Lightyear Network Solutions, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note A—Organization, Operations, and Basis of Presentation—Continued

Reverse Merger, Exchange Transaction and Reorganization—Continued

On February 25, 2010, Libra’s stockholders approved an amendment to the Articles of Incorporation (1) changing the name of Libra to Lightyear Network Solutions, Inc., (2) increasing the number of authorized shares of common stock to 70,000,000 and (3) authorizing 9,500,000 shares of preferred stock. The preferred stock was designated to (a) vote as a single class with shares of common stock; (b) have a stated value of $2.00 per share; (c) have dividends of 5% of the stated value, when and if declared; (d) have conversion rights into one share of common stock (subject to adjustment); (e) have the right to elect a majority of the board of directors, so long as at least 50% of the originally issued preferred stock is outstanding; (f) have a liquidation preference equal to the sum of the stated value and all accrued but unpaid dividends; (g) have a premium upon a change of control transaction equal to the liquidation preference; and (h) have certain negative covenants regarding the declaration of dividends, the issuance of additional preferred stock and the issuance of debt.

On April 12, 2010, the Amendment to the Articles of Incorporation became effective and the Company completed the transactions contemplated in the Exchange Agreement by issuing 9,500,000 shares of preferred stock to LYH. As of April 12, 2010, LYH and LYH’s Convertible Debtholders owned approximately 69% and 11.5% of the Company’s outstanding common stock on a fully-diluted, as-converted basis, respectively.

The transactions under the Master Transaction Agreement are intended to qualify as a tax-free contribution of property for stock under Section 351 of the Internal Revenue Code of 1986. The issuances of the Company’s stock under the Securities Exchange Agreement and the Contribution Agreements are intended to be exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Section 4(2) thereof and Regulation D promulgated thereunder.

For financial reporting purposes, the Exchange Transaction represents a capital transaction of Lightyear or a "reverse merger" rather than a business combination, because the sellers of Lightyear controlled the combined company immediately following the completion of the transaction. Lightyear was deemed to be the accounting acquirer in the transaction and, consequently, the transaction was treated as a recapitalization of Lightyear. Accordingly, the assets and liabilities and the historical operations that are reflected in the financial statements are those of Lightyear and were recorded at the historical cost basis of Lightyear. LNSI’s assets, liabilities and results of operations are consolidated with the assets, liabilities and results of operations of Lightyear after consummation of the acquisition. The number of shares issued and outstanding and additional paid-in capital of the Company have been retroactively adjusted to reflect the equivalent number of shares issued by the Company in the Exchange Transaction, while Lightyear’s historical member’s deficit is being carried forward. All costs attributable to the reverse merger were expensed.

Note B—Summary of Significant Accounting Policies

Principles of Consolidation

The balance sheet, results of operations and cash flows of the Company and its wholly-owned subsidiaries have been included in our consolidated financial statements. All intercompany accounts and transactions have been eliminated.

Estimates

The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) 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 revenue and expenses during the reporting period. Actual results could differ from those estimates. The Company’s significant estimates include the reserves related to receivables, the recoverability and useful lives of long lived assets and the valuation of equity and derivative instruments.

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Lightyear Network Solutions, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note B—Summary of Significant Accounting Policies—Continued

Income Taxes

LNSI is taxed as a corporation. Lightyear is organized as a limited liability company and elected to be treated as a partnership for income tax purposes, whereby taxable income or loss passes through to, and is reportable by, the member of Lightyear. The individual entities file state and local income tax returns in certain jurisdictions and are subject to minimum taxes which are based on measures other than income.

The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of items that have been included or excluded in the financial statements or tax returns. Deferred tax liabilities and assets are determined on the basis of the difference between the tax basis of liabilities and assets and their respective financial reporting amounts (“temporary differences”) at enacted tax rates in effect for the years in which the temporary differences are expected to reverse. The Company is recording a full valuation allowance against any deferred tax assets because it is not more than likely that the deferred tax assets will be realized. As a result, the corporation’s losses do not result in a tax benefit on the statements of operations.

Effective January 1, 2009, the Company adopted accounting guidance which clarifies the accounting for uncertainty in income taxes recognized in the Company’s consolidated financial statements and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The guidance also provides direction on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The adoption of these provisions did not have a material impact on the Company’s consolidated financial position and results of operations.

Management has evaluated and concluded that there were no material uncertain tax positions requiring recognition in the Company’s condensed consolidated financial statements as of September 30, 2010. In most instances, the Company is no longer subject to federal, state and local income tax examinations by tax authorities for the years prior to 2005. The Company files income tax returns with most states.

The Company’s policy is to classify assessments, if any, for tax related interest as interest expense and penalties as selling, general and administrative expenses.

Revenue Recognition

Telecommunications services income such as access revenue and usage revenue are recognized on the accrual basis as services are provided. In general, access revenue is billed one month in advance and is recognized when earned. Wireless handheld devices are sold at a discount when bundled with a long-term wireless service contract. We recognize the equipment revenue and associated costs when title has passed and the equipment has been accepted by the customer. The Company provides administrative and support services to its agents and pays commissions based on revenues from the agents’ accounts. Amounts invoiced to customers in advance of services are reflected as deferred revenues.

Recognition of agent fees and interest income on the related notes receivable is limited to amounts recognizable under the cost-recovery method on an individual agent basis.

In addition, we have the right to offset commissions earned with uncollectible accounts receivable attributed to a specific agent or with past due notes receivable payments, up to certain specified percentages of such uncollectible accounts receivable and up to 100 percent of past due notes receivable payments. We believe our allowances for doubtful accounts and notes receivable, combined with our ability to offset agents’ commissions, are adequate to provide for uncollectible receivables.

Cost of revenue represents primarily the direct costs associated with the cost of transmitting and terminating traffic on other carriers’ facilities.

Commissions paid to acquire customer call traffic are expensed in the period when associated call revenues are recognized.

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Lightyear Network Solutions, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note B—Summary of Significant Accounting Policies—Continued

Fair Value of Financial Instruments

The Company’s financial instruments are cash, accounts receivable and short term borrowings, plus accounts and obligations payable. The recorded values of cash, accounts receivable and short term borrowings, plus accounts and obligations payable approximate their fair values based on their short term nature.

Inventories

The Company maintains inventories consisting of wireless telephones and telecommunications equipment which are available for sale. Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out method. At September 30, 2010 and December 31, 2009, the Company had reserves for obsolete inventory of approximately $65,000 and $70,000, respectively.

The Company continually analyzes its slow-moving, excess and obsolete inventories. Products that are determined to be obsolete are written down to net realizable value.

Stock-Based Compensation

The Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award. For employees and directors, the award is measured on the grant date and for non-employees, the award is generally remeasured on interim financial reporting dates until the service period is complete. The fair value amount is then recognized over the period during which services are required to be provided in exchange for the award, usually the vesting period.

Derivative Liabilities

As of February 11, 2010, LYH’s derivative liabilities were valued using the Black Scholes option pricing model as follows: All - market and exercise price of $1.80, dividend yield of 0%, annual volatility of 45.4%; Warrants – 4.3 to 5.0 years expected term and risk free interest rates ranging from 1.99% to 2.23% and Conversion Options – 0.8 to 1.4 years expected term and risk free interest rates ranging from 0.24% to 0.54%. As of December 31, 2009, derivative liabilities were valued using the Black Scholes option pricing model as follows: All - market and exercise price of $1.80, dividend yield of 0%, annual volatility of 45.4%; Warrants – 4.4 to 4.8 years expected term and risk free interest rates ranging from 2.44% to 2.57% and Conversion Options – 0.9 to 1.2 years expected term and risk free interest rates of 0.47%. The benefit associated with reducing the value of the derivative liabilities through February 11, 2010 was recorded on the books of Lightyear. On February 12, 2010, the convertible promissory notes and warrants which originally resulted in the derivative liabilities were modified or cancelled such that there were no ongoing derivative liabilities or impact on Lightyear after that date.

Net Loss Per Common Share

Basic net loss per common share is computed by dividing the net loss attributable to common stockholders, after deducting the cumulative undeclared dividends on the Company’s preferred stock (see Note F, Issuance of Preferred Stock), by the weighted average number of shares of common stock outstanding during the period. Weighted average shares outstanding for the three and nine months ended September 30, 2010 includes the underlying shares exercisable with respect to the issuance of 32,516 warrants exercisable at $0.01 per share. In accordance with the accounting literature, the Company has given effect to the issuance of these warrants in computing basic net loss per share because the underlying shares are issuable for little or no cash consideration. Diluted net loss per common share adjusts basic net loss per common share for the effects of potentially dilutive financial instruments, only in the periods in which such effects exist and are dilutive. At September 30, 2010, 9,500,000 shares of preferred stock, plus outstanding stock options and warrants to purchase 774,500 and 3,549,702 shares of common stock, respectively, an aggregate of 13,824,202 potentially dilutive shares of common stock, were excluded from the calculation of diluted net loss per common share because their impact would have been anti-dilutive. At September 30, 2009, no potentially dilutive instruments existed.

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Lightyear Network Solutions, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note B—Summary of Significant Accounting Policies—Continued

Recently Issued and Adopted Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance, under ASC Topic 810 on Consolidation, to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. The guidance is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. The adoption of the guidance did not have a material impact on the Company’s condensed consolidated financial statements.

In January 2010, the FASB issued new accounting guidance, under ASC Topic 820 on Fair Value Measurements and Disclosures. The guidance requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement. The guidance now requires a reporting entity to use judgment in determining the appropriate classes of assets and liabilities and to provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. The guidance is effective for interim and annual reporting periods beginning after December 15, 2009. As this standard relates specifically to disclosures, the adoption did not have a material impact on the Company’s condensed consolidated financial statements.

In February 2010, the FASB issued new accounting guidance, under ASC Topic 855 on Subsequent Events, which removes the requirements that an SEC filer disclose the date through which subsequent events have been evaluated. The guidance was effective upon issuance. The adoption of the guidance did not have a material impact on the Company’s condensed consolidated financial statements.

In March 2010, the FASB issued new accounting guidance, under ASC Topic 605 on Revenue Recognition. This standard provides that the milestone method is a valid application of the proportional performance model for revenue recognition if the milestones are substantive and there is substantive uncertainty about whether the milestones will be achieved. Determining whether a milestone is substantive requires judgment that should be made at the inception of the arrangement. To meet the definition of a substantive milestone, the consideration earned by achieving the milestone (1) would have to be commensurate with either the level of effort required to achieve the milestone or the enhancement in the value of the item delivered, (2) would have to relate solely to past performance, and (3) should be reasonable relative to all deliverables and payment terms in the arrangement. No bifurcation of an individual milestone is allowed and there can be more than one milestone in an arrangement. The standard is effective for annual periods, and interim periods within those annual periods, beginning on or after June 15, 2010. The adoption of the guidance did not have a material impact on the Company’s condensed consolidated financial statements.

