts and debt issuance costs		—			127,482			—			204,091
Loss before provision for income taxes		(3,760,889	)		(927,144	)		(5,389,920	)		(1,345,840	)
Provision for income taxes		—			—			—			—
Net loss	$	(3,760,889	)	$	(927,144	)	$	(5,389,920	)	$	(1,345,840	)
Net loss per common share:
Basic and diluted	$	(0.58	)	$	(0.46	)	$	(0.83	)	$	(0.67	)
Weighted average shares outstanding:
Basic and diluted		6,502,740			2,000,000			6,502,740			2,000,000

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

2

AMERICAN TELECOM SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)

	Common stock
	Shares		Amount		Additional paid-in capital		Accumulated deficit			Total stockholders' equity
Balance, July 1, 2006		6,502,740	$	6,503	$	21,239,702	$	(5,933,352	)	$	15,312,853
Stock-based compensation expense related to employee stock options (Notes 2 and 6)		—		—		132,299		—			132,299
Stock-based compensation expense related to non-employee stock options (Notes 2 and 6)		—		—		11,002		—			11,002
Reduction of IPO issuance cost		—		—		57,871		—			57,871
Net loss (unaudited)		—		—		—		(5,389,920	)		(5,389,920	)
Balance, December 31, 2006		6,502,740	$	6,503	$	21,440,874	$	(11,323,272	)	$	10,124,105

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

3

AMERICAN TELECOM SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	For the six months ended December 31, 2006			For the six months ended December 31, 2005
Cash flows from operating activities:
Net loss	$	(5,389,920	)	$	(1,345,840	)
Adjustment to reconcile net loss to net cash used in operating activities
Depreciation		38,130			517
Allowance for doubtful accounts		13,071
Common stock and capital contributed for services		57,871			2,080
Employee and non-employee share based compensation		143,301			—
Amortization of debt discounts and issuance costs		—			204,212
Changes in operating assets and liabilities:
Accounts receivable		(6,779,601	)		(113,258	)
Prepaid expenses and other		(50,533	)		(305,027	)
Inventory		(2,031,469	)		(141,773	)
Deposit and other assets		(5,196	)		(51,902	)
Accounts payable		1,427,398			526,116
Accrued expenses		1,771,600			213,412
Accrued interest payable		—			80,479
Deferred revenue		—			232,625
Net cash used in operating activities		(10,805,348	)		(698,359	)
Cash flows from investing activities:
Purchases of property and equipment		(138,374	)		(16,732	)
Net cash used in investing activities		(138,374	)		(16,732	)
Cash flows from financing activities:
Proceeds from senior convertible notes		—			2,113,500
Deferred financing costs		—			(83,771	)
Debt issuance costs					(531,120	)
Net cash provided by financing activities		—			1,498,609
Net (decrease) increase in cash and cash equivalents		(10,943,722	)		783,518
Cash and cash equivalents — beginning of period		12,372,765			50,780
Cash and cash equivalents — end of period	$	1,429,043		$	834,298
Supplementary disclosure of cash flow information:
Cash paid for income taxes	$	—		$	—
Cash paid for interest	$	—		$	—
Non-cash financing activities:
Capital contribution	$	—		$	2,080
Reduction of accrued offering cost	$	57,871		$	—
Deferred financing costs	$	—		$	624,167

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

4

AMERICAN TELECOM SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Description of the business

American Telecom Services, Inc. (the “Company”) was incorporated in the state of Delaware on June 16, 2003. The Company’s fiscal year ends on June 30.

The Company was formed to design, distribute and market product bundles that include multi-handset phones and low-cost, high value telecommunication services for sale through retail channels. The Company generates revenues through the sale of phones into the retail market and shares in a portion of revenues generated by communications service providers. 

2. Summary of Significant Accounting policies:

Interim reporting

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. However the Company believes that the disclosures are adequate to make the information presented not misleading. The condensed consolidated financial statements reflect all adjustments (consisting primarily of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the Company’s consolidated financial position and results of operations. The operating results for the three and six months ended December 31, 2006 and 2005 are not necessarily indicative of the results to be expected for any other interim period or any future year. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited June 30, 2006 financial statements, including the notes thereto, which are included in the Company’s Form 10K, filed on September 28, 2006.

Basis of Presentation of Consolidated Financial Statements and Use of Estimates

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary American Telecom Services, (Hong Kong) Limited. All significant intercompany transactions and balances have been eliminated. The preparation of the consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant accounting estimates to be made by management include or will include allowances for doubtful accounts, impairment of long-lived assets, the fair value of the Company’s common stock and warrants, estimated warranty reserves and other allowances, the allocation of proceeds from debt to equity instruments and expected volatility of common stock. Because of the uncertainty inherent in such estimates, actual results may differ from these estimates.

Revenue recognition

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

From time to time, the Company initiates programs to promote the sales of its phone products and to motivate phone product customers to activate carrier service with the Company’s service partners, which, in most cases, will generate ongoing revenues for the Company. The Company accounts for such programs in accordance with Emerging Issues Task Force Issue 01-09 (“EITF 01-09”). Accordingly, consideration given to a customer is characterized as a reduction of revenue when recognized in the Company’s income statement, unless certain conditions are met, in which case such consideration would be accounted for as selling expense. The Company recognizes expenditures associated with rebate program expenses as a reduction of revenues in the accompanying condensed consolidated financial statements. Certain reclassifications of these expenses have been made to prior periods for comparative purposes.

5

AMERICAN TELECOM SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Phone Products

The Company’s phone products are sold through Retail Partners to the end user customer. Revenues from sales of phones are recognized in the period when title and risk of loss are transferred to the Retail Partner in accordance with the terms of an agreement, provided all other revenue recognition criteria have been met. Retail Partners participate in various cooperative marketing and other programs, and the Company maintains estimated accruals and allowances for these programs once they commence and records related charges either as a reduction of revenue or an expense depending on the facts and circumstances.

The Company generally warrants its phone products against defects to customers for a period of up to one year. Factors that affect the Company's warranty liability include the number of units sold, historical and anticipated rates of warranty claims and cost per claim. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. As required, the Company accrues a provision for warranty reserves as a selling expense at the time of revenue recognition. During the three and six months ended December 31, 2006 the Company recorded a provision for warranty reserves of $49,394 and $94,507 respectively. As of December 31, 2006, the Company’s warranty liability reserve was $89,917 and is included in accrued expenses.

The Company accrues for sales returns and other allowances based on estimates. Each estimate are based on the Company’s historical experience, management’s consideration of comparable companies, the specific agreements with retail partners, and experience in the wholesale distribution industry. As required, the Company accrues a provision for estimated future costs and estimated returns as a reduction of revenue at the time of revenue recognition. During the three and six months ended December 31, 2006, the Company recorded provisions for sales returns allowances of $493,946 and $719,513 respectively. During the three and six months ended December 31, 2005 the Company recorded provisions for sales returns allowances totaling $9,500 and $9,500, respectively. As of December 31, 2006, the Company’s provision for sales returns was approximately $208,140, which is included in accrued expenses.

Carrier Agreements

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

Under the agreements with SunRocket, Inc. (“SunRocket”) and Lingo, Inc. (“Lingo”), the Company designs and configures its Internet phones to work with each carriers’ communications services. The carriers offers end-user purchasers of the Company’s Internet phones different service plans at set rates.

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

In connection with the agreements with the carriers, the Company is entitled to earn certain commissions from the carriers. For each services account activated with SunRocket by end-users of the Company’s Internet phones, the Company receives a pre-defined commission amount from SunRocket once the account remains active for a certain period of time. The Company is also entitled to receive ongoing monthly commissions from both SunRocket and

6

AMERICAN TELECOM SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

IDT equal to a percentage of the net service revenues received by the respective carrier from end-users of the Company’s phones. In addition, the Company receives certain retail marketing co-op fees and contributions for consumer rebates in certain circumstances from carriers. The Company’s obligations to end-users of the Company’s phones relate solely to the sales of the Company’s phones and the related warranties provided. Aside from marketing the carrier communication services with its phones, the Company has no obligations to the end-users related to the carrier communications services. Accordingly, commission revenues, based on a percentage of the monthly carrier net service revenue from the subscriber users of the Company’s phones, are recognized in the period the usage occurs and commission revenue resulting from service account activation by users of the Company’s phones and marketing co-op fees are recognized once the subscriber activates the phone on the carrier’s network and such account is active for the required period of time. During the three and six month periods ended December 31, 2006, the company recorded $2,568 and $4,147 respectively, of such commission revenue. During the three and six month periods ended December 31, 2005, no such commission revenue was recognized.

The Company offers some Retail Partners a percentage of the service revenue commissions it earns from carriers of communications service providers and a percentage of the subscriber activation fees the Company will receive from SunRocket and Lingo in connection with the purchase of communications services by end-users of the Company’s Internet phones. Such fees are recorded as sales and marketing expenses. During the three and six months ended December 31, 2006, nominal commission revenue was recognized.

Allowance for doubtful accounts

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

Share-Based Compensation

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

The Company adopted SFAS 123(R) prospectively as no share-based compensation awards were granted prior to February 2006. Share-based compensation expense for employees recognized under SFAS 123(R) for three and six months ended December 31, 2006 was $35,464 and $132,299 respectively, which consisted of share-based compensation expense related to stock option grants to employees and directors and is included in general and administrative expense on the accompanying condensed consolidated statements of operations. See Note 6 for additional information.

SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s condensed consolidated statement of operations.

7

AMERICAN TELECOM SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Stock-based compensation expense recognized in the Company’s condensed consolidated statements of operations for the three and six months ended December 31, 2006 included compensation expense for share-based payment awards based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). The Company follows the straight-line single option method of attributing the value of stock-based compensation to expense. As stock-based compensation expense recognized in the condensed consolidated statement of operations for the three and six months ended December 31, 2006 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

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

No share-based compensation awards were granted during the three and six months ended December 31, 2005.

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

The Company has followed the guidance outlined in FASB Interpretations (“FIN”) No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans (“FIN 28”) as it relates to computing expense when appreciation rights vest over time. Share-based compensation for non-employees during the three and six months ended December 31, 2006 resulted in expense of $11,730 and $11,002 respectively, due to the increase in the Company’s stock price and is included in general and administrative expense on the accompanying condensed consolidated statements of operations.

Cash and Cash Equivalents

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

Fair value of financial instruments

The fair value of the Company’s assets and liabilities that qualify as financial instruments under Statement of Financial Accounting Standards (“SFAS”) No. 107 approximate their carrying amounts presented in the condensed consolidated balance sheets at December 31, 2006 and June 30, 2006.

Inventory and Shipping

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

8

AMERICAN TELECOM SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2006, $644,207 of advances to manufacturers of the Company’s phone products is included in prepaid expenses and other on the accompany condensed consolidated balance sheet related to payments made or accrued for inventory purchases for which the Company had an obligation to make payment but had not yet taken title to such inventory as of December 31, 2006.

The Company includes the expense of shipping and handling on products to customers in selling, marketing and development on the condensed consolidated statements of operations. During the three months ended December 31, 2006 and 2005 the Company incurred approximately $740,300 and $71,000 respectively of shipping costs to customers. During the six months ended December 31, 2006 and 2005 the Company incurred approximately $1,063,500 and $71,100 respectively of shipping costs to customers. Included in revenue for the three months ended December 31, 2006 and 2005 approximately $33,670 and $500 respectively, of fees earned from customers related to reimbursements of shipping costs. Included in revenue for the six months ended December 31, 2006 and 2005 approximately $49,000 and $500 respectively, of fees earned from customers related to reimbursements of shipping costs.

Internal Use Software

The Company has adopted statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. This statement requires that certain costs incurred in purchasing or developing software for internal use be capitalized as internal use software development costs and included in fixed assets. Amortization of the software will begin when the software is ready for its intended use. During the six months ended December 31, 2006 the company capitalized $23,200 of costs related to developing internal use software. Substantially all of these capitalized costs were recognized as expenses in the three month period ending December 31, 2006 as these projects were completed and deployed in that period.

Concentrations

Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents and accounts receivable. The Company reduces credit risk by placing its cash and cash equivalents with major financial institutions with high credit ratings. At times, such amounts may exceed federally insured limits. The Company reduces credit risk related to accounts receivable by routinely assessing the financial strength of its customers and maintaining an appropriate allowance for doubtful accounts.

The Company's products have been provided primarily to a limited number of clients located in the United States. The Company had phone product revenues from two (2) customers representing approximately 90% (50% and 40%, respectively) of the $9.3 million in net phone product revenues (excluding promotional rebates expenses) during the three months ended December 31, 2006. The Company had phone product revenues from two (2) customers representing approximately 90% (54% and 36%, respectively) of the $13.6 million in net phone product revenues (excluding promotional rebates expenses) during the six months ended December 31, 2006.

Additionally, the Company is subject to a concentration of credit risk with respect to its accounts receivable. The Company had two (2) customers represent 95% (47% and 48%, respectively) of total gross accounts receivable as of December 31, 2006. The Company had three (3) customers accounting for 95% (58%, 19% and 18%, respectively) of gross accounts receivable as of June 30, 2006.

Net loss per share

Basic loss per share includes no dilution and is computed by dividing loss available to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per share reflect, in periods with

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AMERICAN TELECOM SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

earnings and in which they have a dilutive effect, includes the effect of common shares issuable upon exercise of stock options and warrants. Diluted loss per share for the three months ended December 31, 2006 and 2005 exclude potentially issuable common shares of 5,623,167 and 2,196,834, respectively, primarily related to the Company's outstanding stock options, warrants and convertible debt, because the assumed issuance of such potential common shares is antidilutive.

Recent accounting pronouncements

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No.48, Accounting For Uncertainty in Income Taxes (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS Statement No. 109, Accounting For Income Taxes and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 will be effective for the Company beginning July 1, 2007. The Company will evaluate the effect FIN 48 will have on its financial statements and related disclosures.

In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements (“SFAS No. 157”), which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. SFAS No. 157 applies to other accounting pronouncements that require or permit fair value measurements. The new guidance is effective for financial statements issued for fiscal years beginning after November 15, 2007, and for interim periods within those fiscal years. The Company will evaluate the potential impact, if any, of the adoption of SFAS No. 157 on its consolidated financial position, results of operations and cash flows.

Management does not believe that any other recently issued, but not yet effected, accounting standards if currently adopted would have a material effect on the Company’s consolidated financial statements.

3. Stockholders’ Equity:

Initial Public Offering

On February 6, 2006, the Company consummated an initial public offering (the “Offering”) comprised of 3,350,000 shares of common stock and 3,350,000 Redeemable Warrants to purchase shares of common stock. Additionally, in March 2006, the Company issued an additional 402,500 shares of Common Stock and 502,500 Redeemable Warrants upon the exercise of the over-allotment option by the underwriters.

The Common Stock was sold at an offering price of $5.05 per share and the Redeemable Warrants were sold at an offering price of $0.05 per warrant, generating gross proceeds $19,142,750 to the Company. The Company incurred $1,762,695 in underwriting discounts and expense allowances and $756,022 of other expenses in connection with the Offering, resulting in net proceeds of $16,624,033.

We realized a reduction of deferred IPO related costs of $57,871 in three month period ending December 31, 2006. The reduction was recognized as in increase to additional paid in capital in the period. The nature of this reduction was the settlement of printing related costs for documents produced in our offering.

Purchase Option

Upon closing of the Offering, the Company sold and issued an option (“UPO”) for $100 to HCFP/Brenner Securities LLC (“HCFP”), the representative of the underwriters in the Offering, to purchase up to 335,000 shares of the Company’s common stock and/or up to 335,000 Redeemable Warrants at an exercise price of $6.3125 per share of common stock and $0.0625 per Redeemable Warrant. The UPO is exercisable in whole or in part, solely at

10

AMERICAN TELECOM SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

HCFP’s discretion, during the five-year period commencing on the date of the Offering. The Company accounted for the fair value of the UPO, inclusive of the receipt of the $100 cash payment, as an expense of the public offering resulting in a charge directly to stockholder’s equity with a corresponding increase in paid-in capital. The UPO may be exercised for cash or on a “cashless” basis, at the holder’s option, such that the holder may use the appreciated value of the UPO (the difference between the exercise prices of the UPO and the underlying warrants and the market price of the units and underlying securities) to exercise the UPO without the payment of any cash. Although the UPO and its underlying securities were registered under the registration statement related the Offering, the option grants to holders demand and “piggy back” rights with respect to the registration under the Securities Act of the securities directly and indirectly issuable upon exercise of the UPO. The Company is only required to use its best efforts to cause the registration statement for the Units and securities underlying the UPO to be come effective and once effective to use its best efforts to maintain the effectiveness of such registration statement. The Company has no obligation to net cash settle the exercise of the UPO or the securities underlying the UPO.

Redeemable Warrants

In connection with the Offering in February 2006, the Company sold 3,852,500 redeemable warrants to purchase shares of the Company’s common stock (the “Redeemable Warrants”). In addition, upon consummation of the Offering, 1,475,667 of warrants previously issued in connection with debt were automatically exchanged into a like number of Redeemable Warrants. The Company’s Redeemable Warrants entitle the holder to purchase one share of the Company’s common stock at a price of $5.05 per share, at any time commencing on the date of the Offering and expiring on January 31, 2011. As of December 31, 2006, 5,328,167 Redeemable Warrants were outstanding.

The Company may call the Redeemable Warrants, with HCFP’s prior consent, for redemption at a price of $0.05 per warrant upon a minimum of 30 days’ prior written notice of redemption if and only if, the Company then has an effective registration statement covering the shares issuable upon exercise of the Redeemable Warrants. However the Company may not initiate its call right unless the last sales price per share of the Company’s common stock equals or exceeds 190% (currently $9.60) during the first three months after the consummation of the Offering, or 150% (currently $7.58) thereafter, of the then effective exercise price of the Redeemable Warrants for all 15 of the trading days ending within three business days before the Company sends the notice of redemption.

The Redeemable Warrants may be exercised on or prior to the expiration date by payment of the exercise price in cash for the number of Redeemable Warrants being exercised. The Redeemable Warrants will not be exercisable unless at the time of exercise a prospectus relating to common stock issuable upon exercise of the Redeemable Warrants is current and the common stock has been registered or qualified or deemed to be exempt under the applicable securities laws. The Company has agreed to use its best efforts to maintain a current prospectus relating to common stock issuable upon exercise of the Redeemable Warrants until the expiration of the Redeemable Warrants. The Company will not be obligated to deliver registered securities, and there are no contractual penalties for failure to deliver such securities, if a registration statement is not effective at the time of exercise. However, upon exercise of the Redeemable Warrants, the Company may satisfy the obligation to issue shares in unregistered stock and then continue to use its best efforts to register the shares of stock issued. In no event (whether in the case of a registration statement not being effective or otherwise) will the Company be required to net cash settle a Redeemable Warrant exercise. Holders of Redeemable Warrants do not have the rights or privileges of holders of the Company’s common stock or any voting rights until such holders exercise their respective warrants and receive shares of the Company’s common stock.

4. Related party transactions:

Marketing

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AMERICAN TELECOM SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Certain marketing services are being provided to the Company by Future Marketing whose sole stockholder is also the sole stockholder of The Future, LLC, which owns approximately 5.5% of the Company’s stock subsequent to the Offering. Future Marketing, among other things, assists in the development and execution of the Company’s marketing plans, manages the accounts, assists in product development and handles back-office vendor functions. The Company recognized $102,979 and $46,200 of expenses during the three months ended December 31, 2006 and 2005 respectively, and $148,451 and $87,300 during the six months ended December 31, 2006 and 2005 respectively, pursuant to this arrangement which are included in selling, marketing and development expense on the accompanying condensed consolidated statement of operations.

Carrier Relations

The Company has entered into a five-year agreement with David Feuerstein (a principal stockholder of the Company) pursuant to which, in consideration for helping to establish its service provider relationship with IDT and, going forward, maintaining and expanding its relationship with each of IDT and SunRocket, the Company will pay Mr. Feuerstein one quarter of one percent of all net revenues, as defined, collected by the Company during each year of the term of the agreement directly attributable to the sale of (i) digital cordless multi-handset phone systems, (ii) multi-handset Internet telephones and (iii) related telephone hardware components ((i), (ii) and (iii), collectively, “Hardware”), subject to a maximum aggregate amount of $250,000 for each year. The Company recognized approximately $7,660 and $25,062 of expenses during the three month and six month period ended December 31, 2006. No expenses pursuant to this arrangement were recognized in the three and six month period ended December 31, 2005. These expenses are included in selling, marketing and development expense on the accompanying condensed consolidated statement of operations.

The Company will also pay to Mr. Feuerstein five percent of all net revenues, as defined, collected by the Company from IDT during each year of the term of and directly attributable to the Company’s service agreement dated as of November 25, 2003 with IDT (the “IDT Agreement”), subject to a maximum aggregate amount of $250,000 for each year. The Company recognized a nominal amount of expenses during the three and six month periods ending December 31, 2006 and no such expenses in the three and six month periods ending December 31, 2005. These expenses are included in selling, marketing and development expense on the accompanying condensed consolidated statement of operations.

The Company will also pay to Mr. Feuerstein two percent of all net revenues, as defined, collected by the Company from SunRocket during each year of the term of and directly attributable to the Company’s June 7, 2005 service agreement with SunRocket, subject to a maximum aggregate amount of $250,000 for each year; provided, however, that any revenues attributable under the SunRocket agreement from the provision of Internet-based communications services relating to “subscriber bounty,” “advertising co-op” and “key-city funds” are excluded in any computation of such net revenues. The agreement may be extended for an additional five-year term if the Company is profitable for three of the first five years of the initial term. If so extended, Mr. Feuerstein will be entitled to a reduced revenue sharing allocation. The agreement also provides for certain revenue sharing allocation reductions if certain conditions are not satisfied during the initial term. The Company recognized a nominal amount of expenses during the three and six month periods ending December 31, 2006 and no such expenses in the three and six month periods ending December 31, 2005. These expenses are included in selling, marketing and development expense on the accompanying condensed consolidated statement of operations.

5. Commitments:

Guarantee to supplier

The Company entered into an agreement with CIT Commercial Services (“CIT”) in July 2005 to facilitate the purchase of inventory. Under this agreement, CIT approves purchase orders from the Company’s customers and then indirectly guarantees payment by the Company to the manufacturer and supplier of the Company’s phone

12

AMERICAN TELECOM SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

products. In connection with such services the Company pays CIT a fee of 1.25% on the gross face amount of customer purchase order amount guaranteed. If the actual fees during a quarter are less than $12,500, CIT will charge the Company’s account for the difference. The agreement with CIT can be terminated by CIT or the Company by providing 60 days notice prior to the anniversary date. This agreement was terminated in August of 2006 and no such fees have been assessed subsequent to the termination. Accordingly, the Company recognized a credit to expense of $13,690 and $1,190 during the three and six months ended December 31, 2006, respectively, all of which is included in interest and bank charges on the accompanying statements of operations. The credit to expense was related to the refunding of certain reserves associated with the termination of the agreement. The Company recognized $16,030 of expense during the three and six months ended December 31, 2005 pursuant to this arrangement of which $6,648 is included in selling, marketing and development expense and $9,382 is included in interest and bank charges on the accompanying statements of operations.

On January 18, 2007, we announced that we had secured an open ended asset-based financing facility from CIT Commercial Services, a division of CIT Group. This is an accounts receivable based financing arrangement with a 3 year term. In connection with this arrangement, the Company pays CIT a factoring commission of not less than $25,000 per quarter. Interest on the borrowings associated with this facility is tiered based on the amount of sales factored in a period and is based on prime plus a margin.

Employment Agreements

Prior to the Offering employees were employed at will by the Company and were compensated on a monthly basis. Subsequent to the Offering certain members of management have entered into employment agreements with the Company. Each of the employment agreements an initial term through December 31, 2007 and provide for certain base salaries. In addition such individuals are entitled to bonuses based on the Company’s net sales (defined as the Company’s revenues collected during a period less allowances granted to retailers, markdowns, discounts, commissions, reserves for service outages, customer hold backs and expenses). Such bonuses are limited to an amount no greater than 75% of the recipient’s then current base annual salary. Such individuals are also entitled to bonuses based on net profits (defined as net income, after taxes, as determined in accordance with GAAP):

The employment agreements further provide for certain limits (as a percentage of base salary) on the aggregate bonuses from net sales and net profits for any bonus period. The company accrued $250,555 for such bonus expense in the three and six month periods ended December 31, 2006.

Other

Pursuant to an agreement between the Company and UTAM, Inc. (“UTAM”) related to Federal Communications Commission equipment authorization for certain of the Company’s phone products, the Company is obligated to make certain payment to UTAM based on the quantity of parts meeting certain criteria shipped by the Company to its retail partners. The Company recognized $79,529 and $127,309 of expense during the three month and six month periods ended December 31, 2006. The company recognized no such expenses in the three and six month periods ended December 31, 2005.

13

AMERICAN TELECOM SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

6. Stock Based Compensation Plan:

The Company adopted the 2005 stock option plan (the “Plan”) in October 2005. In addition to stock options, the Company may also grant performance accelerated restricted stock (“PARS”) under the Plan. The maximum number of shares issuable over the term of the Plan is limited to 600,000 shares.

The Plan permits the granting of stock options to employees (including employee directors and officers) and consultants of the Company, and non-employee directors of the Company. Options granted under the Plan have an exercise price of at least 100% of the fair market value of the underlying stock on the grant date and expire no later than five years from the grant date. The options generally become exercisable for 50% of the option shares one year from the date of grant and then 50% over the following 12 months. The Compensation Committee of the Board of Directors has the discretion to use a different vesting schedule.

Due to the Company’s limited history as a public company, the Company has estimated expected volatility based on the historical volatility of certain comparable companies as determined by management. The risk-free interest rate assumption is based upon observed interest rate appropriate for the term of the Company’s employee stock options. The dividend yield assumption is based on the Company’s intent not to issue a dividend under its dividend policy. The expected holding period assumption was estimated based on management’s estimate.

Stock-based compensation expense recognized in the condensed consolidated statement of operations for the three and six months ended December 31, 2006 is based on awards ultimately expected to vest, it had been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based management’s estimate.

The fair value of each stock option grant to employees is estimated on the date of grant. The fair value of each stock option grant to non-employees is estimated on the applicable performance commitment date, performance completion date, or interim financial reporting date. No options were granted during the three and six months ended December 31, 2006.

During the six months ended December 31, 2006 85,000 options were granted to employees or non-employees. The following table summarizes information concerning options outstanding as of June 30, 2006 and for the six months ended December 31, 2006:

	Shares		Weighted Average Exercise Price		Weighted Average Fair Value
Options Outstanding as of June 30, 2006		240,000	$	4.79	$	2.11
Granted		85,000		4.84		0.94
Exercised		—		—		—
Forfeited and Expired		—		—		—
Options Outstanding, December 30, 2006		325,000	$	4.39	$	1.79
Exercisable, December 31, 2006		130,000	$	3.97	$	1.94

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

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AMERICAN TELECOM SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

	Stock Options Outstanding								Stock Options Exercisable
			Weighted Average		Weighted						Weighted Average		Weighted
			Remaining		Average		Aggregate				Remaining		Average		Aggregate
			Contractual		Exercise		Intrinsic				Contractual		Exercise		Intrinsic
Exercise Prices	Shares		Life (Years)		Price		Value		Shares		Life (Years)		Price		Value
$5.05		195,000		4.10	$	5.05	$	—		45,000		4.35	$	5.05	$	—
$3.35 - $3.95		105,000		4.67	$	3.54	$	—		65,000		4.58	$	3.95	$	—
$2.25 - $2.80		25,000		4.72	$	2.69	$	15,750		20,000		4.75	$	2.80	$	10,400
Total		325,000					$	15,750		130,000					$	10,400

There were 20,000 in-the-money options exercisable on December 31, 2006.