Note C—Short-Term Borrowings

In December 2009, as amended in January 2010, Lightyear entered into a short term revolving secured factoring agreement of up to $500,000. In conjunction with this agreement, the factor received a first priority interest in Lightyear’s accounts receivable, intangible assets and deposit accounts. As of December 31, 2009, Lightyear had outstanding borrowings of $500,000 under the facility. Lightyear entered into an agreement to repay the advances under the factoring agreement from a combination of: (1) fifty percent of the proceeds of the private placement that commenced during November 2009 in excess of $1,000,000; and (2) certain fixed weekly payment amounts if the facility had not been repaid by January 22, 2010. On February 8, 2010, the outstanding borrowings were repaid in full from the proceeds of the final closing of LYH’s convertible promissory notes.

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Lightyear Network Solutions, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note C—Short-Term Borrowings—Continued

On March 17, 2010, Lightyear entered into a closed end credit facility (the “Note”) with a limited future multiple advance feature, representing an arrangement that allows Lightyear to obtain advances without giving the bank a separate note for each advance. Lightyear was entitled to borrow up to the full principal amount of $1,000,000 of the Note from time to time, but only up through, and not after, June 16, 2010, subject to certain limitations. The Note bears interest at the prime rate plus 4% but not less than 7.25% per annum. Beginning on April 30, 2010 through June 30, 2010, Lightyear shall pay all accrued but unpaid interest. Beginning on July 30, 2010, Lightyear shall make monthly payments of all accrued but unpaid interest plus monthly principal payments in the amount of $111,112, unless and until the outstanding principal balance of the Note is paid in full. In addition to the payments described above, Lightyear shall apply to payment of the principal balance of the Note, 50% of all net proceeds in excess of $1,000,000 and up to $2,000,000 from the sale of the Company’s equity securities, unless and until the outstanding principal balance of the Note is paid in full (the “Equity Payment”). The Note was modified on August 3, 2010, but is effective as of March 17, 2010, such that the Equity Payment is now due no later than October 30, 2010 (see update at Note H, Short-Term Borrowings). The Note matures on March 30, 2011. The Note is secured by a security interest in all tangible and intangible assets of Lightyear, including lockbox accounts and its operating account, and by the personal guaranties of an officer and a director of the Company. As of September 30, 2010, Lightyear had outstanding advances totaling $653,764.

Note D—Related Party Transactions

Lightyear has significant transactions with its former parent, LYH, and members of LYH and deals with certain companies or individuals which are related parties either by having owners in common or because they are controlled by members of LYH, directors and/or officers of the Company or by relatives of members of LYH, directors and/or officers of the Company. Aggregate related party transactions are segregated on the face of the balance sheets and statements of operations.

Settlement Agreement

In July 2004 and July 2008, LYH borrowed funds, most of the proceeds of which were ultimately provided to Lightyear. The lenders were all affiliates of LYH, including an affiliate of Chris T. Sullivan, who is an affiliate of LYH and a director of Lightyear. In connection with the loans, LYH and Lightyear executed agreements (the “Letter Agreements”) to pay the lenders (the “Letter Agreement Holders”), in addition to principal and interest payments on the accompanying notes, an amount each month equal to an aggregate of 3% and 4% of the gross commissionable monthly revenues from Lightyear’s sales of wireless and VoIP service offerings (the “Revenue Payments”), respectively. The Letter Agreements have a term of ten years unless terminated early due to a sale of all or substantially all of LYH. Upon an early termination event, Lightyear would be obligated to pay the respective Letter Agreement Holders a termination fee in the amount of the sum of the Revenue Payments for the immediately preceding twelve full months. On February 11, 2010, LYH, Lightyear and each of the Letter Agreement Holders entered into the First Modification to Letter Agreements, pursuant to which the Letter Agreements were modified to, among other things, release and discharge LYH from all obligations under the Letter Agreements. The Letter Agreement Holders are all associated with directors of the Company, including the Company’s Chief Executive Officer.

Pursuant to a loan made to LYH by Sullivan, on February 11, 2010 LYH issued an amended promissory note (the “Second LYH Note”) to Sullivan in the original principal amount of $8,000,000 with a maturity date of July 1, 2010. The Second LYH Note bears interest at a rate of LIBOR plus 4.75% on all amounts owed up to $7,000,000 and LIBOR plus 7.75% on all amounts owed in excess of $7,000,000, neither of which will exceed 10% per annum. The Second LYH Note is secured by a security interest in (i) the capital stock of LNSI held by LYH and (ii) certain interests in LYH, excluding Sullivan’s interest. As of April 29, 2010, $7,750,000 was outstanding pursuant to the Second LYH Note, $250,000 of which was scheduled to have been paid on March 31, 2010 and the remainder of which was due on the July 1, 2010 maturity date.

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Lightyear Network Solutions, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note D—Related Party Transactions—Continued

Settlement Agreement—Continued

On April 29, 2010, Lightyear, LYH, Sullivan and the Letter Agreement Holders entered into a settlement agreement (the “Settlement Agreement”) pursuant to which: (1) Lightyear purchased the Second LYH Note from Sullivan for an aggregate purchase price of $7,750,000 (the “LNS Obligation”) ; (2) LYH became indebted to Lightyear pursuant to and in the amount of the Second LYH Note; and (3) Lightyear became obligated to reimburse LYH for $260,000 (the “LYH Reimbursement”, which is recorded as other expense - related parties in the condensed consolidated statements of operations) in advances made by LYH to Sullivan after the parties reached an agreement in principle, but before the execution of the agreement. Of the $7,750,000 LNS Obligation, $250,000 was paid contemporaneous with the execution of the Settlement Agreement and $250,000 was scheduled to be paid on July 1, 2010 and on the first day of each quarter thereafter, until and including the maturity date. The maturity date is the sooner of (a) July 1, 2011, or (b) the maturity date of Sullivan’s underlying bank loan related to the Second LYH Note, which is currently January 10, 2011. The LNS Obligation has the same interest terms as the Second LYH Note.

To induce Lightyear to purchase Sullivan’s rights under the Second LYH Note, the Letter Agreement Holders have (a) granted Lightyear an additional security interest in the Letter Agreements to secure LYH’s payments to Lightyear pursuant to the Second LYH Note, and (b) given Lightyear an option pursuant to which Lightyear may purchase the Letter Agreements for $8,000,000 at any time until May 1, 2012.

In the Event of Default, as defined in the Settlement Agreement, Sullivan may (a) declare the outstanding balance and accrued interest to be at once due and payable or (b) declare the Settlement Agreement to be void. If Sullivan voids the Settlement Agreement, (i) the Second LYH Note reverts to Sullivan, (ii) Lightyear will have no further obligation to make any payments to Sullivan, whether for amounts withheld or to become due, (iii) the payments received from Lightyear will be credited against the LNS Obligation, and (iv) Sullivan may pursue remedies of default against LYH and certain Letter Agreement Holders, including the additional security interest.

On August 12, 2010, effective April 29, 2010, (1) Lightyear and Sullivan agreed that Lightyear’s $250,000 July 1, 2010 principal payment on the LNS Obligation would be waived, Lightyear would make a $250,000 principal payment on October 1, 2010; (2) Lightyear and LYH agreed to amend the Second LYH Note to make it a demand note; and (3) in the event that Sullivan voids the Settlement Agreement, LYH will execute a note in favor of LNS in the amount equal to its prior aggregate payments to Sullivan. In addition, all parties waived any entitlement to late charges or a default rate of interest resulting from the non-payment of any scheduled principal payments prior to October 1, 2010. In addition, the parties clarified that (a) Sullivan had been made the beneficiary on the Company’s key man life insurance policy on an executive officer; (b) Sullivan was only permitted to use the $5,000,000 of life insurance proceeds toward the satisfaction of any outstanding LNS Obligation; (c) that any excess proceeds must be returned to LNS; and (d) upon repayment of the LNS Obligation in full, LNS would become the beneficiary on the key man life insurance policy. On October 1, 2010, the Company paid $361,594 on the LNS Obligation, $250,000 of principal and $111,594 of interest.

On July 16, 2010, pursuant to the terms of the Second LYH Note, the interest rate was increased to LIBOR plus 5.75% on all amounts owed up to $7,000,000 and LIBOR plus 8.75% on all amounts owed in excess of $7,000,000, neither of which will exceed 10% per annum.

As of September 30, 2010, the balance due to Lightyear on the Second LYH Note is $7,750,000 and the interest receivable is $225,753. Interest income on the Second LYH Note was $121,341 and $225,753 for the three and nine months ended September 30, 2010. As of September 30, 2010, the balance owed by Lightyear on the LNS Obligation is $7,500,000, plus $111,594 of interest payable.

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Lightyear Network Solutions, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note D—Related Party Transactions—Continued

Other

An officer of the Company owns an indirect interest in a Lightyear agency. The agency has a standard Lightyear agent agreement and earned approximately $5,000 and $14,000 in commissions from Lightyear during the three and nine months ended September 30, 2010 and $6,000 and $19,000 during the three and nine months ended September 30, 2009, respectively.

Beginning in 2008, an employee (and son of an officer) of the Company, has maintained a representative position in a direct selling entity which earned approximately $15,000 and $74,000 in commissions from Lightyear during the three and nine months ended September 30, 2010 and $7,000 and $109,000 during the three and nine months ended September 30, 2009, respectively.

Commission expense – related parties includes certain VoIP and wireless revenue override payments due to directors of the Company. During the three and nine months ended September 30, 2010, Lightyear recorded approximately $35,000 and $104,000 of VoIP and wireless revenue override expense, respectively. The holders of the override rights had waived their right to such payment in 2009.

Pursuant to an officer’s employment agreement, Lightyear provides life insurance coverage consisting of $3,000,000 under a whole life policy and $3,000,000 under a term life insurance policy. Lightyear also maintains $5,000,000 in key man life insurance on the same officer. The proceeds from the key man life insurance have been assigned to Sullivan as collateral for the LNS Obligation. Aggregate insurance premium expense for these policies was approximately $19,000 and $63,000 for the three and nine months ended September 30, 2010 and $25,000 and $76,000 for the three and nine months ended September 30, 2009, respectively.

In contemplation of the Exchange Transaction, on February 4, 2010, the officer assigned the ownership of a split-dollar life insurance policy to Lightyear and Lightyear has been made the owner and beneficiary under this policy.

On February 12, 2010, in connection with the forgiveness of Lightyear’s intercompany indebtedness to LYH, Lightyear transferred the remaining deferred financing costs in the amount of approximately $811,000 to LYH, since the original debt that gave rise to such costs remains outstanding.

Note E—Supplier Concentration

Of the telecommunications services used in its operations, Lightyear acquired approximately 45% and 11% during the three months ended September 30, 2010 and 43% and 12% during the nine months ended September 30, 2010 from two suppliers. Lightyear acquired approximately 42% during the three months ended September 30, 2009 from one supplier and 50% during the nine months ended September 30, 2009 from one supplier. Although there are other suppliers of these services, a change in suppliers could have an adverse effect on the business which could ultimately affect operating results.

Note F—Stockholders’ Deficiency

Reverse Merger, Exchange Transaction and Reorganization

At the time of the Exchange Transaction, LNSI had 5,505,000 shares of common stock outstanding. The LYH Convertible Debtholders contributed the First LYH Note to LNSI in exchange for an aggregate of 3,242,533 shares of LNSI stock. The First LYH Note of $5,149,980 and the related interest receivable of $162,965 at September 30, 2010, are recorded as a contra-equity item because they represent receivables from an affiliate. The maturity date of the First LYH Note is December 31, 2011 and interest accrues at the rate of 5% and quarter end interest payments were scheduled beginning June 30, 2010. On November 11, 2010, Lightyear agreed to forbear from demanding payment of past due interest under the First LYH Note or commencing any action until December 31, 2010 or such other date as agreed by the parties. See Note A Reverse Merger, Exchange Transaction and Reorganization for additional details.

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Lightyear Network Solutions, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note F—Stockholders’ Deficiency—Continued

Issuance of Preferred Stock

On April 12, 2010, the Company completed the transactions contemplated in the Exchange Agreement by issuing 9,500,000 shares of Preferred Stock to LYH. See Note A, Reverse Merger, Exchange Transaction and Reorganization for additional details.

The Preferred Stock ranks senior to Common Stock and holders of the Preferred Stock shall be entitled to be paid out of the assets of the Corporation available for distribution upon a Liquidation Event, before any payment shall be made to the holders of Common Stock, an amount per share equal to the greater of (i) the Stated Value of $2.00, plus any Accruing Dividends accrued but unpaid thereon, whether or not declared, together with any other dividends declared but unpaid thereon, or (ii) such amount per share as would have been payable had all shares of Preferred Stock been converted into Common Stock. Each share of Preferred Stock shall be convertible, at the option of the holder thereof, at any time, and without the payment of additional consideration by the holder thereof, into such number of fully paid and non-assessable shares of Common Stock as is determined by dividing the Stated Value by the Conversion Price (currently set at $2.00 per share) in effect at the time of conversion, subject to typical anti-dilution provisions. The Preferred Stock is convertible automatically upon the earlier of (a) a public offering of $40 million of gross proceeds from the sale of Common Stock, (b) shares of Common Stock trading for 20 consecutive trading days at a daily average price of not less than 200% of the Conversion Price, at an average volume of not less than 500,000 shares per day over such 20 trading day period or (c) the conversion of at least fifty percent of the shares of Preferred Stock originally issued, subject to typical adjustments for stock splits, stock dividends or other similar recapitalization events, or (d) upon the agreement of at least a majority of the Preferred Stock holders.

Holders of Preferred Stock are entitled to receive dividends at the rate of 5% of the aggregate Stated Value of Preferred Stock held by them per annum, which shall accrue and be payable when, as and if declared by the Company’s board of directors. If the Company fails to pay dividends on Preferred Stock on a quarterly basis, the dividend payment rate will increase to 8% per annum with respect to dividends previously accrued and unpaid and any future dividend payments, until such time as all accrued dividends have been paid and distributed, at which time the rate of 5% per annum shall resume. Through September 30, 2010, the Company’s board of directors did not declare, and the Company did not pay, a dividend on the issued and outstanding shares of its Preferred Stock, $0.001 par value per share. Therefore, the dividend payment rate on the Company’s Preferred Stock increased from 5% per annum to 8% per annum on all accrued but unpaid dividends on the Company’s Preferred Stock. Cumulative undeclared dividends on the Company’s Preferred Stock at the rate of 8% per annum total $383,124 and $712,110 or $0.040 and $0.075 per share for the three and nine months ended September 30, 2010, respectively.

Issuance of Common Stock and Warrants

From June to September 2010, the Company sold an aggregate of 1,342.525 unregistered units (each, a “Unit”). Each Unit sold for a price of $4,000 for aggregate gross proceeds of $5,370,100. The net proceeds from the issuance of common stock and warrants were $3,850,796, after deducting fees withheld of $1,013,314 and issuance costs paid of $505,990.

Each Unit consists of:

1,000 shares of Common Stock, $0.001 par value;

500 warrants (the “Fixed Warrants”), which are currently exercisable, to purchase one share of Common Stock at an exercise price of $4.00 per share (subject to adjustments) with a five year term;

2,000 warrants (the “Milestone Warrants”), which become exercisable only as set forth below, to purchase one share of Common Stock at an exercise price of $0.01 per share (subject to adjustments) with a three year term, and;

Up to 600 additional warrants (the “Additional Warrants”) to purchase one share of Common Stock at an exercise price of $0.01 per share with a five year term, subject to a holding requirement of shares purchased in the Offering.

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Lightyear Network Solutions, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note F—Stockholders’ Deficiency—Continued

Issuance of Common Stock and Warrants—Continued

The Fixed Warrants and Additional Warrants are exercisable at any time before their expiration and are subject to mandatory exercise or redemption, at the election of the Company, on the occurrence of certain conditions. The Milestone Warrants become exercisable only if the Company fails to achieve certain milestone conditions relating to strategic, acquisition, financial and governance issues (each a “Milestone,” and collectively, the “Milestones”). If the Company fails to meet a particular Milestone, the Milestone Warrant becomes immediately exercisable with respect to the number of shares associated with that Milestone. If the Company meets a particular Milestone, then the Milestone Warrant will be cancelled with respect to the shares associated with that Milestone.

At the end of each calendar quarter (initially September 30, 2010) following the purchase of the Units, the Company will issue to the original purchaser of Units an Additional Warrant to purchase 30 shares of Common Stock for every 1,000 shares of Common Stock held by that original purchaser (subject to proration). The right to Additional Warrants terminates five years from the date of the original issuance of the Common Stock, or upon the transfer of the originally issued Common Stock by the purchaser.

The Company entered into a Registration Rights Agreement with each of the investors purchasing Units. Subject to certain limitations and conditions under the Registration Rights Agreement, upon demand by the holders of a majority of the Units, the Company is required to file a registration statement relating to the resale of (i) the shares of Common Stock sold and (ii) the shares of Common Stock underlying each Fixed Warrant and each Milestone Warrant. Pursuant to the Registration Rights Agreement, if the Company fails to file quarterly and annual reports (the “Periodic Reports”) with the SEC in a timely manner and the investors would otherwise be able to sell Common Stock under Rule 144 promulgated under the Securities Act of 1933, the Company must pay partial liquidated damages to the investor equal to 2% of the aggregate purchase price of the Units sold in the offering associated with Common Stock still held by the investor for each month the Periodic Reports aren’t current, up to aggregate partial liquidated damages of 10% of the aggregate purchase price of the Units sold in the offering associated with Common Stock still held by the investor. As of September 30, 2010, the investors have not demanded registration of the shares.

The Company engaged selling agents in connection with the sale of Units. The Company paid selling agents aggregate placement fees of $608,412, aggregate financial advisory fees of $300,000, and aggregate expense reimbursement allowances of $101,402. In addition, the Company incurred other costs in connection with the sale of the Units of $505,990. The Company has also agreed to issue aggregate Selling Agent Warrants to purchase shares of Common Stock equal to 10% of the shares of Common Stock issued to investors (including for this purpose the number of shares of Common Stock underlying the warrants, to the extent that such warrants are exercisable by the investors) at an exercise price of $4.00 per share with a five year term. The warrants to be issued to the selling agent contain substantially the same terms as the Fixed Warrants.

In connection with the sale of Units, the Company issued Common Stock of 1,342,525 shares, plus Fixed Warrants, Milestone Warrants, Additional Warrants and Selling Agent Warrants to purchase 671,271, 2,685,050, 32,516 and 193,381 shares of Common Stock, respectively. As of September 30, 2010, none of the Milestone Warrants are exercisable.

Settlement Agreement

The $7,750,000 note receivable from LYH and the related interest receivable of $225,753 at September 30, 2010 are recorded as contra-equity items because they represent receivables from an affiliate. See Note D, Settlement Agreement, for additional details.

Recapitalization of LLC’s Accumulated Deficit at the Time of the Exchange

On February 12, 2010, Lightyear’s $26,597,754 accumulated deficit was recapitalized as additional paid in capital, as the reporting entity reorganized from a limited liability company to a corporation.

- 15 -

Lightyear Network Solutions, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note F—Stockholders’ Deficiency—Continued

Stock Plan

The 2010 Stock and Incentive Compensation Plan (the “2010 Plan”), which was approved by the board of directors and the majority stockholder of the Company on May 18, 2010, provides for grants of stock options, restricted stock, and other stock-based or cash awards to the Company’s employees, directors, and independent contractors. The number of shares of the Company’s common stock that may be issued under the 2010 Plan is 1,000,000.

Stock Option Grants

On May 19, 2010, the Company granted options to purchase an aggregate of 780,500 shares of common stock at an exercise price of $3.90 to existing employees, pursuant to the 2010 Plan. The options vest ratably over a three year period and expire after ten years. The approximate $1,444,000 grant date fair value is being amortized over the three year vesting term.

The Company has computed the fair value of options granted using the Black-Scholes option pricing model. Forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period. This estimate will be adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate, when it is material. The expected term of options granted represents the estimated period of time that options granted are expected to be outstanding. The Company utilizes the “simplified” method to develop an estimate of the expected term of “plain vanilla” option grants. Given that LNSI's shares have only been publicly traded in their current form since February 12, 2010, until such time as LNSI has sufficient trading history to compute the historical volatility of its common stock, the Company is utilizing an expected volatility figure based on a review of the historical volatilities, over a period of time, equivalent to the expected life of these options, of similarly positioned public companies within its industry. The risk-free interest rate was determined from the implied yields from U.S. Treasury zero-coupon bonds with a remaining term consistent with the expected term of the options.