During the three and six months ended December 31, 2006, the Company recognized compensation expense of $96,835 and $132,299, respectively as a result of the continued vesting of options previously issued to employees which is included in general and administrative expense on the accompanying condensed consolidated statement of operations.

As of December 31, 2006, the unvested portion of share-based compensation expense attributable to employees and directors stock options and the period in which such expense is expected vest and be recognized is as follows:

Year ending June 30, 2007	$	86,928
Year ending June 30, 2008		119,882
Year ending June 30, 2009		13,558
	$	220,368

Performance Accelerated Restricted Stock (“PARS”)

PARS vest upon the achievement of certain targets, and are payable in shares of the Company’s common stock upon vesting. Upon consummation of the Offering, certain officers and directors and a consultant received PARS under the Plan. Of the total PARS granted to each executive officer or director and consultant, 25% will vest only if net sales equal or exceed $20 million during fiscal 2006 and another 25% will vest only if net profits equal or exceed $1 million during fiscal 2006. An additional 25% will vest only if net sales equal or exceed $50 million in fiscal 2007 and the final 25% will vest only if net profits equal or exceed $5 million during fiscal 2007. If the performance conditions are not met in the first year, no PARS will vest in such year. If the performance conditions are not met in the second year but cumulative amounts are achieved by the second year representing 80% or more of the cumulative target amounts for both years for a respective condition, then a percentage of the unvested PARS for both years will nevertheless vest in the second year in respect of such condition. In such event, the percentage of unvested PARS that will vest in the second year in respect of a particular performance condition will equal the percentage that such aggregate amount achieved in the first and second years represents of the aggregate amount required to be met by the respective condition for both years. The fair value is based on the market price of the Company’s stock on the grant-date and assumes that the target payout level will be achieved. Compensation cost will be adjusted for subsequent changes in the expected outcome of performance-related conditions until the vesting date. The Company will record stock based compensation expense equal to the fair value of the PARS once the likelihood of achievement of the performance targets becomes probable. As of December 31, 2006, 325,000 PARS awards are outstanding and none have vested as of December 31, 2006.

15

AMERICAN TELECOM SERVICES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

6. Subsequent Events:

On January 30, 2007, the Company sold (i) 5,000 shares of its 8% Series A Cumulative Convertible Preferred Stock (“Preferred Stock”) and (ii) warrants to purchase an aggregate of 1,176,471 shares of its common stock (the “Warrants”) for an aggregate purchase price of $12.5 million to certain investors, including $325,000 from certain of the Company’s directors. Each share of Preferred Stock is convertible at the holder’s option at a rate of 588.2353 shares of the Company’s common stock per share of Preferred Stock, or an aggregate of 2,941,176 shares of common stock, which is equivalent to an initial conversion price of $4.25 per share. The Warrants are exercisable at an exercise price of $4.25 per share and expire on January 30, 2012.

In connection with the sale of the Preferred Stock and Warrants, the Company has agreed to use its best efforts to file a resale registration statement with the SEC covering the shares issuable upon conversion the Preferred Stock and upon exercise of the Warrants and to use its best efforts to cause such registration statement to become effective and once effective to continue to use its best efforts to maintain effectiveness.

The Company paid the placement agent for this private offering $689,925 for its services and $30,000 for its costs. In addition the Company issued Warrants to the placement agent to purchase 196,847 shares of the Company’s common stock containing the same terms and conditions as those issued to the participants in the private offering.

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

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

OVERVIEW

We were incorporated in Delaware in June 2003. Our primary business is the marketing and sale of our custom-designed digital cordless multi-handset phones bundled with Internet phone communications (Voice-over-Internet-Protocol or “VoIP”) services and/or prepaid long distance services. We sell our communications phone/service bundles under our “American Telecom”, “ATS”, “Digital Clear”, and “Pay N’ Talk” brand names. Our telecom platform is designed to enable seamless access to the communications services provided by our strategic partners. We are marketing our phone/service bundles to the retail mass market and anticipate expanding through a diversified group of retail channels. The channels include office superstores, electronics stores, mass retailers, department stores and Internet-based retail distribution outlets. We also are targeting the U.S. residential and small office/home office (“SOHO”) markets through the office superstore contract divisions. Our strategic telecom service partners include IDT Corporation, SunRocket, Inc. and Lingo, Inc. IDT is an established communications carrier for our prepaid long distance product/service offerings. SunRocket and Lingo are established and growing service providers for our VoIP offerings. In addition to the revenues we generate through the sales of our phone hardware, we receive a percentage of the monthly service revenues generated by users of our product/service offerings with our strategic partners. As part of our agreements with our retail partners in our retail distribution channels, we will typically share with them a portion of our service revenues.

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

During the six months ended December 31, 2006 we continued production of our initial VoIP and prepaid residential long distance service phones and funded these initial manufacturing efforts from the proceeds of our initial public offering in February 2006 and from the net proceeds of our private placements of notes (the “Notes”) and private warrants conducted in September 2005. We received our initial purchase orders in September 2005 and shipments of our phones began arriving in retail stores in October 2005. Both our prepaid long distance and Internet phone/service bundles are available through our retail customers, catalogs, and online retail outlets.

RESULTS OF OPERATIONS

Three and six months ended December 31, 2006 and 2005

Revenues— In accordance with our revenue recognition policy which is outlined in the accompanying notes to unaudited condensed consolidated financial statements, we recognize expenses relating to rebate promotions as a reduction of revenues.

Gross revenue in the three month periods ending December 31, 2006 and 2005 was $9,915,159 and $317,869, respectively. Net revenue in the same periods was $7,373,921 and $298,940, respectively. In the three month periods ending December 31, 2006 and 2005, we recognized rebate promotion expenses of $1,936,042 and $9,429, respectively.

Gross revenue in the six month periods ending December 31, 2006 and 2005 was $14,443,412 and $317,869. Net revenue in the same periods was $11,157,708 and $298,940, respectively. In the six month periods ending December 31, 2006 and 2005, we recognized rebate promotion expenses of $2,418,905 and $9,429, respectively.

The growth in revenues over the prior periods reflects our increase in distribution compared to periods with limited commercial activity.

Our phone product revenues during the six months ended December 31, 2006 were earned from a limited amount of customers, with two (2) customers representing 90% of our phone product revenues during the period.

We did not generate any revenues through September 30, 2005. Since we only began generating significant revenues during the fourth fiscal quarter of our fiscal year ended June 30, 2006, our historical financial information is not necessarily indicative of our future financial performance.

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Cost of Revenues—Cost of sales was $6,833,334 for the three months ended December 31, 2006 and $231,597 for the three months ended December 31, 2005. Cost of sales was $9,823,015 for the six months ended December 31, 2006 and $231,597 for the six months ended December 31, 2005. Cost of sales consists primarily of cost of phone inventory sold, including landing charges.

Gross Margin—Gross margin during the three months ended December 31, 2006 was $540,587 or 7.3%. The gross margin is a result of our net revenues less the cost of the phones, including transportation costs to acquire the phones. Gross margin in the six month period ending December 31, 2006 was $1,334,062, or 12%. Our gross margins have been adversely impacted by two key factors. First is the limited availability of our custom built microchips. As our growth and diversity in sales has accelerated at a higher rate than our original product development timeline, we have had to substitute open market chips for our custom built chips at a higher rate than originally anticipated in order to satisfy the increased demand for our products. These substitute open market chips require additional costs to customize and program in the production process. This increased use of the open market chips resulted in a cost differential that represented a 2.1 percentage points reduction to our gross margin for the three month period ended December 31, 2006. We do not expect any significant recurrence of our need to purchase open market chips for normal production of developed phones for ongoing sales, although we do anticipate that from time to time we may require limited numbers of open market chips to help speed the development and launch of new products. We do not expect this to be a persistent issue on fully developed and launched products. Accordingly, we do expect the gross margin to improve as production of our custom microchips rises to meet demand and as the sales from units sold during this quarter contribute service revenues in future quarters. The second and most material, was the increase in rebate promotion related expenses. We are required to recognize these expenses as a reduction of sales. In the three month period ending December 31, 2006, these charges totaled $1,936,042, compared to $9,429 in the three month period ending December 31, 2005. We chose to participate in key rebate promotions at our retailers in order to take advantage of promotional programs during the holiday shopping season. We used these promotions to increase consumers’ awareness of our brand and product offering and to incentive those consumers who do purchase our phones to activate service, which we anticipate will drive ongoing service commission revenue for us. Our expenditures for rebate promotions increased from $9,429 in the three month period ending December 31, 2005 to $1,936,042 in the three month period ending December 31, 2006. In the six month period ending December 31, 2006, promotional expense relating to rebates was $2,418,905.

Management evaluates gross margin by excluding the charges for rebates from revenue. This is a non GAAP measurement, however, we believe it is an important metric in our analyses on the growth trends in the core business. Under this perspective, adjusted to remove these rebate charges, gross margins in the three month periods ending December 31, 2006 and 2005 would be 26.6% and 24.9%, respectively. For the six month periods ending December 31, 2006 and 2005, the adjusted gross margin would be 27.6% and 24.9%.

Selling, Marketing and Development—Selling, marketing and development expense was $2,907,674 for the three months ended December 31, 2006 and $339,887 for the three months ended December 31, 2005, an increase of $2,567,787. Selling, marketing and development expense was $3,946,019 for the six months ended December 31, 2006 and $445,685 for the six months ended December 31, 2005, an increase of $3,500,334. This increase is attributable to the increase in our selling and marketing efforts related to sales of our phone products and the development of an extensive line of new products and services compared to minimal sales activities during the three and six months ended December 31, 2005. Selling, marketing and development expenses are directly associated with the development of products, recurring service revenue, distribution to sales channels and stimulating subscriber growth. These costs consist primarily of commissions, co-op marketing, promotional minutes, package design costs, collateral design costs, shipping to customers, advertising and certain non-recurring expenses for new business development. In the six month period ended December 31, we introduced and shipped 11 new Pay ‘N Talk® phones, which include masters, extensions, and multi handset packaging sets and began shipping our VoIP product offering. On January 8, 2007, we announced the introduction of over 30 new phone models, for which the expenses of product development in Asia, product packaging and collateral development were mainly incurred in this quarter. Additionally, we expanded our distribution which grew from approximately 9,000 outlets at June 30, 2006 to approximately 12,000 outlets as of December 31, 2006.

During the three months ended December 31, 2006 and 2005, $740,296 and $70,959, respectively, related to freight is included in selling expense. Of the $740,296 incurred in the three month period ended December 31, 2006, $448,153 is related to the incremental cost of air freight incurred by us to meet the accelerated demand from our retailers for our products for promotional events in the holiday shopping season. We chose to incur these additional costs to take advantage of the seasonal promotional events at our retail partners and to prevent damaging our relationships with retail partners. We made this decision in order to increase the penetration of our product and expose a greater number of consumers to our service offering. During the six months ended December 31, 2006 and 2005 approximately $1,063,458 and $71,124 respectively represent the expense related to our incurrence of shipping charges.. Of the $1,063,458 incurred in the six months ended December, 31, 2006, $702,153 resulted from expedited air freight charges mainly to meet the increasing demand for our products and to take advantage of key promotional events.

In connection with our participation in the above-mentioned key marketing and promotional activities at our retail partners during the holiday season, we participated in cooperative advertising with our retail partners. This advertising was focused on increasing the consumer awareness of our brand and products as well as increasing the desire to purchase our phones and activate service with our service providers, which we anticipate will drive recurring service revenues for us. Accordingly, our expenditures in these areas increased substantially when compared to the expenditures in the comparitive periods in

18

the last fiscal year when our sales and promotional activity was limited. We did not have any cooperative advertising expenditures in the three and six month periods ending December 31, 2005. Our cooperative advertising expenditures in the three month period ending December 31, 2006 was $495,176 and $650,176 in the six month period ending December 31, 2006. Overall, these increases in promotional expenditures are related to the expansion in our distribution and the growth in our business over the prior periods.

On a non GAAP basis, including the costs of rebate promotions expenses, selling, marketing and development expense for the three month periods ended December 31, 2006 and 2005 were $4,843,712 and $349,312, respectively, and under the same basis for the six month periods ended December 31, 2006 and 2005 were $6,364,926 and $455,114, respectively.

General and Administrative — General and administrative expense was $1,400,570 for the three months ended December 31, 2006 and $470,062 for the three months ended December 31, 2005, an increase of $930,508. General and administrative expense was $2,870,135 for the six months ended December 31, 2006 and $670,957 for the six months ended December 31, 2005, an increase of $2,199,178. General and administrative expenses consist primarily of personnel costs, corporate overhead, travel and professional fees. The above increases reflect the growth in our operations to support increasing production, development and selling activities. General and administrative expenses also include share-based compensation expense of $34,736 and $143,301, respectively, for the three and six month periods ended December 31, 2006, respectively. No share based compensation awards were granted prior to our IPO in February 2006; therefore we recognized no share-based compensation expenses in the three and six month periods ending December 31, 2005.

Interest and Bank Charges, net—Interest and bank charges, net were an income of $6,768 for the three months ended December 31, 2006 compared to $57,056 of expense for the three months ended December 31, 2005, an increase in income of $63,824. The increase in income is due to no longer incurring interest expense on notes which were outstanding until the consummation of our IPO. Interest expense of $19,464 during the three months ended December 31, 2006 consists primarily of banking fees. Interest income of $26,232 during the three months ended December 31, 2006 relates to income earned on cash deposits maintained at financial institutions. Net interest resulted in an income of $92,172 for the six month period ended December 31, 2006 and was comprised of $116,705 in interest income and $24,533 of expense. Net interest resulted in an expense of $92,450 in the six month period ended December 31, 2005.