In applying the Black-Scholes option pricing model, the Company used the following weighted average assumptions:

	For the Nine Months Ended September 30, 2010
Risk free interest rate		2.48	%
Expected term (years)		6.0
Expected volatility		46.7	%
Expected dividends		—

The weighted average estimated fair value of the stock options granted during the nine months ended September 30, 2010 was $1.85 per share. There were no stock options granted during the three months ended September 30, 2010.

During the nine months ended September 30, 2010, options to purchase 6,000 shares of common stock were forfeited due to employee terminations, leaving options to purchase 774,500 shares common stock outstanding with an intrinsic value of approximately $658,000 as of September 30, 2010. No options are exercisable as of September 30, 2010.

The Company recognized approximately $105,000 and $153,000 of stock-based compensation expense during the three and nine months ended September 30, 2010, related to employee stock option grants, which is reflected as selling, general and administrative expense in the condensed consolidated statements of operations. As of September 30, 2010, there was approximately $1,280,000 of unrecognized employee stock-based compensation expense related to stock option grants that will be amortized over a weighted average period of 2.6 years.

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Lightyear Network Solutions, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note F—Stockholders’ Deficiency—Continued

Forgiveness of Indebtedness to Former Parent

On February 12, 2010, LYH forgave Lightyear’s intercompany indebtedness of $25,292,175 in conjunction with the Exchange Transaction, which was comprised of $21,116,242 of loans payable to LYH and $4,762,750 of interest payable to LYH, partially offset by a $586,817 receivable from LYH.

Prior to the forgiveness of the intercompany indebtedness by LYH on February 12, 2010, but subsequent to December 31, 2009, Lightyear became indebted to LYH for an additional $2,099,980 of loans. LNS incurred fees associated with these loans aggregating $367,300. These costs were capitalized as deferred financing costs on the books of Lightyear. The additional funding arose from the following financing activity of the Former Parent:

In November 2009, LYH commenced a private placement offering and beginning in January 2010 and continuing through February 8, 2010, LYH raised $2,099,980 of gross proceeds. The notes bear simple interest at a rate equal to 10% per annum and are payable eighteen months from the date of the respective closings.

The note terms stipulated that in the event that LYH consummated (i) an offering or series of related offerings, whether in the form of debt, equity or a combination thereof, that results in gross proceeds to LYH of at least $5,000,000 (see Note A regarding Exchange Transaction), inclusive of the proceeds from an earlier convertible note offering that raised an aggregate of $3,050,000, and (ii) a merger, share exchange, sale or contribution of all substantially all of Lightyear’s assets or other business combination with a publicly-traded shell company, as a result of which the members of Lightyear immediately prior to such transaction, directly or indirectly, beneficially own more than 50% of the voting power of the surviving or resulting entity (the “Reverse Merger”), the holders of the notes would be required to exchange their notes for (i) such number of shares of common stock equal to the number of LYH Class B Units for which such notes are convertible (ii) and new five year warrants to purchase up to 50% of the number of shares of LYH Class B Units for which such notes are converted, issued at an exercise price of $1.80 per share. The transaction calls for the holders of the earlier convertible notes and warrants from the prior note to be treated in a substantially similar manner as the holder of the notes and warrants in this offering.

Prior to the Exchange Transaction (see Note A), the holders rescinded their purchase of the notes and instead received a term note with the same interest rate and duration as the notes.

Note G—Commitments and Contingencies

Litigation

As of September 30, 2010, claims have been asserted against Lightyear which arose in the normal course of business. While there can be no assurance, management believes that the ultimate outcome of these legal claims will not have a material adverse effect on the consolidated financial statements of the Company.

Billing Disputes

As of September 30, 2010, Lightyear has disputed certain vendor billings which arose in the normal course of business. While there can be no assurance, management believes that the ultimate outcome of these billing disputes will not have a material adverse effect on the consolidated financial statements of the Company.

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Lightyear Network Solutions, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note G—Commitments and Contingencies—Continued

SouthEast Asset Acquisition

On June 30, 2010, the Company and its wholly-owned subsidiary, SE Acquisitions, LLC (“SEA”), a Kentucky limited liability company organized on June 22, 2010, entered into an Asset Purchase Agreement (the “Agreement”) with SouthEast Telephone, Inc. (“SouthEast”), a Kentucky corporation. SouthEast had previously filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Eastern District of Kentucky, Pikeville Division. SouthEast provides voice and data telecommunications products and services, including local and long distance phone service, DSL and paging, to primarily residential customers. SouthEast has approximately 138 employees and approximately 31,000 customer lines. SouthEast is a debtor in possession and is operating its business under Section 1108 of the Bankruptcy Code.

Pursuant to the Agreement, SEA agreed to purchase substantially all of the real property, intellectual property, tangible assets, and selected vendor contracts used in the conduct of SouthEast’s business, and to assume certain post-closing liabilities related to the purchased assets. SouthEast will retain certain liabilities related to its business. SEA has the right under the Agreement to designate additional assets or liabilities of SouthEast to be included in the Agreement. In consideration of the purchased assets, SEA could pay: (i) up to $560,000 in cash to SouthEast for administrative and priority expenses; (ii) $4,000 in cash to each of SouthEast’s employees who is not offered employment with the Company; and, (iii) an aggregate of 200,000 shares of Company common stock, par value $0.001 per share, to SouthEast’s equity holders. SEA will also assume approximately $4,330,000 of SouthEast’s secured debt.

On August 16, 2010 the United States Bankruptcy Court for the Eastern District of Kentucky entered a Confirmation Order approving the sale of substantially all the assets of SouthEast Telephone, Inc. to SE Acquisitions, LLC.

On August 16, 2010, the United States Bankruptcy Court for the Eastern District of Kentucky entered a Stipulation and Agreed Order Between Debtor, AT&T and Lightyear, whereby (1) AT&T agreed to the post-closing assumption and assignment of the AT&T contracts by Lightyear; (2) Lightyear assumes only the post-closing liabilities arising under the AT&T contracts and specifically does not assume various AT&T Claims; (3) in settlement of all pre-petition AT&T claims, $361,536 of SouthEast’s $661,536 deposit with AT&T will be released to AT&T and commencing on the fourth month after the final closing date, Lightyear shall pay to AT&T $55,245 on the fifteenth day of each month for a period of ten consecutive month for a total of $552,452; (4) Lightyear will deposit with AT&T $100,000 on the fifteenth day of each month for a period of three consecutive months after the final closing date, such that the aggregate deposit will become $600,000; (5) the AT&T claim shall be deemed permanently fixed stipulated and allowed as a general unsecured claim against SouthEast in the amount of $23,688,572, but AT&T waives its right to receive a distribution as a claimant, provided that a majority of claimants vote to accept the plan and Windstream Kentucky East, LLC (“Windstream”) similarly agrees to waive its right to receive a distribution on its claim; (6) Lightyear is obligated to make weekly $280,000 prepayments toward its obligation under the AT&T contracts which will be reconciled and adjusted by both AT&T and Lightyear by the 15th of the following month; and (7) AT&T and SouthEast agree to voluntarily dismiss all of the AT&T litigation with prejudice with each party bearing its own costs and expenses, with the exception of one action that will be prosecuted by AT&T through conclusion, but the parties agree that AT&T shall waive any back-due fees arising under the action and will only charge Lightyear the rates allowed under the action on a going forward basis. AT&T will review the above credit terms after approximately twelve months.

On August 16, 2010, the United States Bankruptcy Court for the Eastern District of Kentucky entered a Stipulation and Agreed Order Between Debtor, Windstream and Lightyear, whereby (1) Windstream agreed to the post-closing assumption and assignment of the Windstream contracts by Lightyear; (2) Lightyear assumes only the post-closing liabilities arising under the Windstream contracts and specifically does not assume various Windstream Claims; (3) in settlement of all pre-petition Windstream claims, $61,000 of SouthEast’s $146,000 deposit with Windstream will be released to Windstream and commencing on the first month after the final closing date, Lightyear shall pay to Windstream $9,800 on the fifteenth day of each month for a period of five consecutive months for a total of $49,000; and (4) the Windstream claim shall be deemed permanently fixed stipulated and allowed as a general unsecured claim against SouthEast in the amount of $222,862, but Windstream waives its right to receive a distribution as a claimant.

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Lightyear Network Solutions, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note G—Commitments and Contingencies—Continued

SouthEast Asset Acquisition—Continued

On August 16, 2010, the United States Bankruptcy Court for the Eastern District of Kentucky entered a Stipulation and Agreed Order Between Debtor, Qwest Communications Company (“Qwest”) and Lightyear, whereby (1) Qwest agreed to the post-closing assumption and assignment of the Qwest contracts by Lightyear; (2) Lightyear assumes only the post-closing liabilities arising under the Qwest contracts and specifically does not assume various Qwest Claims; and (3) the Qwest claim shall be deemed permanently fixed stipulated and allowed as a general unsecured claim against SouthEast in the amount of $1,616,600, but Qwest waives its right to receive a distribution as a claimant.

On August 16, 2010, the United States Bankruptcy Court for the Eastern District of Kentucky entered a Stipulation and Agreed Order Between Debtor, two additional vendors and Lightyear, whereby (1) the vendor contracts were deemed rejected; and (2) the vendors were permitted to retain their aggregate deposits of $110,009.

The Agreement contains customary representations and warranties of the parties. The asset purchase transaction closed on October 1, 2010. See Note H, SouthEast Asset Acquisition, for additional details.

Employment Agreements

On February 12, 2010, upon the closing of the Exchange Agreement, the Company assumed LYH’s employment agreement (the “Agreement”) with an officer of the Company. The initial term of the Agreement was from March 31, 2004 through December 31, 2008. At the end of the initial term, the Agreement was automatically renewed for an additional one year term, and shall be automatically renewed for successive additional one-year terms, unless within 180 days prior to the end of the initial term or any additional term either party gives the other written notice of the Company’s or the officer’s intent not to renew the agreement. Under the Agreement, the officer is to receive a base salary, adjusted annually consistent with increases given to other executives of the Company, plus other fringe benefits and is eligible for various bonuses. During the employment term, the base salary has been periodically amended and as of September 30, 2010 is approximately $282,000 per annum.

On April 29, 2010, the Company’s new Chief Operating Officer entered into an employment agreement with the Company with a salary of $125,000 per annum, a discretionary bonus and an expectation to receive options to purchase shares of the Company’s common stock, upon the approval of a Company stock incentive plan (See Note F). The term of the employment agreement is three years. The agreement provides that, in the event of a termination without cause or a resignation for good reason, as defined in his employment agreement, the Chief Operating Officer will continue to: be paid his salary in accordance with the Company’s regular payment schedule until the end of twelve months; be entitled to receive any incentive payments earned and accrued but not yet paid; receive continued medical coverage at the Company’s expense until the end of twelve months; and receive, through the termination date, all accrued and unpaid salary, all unused vacation time, and all unreimbursed business expenses incurred.

Note H—Subsequent Events

SouthEast Asset Acquisition

On October 1, 2010, the Company and SEA consummated the purchase of substantially all of the real property, intellectual property, tangible assets, and selected vendor contracts used in the conduct of business of SouthEast, assuming certain post-closing liabilities related to the purchased assets.

The aggregate purchase price paid is estimated to be $1,510,000, which consists of up to $560,000 in cash to SouthEast to fund SouthEast’s administrative and priority expenses and 200,000 shares of common stock in Lightyear Networks Solutions, Inc., valued at $950,000. Prior to the acquisition, SouthEast paid $123,844 for administrative claims, and on the acquisition date, SouthEast retained $328,830 in cash for the purpose of paying further administrative and priority expenses, which amounts were credited against the $560,000 obligation. To the extent that this amount does not satisfy all of SouthEast’s administrative claims, Lightyear will pay up to an additional $107,326 for such expenses. SEA assumed approximately $4,330,000 of SouthEast’s secured debt. SEA also assumed SouthEast’s remaining obligations under the Lease (see Pike County Real Estate Lease).

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Lightyear Network Solutions, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note H—Subsequent Events—Continued

SouthEast Asset Acquisition—Continued

As part of the Agreement, SEA assumed SouthEast’s obligations under the agreements discussed in Note G, SouthEast Asset Acquisition, plus the following:

Community Trust Bank Notes

On October 1, 2010, SEA and the Company, as co-borrowers with joint and several liability, (i) entered into a $2,536,874 secured term note (the “CT Note”), (ii) assumed a $140,250 real estate secured note with an unpaid principal balance of $117,408 (“CT Mortgage Note 1”), and (iii) assumed a $63,750 real estate secured note with an unpaid principal balance of $32,026 (“CT Mortgage Note 2”) with Community Trust Bank, Inc. (“Community Trust”). The amount available under the CT Note is for the refinancing of debt assumed by SEA from SouthEast pursuant to the Purchase Agreement. The amounts due under CT Mortgage Note 1 and CT Mortgage Note 2 were assumed by SEA pursuant to the terms of the Purchase Agreement and assumed by SEA and the Company pursuant to that certain Assumption Agreement by and between SEA, the Company and Community Trust dated October 1, 2010.

Borrowing under the CT Note will bear interest at a rate equal to the most recently quoted Prime Rate on corporate loans in effect at large United States money center commercial banks, as reported in the Wall Street Journal, plus one percent (1%); provided, however, that the rate will never be less than five percent (5%) and will never be more than six and ½ percent (6.5%). In the event the Wall Street Journal quotes more than one prime rate, the Prime Rate for purposes of the CT Note shall be the highest Prime Rate quoted. As of October 1, 2010, the rate on the CT Note was five percent (5%). The CT Note has a sixty (60) month term with a maturity date on September 30, 2015. SEA must make monthly payments consisting of principal and interest in the amount necessary to pay the CT Note in full over the sixty (60) month term with the entire then-outstanding principal balance and all accrued but unpaid interest on the CT Note due and payable in full on the maturity date.

The CT Note is secured by a first priority perfected security interest, subject to certain permitted encumbrances, in SEA’s accounts receivable, inventory, equipment, general intangibles, documents, instruments, fixtures, all other assets and personal property of SEA, and the proceeds of the foregoing. The CT Note is further secured by a first priority perfected security interest in the membership interests in SEA held by the Company.

Outstanding principal under CT Mortgage Note 1 will bear interest at a rate equal to the highest Prime Rate most recently published in the Wall Street Journal plus one percent (1%). As of October 1, 2010, the rate on CT Mortgage Note 1 was four and ¼ percent (4.25%). CT Mortgage Note 1 has a twenty (20) year original term with a maturity date on October 18, 2024. SEA must make monthly payments consisting of principal and interest in the amount of $991, subject to any payment changes resulting from changes in the applicable interest rate.

CT Mortgage Note 1 is secured by a mortgage in the real property located at 119 Second Street, Pikeville, Kentucky, dated October 18, 2004, and is further secured by an assignment of rents as of the same date.

Outstanding principal under CT Mortgage Note 2 will bear interest at a rate equal to the highest Prime Rate most recently published in the Wall Street Journal plus one percent (1%). As of October 1, 2010, the rate on CT Mortgage Note 2 was four and ¼ percent (4.25%). CT Mortgage Note 2 has a ten (10) year original term with a maturity date on January 26, 2014. SEA must make monthly payments consisting of principal and interest in the amount of $678, subject to any payment changes resulting from changes in the applicable interest rate.

CT Mortgage Note 2 is secured by a mortgage in the real property located at 106 Scott Avenue, Pikeville, Kentucky, dated January 26, 2004.

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Lightyear Network Solutions, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note H—Subsequent Events—Continued

SouthEast Asset Acquisition—Continued

Pike County Real Estate Lease

On October 1, 2010, SEA assumed SouthEast’s Lease and Option Agreement (the “Lease”), dated January 1, 2004, with Pike County, Kentucky (“Pike County”) for the building and land located at 106 Scott Avenue, Pikeville, KY (the “Leased Premises”). SouthEast used the Leased Premises for its Administrative and Customer Care Headquarters.

The original term of the Lease is 10 years through December 31, 2013. However, unless SEA gives prior written notice to Pike County of its intent not to extend the Lease, the Lease automatically extends for another 10 year term on the same payment terms, expiring on December 31, 2023. If SEA does not extend the Lease after the original term, SEA must pay to Pike County a fee of $100,000.

The monthly rent for the Leased Premises is $6,657, subject to certain required employment levels. If SEA fails to maintain 80 full time employees during the term of the Lease, the monthly rent increases to $7,509. Under the Lease, SEA is required to: (i) maintain comprehensive liability insurance in an amount not less than $2,000,000 combined, single limit; (ii) pay all real estate taxes; and, (iii) indemnify Pike County from and against all suits whatsoever relating to the Leased Premises, except legal action concerning title to the Leased Premises.

SEA has an option to purchase the Leased Premises at any time during the term of the Lease upon written notice (certified mail) to Pike County at least 30 days before the date on which SEA desires to exercise the option and purchase the Leased Premises. The option price to purchase the Leased Premises is $977,543 as of October 1, 2010.

Unaudited Pro Forma Financial Information

The following presents the unaudited pro forma combined results of operations of the Company and SouthEast as if the acquisition was consummated at the beginning of the periods presented.

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2010			2009			2010			2009

Revenues	$	18,308,113		$	21,223,758		$	56,261,007		$	71,925,947

Net loss attributable to common stockholders	$	(1,237,465	)	$	(1,013,152	)	$	(3,933,550	)	$	(3,669,890	)

Pro-forma basic and diluted net loss per common share	$	(0.06	)	$	(0.10	)	$	(0.22	)	$	(0.36	)

Pro-forma weighted average common shares outstanding – basic and diluted		20,031,101			10,200,000			17,971,761			10,200,000

The pro forma combined results are not necessarily indicative of the results that actually would have occurred if the acquisition of SouthEast had been completed as of the beginning of 2010 or 2009, nor are they necessarily indicative of future consolidated results.

Stock Option Grants

On October 1, 2010, the Company granted options to purchase an aggregate of 155,000 shares of common stock at an exercise price of $4.75 to certain key employees that joined the Company in connection with the SouthEast asset acquisition, pursuant to the 2010 Plan. The options expire after ten years. The approximate $338,000 grant date fair value will be amortized ratably over the three year vesting term. The Company has computed the fair value of options granted using the Black-Scholes option pricing model. In applying the Black-Scholes option pricing model, the Company used a risk free interest rate of 1.58%, an expected term of 6 years, expected volatility of 47% and no expected dividends.

- 21 -

Lightyear Network Solutions, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note H—Subsequent Events—Continued

Restricted Stock Grants

On October 12, 2010, the Company granted an aggregate of 16,234 shares of restricted stock to its non-employee directors, pursuant to the 2010 Plan, at a market value of $4.75 per share, the closing price on that date. Accordingly, the approximate $77,000 grant date fair value will be amortized over the one year vesting period.

Short-Term Borrowings

On November 10, 2010, effective as of March 17, 2010, the Note associated with the closed end credit facility was modified to eliminate the Equity Payment that had been scheduled for October 30, 2010. The Company is required to continue to make the regular scheduled monthly principal payment of $111,112, plus interest.

Milestone Warrants

During October 2010, as determined by the Board of Directors on November 11, 2010, the Company satisfied two of the milestones associated with the Milestone Warrants, which resulted in the cancellation of Milestone Warrants to purchase 894,129 shares of common stock.

- 22 -

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

The following discussion and analysis of the results of operations and financial condition of Lightyear Network Solutions, Inc. and Subsidiaries (“LNSI”) for the three and nine months ended September 30, 2010 and 2009 should be read in conjunction with our financial statements and the notes to those financial statements that are included elsewhere in this Quarterly Report on Form 10-Q. References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to “us,” “we,” “our,” and similar terms refer to LNSI. References to Lightyear refer to LNSI’s wholly-owned subsidiary Lightyear Network Solutions, LLC. This discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors. See “Risk Factors” under Item 2.01 of LNSI’s Form 8-K/A filed March 31, 2010. Words such as “anticipate,” “estimate,” “plan,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions are used to identify forward-looking statements.

Overview

Lightyear provides a broad suite of telecommunications services throughout the United States. Lightyear was organized in 2003 and is a wholly-owned subsidiary of LNSI which was incorporated in 1997. Lightyear and its wholly-owned subsidiary, Lightyear Alliance of Puerto Rico, LLC, provide telecommunications services in 49 states and Puerto Rico and are licensed local carriers in 44 states. The Company sells its products and services primarily through a distribution network of more than 350 authorized independent agents. In addition to the primary products of the Company, long distance and local service, we offer internet/intranet services, calling cards, advanced data, wireless, Voice over Internet Protocol (“VoIP”) and conference calling. The Company continuously evaluates new telecommunications services as they become available and as they are requested by customers.