Amortization of Debt Discounts and Issuance Costs—-Amortization of debt discounts and debt issuance costs are associated with our convertible notes which were issued in September 2005 and July 2005. Such costs were amortized over the life of the related debt. Upon consummation of our IPO in February 2006, the principal amount of the Notes and accrued interest payable thereon automatically converted into 750,240 shares of our common stock at a conversion price of $3.00 per share. Accordingly, there has been no amortization of debt issuance costs and discounts after our IPO. Amortization of debt discount and debt issuance cost were $0 and $127,482 for the three months ended December 31, 2006 and 2005, respectively. Amortization of debt discount and debt issuance cost were $0 and $204,091 for the six months ended December 31, 2006 and 2005, respectively.

Net loss— Net loss was $(3,760,889), or $(0.58) per share, and $(927,144), or $(0.46) per share, for the three months ended December 31, 2006 and 2005, respectively, which was an increase of $2,833,755. Net loss was $(5,389,920), or $(0.83) per share, and $(1,345,840), or $(0.67) per share, for the six months ended December 31, 2006 and 2005 respectively, an increase of $4,044,080. We expect our losses may increase during the short term as we continue to develop our phone products and expand distribution of our phone/service bundles. However, we do anticipate that, as our business matures, we should trend toward profitability as we improve our hardware margins through increased utilization of our custom chips, take advantage of our increasing scale with our suppliers, manage our costs and leverage them against our planned recurring revenue base.

LIQUIDITY AND CAPITAL RESOURCES

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

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

At December 31, 2006, our working capital was $9,768,394 compared to a working capital of $13,426,376 at September 30, 2006. Cash and cash equivalents was $1,429,043 at December 31, 2006 compared to $6,223,206 at September 30, 2006. As of June 30, 2006, working capital was $15,062,582. The principal components of working capital at December 31, 2006 were cash and cash equivalents, accounts receivable, advances to suppliers and inventory, offset by an increase in our accounts payable and accrued expenses associated with the increase in activity associated with purchase and sales of our products. The decrease in cash and cash equivalents was due primarily to the consumption of cash to purchase inventory, to support our marketing and development efforts and to fund operations. Our customers are primarily large, United States based retail companies and, as a result, we have seldom experienced issues with the reliability or timing of customer receipts. However, vendors’ payment terms vary and are tightly managed to maximize working capital.

Operating Cash Flows

During the six months ended December 31, 2006, we utilized cash from our operating activities of $10,805,348, compared to $698,359 used in operating activities during the six months ended December 31, 2005.

Net cash used in operating activities during the six months ended December 31, 2006 can be attributed to increases in accounts receivable, prepaid assets and inventory, and to cash used to fund our operating activities, offset by customer collections and increases in accrued expenses. Depreciation has been relatively minimal since our inception. Net cash used in operating activities during the six months ended December 31, 2005 related primarily to the commencement of our commercial operations and initial purchases of inventory.

Accounts Receivable

During the six months ended December 31, 2006, sales of our phone products resulted in an increase in accounts receivable in the amount of $6,779,601 from June 30, 2006, and a corresponding reduction in operating cash flow for the period.

Prepaid Expenses and Inventory

During the six months ended December 31, 2006 we made payments to suppliers and vendors in advance of services being rendered. At December 31, 2006 prepaid expenses increased from June 30, 2006 which decreased operating cash flow by $50,533 in the period.

During the six months ended December 31, 2006 we built up our inventory in order to fulfill customer demand orders in our second and third quarter. At December 31, 2006 the increase in inventory decreased operating cash flow by $2,031,469.

Accounts Payable and Accrued Expenses

The increase in our accounts payable and accrued expenses during the six months ended December 31, 2006 was commensurate with the increase in our commercial operations, including purchases of our phone products and reserves associated with the increase in our revenues. This increase in accounts payable and accrued expenses improved operating cash flow by $1,427,398.

Cash Flows from Investing Activities.

During the six months ended December 31, 2006, cash used in investing activities was $138,374 compared to $16,732 used in investing activities during the six months ended December 31, 2005.

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Since our suppliers manufacture our phone products and we pay suppliers for warehouse space, we typically have very low levels of capital expenditures. We incur relatively minimal capital expenditures. We do not anticipate any material increases in capital expenditures and do not currently have any plans or proposed projects which would require any additional significant capital expenditures. Our capital expenditures are predominantly related to office fixtures and furnishings, computer equipment, software and software development. There are no known timing elements where our capital expenditure would be materially significant or differ from other periods.

Cash Flows from Financing Activities.

During the six months ended December 31, 2006, cash provided by financing activities was $0, compared to $1,498,609 provided by financing activities during the six months ended December 31, 2005.

During the period July 2005 through September 2005, we issued and sold in a series of private transactions an aggregate of $2,113,500 in principal amount of our 8% notes. Such notes were converted to common stock upon consummation of our IPO.

We will utilize the remaining net proceeds from our IPO to continue and expand commercial distribution of our phone/service bundles, develop and enhance product and service features and expand our contract manufacturing, sales and marketing capabilities and to generally fund our operations during the current fiscal year.

On January 18, 2007, we announced that we had secured an open ended asset-based financing facility from CIT Commercial Services, a division of CIT Group. CIT Commercial Services is one of the nation’s largest providers of factoring and commercial finance services.

On January 31, 2007, we announced the completion of a $12,500,000 private equity placement. Investors in this offering included, among others, Credit Suisse, SIAR Capital, and Benchmark Capital, as well as members of management and the board of directors. The private placement consisted of 5,000 shares of Series A Convertible Preferred Stock, which is convertible into a total of 2,941,175 common shares, in addition to 1,176,471 5-year warrants, which carry an exercise price of $4.25. An 8% annual cash dividend will be paid semi-annually to holders of the preferred. The net proceeds of this offering contributed to an improvement in working capital.

We believe that the remaining proceeds of our prior private placements, the IPO, the recently secured asset based financing arrangement and the proceeds from our preferred stock offering, combined with certain minimum levels of anticipated revenues, will be sufficient to fund our capital requirements for at least the next 12 months. However, in light of the competitive nature of the telecommunications industry and the evolution of new phones and services from time to time, any estimate as to our liquidity and overall financial condition may change over time. Some factors that could affect our liquidity and overall financial condition are the timing of our introduction of our phone/service bundles, customer acceptance and usage of our phone/service bundles and competition from existing service providers and other telecommunications companies. To the extent that circumstances evolve in an unfavorable manner, we may generate lower revenues then we currently anticipate and, as a result, we would experience reduced cash flow. In such a series of events, we may be required to seek additional equity and/or debt financing.

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ITEM3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Sensitivity

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

Exchange Rate Sensitivity

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

ITEM 4 CONTROLS AND PROCEDURES

Our management carried out an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of December 31, 2006. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act are accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

There has not been any change in our internal control over financial reporting in connection with the evaluation required by Rule 13a-15(d) under the Exchange Act that occurred during the quarter ended December 31, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II

ITEM 1 LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

There have been no material changes in the risk factors from those disclosed in the risk factors section in Item 1A of our annual report on Form 10-K for our fiscal year ended June 30, 2006.

ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The effective date of our registration statements, filed on From S-1 under the Securities Act (File No’s. 333-129361 and 333-131437) relating to the initial public offering of our Common Stock and Redeemable Warrants, was February 1, 2006. A total of 3,350,000 shares of Common Stock and 3,350,000 Redeemable Warrants were registered and sold in the offering which commenced on February 1, 2006 and closed on February 6, 2006. Additionally, in March 2006, we issued an additional 402,500 shares of Common Stock and 502,500 Redeemable Warrants upon the exercise of the over-allotment option by the underwriters. The managing underwriter for the public offering was HCFP/Brenner Securities LLC.

The Common Stock was sold at an offering price of $5.05 per share and the Redeemable Warrants were sold at an offering price of $0.05 per warrant. The aggregate offering price was $19,142,750. We incurred approximately $2.5 million in underwriting and other expenses in connection with the offering, resulting in net proceeds of approximately $16.6 million. Since the consummation of our initial public offering through December 31, 2006, we have primarily used the net proceeds from the offering as follows:

Purpose	Use of Proceeds through December 31, 2006
Contract manufacturing of phones and related components	$9,800,000
Sales and marketing, including salaries of personnel	$2,700,000
Product enhancement and new product development	$   600,000
Purchase and/or lease of office equipment	$   220,000
Working capital and general corporate purposes	$3,300,000

ITEM 3 DEFAULTS UPON SENIOR SECURITIES

Not Applicable

ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Our Annual Meeting of Stockholders was held on December 14, 2006.

At that meeting, all of our then-current directors were elected. The vote was as follows:

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	For	Against
Lawrence Burstein	4,768,547	0
Bruce Hahn	4,709,847	58,700
Robert F. Doherty	4,768,547	0
Elliot J. Kerbis	4,768,547	0
Donald G. Norris	4,768,547	0
Robert S. Picow	4,768,547	0

At that meeting, our shareholders ratified the appointment of BDO Seidman, LLP as our independent auditors for the fiscal year ending June 30, 2007. The vote was as follows:

For: 4,760,547 Against: 0 Abstain: 8,000

ITEM 5 OTHER INFORMATION

Not Applicable

ITEM 6 EXHIBITS

Exhibit Number	Description
10.1	Agreement between SunRocket, Inc. and Registrant, dated November 14, 2006 *
31.1	Rule 13a-14(a) Certifications
32.1	Section 1350 Certifications

______________

*Confidential treatment requested for certain portions of this Exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, which portions are omitted and filed separately with the Securities and Exchange Commission.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	AMERICAN TELECOM SERVICES, INC.
Date: February 15, 2007	By:	/s/ Bruce Hahn
		Bruce Hahn Chief Executive Officer

By:	/s/ Edward James
	Edward James Chief Financial Officer

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EX-10.1

EXHIBIT 10.1

This Agreement (“Agreement”), effective as of the date executed by the last to sign of the parties (“Effective Date”), between SunRocket, Inc. (“Service Provider” hereinafter referred to as “SP”), a Delaware corporation, located at 8045 Leesburg Pike, Suite 300, Vienna, Virginia 22182, and American Telecom Services, Inc., a Delaware corporation (“ATS”) located at 2466 Peck Road, City of Industry, CA 90601 memorializes the obligations of the parties in connection with VoIP hardware (“Telephones” and/or “Telephone”) provided by ATS, associated with the ATS System (“ATS System”) as described in Appendix A and future versions of the Telephone (“New Telephones” and/or “New Telephone”) to be reviewed and approved by SP from time to time as further outlined herein. Such approval shall be subject to the certification process and requirements as set forth in Appendix F herein. SP provides Internet Phone services to consumers, including communications and customer services (“Services”) to support customer accounts (“Customer Account” or “Customer Accounts”). The Telephones and New Telephones shall be preconfigured to support an SP Customer Account. The Telephones shall be distributed to retail outlets for subsequent resale to consumers who then activate new Customer Accounts in conjunction with such Telephones and/or New Telephones (“End Users”) throughout the United States.

As of the Effective Date, all prior agreements between the parties, whether oral or written, including the agreement dated June 7, 2005, shall terminate.

1.   ATS Obligations.

a.   Upon execution of this Agreement, ATS will use commercially reasonable efforts to configure its Telephones and New Telephones to work with the SP Services. ATS will use commercially reasonable efforts to provide engineering and technical configuration support to SP as necessary to ensure its Telephones and New Telephones can support SP service features and quality standards. ATS will also ensure that the appropriate SP mark or marks (as determined by SP) are placed on each of the Telephones and New Telephones and any supporting equipment when inventory considerations and design specifications permit, at ATS’s sole discretion.

b.   ATS further agrees to design the packaging and packaging inserts for the Telephones and New Telephones. ATS will ensure that the appropriate SP mark or marks (as determined by SP) will be placed on all packaging and packaging inserts. SP, with ATS’s cooperation and guidance, will provide all information and design for service offering inserts and information pertaining to the service offering for the packaging. ATS acknowledges that any retail packaging or materials shall include any information necessary to comply with FCC and FTC regulations as mutually agreed upon by the parties and provided for by ATS with respect to the Telephones and New Telephones and SP with respect to the Services. SP will have the right to review and approve the use of its brand, marks and colors and the representation of its service plans.

c.   ATS will provide SP with all documentation and training materials associated with its Telephones and New Telephones so that SP can provide first level customer support. ATS further agrees to provide second level support and troubleshooting assistance for SP technical support. The account servicing obligations of each party, including the hours during which each party must provide such support, are described in Appendix D.

d.   ATS will send to SP via FTP transfer data files on a periodic basis containing a list of MAC IDs for Telephones and New Telephones to be shipped to retailers or to be designated for corporate use. Such MAC IDs in the data file will be associated with the retailer that they are being shipped to (or otherwise designated as corporate use accounts). SP will enter these MAC IDs into their database, making the Telephones and New Telephones associated with those MAC IDs ready for activation by End Users, associate them with the designated retailer, and send an email to ATS acknowledging that the information has been entered into their system and that the associated hardware may be activated within seven (7) business days following the date that the file was received.

e.   ATS will use commercially reasonable efforts to resolve all End User disputes regarding Telephones and New Telephones within a commercially reasonable amount of time.

2.   SP Obligations.

a.   During the term and subject to the terms and conditions contained herein, SP agrees to provide Telephone and New Telephone End Users with Services, subject to the terms contained herein.

b.   SP will use commercially reasonable efforts to resolve all End User disputes regarding Services within a commercially reasonable amount of time.

c.   Subject to FCC, FTC and any other governmental requirements, SP agrees to provide ATS with End User information as described in Appendix C, section 3. Such information shall constitute Confidential Information under this Agreement. ATS shall use such information only for the purposes specified in Appendix C and only in full compliance with SP’s privacy policy, the most recent copy of which is available at www.sunrocket.com/privacy.

d.   SP shall make commercially reasonable efforts to ensure new End Users contacting SP to activate a Telephone or a New Telephone are activated on such devices so ATS receives appropriate credit for such Customer Account activations.