Lightyear provides service to approximately 40,000 customer locations as of September 30, 2010, with a significant concentration in the five state area of Kentucky, Ohio, Indiana, Florida and Georgia. The Company builds regional customer concentrations which provide a contiguous service area and operational efficiencies. This is expected to result in higher margins with a nationwide distribution network through which new concentrations may be built. Approximately 84% of the Company’s revenues were received from business customers and 16% from residential customers in the quarter ended September 30, 2010 and approximately 77% of the Company’s revenues were received from business customers and 23% from residential customers in the quarter ended September 30, 2009.

We intend to increase Lightyear’s revenue and earnings via a combination of organic and acquisition based growth. The organic growth strategy is focused on the Company’s extensive network of independent agents and a growing number of creative marketing and incentive plans targeting higher margin products and multi-location customers. In addition, new carrier relationships and enhanced wireless, VoIP and data products will complement our existing strengths in landline service products. Our acquisition strategy is focused on identifying small to mid-sized companies that provide either products or services similar to those provided by Lightyear or ones that expand the Company’s product offering and/or geographic reach. We maintain a disciplined approach to acquisitions such that potential acquisition candidates are expected to meet specific criteria including the following:

Accretive to earnings in the first year;

Accretive to cash flow, including amortization of the cost of capital, in the first 6 months following the acquisition;

Strategic locations throughout the US where Lightyear has and/or anticipates significant demand for its service offerings.

Lightyear’s management team and its advisors bring significant strengths to its ability to integrate and consolidate acquired companies and assets. In addition, specific technologies have been developed to significantly facilitate such integrations. An example is the Portal System, Lightyear’s proprietary Operation Systems Support system (“OSS”), a single point of entry for quoting new business, order entry, billing and collections, and communicating directly with our major suppliers.

- 23 -

On October 1, 2010, Lightyear and its wholly-owned subsidiary, SE Acquisitions, LLC (“SEA”), completed the acquisition of the business assets of Southeast Telephone, Inc. (“SouthEast”), a Kentucky corporation, for total consideration of approximately $1.5 million from SouthEast’s bankruptcy estate. SouthEast filed for bankruptcy under Chapter 11 in September 2009.

SouthEast, with approximately 31,000 customer lines, provides voice and data telecommunications products and services, including local and long distance phone service, DSL and paging, to primarily residential customers. SouthEast’s revenues were approximately $37.5 million and $24.0 million for the twelve months ended December 31, 2009 and nine months ended September 30, 2010, respectively. SouthEast currently has approximately 138 employees. As of September 30, 2010, SouthEast was a debtor in possession and was operating its business under Section 1108 of the Bankruptcy Code. See Recent Developments – SouthEast Asset Acquisition for additional details.

Many of the unfavorable economic conditions and market pressures, including heightened competition, which affected our results of operations in 2009 continued in the first nine months of 2010. In mid 2009, we initiated an extensive evaluation of our product lines and product line performance. As a result of that evaluation, the Company determined that the post-paid wireless product had resulted in significant growth in bad debt expense. The sales and marketing of that product were significantly scaled back as a result until a more robust pre-paid product could be developed and marketed. Largely as a result of this action, our provision for bad debt expense was reduced to $0.2 million from $0.9 million and to $0.9 million from $3.0 million for the three and nine months ended September 30th 2010 and 2009, respectively. The pre-paid wireless plan has been continuously improved subsequent to its initial launch in June 2009 and revenues have reached approximately $140,000 in the month of September 2010. The Company further determined that margins were being adversely affected by the sale of wholesale voice services to a small number of customers. The discontinuance of these services resulted in a decrease of voice revenues to $15.6 million from $18.2 million for the nine months ended September 30, 2010 and 2009, respectively. However, the transfer of additional SouthEast traffic to Lightyear in the third quarter of 2010 resulted in voice revenues increasing to $5.5 million from $5.2 million for the three months ended September 30, 2010 and 2009, respectively. We also determined that although margins for our web-based products were robust, significant customer turnover existed in this product category. As a result, we reduced our sales in this category to $0.1 million from $0.4 million and to $0.6 million from $2.6 million for the three and nine months ended September 30, 2010 and 2009, respectively. Lightyear also elected to strengthen its sales efforts and added a new Vice President of Sales to its senior management group to increase focus on the sales of higher margin products. In addition, new discussions were initiated with various carriers to begin the direct sale of their wireless products to increase wireless margins and broaden the array of wireless products that can be offered.

Other Management Information

Our Company uses various operating statistics to manage our business. We believe that such operating statistics are important in measuring operating performance and evaluating our performance. The two key operating statistics we employ are ARPU and Average Churn.

ARPU is a metric that measures service revenues per period divided by the weighted average number of customers in service during that period,

Average Churn measures the net gain or loss of revenue from customers as a percentage change from the beginning of the period to the end of the period, net of acquisitions.

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These operating statistics should be considered in addition to, but not as a substitute for, the information contained in our condensed consolidated statements of operations.

	For The
	Month Ended September 30,
	2010		2009
ARPU	$	99	$	65

	For The
	Nine Months Ended September 30,
	2010			2009
Average Churn		3.2	%		6.2	%

Revenues

Our revenues are primarily derived from the sales and provision of the following services:

Voice Services

Local Services

VoIP Services

Data Services

Wireless Services

Other Services

Cost of Revenues

Cost of revenues consist primarily of carrier access fees, network costs and usage fees associated with providing our wholesale telecommunications services.

Operating Expenses

Operating expenses include:

commission expense which consists of payments to agents based on a percentage of the monthly billings and upfront payments to agents at the time the customer was acquired;

depreciation and amortization, including depreciation of long-lived property, plant and equipment and amortization of intangible assets where applicable;

bad debt expense represents an estimate of the incremental non-collectible receivables;

transaction expenses represent expenses related to the reverse merger or acquisition activity; and

selling, general and administrative expenses which consist of selling, advertising, marketing, billing and promotion expenses, plus salaries and benefits, rent associated with our office space, professional fees, travel and entertainment, depreciation and amortization and other costs.

Other Income (Expense)

Interest income – related parties represents interest earned on the First and Second LYH Notes;

Interest expense – related parties currently represents interest payable on the LNS Obligation and formerly on the loans payable to LYH;

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Other Income (Expense)—Continued

Amortization of deferred financing costs represents the charging off of the costs associated with LYH’s convertible note and warrant offering, originally over the term of the notes, but which ceased being amortized on Lightyear’s books on February 12, 2010;

Amortization of debt discount represents the charging off of the value of the conversion option of the notes and the related warrants, originally over the term of the notes, but which ceased being amortized on Lightyear’s books on February 12, 2010;

Change in fair value of derivative liabilities represents the mark-to-market of the value of LYH’s derivative liabilities (various warrants and conversion options) through February 12, 2010. Through February 12, 2010, Lightyear bore the expense associated with interest expense, deferred financing costs, amortization of debt discount and change in the fair value of derivative liabilities because the related financings were conducted by LYH in order to fund Lightyear’s operations. On February 12, 2010, LYH forgave the intercompany indebtedness and assumed responsibility for the remaining expenses; and

Other expense – related parties represents the cost of the Settlement Agreement transaction.

Results of Operations

Comparison of Three Months Ended September 30, 2010 and 2009

Revenues

The following table presents our operating revenues by product category for the three months ended September 30, 2010 and 2009

	For The
	Three Months Ended September 30,
(dollars in millions)	2010		2009		$ variance			% variance
Voice service	$	5.5	$	5.2	$	0.3			6	%
Local service		2.0		2.1		(0.1	)		(3	)%
VoIP		1.0		1.2		(0.2	)		(17	)%
Data services		1.0		1.1		(0.1	)		(11	)%
Wireless services		0.7		1.2		(0.5	)		(44	)%
Other services		1.4		1.7		(0.3	)		(15	)%
TOTAL	$	11.6	$	12.5	$	(0.9	)		(7	)%

Revenues were approximately $11.6 million and $12.5 million, respectively for the three months ended September 30, 2010 and 2009, a decrease of $0.9 million or 7%. This decrease reflects continued market pressure and the reasons discussed above, principally the shift away from lower margin revenue to sales programs designed to capture higher margin, lower churn revenue. Other services include the sale of web-based products.

Cost of Revenues

Cost of revenues for the three months ended September 30, 2010 and 2009, amounted to approximately $8.0 million (69% of revenues) and $8.3 million (67% of revenues), respectively, a decrease of $0.3 million or 4%. Cost of revenues as a percentage of revenues rose slightly due to increased market pressures on the pricing of our products.

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Operating Expenses

Consistent with our de-emphasizing post-paid wireless services as discussed above, bad debt expense decreased by $0.7 million or 75% to $0.2 million from $0.9 million, as a result of significant uncollectible receivables in 2009 associated with the launch of our post paid wireless product, which ultimately resulted in shifting our focus to a prepaid product. Selling, general and administrative expenses decreased by $0.3 million or 10% to $2.7 million from $3.0 million, primarily as a result of a decrease in headcount and related benefits, plus other cost reduction measures, partially offset by an increase in professional fees associated with the Company being a publicly held entity and fees incurred in connection with the implementation of a stock compensation plan. Commission expenses increased by $0.3 million or 29% to $1.3 million (11% of revenues) from $1.0 million (18% of revenues), primarily as a result of payments earned by agents under a new bonus program combined with waivers of 2009 Revenue Payments to members of LYH related to VoIP and wireless revenues. Depreciation and amortization expense decreased negligibly to $0.1 million. Transaction expenses of $0.3 million in 2010 represent professional service costs associated with our asset acquisition.

Other Income (Expense)

Interest income – related parties increased to $0.3 million from none due to the recording of interest income on the First and Second LYH Notes. Interest expense – related parties decreased $0.4 million or 77%, to $0.1 million from $0.5 million, due principally to a decrease in interest expense associated with the forgiveness of the intercompany indebtedness, partially offset by the recording of interest expense associated with the LNS Obligation.

Comparison of Nine Months Ended September 30, 2010 and 2009

Revenues

The following table presents our operating revenues by product category for the nine months ended September 30, 2010 and 2009

	For The
	Nine Months Ended September 30,
(dollars in millions)	2010		2009		$ variance			% variance
Voice service	$	15.6	$	18.2	$	(2.6	)		(14	)%
Local service		6.2		6.6		(0.4	)		(7	)%
VoIP		3.0		3.7		(0.7	)		(18	)%
Data services		3.0		3.8		(0.8	)		(21	)%
Wireless services		2.0		5.7		(3.7	)		(65	)%
Other services		4.3		6.1		(1.8	)		(29	)%
TOTAL	$	34.1	$	44.1	$	(10.0	)		(23	)%

Revenues for the nine months ended September 30, 2010 and 2009 were approximately $34.1 million and $44.1 million, respectively, a decrease of $10.0 million or 23%. This decrease reflects continued market pressure and the reasons discussed above, principally the shift away from lower margin revenue to sales programs designed to capture higher margin, lower churn revenue. Other services include the sale of web-based products.

Cost of Revenues

Cost of revenues for the nine months ended September 30, 2010 and 2009, amounted to approximately $23.3 million (68% of revenues) and $29.1 million (66% of revenues), respectively, a decrease of $5.8 million or 20%. Cost of revenues as a percentage of revenues rose slightly due to increased market pressures on the pricing of our products.

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Operating Expenses

Consistent with our de-emphasizing post-paid wireless services as discussed above, bad debt expense decreased by $2.1 million or 69% to $0.9 million from $3.0 million, as a result of significant uncollectible receivables in 2009 associated with the launch of our post paid wireless product, which ultimately resulted in shifting our focus to a prepaid product. Selling, general and administrative expenses decreased by $1.8 million or 18% to $8.1 million from $9.9 million, primarily as a result of a decrease in headcount and related benefits, plus other cost reduction measures, partially offset by an increase in professional fees associated with the Company being a publicly held entity and fees incurred in connection with the implementation of a stock compensation plan. Commission expenses decreased $0.4 million or 10%, to $3.8 million (11% of revenues) from $4.2 million (10% of revenues), due to payments earned by agents under a new agent bonus program combined with waivers of 2009 Revenue Payments to the members of LYH related to VoIP and wireless revenues. Depreciation and amortization expense decreased $0.2 million or 58%, to $0.2 million from $0.4 million, primarily due to the fact that intangible assets with finite lives were fully amortized by March 2009. Transaction expenses of $0.8 million represent professional service costs associated with structuring and compliance activities supporting our February 12, 2010 reverse merger and our asset acquisition.

Other Income (Expense)

Interest income – related parties increased to $0.4 million from none due to the recording of loan interest income on the First and Second LYH Notes. Interest expense – related parties decreased $1.0 million or 70%, to $0.4 million from $1.4 million, due principally to a decrease in interest expense associated with the forgiveness of the intercompany indebtedness, partially offset by the recording of interest expense associated with the LNS Obligation. Other expense – related parties increased to $0.3 million from none because the Company incurred a charge in connection with the acquisition of the Second LYH Note.

Recent Developments

Issuance of Common Stock and Warrants

From June to September 2010, the Company sold an aggregate of 1,342.525 unregistered units (each, a “Unit”). Each Unit sold for a price of $4,000 for aggregate gross proceeds of $5,370,100.

Each Unit consists of:

1,000 shares of Common Stock, $0.001 par value;

500 warrants (the “Fixed Warrants”), which are currently exercisable, to purchase one share of Common Stock at an exercise price of $4.00 per share (subject to adjustments) with a five year term;

2,000 warrants (the “Milestone Warrants”) to purchase one share of Common Stock at an exercise price of $0.01 per share (subject to adjustments) with a three year term; and,

Up to 600 additional warrants (the “Additional Warrants”) , which become exercisable only as set forth below, to purchase one share of Common Stock at an exercise price of $0.01 per share with a five year term, subject to a holding requirement of shares purchased in the Offering.

The Fixed Warrants and Additional Warrants are exercisable at any time before their expiration and are subject to mandatory exercise or redemption, at the election of the Company, on the occurrence of certain conditions. The Milestone Warrants become exercisable only if the Company fails to achieve certain milestone conditions relating to strategic, acquisition, financial and governance issues (each a “Milestone,” and collectively, the “Milestones”). If the Company fails to meet a particular Milestone, the Milestone Warrant becomes immediately exercisable with respect to the number of shares associated with that Milestone. If the Company meets a particular Milestone, then the Milestone Warrant will not be exercisable with respect to the shares associated with that Milestone.

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The Company engaged selling agents in connection with the sale of Units. In connection with the closings, the Company paid selling agents aggregate placement fees of $608,412, aggregate financial advisory fees of $300,000, and aggregate expense reimbursement of $101,402. In addition, the Company incurred other costs of $505,990 in connection with the June 2010 closings. The Company has also agreed to issue aggregate Selling Agent Warrants to purchase shares of Common Stock equal to 10% of the shares of Common Stock issued to investors (including for this purpose the number of shares of Common Stock underlying the warrants, to the extent that such warrants are exercisable by the investors) at an exercise price of $4.00 per share with a five year term. The warrants to be issued to the selling agent contain substantially the same terms as the Fixed Warrants.

SouthEast Asset Acquisition

On October 1, 2010, Lightyear and its wholly-owned subsidiary, SEA, completed the acquisition of the business assets of Southeast, for total consideration of approximately $1.5 million from SouthEast’s bankruptcy estate.

Lightyear purchased substantially all of the real property, intellectual property, tangible assets, and selected vendor contracts used in the conduct of SouthEast’s business, and assumed certain post-closing liabilities related to the purchased assets. SouthEast retained certain liabilities related to its business. In consideration of the purchased assets, Lightyear paid: (i) up to $560,000 in cash to SouthEast for SouthEast’s administrative and priority expenses; (ii) an aggregate of $28,000 in cash to SouthEast’s 7 employees who were not offered employment with the Company; and, (iii) an aggregate of 200,000 shares of Company common stock, par value $0.001 per share, valued at $950,000, based on a $4.75 October 1, 2010 closing market price per share, to SouthEast’s equity holders. Prior to the acquisition, SouthEast paid $123,844 for administrative claims, and on the acquisition date, SouthEast retained $328,830 in cash for the purpose of paying further administrative and priority expenses, which amounts were credited against the $560,000 obligation. To the extent that this amount does not satisfy all of SouthEast’s administrative claims, Lightyear will pay up to an additional $107,326 for such expenses. SEA will also assume approximately $4,330,000 of SouthEast’s secured debt. Lightyear anticipates recognizing an estimated pre-tax gain on the bargain purchase of these assets of approximately $4 million in the fourth quarter of 2010.

Short-Term Borrowings

On November 10, 2010, effective March 17, 2010, the Note associated with the closed end credit facility was modified to eliminate the Equity Payment that had been scheduled for October 30, 2010. The Company is required to continue to make the scheduled monthly principal payment of $111,112, plus interest.

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Liquidity and Capital Resources

Overview

Since Lightyear began operations in 2004, we have incurred significant operating losses. Through the date of the reverse merger, Lightyear had an accumulated member’s deficit of approximately $26.6 million. As a result, we have monitored our cash balances and operating costs to attempt to maintain an adequate level of cash. As of September 30, 2010, Lightyear had a cash balance of $0.2 million and a working capital deficit of $9.8 million.

Historically, Lightyear’s working capital had come from loans from LYH and, when available, from operations. In connection with the reverse merger transaction with Libra, Lightyear’s debt and interest obligations to LYH were extinguished. We have instituted cost reductions, raised our customer credit requirements, and stepped up our efforts to increase revenues through targeted promotions over the past 18 months, all toward the goal of achieving positive cash flow from operations within the coming twelve months.

Currently, the significant items impacting Lightyear’s liquidity are aggregate notes and interest receivable from LYH of $13.3 million (not included in the working capital deficit above) and aggregate obligations and interest payable to Sullivan of $7.6 million. LYH’s principal assets are 10 million shares of Lightyear common stock and 9.5 million shares of Lightyear preferred stock, which are convertible into the same number of shares of common stock.

(a)

The LYH receivables include a $5.15 million note receivable (“First LYH Note”) and a related $0.2 million interest receivable as of September 30, 2010, both of which are reflected as contra-equity items on the balance sheet. The First LYH Note was contributed to Lightyear by the LYH Convertible Debtholders in exchange for shares of the Company’s common stock, pursuant to the Exchange Transaction. The First LYH Note has a maturity date of December 31, 2011 and interest is payable at each quarter end, beginning June 30, 2010. On November 11, 2010, Lightyear agreed to forbear from demanding payment of past due interest under the First LYH Note or commencing any action until December 31, 2010 or such other date as agreed by the parties. The obligations under the First LYH Note are secured by a subordinated security interest in certain assets of LYH, specifically including its interests in Lightyear common stock and preferred stock.

(b)

The LYH receivables also include a $7.75 million note receivable (“Second LYH Note”) and a related $0.2 million interest receivable as of September 30, 2010, both of which are reflected as contra-equity items on the balance sheet. The Second LYH Note was purchased by Lightyear pursuant to the Settlement Agreement. The Second LYH Note is a demand note. The obligations under this note are secured by a security interest in LYH’s interests in Lightyear common stock and preferred stock and certain interests in LYH, excluding Sullivan’s interest.

(c)

The LNS Obligation to Sullivan is $7.5 million plus an interest payable of $0.1 million. The LNS Obligation represents Lightyear’s consideration for the purchase of the Second LYH Note pursuant to the Settlement Agreement. The LNS Obligation principal and unpaid interest is due on the maturity date, which is the earlier of (a) July 1, 2011, or (b) the maturity date of Sullivan’s underlying bank loan (acknowledged to currently be January 10, 2011). In addition, Lightyear is scheduled to make quarterly principal payments of $250,000 plus interest on the first day of each quarter, including the payment made on October 1, 2010. The LNS Obligation is reflected in the working capital deficit cited above, but the Settlement Agreement specifies that Lightyear is not required to make payments to Sullivan if Lightyear, in its sole discretion, determines that such payments would impair Lightyear’s ability to pay other creditors.

In connection with the SouthEast asset acquisition, we will pay: (i) up to $560,000 in cash to SouthEast for SouthEast’s administrative and priority expenses; (ii) an aggregate of $28,000 in cash to SouthEast’s 7 employees who were not offered employment with the Company; and, (iii) an aggregate of 200,000 shares of Company common stock, par value $0.001 per share, valued at $950,000, to SouthEast’s equity holders. We also assumed approximately $4,330,000 of SouthEast’s secured debt. SouthEast’s revenues were approximately $37.5 million and $24.0 million for the twelve months ended December 31, 2009 and nine months ended September 30, 2010, respectively.

As of September 30, 2010, Lightyear had outstanding advances on its new closed end credit facility of $653,764. Lightyear is currently scheduled to make regular month end payments of $111,112 of principal plus accrued interest pursuant to the recently amended agreement.

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During September 2010, we completed a private placement of common stock and warrants and raised gross proceeds of $5,370,100. The expected use of proceeds is: (1) offering expenses, (2) acquisitions, (3) general working capital and (4) debt reduction.