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3.   VoIP Hardware

a.   Telephones: For purposes of this Agreement, the terms Telephone and Telephones shall refer individually and collectively to the following ATS models:    *     and     *    .

b.   New Telephones: For purposes of this Agreement, the terms New Telephone and New Telephones shall refer individually and collectively to up to ten (10) additional ATS devices, provided they comply with the requirements of Appendix A. ATS has initially designated the following models as New Telephones:     *     and     *    .

c.   No Telephones or New Telephones may be sold by ATS or its retail/channel partners unless ATS has provided SP with all requested and required documentation necessary to support such Telephones or New Telephones and such Telephones and New Telephones have been certified by SP for use on SP’s network in the manner provided in section 3.d. Minimum documentation requirements for customer support are outlined in Appendix E.

d.   ATS shall give SP a minimum of     *     days to test any Telephones and New Telephones to ensure such Telephones and New Telephones interact properly with SP’s network, based on the certification requirements and process outlined in Appendix F. Upon submission, SP will, within     *     days of receipt of a Telephone or New Telephone, provide ATS with an expected timeframe for testing within the     *     day window. SP shall use commercially reasonable efforts to complete testing of Telephones and New Telephones within this expected timeframe, however, SP and ATS acknowledge that unforeseen circumstances, including, but not limited to, bugs and other issues with Telephones and New Telephones uncovered by SP may limit SP’s ability to complete testing and certification within the expected timeframe outlined above. SP may reject any Telephones or New Telephones that do not meet SP’s requirements for interaction with SP’s network and ask that ATS resubmit such Telephones and New Telephones for approval once identified issues have been remedied.

e.   If SP determines that End Users using any Telephone and/or New Telephone are (i) churning at rates     *     percent (    *    %) or more than churn rates of SP subscribers not using such Telephone and/or New Telephone (churn rate comparisons of End Users using any Telephone and/or New Telephone shall be based on a comparison to churn rates of SP subscribers not using Telephones or New Telephones in a comparable stage of tenure); and/or (ii) driving SP customer support trouble tickets at rates     *     percent (    *    %) or more of customer support trouble ticket rates of SP subscribers not using Telephones or New Telephones, SP may, in its sole discretion, require ATS to cure the identified problem. If, after     *     days from the point ATS is asked to cure such problem (the “Cure Period”), during which time ATS shall not be permitted to distribute any additional such Telephone or

____________________

* Subject to a request for confidential treatment; Separately filed with the Commission.

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New Telephone to Strategic Accounts or Non-Strategic Accounts (as defined below), ATS is unable to remedy the issues causing such churn or customer care issues, ATS will immediately cease production and recall, at its sole cost and expense, all such Telephones and/or New Telephones from retailers and cease further sales of such Telephones and/or New Telephones to prospective and existing End Users until issues causing such churn or customer care issues have been addressed to SP’s satisfaction. SP may agree, in its sole discretion, to extend the Cure Period upon written notice to ATS.

4.   Reports. SP shall provide to ATS the reports described in Appendix C, section 3 at the frequencies provided therein. In addition, from time to time, ATS may identify additional reports to be generated by SP and delivered to ATS on an ad hoc or periodic basis. SP will use commercially reasonable efforts to produce such additional reports requested by ATS.

5.   Deactivation. SP reserves the right to terminate Services to any Customer Account if it determines, in its sole discretion, that End Users of such Customer Accounts are actually or allegedly engaged in activities that are illegal, fraudulent or wrongful or which may be harmful to SP in any way. ATS shall receive a     *     report of all such deactivated Customer Accounts and SP shall make commercially reasonable efforts to provide reasons for such deactivations. SP may also terminate End Users for non-payment or if they are violating the terms of SP’s “Terms of Service” as set forth on the SunRocket.com website and as may change from time to time.

6.   Marketing and Distribution. ATS will use its commercially reasonable efforts to promote and market the Services in conjunction with the ATS System under this Agreement. ATS’s distribution of the Telephones and New Telephones in conjunction with the Services shall be limited initially to the Strategic Accounts identified in Section 9 below, except as further outlined below. Distribution of Telephones and New Telephones through any other retailer or channel (a “Non-Strategic Account”) may occur only if approved in writing in advance by SP, which approval is in SP’s sole discretion. ATS and SP agree that     *    ,     *    ,     *     and any accounts where ATS has already shipped products, to be limited to     *    ,     *    ,     *     and     *    , shall be considered approved Non-Strategic Accounts under this Agreement. Nothing herein shall limit ATS’ right to promote, market and distribute any hardware or device that is not bundled with the Services provided by SP, nor SP’s right to promote and distribute other hardware or Services not bundled with the ATS System. ATS shall be solely responsible for the development of all promotional and marketing materials, inserts and advertising materials (“Materials”) except as set forth in section 1 (b) above and SP shall have the right to approve in writing in advance the representation of the SP brand, logos, marks, service plans and any marketing positioning related to the SP Services on all such Materials. SP will make commercially reasonable efforts to issue approval or rejection of such Materials within five (5) business days. Should SP require certain disclosures required by Regulatory Authorities to be included with the Telephones and/or New Telephones in the packaging, SP agrees to provide ATS with such information in a timeframe

____________________

* Subject to a request for confidential treatment; Separately filed with the Commission.

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sufficient to permit ATS to include the disclosures with the Telephones and/or New Telephones.

7.   PAYMENT METHODS FOR SUBSCRIBERS. SP agrees to accept payment via credit card and debit card. More payment methodologies such as ACH and Pay Pal may be added in the future, but may require an additional fee, paid by the End User, for the use of Services (any such fees shall not be due any Commissions as defined in section 10 below).

8.   MARKETING CO-OP PAYMENTS. SP agrees to pay     *     per Customer Account activated on Telephones through any Non-Strategic Account (as defined in Section ‎6 above), as applicable. Such payments will be payable on all such Customer Accounts activated through Non-Strategic Accounts that are active thirty (30) days post initial Customer Account activation. SP agrees to pay     *     per Customer Account activated on New Telephones through any Non-Strategic Account (as defined in Section ‎6 above), as applicable. Such payments will be payable on all such Customer Accounts activated through Non-Strategic Accounts that are active sixty (60) days post initial Customer Account activation. Such payments will be allocated by ATS for the promotion and marketing of Services, such that the creative design of such promotions shall conform with section 1(b) and section 19 herein. On a regular and timely basis, ATS will provide SP in advance with a summary plan for spending allocations and purposes, plus regular performance reports as specified in Appendix C.3 and SP shall have the right to audit such spending and confirm matching payment by ATS and confirm that such funds were used solely for the purpose of marketing the combination of the ATS System and SP’s Service. At ATS’ sole discretion, ATS may allocate up to     *     of the Agent Fees as set forth in section 10 below as an additional Marketing Co-op Payment. All payments to ATS shall be made to ATS via wire transfer by the 25^th day of each month for the prior month’s activity, provided that no such payment shall be made for a sum less than $10,000, in which case the amount shall be accrued in an account earmarked for ATS and paid with the next payment due to ATS.

9.   KEY CITY FUNDS. ATS hereby designates     *    and     *     as its     *    allowed “Strategic Accounts” under this Agreement, for which “Key City Funds” would apply. Upon acceptable notification of the shipment of Telephones and New Telephones and related equipment to and their arrival at a Strategic Account, SP and ATS agree to each commit     *     to service the initial Strategic Accounts as “Key City Funds” to be allocated by ATS. SR shall have the right to audit spending on Key City Funds and confirm matching payment by ATS and confirm that such funds were used solely for the purpose of marketing the combination of the ATS System and SP’s Service. All payments to ATS shall be made to ATS via wire transfer by the 25^th day of each month following the submission of allocation information or a bill from ATS to SP for the prior month’s activity.

10.   SERVICE COMMISSIONS. SP shall be responsible for maintaining all billing, collection and transaction records with respect to an End User’s use of the Services in conjunction with Telephones or New Telephones. SP shall pay a percentage of Net

________________

* Subject to a request for confidential treatment; Separately filed with the Commission.

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Revenue (“Commissions”) to ATS for each End User who purchases a Telephone or New Telephone through ATS, a Strategic Account or a Non-Strategic Account and newly activates a Customer Account in conjunction with such purchase as outlined below. The term “Net Revenue” means gross revenues collected less any service credits, taxes and regulatory mandated fees incurred by SP.

End Users Of Telephones: For the first     *     in monthly Net Revenue per End User using a Telephone, SP agrees to pay ATS     *    percent (    *    %) of the Net Revenue for any Customer Account activated. For monthly Net Revenue per End User using a Telephone exceeding     *    , SP agrees to pay ATS     *     percent (    *    %) of the Net Revenue in excess of     *    .

End Users of New Telephones: Except for End Users on SP’s limited monthly plan (currently priced at $9.95), SP agrees to pay ATS: (i)     *     percent (    *    %) of the Net Base Plan Revenue (as defined below) for any End User using a New Telephone for the first twelve (12) months following activation; plus (ii)     *     percent (    *    %) of the Net Base Plan Revenue for any End User using a New Telephone during the second twelve (12) months following activation; plus (iii)     *     percent (    *    %) of the Net Base Plan Revenue for any End User using a New Telephone during the third twelve (12) months following activation. For purposes of calculating Commissions payable on End Users of New Telephones, “Net Base Plan Revenue” shall mean gross revenue collected on such End User’s base telephony service plan, less any service credits related to such End User’s base telephony plan, taxes and regulatory mandated fees associated with such base telephony service plan. “Net Base Plan Revenue” shall not include revenue from any additional services sold on top of such End User’s base telephony service plan.

All payments to ATS shall be made via wire transfer by the 25^th day of each month for the prior month’s activity, provided that no such payment shall be made for a sum less than $10,000, in which case the amount shall be accrued in an account earmarked for ATS and paid with the next payment due to ATS. Upon reaching minimum monthly volume levels, each payment shall be accompanied by a detailed report that includes a month-to-date activity summary for the covered period, listed by Customer Account as formatted in Appendix C.

Commissions on End Users who activate monthly plans shall be payable on monthly Net Revenue or Net Base Plan Revenue as received by SP. For End Users of the Telephones and/or New Telephones who sign up for a SP prepaid plan (i.e. any SP plan where payment for a period in excess of a month is made up-front), applicable gross revenue for purposes of calculating Net Revenue/Net Base Plan Revenue and associated Commissions due in a given month of the term of such prepayment shall be equal to the prepaid amount spread evenly over the number of months to which such prepayment applies, assuming such End User

________________

* Subject to a request for confidential treatment; Separately filed with the Commission.

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still has an active Customer Account with SP. If such End User no longer has an active Customer Account with SP, no further Commissions shall be due to ATS.

For example, if an End User of a Telephone signs up for a $199 prepaid annual plan, gross service revenue used for calculating Net Revenue and associated Commissions payable on such End User for a particular month shall be equal to $16.58, which equals $199 divided by 12. If, however, such End User no longer has a Customer Account, no Commission payment shall be due to ATS on the refunded amount.

11.   AGENT FEES. SP agrees to pay ATS an Agent Fee (“Agent Fee”) for each activated Customer Account generated by ATS that remains active for a period of at least     *     days according to the table as set forth in Appendix B. All payments to ATS shall be made to ATS via wire transfer by the 25^th day of each month for the prior month’s activity, provided that no such payment shall be made for a sum less than $10,000, in which case the amount shall be accrued in an account earmarked for ATS and paid with the next payment due to ATS. Each payment shall be accompanied by a detailed report that includes a month-to-date activity summary for the covered period, listed by Customer Account.

12.   RATES AND SERVICE PLANS. SP agrees to offer End Users the same Services plans it offers generally to its prospective subscribers, excluding limited-time special promotions. If ATS would like to create a special promotion to offer End Users, it will (i) obtain written approval from SP prior to offering such special promotion and (ii) fully fund the cost of such promotion (for example, if ATS were to offer prospective End Users a special promotion of three (3) free months of SP service when signing up for the $24.95 monthly plan, it would pay SunRocket $24.95 per month less applicable commissions during which SunRocket is not able to collect such revenue from such End Users due to the special promotion; similarly, if ATS were to offer End Users a promotion of three (3) free months of SP service when signing up for the $199 annual plan, it would pay SP $16.58 per month less applicable commissions of the promotion). ATS payments to SP for the above promotional activities may be netted against SP Agent Fees, Commissions and any other monies payable by SP to ATS, assuming such monies in the given month are sufficient to offset ATS’ promotional activities in the month.

13.   REBATES. SP agrees to pay ATS     *     percent (    *    %) of the redemption value of any rebates offered on phone master base station units and/or combination package containing the master base station unit and any number of expansion units for Telephones and New Telephones up to a maximum advertised rebate of     *    . SP agrees to pay ATS     *     percent (    *    %) of the redemption value of any rebates offered on phone expansion units for Telephones up to a maximum advertised rebate of     *     (“Rebate”). SP shall not bear the cost of any rebates associated with phone expansion units for New Telephones. ATS will invoice SP for the Rebate deposit prior to SP making any Rebate redemption payments. All payments to ATS shall be made to ATS via wire transfer on a bi-weekly basis, based on documented redemption.

________________

* Subject to a request for confidential treatment; Separately filed with the Commission.

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14.   RECORDS. Each party hereto shall maintain reasonably complete, clear and accurate records of all information required to determine the amounts of any payments or transactions under the Agreement. Each party hereto, upon giving thirty (30) days prior written notice to the other party hereto, and no more than once during any twelve (12) month period, may conduct, at reasonable times during regular business hours and subject to the Confidentiality Obligations of Section 21, an inspection and audit of the portions of such books and records of the other party as is necessary to verify that such payments, including the amounts thereof, have been made in accordance with the terms hereof.

15.   TERM. This Agreement shall continue from the Effective Date until December 31, 2008 (the “Term”).

16.   TERMINATION.

a.   This Agreement may be terminated prior to its expiration upon the occurrence of any of the following: (a) by the non-breaching party, if the other party materially breaches this Agreement which breach is not cured within thirty (30) days of written notice thereof to the breaching party; (b) by SP or ATS, upon a determination by any governmental authority with jurisdiction over the parties that the provision of the Telephones, New Telephones and/or Services under this Agreement in the jurisdictions in which the Telephones and/or New Telephones are being distributed is contrary to existing laws, rules or regulations; the party electing to terminate shall provide written notice to the other party setting forth in reasonable detail the factual basis for such termination and the parties agree in good faith to attempt to create a solution or workaround, or modify the Services to eliminate the requirement creating the basis for such termination in a manner mutually agreeable for a period of no less than ten (10) business days after the receipt of such notice and if such agreement is reached or the factual basis for such termination is otherwise resolved, then the Agreement shall not be terminated. Upon termination of this Agreement for any reason, ATS shall immediately cease production of the Telephones and New Telephones intended to be used with Services provided by SP. Upon termination of this Agreement other than for breach by ATS or legal or governmental requirement, should ATS decide, in its sole discretion, to have SP continue to activate Customer Accounts associated with Telephones or New Telephones remaining in inventory, ATS shall provide SP with a final accounting setting forth the number of units in retail inventory (“Inventory Units”). SP will continue to activate Customer Accounts for End Users who purchase such Inventory Units for an additional period of up to six (6) months and ATS shall be entitled to all associated compensation (including, but not limited to Commissions, Agent Fees, Marketing Co-Op payments and SP contributions to rebates on Telephones, New Telephones and their expansion units) during that period; after this six (6) month period, SP will continue to activate Inventory Units, however, no further compensation (including, but not limited to Commissions, Agent Fees, Marketing Co-Op payments and SP contributions to rebates on Telephones,

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New Telephones and their expansion units) would be due to ATS for such activations. Should ATS decide, in its sole discretion, to have SP discontinue activation of Customer Accounts associated with Inventory Units, then ATS shall, at its sole cost and expense, immediately recall all Inventory Units as of the date of said election and shall agree to indemnify and hold SP harmless as set forth below.

b.   SP may terminate this Agreement at any time after March 31, 2008 if ATS has not generated     *     active End Users as of March 31, 2008. Active End Users equals total Customer Account activations generated by ATS less any churn associated with such Customer Accounts.

c.   Following expiration of the Initial Term or any extension or renewal thereof or termination (other than as provided in this section 16) of this Agreement, SP shall continue to pay applicable Commissions on End Users of Telephones and/or New Telephones for a period of twelve (12) additional months. For End Users of Telephones and/or New Telephones who activated their Services in the twelve (12) months preceding the date of termination of this Agreement (other than for breach), SP shall continue to pay applicable Commissions for an additional twelve (12) months.

17.   OWNERSHIP OF INTELLECTUAL PROPERTY RIGHTS. SP shall be the sole and exclusive owner of all right, title and interest in and to all patents, copyrights, trademarks, trade secrets or other proprietary rights (“Intellectual Property Rights”) it owns. ATS acknowledges that the SP Services and system constitute valuable trade secrets of SP and constitute Confidential Information under this Agreement. ATS shall be the sole and exclusive owner of all right, title and interest (including, without limitation, all Intellectual Property Rights) in and to the ATS System. SP acknowledges that the ATS System constitutes valuable trade secrets of ATS and Confidential Information under this Agreement. Nothing in this Agreement shall be deemed to grant to one party, by implication, estoppel or otherwise, license rights, ownership rights or any other Intellectual Property Rights in any materials owned by the other Party or any affiliate of the other Party. Neither Party shall attempt to register the Intellectual Property Rights of the other Party, or cause any claim, lien or encumbrance to attach to any Intellectual Property Rights of the other Party nor decompile or reverse engineer any proprietary of the other Party. To the extent that ATS acquires any patent or other Intellectual Property Rights related to this Agreement, ATS shall grant to SP a royalty-free, nonexclusive, nontransferable right and license under any such patent or resulting patent for the term of the Agreement.

18.   INSURANCE. ATS and SP each agree to maintain levels of general commercial liability insurance coverage each deems appropriate during the Term.

19.   USE OF MARKS. Any and all trademarks and trade names that SP uses are and shall remain the exclusive property of SP. ATS has no rights therein and shall not reproduce or use any corporate names, trademarks, service marks, trade names or logos of SP (collectively “Marks”) without SP’s express prior written consent. SP

________________

* Subject to a request for confidential treatment; Separately filed with the Commission.

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hereby grants ATS a limited, royalty-free license to use SP’s name and logo for the purpose of marketing the Products and Services during the Term of this Agreement, on all inserts, advertising, packaging, product and point of purchase, subject to the requirement of SP’s prior written approval as specified above.

20.   REPRESENTATIONS & WARRANTIES. Each party represents and warrants that: (a) it is duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is organized; (b) it has all necessary power and authority to enter into this Agreement and to perform all its obligations hereunder; (c) neither the execution, delivery, or performance of this Agreement will (i) result in the breach of, or constitute a default under, the terms of any material contract to which it is a party or by which it is bound; (ii) violate its charter or by-laws; or (iii) require the consent or approval of any third party; and (d) it will perform its obligations hereunder in compliance with all applicable laws, rules and regulations. ATS further represents and warrants that the Telephones and the New Telephones do not infringe upon the Intellectual Property Rights of any third party, whether on a standalone basis or used in conjunction with the Services and that it has not received any notice or communication from any third party to such effect. EXCEPT FOR WARRANTIES EXPRESSLY MADE IN THIS AGREEMENT, EACH OF SP AND ATS MAKES NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, TO ATS OR SP (AS APPLICABLE), OR TO ANY OTHER PERSON, INCLUDING, WITHOUT LIMITATION, ANY WARRANTIES REGARDING THE MERCHANTABILITY, SUITABILITY, ORIGINALITY, QUALITY, FITNESS FOR A PARTICULAR PURPOSE, NONINFRINGEMENT OR OTHERWISE (IRRESPECTIVE OF ANY PREVIOUS COURSE OF DEALINGS BETWEEN THE PARTIES OR CUSTOM OR USAGE OF TRADE), OR RESULTS TO BE DERIVED FROM THE USE OF ANY SOFTWARE, SERVICES, HARDWARE OR OTHER MATERIALS PROVIDED UNDER THIS AGREEMENT.

21.   INDEMNIFICATION.

21.1   Indemnity By ATS.

Subject to the limitations set forth elsewhere in this Agreement including, but not limited to the limitations set forth in Section 24, ATS, at its own expense, shall defend, indemnify and hold harmless SP, its affiliates,and their respective and current and former directors, officers and employees from and against any claims or demands by third parties (including, but not limited to, reasonable attorneys’ fees and other costs and expenses of litigation), or any other liabilities, losses, damages, judgments, or obligation of any kind or nature, or expenses related thereto, arising out of (i) ATS’s breach of the terms of this Agreement (including, but not limited to, a breach of any representation or warranty set forth in Section 20); (ii) ATS’s marketing or facilitation of the Services or provision of the Telephones, the New Telephones or the ATS System, including, without limitation, claims of fraud, misrepresentation or theft arising therefrom; (iii) any misconduct, act or omission on ATS’s part, whether negligent or intentional; (iv) ATS’s misuse or unauthorized use of the Marks; (v) any claim by a third

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party that the Telephones, New Telephones, or ATS System, or any portion or combination thereof contemplated under this Agreement, infringes any patent, copyright, trademark, trade secret, or other proprietary right of a third party; and (vi) ATS’s violation of FCC, trademark, copyright telemarketing or privacy laws.

21.2   Indemnity by SP.

Subject to the limitations set forth elsewhere in this Agreement including, but not limited to the limitations set forth in Section 24, SP, at its own expense, shall defend, indemnify and hold harmless ATS, its affiliates, and their respective current and former directors, officers and employees from and against any claims or demands by third parties (including, but not limited to, reasonable attorneys’ fees and other costs and expenses of litigation), or any other liabilities, losses, damages, judgments, or obligation of any kind or nature, or expenses related thereto, arising out of (i) SP’s breach of the terms of this Agreement (including, but not limited to, a breach of any representation or warranty set forth in Section 20); (ii) SP’s marketing or facilitation of the Services or provision of the Telephones, the New Telephones or the ATS System, including, without limitation, claims of fraud, misrepresentation or theft arising therefrom; (iii) any misconduct, act or omission on SP’s part, whether negligent or intentional; (iv) SP’s misuse or unauthorized use of the Marks; (v) any claim by a third party that the Services contemplated under this Agreement, infringes any patent, copyright, trademark, trade secret, or other proprietary right of a third party; and (vi) SP’s violation of FCC, trademark, copyright, telemarketing or privacy laws.

21.3   Limitations.

Notwithstanding Sections 21.1 and 21.2, if any claims, demands, liabilities, losses, damages, judgments or obligations referenced in Sections 21.1 and 21.2 are made, asserted or otherwise initiated against both ATS and SP, either in the same or different actions, and both parties are jointly or severally liable for such actions, the indemnity obligations set forth in Sections 21.1 and 21.2 shall not apply and, accordingly, each party is responsible to bear its own proportionate share of all costs and liabilities with respect to such actions.

21.4   Procedure.

All indemnification obligations set forth in Section 21 shall be subject to the following requirements (provided that the failure to comply with such requirements shall deprive the indemnified party of its right to indemnification only to the extent that such failure materially prejudices the indemnifying party): (i) the indemnified party shall provide the indemnifying party with prompt written notice of any claim; (ii) the indemnified party shall permit the indemnifying party to assume and control the defense of any action; and (iii) the indemnified party shall not enter into any settlement, assume any obligation to pay or compromise any claim without the indemnifying party’s prior written consent, which consent

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shall not be unreasonably withheld or delayed. In addition, the indemnified party may, at its own expense, participate in its defense of any claim.

22.   MANNER OF CONDUCTING BUSINESS. ATS and SP agree that, at all times during the term of this Agreement, each party shall: conduct its business in a manner that reflects favorably on the Services and the ATS System; make no false or misleading representation with regard to each other or the Services or ATS System; and conduct its business and the performance of its obligations under this Agreement in compliance with all applicable laws and regulations including all laws relating to tax, currency exchange, export, and commercial corrupt practices.

23.   CONFIDENTIALITY. “Confidential Information” means and all information which is of a confidential, proprietary, or trade secret nature, whether or not marked as confidential, that is furnished or disclosed by either party (“Disclosing Party”) to the other Party (“Receiving Party”) under this Agreement, including the specific business terms of the Agreement, business plans, technical data, performance data, programs, contracts, client lists, financial information, sales and marketing plans, business information, and any other information that is marked as “Confidential,” “Proprietary,” “Trade Secret,” or in some other manner to indicate its confidential, proprietary, or trade secret nature. Each of ATS and SP shall hold such Confidential Information in strict confidence and shall not reveal the same for a period of five (5) years after the termination of this Agreement, except for any information which is: generally available to or known to the public without violation of this Agreement; known to such party prior to the negotiations leading to this Agreement; or independently developed by such party outside the scope of this Agreement. Neither party shall be in breach of its confidentiality obligations hereunder if the Confidential Information is disclosed pursuant to a subpoena, judicial or governmental order or requirement (including the applicable disclosure requirements of the Federal securities laws and the rules and regulations of the Securities and Exchange Commission promulgated thereunder in the event that SP, shall file a registration statement to initiate a public offering of its securities during the term of this Agreement) SP acknowledges that ATS is a mandatory reporting company under Section 12(b) of the Securities Exchange Act of 1934, as amended, and as such, is subject to the applicable disclosure requirements of the Federal securities laws notwithstanding anything to the contrary contained in this section 23, but expressly subject to the immediately preceding sentence, the disclosing party only makes such disclosure to the extent required and, prior to making such disclosure, takes all reasonable steps to provide prompt and sufficient notice to the other party so that the other party may contest and/or limit such requirement, subpoena or order. Each of ATS and SP shall safeguard the Confidential Information of the disclosing party to the same extent that it safeguards its own confidential materials or data relating to its own business, and in any event with no less than a reasonable standard of care. Except as provided above, neither ATS nor SP shall reveal any such Confidential Information without the disclosing party’s express prior written consent. The parties agree that an impending or existing violation of these confidentiality provisions would cause to the disclosing party irreparable injury for which it would have no adequate remedy at law and the disclosing party may be entitled to obtain immediate

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injunctive relief prohibiting such violation, in addition to any other rights and remedies available to it.

24.   LIMITATION OF LIABILITY. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY OR ANY THIRD PARTY IN ANY RESPECT FOR ANY INDIRECT, SPECIAL, INCIDENTAL, CONSEQUENTIAL, EXEMPLARY, RELIANCE OR PUNITIVE DAMAGES, WHETHER IN TORT, CONTRACT OR PRODUCT LIABILITY, NOR SHALL EITHER PARTY BE LIABLE FOR ANY LOSS OF PROFITS, REVENUE, DATA, GOODWILL, BUSINESS OPPORTUNITIES OR ANY OTHER COMMERCIAL DAMAGE OF ANY KIND OR NATURE WHATSOEVER. EXCEPT WITH REGARD TO ANY LIABILITY THAT RESULTS FROM INTENTIONAL MISCONDUCT BY A PARTY OR BREACH OF CONFIDENTIALITY OBLIGATIONS, IN NO EVENT SHALL THE LIABILITY OF EITHER PARTY WITH RESPECT TO ANY TELEPHONES, NEW TELEPHONES OR SERVICES PROVIDED HEREUNDER EXCEED THE AGGREGATE AMOUNT PAYABLE UNDER THE TERMS OF THIS AGREEMENT RELATING TO THE SPECIFIC ACCOUNTS GIVING RISE TO ANY CLAIM, WHETHER IN CONTRACT, TORT OR OTHER LEGAL THEORY. IN THE EVENT THAT EITHER PARTY PROVES THAT A FRIVOLOUS LAWSUIT HAS BEEN INITIATED, THEN SUBJECT TO THE RULING OF AN ARBITRATOR, RULE 11 MAY APPLY.

25.   APPROVAL. Whenever prior approval or consent is required in this Agreement, the approval or consent shall be memorialized in writing.

26.   PUBLICITY. Neither party, without the prior written consent of the other party, will make any news release or other public statement or disclosure regarding the existence of the terms and conditions of all or any part of this Agreement or any discussions or negotiations relating thereto, except as may be required by applicable securities laws, but only upon reasonable advance notice to, and consultation with, the other party.

27.   FORCE MAJEURE. Neither Party shall be liable to the other Party or be deemed to be in breach of this Agreement by reason of any Excusable Delay. A Party experiencing an Excusable Delay in its performance shall immediately notify the other Party by telephone (to be confirmed in writing within three days after the inception of the Excusable Delay) and shall describe in reasonable detail the circumstances causing such Excusable Delay. The Party experiencing Excusable Delay shall be excused from performance of such obligations so affected by the Excusable Delay event for the period during which the Excusable Delay event continues and for such time thereafter as is reasonably necessary to overcome the effects of such Excusable Delay. Both Parties shall use all commercially reasonable efforts to overcome or work around the Excusable Delay event as soon as reasonably practicable. The term “Excusable Delay” shall mean a delay in performance or failure to perform which is due to an event beyond the reasonable control of a Party and shall include, without limitation, (a) acts of God, weather conditions, explosion, flood, earthquake, or fire; (b) war or threat of war, sabotaging, riot, revolution, civil disturbance or requisition; (c) acts, restrictions, regulations, prohibitions or measures

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of any kind on the part of any governmental authority; (d) import and export regulations or embargos; or (e) strikes, lockouts, or other industrial actions or trade disputes.

28.   CHOICE OF LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York for contracts executed and to be performed entirely in such State.

29.   ARBITRATION.The parties shall use their commercially reasonable efforts to resolve any disputes, controversies or claims arising out of, in connection with, or in relation to this Agreement, or the breach thereof (each, a “Dispute”). If SP and ATS cannot resolve any Dispute to their mutual satisfaction within a thirty (30) day period after the commencement of such efforts, then, in each such instance, the Dispute shall be submitted to binding arbitration pursuant to the rules of the American Arbitration Association before one arbitrator selected jointly by the ATS and SP; provided, however, that if the parties fail to select an arbitrator within thirty (30) days after initiation of arbitration, the American Arbitration Association shall make such selection. The arbitrator shall be governed by the laws of the State of New York in the settlement of any dispute submitted to him or her. The arbitration shall be held in the County and City of New York. The arbitrator’s award shall be final and judgment may be entered upon it in any court having jurisdiction thereof. Arbitration as provided in this paragraph 29 shall be the sole and exclusive remedy for any Dispute.

30.   ENTIRE AGREEMENT; AMENDMENT. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all previous proposals, negotiations, representations, commitments writings and all other communications between the parties, both oral and written. No change, amendment, modification, termination or attempted waiver of any of the provisions hereof shall be binding unless in writing and signed by an authorized signatory of both parties hereto.

31.   NOTICE. Any notice required to be given by either party to the other shall be deemed given upon proof of delivery only when mailed first class mail or by nationally recognized overnight courier service, duly addressed and with proper postage, if in writing addressed to the party to whom notice is being given at the address of such party set forth above.

32.   ASSIGNMENT. This Agreement is not assignable by either party hereto without the consent of the other party. Notwithstanding the foregoing, either party may assign this Agreement to any of its affiliates or subsidiaries without the consent of the other Party; provided that the party assigning the Agreement shall remain liable for the performance of such affiliate or subsidiary.

33.   SEVERABILITY/WAIVER. If any provision of this Agreement is determined by a court of competent jurisdiction to be invalid or unenforceable, such determination shall not affect the validity or enforceability of any other part or provision of this

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Agreement. No waiver by any party of any breach of any provision hereof shall constitute a waiver of any other breach of that or any other provision hereof.

34.   EXPORT COMPLIANCE. ATS agrees to comply with all applicable export control legislation. Certain parts of the ATS System may be subject to United States export laws prior to import to or export from another country in accordance with the Export Administration Regulations. ATS agrees to comply with such laws and regulations. Diversion contrary to U.S. law is prohibited and will be a breach of this Agreement.

35.   SURVIVAL. The representations, warranties, limitations of liability, confidentiality, accrued payment obligations, and indemnities set forth in this Agreement shall survive the expiration or other termination hereof.

36.   EXECUTION. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, and all counterparts shall constitute but one and the same instrument, sufficient evidence of which for all purposes shall be any set containing counterparts executed by both Parties. The Parties agree that such counterparts may delivered by facsimile and that such facsimile counterparts shall evidence a binding agreement.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

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Please acknowledge your acceptance of the above Agreement by signing where indicated below.

Sincerely,

American Telecom Services Inc.

By:    /s/ Adam Somer

Adam Somer, Co-President

Date:    Nov. 13/06

AGREED TO AND ACCEPTED:

SUNROCKET, INC.

By:    /s/ Lisa Hook

Name, Title:    Lisa Hook, President and CEO

Date:    11/14/06

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Appendix A: The ATS System

The ATS System is a multi-handset cordless broadband phone. The master unit connects directly, using an RJ-45 connection, into the End User’s modem or router. Each master unit is able to connect with multiple extension handsets. The extension handsets receive their network connection by communicating with the master unit using radio. Their bases only serve to re-charge their battery. This phone, and future phones within this classification includes systems that have multiple handset configurations regardless of the radio technology that is used.

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Appendix B: Agent Fees

Telephones: SP shall pay ATS the following Agent Fees for new End Users who activate Customer Accounts in conjunction with their purchase of Telephones through ATS, its Strategic Accounts and its Non-Strategic Accounts and remain End Users for a period of     *     days:

·       *    . The maximum Agent Fee payable by SP under this structure is     *    .

·       *    

New Telephones: SP shall pay ATS the following Agent Fees for new End Users who activate Customer Accounts in conjunction with their purchase of New Telephones through ATS, its Strategic Accounts and its Non-Strategic Accounts and remain End Users for a period of     *     days:

·       *    

________________

* Subject to a request for confidential treatment; Separately filed with the Commission.

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Appendix C: General Functions

1.   Incoming Call Rate Centers, Area Codes and Geographic Availability

The Services are designed for End Users who use them in geographic locations for which SP can provide Enhanced 911 (E911) emergency support, which will initially be limited to the geographic coverage region for the rate centers associated with the available SP phone numbers. Enhanced 911 provides access to emergency dispatch operators, who will automatically receive location and call-back information with the call.

2.   Local Number Portability

Local number portability (the service that allows consumers to have their phone number moved from their previous service provider to SP) is currently available to all users in serviceable areas provided that the consumer’s existing provider supports this function. Local number portability will continue to be made available to all users in serviceable areas and will be made available to existing users as it becomes possible in their area.

3.   Reporting

SP will provide ATS with the following reports for each     *     activity within     *     of the end of such     *    :

a.       *     Activity Summary: Summary of all Agent Fees, Co-Op Payments and Commissions for each Strategic Account and Non-Strategic Account

SP shall keep full, true and accurate records of all information necessary to accurately calculate Agent Fees, Co-Op Payments and Commissions. Upon request from time-to-time, but no greater than     *    , SP shall make such records available for audit by ATS,     *    , during normal business hours at SP’s principal place of business or such other reasonable location determined by SP.

b.   MAC-ID Report: Detailed list of Telephone and New Telephone MAC-IDs activated and deactivated in the month, along with the service plan associated with the newly activated MAC-IDs.

________________

* Subject to a request for confidential treatment; Separately filed with the Commission.

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Appendix D: Service Obligations

All customer services issues will first be directed to SP customer service via web, email or telephone. SP will handle all issues related to technical support, billing and general customer service and will use its commercially reasonable efforts to provide this service in accordance with its current service level standards of operation. SP’s current customer service level standards are as follows:

Hours of operation: Billing, General Customer
And Technical issues:	8 a.m. to 12 p.m. Monday to Friday 8 a.m. to 12 p.m. Saturday 8 a.m. to 12p.m. Sunday
Hold times:	80% of all customer calls will be answered within 90 seconds with a maximum hold time average in any 24 hour period of 10 minutes
E-mail response time:	Max: 24 Hours (not including auto-responder)

In the event that for any reason SP provided customer service does not comply with the levels of service described above, SP will take immediate action to rectify and improve the level of service to be consistent with existing standards. Maximum “hold times” above mentioned will not include aggregate hold times as a result of a required transfer of customer service to ATS as described below.

When a customer inquiry is received that involves issues or problems related to the products provided by ATS, SP will use its commercially reasonable efforts to troubleshoot the problem using troubleshooting guidelines provided by ATS. ATS agrees to provide ongoing training and support to SP customer service representatives in an effort to equip them to answer questions related to ATS products. Such support will be made available by ATS during SP’s customer service hours of operation, as outlined above.

Product (ATS) Returns:

ATS agrees to handle all aspects of ATS product returns (including, but not limited to Telephones and New Telephones) regardless of the reason for the return. In no instance shall SP be required to take physical possession of or remedy defects or other issues related to ATS devices or products. In the event SP inadvertently receives ATS product returns, SP will immediately forward the returns to ATS at the location specified by ATS. Additionally, in the event SP receives a request to accept return of an ATS product, the request will be forwarded to ATS customer service for resolution. In the event that SunRocket makes changes to its network that affects the consumers use of an ATS product, SP will work with ATS to troubleshoot problems that are identified with ATS products that are not the result of non-compliance with SunRocket certification rules so as to develop a standard answer or software update that may be provided to consumers so as to try to avoid product returns wherever possible.

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Should ATS and SP agree to have SP or its other partners distribute Telephones and/or New Telephones on ATS’ behalf, or to have SP purchase Telephones and/or New Telephones for direct resale to existing and/or prospective SP subscribers, ATS and SP will mutually agree on the terms of such arrangements and the appropriate handling of returns related to such sales.

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Appendix E: SP Minimum Customer Support Requirements

Prior to Training (4 weeks prior to launch of Telephone or New Telephone)

·   Product Overview describing the Telephone or New Telephone to be launched..

·   15 units of the Telephone or New Telephone to be used for customer support reference and testing purposes.

·   One soft copy and 10 hard copies of the user manuals, installation guides and administrative guides for the Telephone or New Telephone.

·   Advance copy of the Power Point presentation that will be used for training purposes below.

Training

·   ATS will provide on-site “Train-the-Trainer” sessions of approximately 4 hours each on a single visit per product introduction. The trainer must be available to train at a single location in the United States to be determined by SP; multiple “Train-the-Trainer” sessions on that visit may be required in SP’s sole discretion.

·   Trainers must be available for “Train-the-Trainer” and additional follow ups 3 weeks before the device is available for sale to consumers

o   During the first week, the trainer will be on-site at SP call centers performing “Train-the-Trainer” sessions.

o   During the second 2 weeks, the trainer must be available to assist in answering follow up questions and to finalize case base articles (protocols for dealing with common user occurrences).

Post Training

An engineer or trainer must be available for regular calls as deemed reasonably necessary by SP to answer further questions on the Telephones or New Telephones and to assist in continual updates to case base articles.

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Appendix F: SP Customer Premise Equipment Certification Process

Section A: Certification Requirements

These certification requirements as set forth in Appendix F may be changed from time to time by SunRocket in its sole discretion, provided that such changes are applied to the requirements given to all vendors equally with respect to certification of new devices for interaction with the SP network.

Registration

Confirmation of Registration for 48 hours

Device must support     *    .

Device must stay registered.

Call-ID field must not change.

SIP Messages

Send SIP messages to ATA, verify the ATA generated SIP messages are in accordance with RFC

SFTF Test     *    , Unusual reason phrase: TBD (received ACK for     *     without reason phrase)

SFTF Test     *    , Valid request-URI: TBD (INVITE rejected)

SFTF Test     *    s, Missing Required Header Fields: TBD (all mandatory header fields present)

SFTF Test     *    , Redirection: TBD (successfull redirection)

SFTF Test     *    , Digest Authentication of REGISTER without qop: TBD (authentication reply is valid)

SFTF Test     *    , Server-driven re-registration period: TBD (received REGISTER shortly before expires)

SFTF Test     *    s, Presence of the rport parameter in Via: TBD (Via contains rport)

SFTF Test     *    , Proper Generation of transaction ID: TBD (branches in CANCEL and INVITE are equal)

SFTF Test     *    s, Ignore Record-Route from negative replies: TBD (Route header omitted because of negative reply)

SFTF Test     *    , Correct Route set construction: TBD (both RR and Route entries are equal)

SFTF Test     *    , To-tag resetting after     *    xx: TBD (To-tag is equal in redirected INVITE and original INVITE)

SFTF Test     *    , To-tag in CANCEL: TBD (To-tag is equal in CANCEL and INVITE)

____________________

* Subject to a request for confidential treatment; Separately filed with the Commission.

-23-

SFTF Test     *    , Proper To-tag use after receipt of multiple     *    x: TBD (To-tag in ACK matches correct     *     tag)

SFTF Test     *    ack, Proper Generation of ACK: TBD (r-uri and Via of INVITE and ACK are equal)

SFTF Test     *    can, Proper Generation of CANCEL: TBD (r-uri and Via of INVITE and CANCEL are equal)

SFTF Test     *    s, Correct loose routing: TBD (Loose routing is correct in request URI and Route header)

SFTF Test     *    s, Correct strict routing: TBD (Strict routing is correct in request URI and Route header)

SFTF Test     *    s, Correct UDP retransmission timing: TBD (UDP request retransmission matches RFC)

SFTF Test     *    , Presence of RFC3261 branch ID in Via: TBD (branch value begins with magic cookie ‘z9hG4bK’)

SFTF Test     *    , Presence of From tag: TBD (From contains tag)

SFTF Test     *    , Presence of Content-Length header: TBD (Content-Lenght is present)

SFTF Test     *    , Presence of Max-Forwards header: TBD (Max-Forwards is present)

SFTF Test     *    , OPTIONS support: TBD (OPTIONS answered with     *    )

SFTF Test     *    , Correct Via returning: TBD (Via in first reply is equal to Via in first request)

SFTF Test     *    , Require handling: TBD (INVITE rejected with     *    )

SFTF Test     *    , UTF in display names: TBD (request with UTF display names accepted)

SFTF Test     *    , A short torture request: TBD (torture INVITE accepted)

SFTF Test     *    , Extra trailing octets in a UDP datagram: TBD (trailing zeros ignored and INVITE accepted)

MOS Test     *    , Service Unavailable with Retry-After: TBD (next registration request is at retry-after interval)

MOS Test DNS_SRV, multiple SIP Proxies offered: TBD (fail over to alternate SIP Proxy)

Verify that ATA implements a backoff algorithm in case of NOT receiving     *     OK from Proxy during registration request

SIP User Agent must include the software version

    *    

    *    

    *    

    *    

    *    

Call Scenarios

Device must be compliant with SIP RFCs, this applies to all tests in this section.

PSTN to SIP, all calls will be placed from a PSTN phone

Call setup, caller hang-up before call is answered

____________________

* Subject to a request for confidential treatment; Separately filed with the Commission.

-24-

Normal call, call is answered

Ring no answer

Inbound anonymous call

Call on hold, re-invite. The call is put on hold and then reconnected after a few seconds

Music on hold, re-invite with new SDP

SIP call forwarding, rings then forward to voice mail

Three way conference call

Caller disconnect the call

Callee disconnect the call

Busy here SIP 486

Call is answered and held up for one hour

SIP to PSTN, all calls will be placed from a SIP phone

Call setup, caller hang-up before call is answered

Normal call, call is answered

Ring no answer

Inbound anonymous call

Call on hold, re-invite. The call is put on hold and then reconnected after a few seconds

Music on hold, re-invite with new SDP

SIP call forwarding, rings then forward to voice mail

Three way conference call

Call is answered and held up for one hour

DTMF, the call is answered by PSTN and DTMF digits are sent

Busy here, SIP response 486

Call is answered PSTN disconnect the call

Call is answered SIP disconnect the call

7,10,11,15 and 16 digit dialing

SIP to SIP, all calls will be placed from a SIP phone:

Call setup, caller hang-up before call is answered

Normal call, call is answered

Ring no answer

Outbound anonymous call

Call on hold, re-invite. The call is put on hold and then reconnected after a few seconds

Music on hold, re-invite with new SDP

SIP call forwarding, rings then forward to voice mail

Three way conference call

Call is answered and held up for one hour

DTMF, the call is answered by SIP and DTMF digits are sent

Busy here, SIP response 486

Call is answered caller disconnect the call

Call is answered Callee disconnect the call

-25-

Other Telephony Features

Call waiting

Call waiting tone must be heard when call is active and another call is incoming.

Distinctive ring

Device must support Bellcore-dr1, Bellcore-dr2, Bellcore-dr3 and Bellcore-dr4 tones.

Message waiting indicator

Device must indicate to user when it receives Messages-Waiting: yes.

Stutter tone

Stutter tone is heard when handset is off hook and voice mail is waiting.

Caller ID

Calling party Caller ID is displayed on the handset.

411 (Directory Assistance)

611 (SunRocket Service)

0 (SunRocket Service)

00 (Voice mail)

*00 (Last Number Redial)

*66 (Busy Call Return)

*67 (Caller ID block per call)

*69 (Last Call Return)

*82 (Unblock Caller ID)

    *     to     *     (Programmable Speed Dial)

Customer enters numbers via SunRocket customer portal, device must send     *     through     *     in the INVITE.

Fax (if device should reasonably be expected to allow for faxing- e.g. through extra RJ-11 port or otherwise)

A ten page fax is sent, fax must be received successfully with comparable image quality to the original.

Local Fax ATA to PSTN

    *     enabled

    *     enabled and     *     voice codec

    *     enabled and     *     voice codec

Local Fax PSTN to ATA

    *     enabled

____________________

* Subject to a request for confidential treatment; Separately filed with the Commission.

-26-

*     enabled and     *     voice codec

    *     enabled and     *     voice codec

Long distance Fax ATA to PSTN

    *     enabled

    *     enabled and     *     voice codec

    *     enabled and     *     voice codec

    *     enabled and     *     voice codec

    *     enabled and     *     voice codec

Fax ATA to ATA

Both end     *     enabled

Sender     *    , Receiver     *     and     *    

Both end     *     enabled and     *     voice codec

Both end     *     enabled and     *     voice codec

Modem

TiVo dial out (if device should reasonably be expected to support interaction with TiVo service - e.g. through extra RJ-11 port or otherwise)

TiVo must be able to successfully dial out to local number.

Answering machine

Answering machine picks up, records message and is disconnected when caller hangs up

Other

Ensure INVITE packet size does not exceed     *     bytes

Seconds to hear first ring back tone

Ring back should be heard in under     *     seconds.

Off Hook condition transition to loud busy to notify of off-hook

Verify callid time stamps are correct

Device must support NTP.

Device must be configurable for different timezones.

Device must present correct local time to handset on incoming calls.

Pull power plug while firmware is updating

Device must recover gracefully and boot up on previous firmware.

Pull power plug when config is updating

Device must recover gracefully and boot up on previous configuration.

Push firmware update while call and ethernet traffic are active, what happens?

Device must not drop call, it should wait for call to end and then update firmware.

Push config update while call and ethernet traffic are active, what happens?

Device must not drop call, it should wait for call to end and then update configuration.

Push corrupt config file, what happens?

Device must recover gracefully and boot up on previous configuration. 

____________________

* Subject to a request for confidential treatment; Separately filed with the Commission.

-27-

Push corrupt firmware file, what happens?

Device must recover gracefully and boot up on previous firmware.

User lost their password, how do we restore?

Device must support a method to reset user password.

What is the config snippet to give us remote access?

Device must support remote access (ssh, http, etc), this is toggled on and off in the configuration file.

What are the IVR functions, minimal requirement to enable IVR and the IVR codes?

Any IVR codes the device supports must be documented. No IVR code can circumvent configuration settings related to security or SIP credentials.

How do you push new config (sip/gui)

Document how to send updated configuation file.

How do you push firmware (sip/gui)

Document how to send updated firmware.

How do you pull config? (sip/gui)

Document how to retrieve running configuration from unit.

Router features

Downloading Config file via HTTP

If supported, provide example syntax.

Downloading Config file via TFTP

If supported, provide example syntax.

Telnet to ATA

If supported, provide example syntax.

Download time for new SW version

Measure time to download file, device and file server on same lan, time must be under one minute.

Router throughput with testing procedure

Device must achieve minimum     *    Mb/s on all tests with the exception of QoS.

Device must not reboot under load.

http, ftp and scp tests used a     *     binary file.

Get the file     *     times, compute average.

QOS used TBF with a limit of     *     Kb/s (    *     Mb/s).

No calls were up.

ATA config	Server location	Traffic type	Throughput
NAT	WAN	http	Mb/s
NAT	WAN	ftp	Mb/s
NAT	WAN	scp	Mb/s
NAT	WAN	ttcp push to WAN	Mb/s
NAT PF     *	LAN	http	Mb/s
NAT PF     *	LAN	ftp	Mb/s
NAT PF     *	LAN	scp	Mb/s

____________________

* Subject to a request for confidential treatment; Separately filed with the Commission.

-28-

 

NAT PF     *	LAN	ttcp push to LAN	Mb/s
NAT mac clone	WAN	http	Mb/s
NAT mac clone	WAN	ftp	Mb/s
NAT mac clone	WAN	scp	Mb/s
NAT mac clone	WAN	ttcp push to WAN	Mb/s
NAT mac clone PF     *	LAN	http	Mb/s
NAT mac clone PF     *	LAN	ftp	Mb/s
NAT mac clone PF     *	LAN	scp	Mb/s
NAT mac clone PF     *	LAN	ttcp push to LAN	Mb/s
Bridge	WAN	http	Mb/s
Bridge	WAN	ftp	Mb/S
Bridge	WAN	scp	Mb/s
Bridge	WAN	ttcp push to WAN	Mb/s
Bridge	LAN	http	Mb/s
Bridge	LAN	ftp	Mb/s
Bridge	LAN	scp	Mb/s
Bridge	LAN	ttcp push to LAN	Mb/s
QOS - TBF	WAN	http	Mb/s
QOS - TBF	WAN	ftp	Mb/s
QOS - TBF	WAN	scp	Mb/s
QOS - TBF	WAN	ttcp push to WAN	Mb/s
QOS - TBF	LAN	http	Mb/s
QOS - TBF	LAN	ftp	Mb/s
QOS - TBF	LAN	scp	Mb/s
QOS - TBF	LAN	ttcp push to LAN	Mb/s

Overnight test, WAN to LAN:

Test ran for n hours.

A wget loop completed n downloads of a     *    MB file.

Average throughput was n Mb/s

PC interface saw roughly n GB RX, n GB TX.

The ATA did / did not reboot.

PPPoE

Service-Name field must be blank in PADI packets.

Device must get IP address, netmask, default gateway and DNS server information from PPPoE server.

MAC Spoofing

Device must support MAC Spoofing with any valid MAC address. This is only for TCP/UDP packets on the local lan. When the device requests its configuration file, it must uses its real MAC address in the path.

____________________

* Subject to a request for confidential treatment; Separately filed with the Commission.

-29-

IPSec Pass Through

Device must support Cisco and Nortel VPN clients in that no special configuration changes need to be made to support customer VPN.

Remote Configuration Management

Describe how device is remotely managed, access methods, etc.

Device must support http GET of its configuration and firmware files. The path for both of these must be fully customizable by SunRocket. Configuration files must include the device mac address in the path.

IP Filtering

No ports from any LAN computer should be exposed on the WAN side of the ATA unless explicitly configured.

Port Forwarding

Device must support TCP and UDP port forwarding.

DMZ Host

Must be able to enter the IP address of an internal host, device exposes all ports to this IP address except those ports forwarded otherwise.

User and admin web GUI access (SIP info must be inaccessible to user)

User account must be able to set all WAN IP address and connection method related parameters.

DHCP LAN network must default to     *     is the device itself. Configuration file must support ability to define alternate LAN addresses.

Admin web access must be disabled by default, with password protected access only.

Upstream router interoperability

Interoperability with different routers

Device WAN interface must be interoperable with consumer grade home routers, DHCP negotiation must be successful, device must be able to route traffic to and from WAN interface.

Interoperability with cable modems

Device WAN interface must be interoperable with cable modems, DHCP negotiation must be successful, device must be able to route traffic to and from WAN interface.

External port scan

Nessus Port Scan

A port scan will be conducted to ensure that only those ports configured for SIP and remote management (if enabled) are exposed on the WAN interface. All other ports must be closed.

____________________

* Subject to a request for confidential treatment; Separately filed with the Commission.

-30-

Appendix F: SP Customer Premise Equipment Certification Process (Cont’d)

Section B: Certification Process

1.   SP makes decision to receive sample to certify

2.   Certification entails three processes:

o   Gizmo Management System (GMS) integration

o   Feature compatibility and testing

o   Performance and load testing

3.   Gizmo Management System (GMS) Integration

o   Ability to serve configuration files to remote ATA

o   Ability to serve new firmware versions to remote ATA

o   Ability to do an initial configuration of ATA for new customer

o   Software development effort to configure GMS to support new ATA

4.   Feature and Compatibility Testing

o   Test and support all SP service features

§   “*” codes

§   Call management features

o   SIP protocol compatibility with SP Platform

5.   Performance and Load Testing

o   Put IP traffic through device at line speed

§   Both directions

o   Long duration load testing

§   How long does device stay up at line speed

6.   Integration Testing in Development Lab

o   GMS and ATA integration testing

7.   Regression Testing in Operations QA Lab

o   GMS testing with currently supported ATA’s

8.   Decision on Certification Approval

o   Make sure all tests were done and results reviewed

o   Confirm devices meet minimum Certification Requirements outlined in Section A above

-31-

EX-31.1

EXHIBIT 31.1

CERTIFICATIONS

I, Bruce Hahn, certify that:

(1) I have reviewed this report on Form 10-Q of American Telecom Services, Inc.;

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

(5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

February 15, 2007

AMERICAN TELECOM SERVICES, INC.
By:	/s/ Bruce Hahn
	Bruce Hahn
	Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATIONS

I, Edward James, certify that:

(1) I have reviewed this report on Form 10-Q of American Telecom Services, Inc.;

(2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

(3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

(5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

February 15, 2007

AMERICAN TELECOM SERVICES, INC.
By:	/s/ Edward James
	Edward James
	Chief Financial Officer

EX-32

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of American Telecom Services, Inc. (the “Company”) on Form 10-Q for the period ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Bruce Hahn, Chief Executive Officer, and Edward James, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

February 15, 2007

AMERICAN TELECOM SERVICES, INC.
By:	/s/ Bruce Hahn
	Bruce Hahn
	Chief Executive Officer

By:	/s/ Edward James
	Edward James
	Chief Financial Officer