The Company is currently investigating the capital markets for additional financings in order to fund (i) network build-out; (ii) debt reduction; (iii) public/investor relations; and (iv) working capital requirements. There can be no assurance that we will be successful in securing additional capital. If we are unable to raise additional funds, we may need to (i) initiate additional cost reductions; (ii) forego acquisition opportunities; and (iii) seek extensions of our scheduled payment obligations, including the LNS Obligation.

Nine Months Ended September 30, 2010 and 2009

Operating Activities

Net cash used in operating activities was $5.3 million for the nine months ended September 30, 2010 compared to $1.5 million for the nine months ended September 30, 2009. The amount used during the nine months ended September 30, 2010 was primarily due to a $2.4 million cash loss from operations (after non-cash adjustments), a $2.0 million reduction in operating liabilities, primarily a reduction in accounts payable as a result of cash available from proceeds from financing activities and a $0.9 million increase in operating assets, principally an increase in accounts receivable. The amount used during the nine months ended September 30, 2009 was primarily due to a $3.8 million increase in operating assets, primarily an increase in accounts receivable, a $0.3 million cash loss from operations, partially offset by a $2.6 million increase in operating liabilities, primarily an increase in accounts payable and accrued interest, as a result of cash conservation measures.

Investing Activities

Net cash used in investing activities was a negligible amount for the nine months ended September 30, 2010 compared to $0.1 million for the nine months ended September 30, 2009. During both periods, the usage of cash was related to the purchase of property and equipment.

Financing Activities

Net cash provided by financing activities was $5.5 million for the nine months ended September 30, 2010 compared to $1.6 million for the nine months ended September 30, 2009. The amount for the nine months ended September 30, 2010 was due to $3.9 million of net proceeds received by Lightyear in connection with an equity private placement offering, $1.8 million of net proceeds received by Lightyear after LYH’s issuance of convertible notes and $1.0 million of proceeds from a new credit facility, partially offset by $1.2 million of repayments. The amount for the nine months ended September 30, 2009 was primarily due to $2.7 million of net proceeds received by Lightyear after LYH’s issuance of convertible notes, partially offset by $0.8 million of repayments and $0.3 million of debt offering costs.

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Off Balance Sheet Arrangements

As of September 30, 2010, Lightyear has provided irrevocable standby letters of credit, aggregating approximately $185,000 to five states and two vendors, which automatically renew for terms not longer than one year, unless notified otherwise. As of September 30, 2010 and December 31, 2009, these letters of credit had not been drawn upon.

On April 12, 2010, the Company completed the transactions contemplated in the Exchange Agreement by issuing 9,500,000 shares of Preferred Stock to LYH. See Note A Reverse Merger, Exchange Transaction and Reorganization for additional details. Holders of Preferred Stock are entitled to receive dividends at the rate of 5% of the aggregate Stated Value of Preferred Stock held by them per annum, which shall accrue and be payable when, as and if declared by the Company’s board of directors. If the Company fails to pay dividends on Preferred Stock on a quarterly basis, the dividend payment rate will increase to 8% per annum with respect to dividends previously accrued and unpaid and any future dividend payments, until such time as all accrued dividends have been paid and distributed, at which time the rate of 5% per annum shall resume. Through September 30, 2010, the Company’s board of directors did not declare, and the Company did not pay, a dividend on the issued and outstanding shares of its Preferred Stock, $0.001 par value per share. Therefore, the dividend payment rate on the Company’s Preferred Stock increased from 5% per annum to 8% per annum on all accrued but unpaid dividends on the Company’s Preferred Stock. Accrued but unpaid dividends on the Company’s Preferred Stock at the rate of 8% per annum total $712,110 at September 30, 2010.

Critical Accounting Policies

There are no material changes from the critical accounting policies set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our December 31, 2009 financial statements filed on Form 8-K/A dated March 31, 2010. Please refer to that document for disclosures regarding the critical accounting policies related to our business.

Recent Issued and Adopted Accounting Pronouncements

In June 2009, the FASB issued new accounting guidance, under ASC Topic 810 on Consolidation, to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. The guidance is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. The adoption of the guidance did not have a material impact on the Company’s condensed consolidated financial statements.

In February 2010, the FASB issued new accounting guidance, under ASC Topic 855 on Subsequent Events, which requires an entity that is an SEC filer to evaluate subsequent events through the date that the financial statements are issued and removes the requirements that an SEC filer disclose the date through which subsequent events have been evaluated. The guidance was effective upon issuance. The adoption of the guidance did not have a material impact on the Company’s condensed consolidated financial statements.

In March 2010, the FASB issued new accounting guidance, under ASC Topic 605 on Revenue Recognition. This standard provides that the milestone method is a valid application of the proportional performance model for revenue recognition if the milestones are substantive and there is substantive uncertainty about whether the milestones will be achieved. Determining whether a milestone is substantive requires judgment that should be made at the inception of the arrangement. To meet the definition of a substantive milestone, the consideration earned by achieving the milestone (1) would have to be commensurate with either the level of effort required to achieve the milestone or the enhancement in the value of the item delivered, (2) would have to relate solely to past performance, and (3) should be reasonable relative to all deliverables and payment terms in the arrangement. No bifurcation of an individual milestone is allowed and there can be more than one milestone in an arrangement. The standard is effective for interim and annual periods beginning on or after June 15, 2010. The adoption of the guidance did not have a material impact on the Company’s condensed consolidated financial statements.

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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4: CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Disclosure controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), such as this quarterly report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Internal controls are procedures which are designed with the objective of providing reasonable assurance that (1) our transactions are properly authorized, recorded and reported; and (2) our assets are safeguarded against unauthorized or improper use, to permit the preparation of our condensed consolidated financial statements in conformity with United States generally accepted accounting principles.

In connection with the preparation of this Quarterly Report on Form 10-Q for the quarter ended September 30, 2010, management, with the participation of our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this quarterly report on Form 10-Q, our disclosure controls and procedures were effective.

Changes in Internal Controls

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f)) during the quarter ended September 30, 2010, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations of the Effectiveness of Control

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations of any control system, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

Claims have been asserted against Lightyear which arose in the normal course of business and from the Lightyear Holdings’ bankruptcy proceedings. While there can be no assurance, management believes that the ultimate outcome of these legal claims will not have a material adverse effect on the consolidated financial statements of the Company.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The Company has previously reported unregistered sales of equity securities in Current Reports on Form 8-K filed on July 1, 2010, July 16, 2010, August 5, 2010 and October 7, 2010, plus in the Quarterly Report on Form 10-Q filed on August 16, 2010.

Item 3. Defaults Upon Senior Securities.

(a)

There has been no material default in the payment of principal or interest with respect to any indebtedness of the Registrant.

(b)

Holders of the Company’s Preferred Stock are entitled to receive dividends at the rate of 5% of the aggregate Stated Value of Preferred Stock held by them per annum, which shall accrue and be payable when, as and if declared by the Company’s board of directors. If the Company fails to pay dividends on Preferred Stock on a quarterly basis, the dividend payment rate will increase to 8% per annum with respect to dividends previously accrued and unpaid and any future dividend payments, until such time as all accrued dividends have been paid and distributed, at which time the rate of 5% per annum shall resume. Through September 30, 2010, the Company’s board of directors did not declare, and the Company did not pay, a dividend on the issued and outstanding shares of its Preferred Stock, $0.001 par value per share. As disclosed in the Company’s Form 8-K filed on July 1, 2010, the dividend payment rate on the Company’s Preferred Stock increased from 5% per annum to 8% per annum on all accrued but unpaid dividends on the Company’s Preferred Stock. Cumulative undeclared dividends on the Company’s Preferred Stock at the rate of 8% per annum total $383,124 and $712,110 for the three and nine months ended September 30, 2010, respectively.

Item 4. (Removed and Reserved)

Not applicable.

Item 5. Other Information.

First Savings Bank, F.S.B. Modification

On November 10, 2010, effective March 17, 2010, Lightyear Network Solutions, LLC (“Lightyear”), the Company’s wholly owned subsidiary, entered into the Second Modification of Note (the “Modification”) amending the $1,000,000 ($653,764 outstanding at September 30, 2010) secured promissory note (the “Note”) with First Savings Bank, F.S.B. (the “Bank”), of Clarksville, Indiana that was originally reported in the Company’s Current Report on Form 8-K filed on March 23, 2010, as modified as previously reported in the Current Report on Form 8-K filed on August 5, 2010.

Under the Modification, the section of the Note entitled “Payment Schedule” was revised to delete the requirement that Lightyear must apply as payments of the principal balance of the Note, 50% of all net proceeds, if any, in excess of $1,000,000 and up to $2,000,000 from the sale of equity securities of the Company, unless and until the outstanding principal balance of the Note is paid in full.

J. Sherman Henderson III and Ronald L. Carmicle, both directors of the Company, consented to the Modification as guarantors on the Note.

The foregoing description of the Modification does not purport to be complete and is qualified in its entirety by reference to the Modification, a copy of which is attached hereto as Exhibit 10.4 and incorporated herein by reference.

- 34 -

Satisfaction of Milestone Warrant Conditions

As described in Note F to the Condensed Consolidated Financial Statements in Part I of this Form 10-Q, in the second and third quarter of 2010, the Company issued Milestone Warrants to purchase 2,685,050 shares of Common Stock. The Milestone Warrants become exercisable only if the Company fails to achieve certain Milestone conditions relating to strategic, acquisition, financial and governance issues (each a “Milestone” and collectively, the “Milestones”). If the Company meets a particular Milestone, then the Milestone Warrant will be cancelled with respect to the shares associated with that particular Milestone. On November 11, 2010, the Company’s Board of Directors determined that the Company had satisfied Milestone #1 related to corporate governance issues and Milestone #2 related to a significant acquisition. Milestone Warrants to purchase 1,790,921 shares of Common Stock remain outstanding following the Board’s determination.

Forbearance Agreement

As described in Note F to the Condensed Consolidated Financial Statements in Part I of this Form 10-Q, on November 11, 2010, the Company entered into a Forbearance Agreement with LY Holdings, LLC, whereby the Company agreed to forbear from demanding payment of past due interest under the First LYH Note or commencing any action until December 31, 2010, or such other date as agreed by the parties.

The foregoing description of the Forbearance Agreement does not purport to be complete and is qualified in its entirety by reference to the Forbearance Agreement, a copy of which is attached hereto as Exhibit 10.5 and incorporated herein by reference.

Item 6. Exhibits.

Exhibit		Description

4.1		Form of Subscription Agreement (incorporated by reference to Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated June 28, 2010)

4.2		Form of Fixed Warrant (incorporated by reference to Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated June 28, 2010)

4.3		Form of Milestone Warrant (incorporated by reference to Exhibit 4.3 to Registrant’s Current Report on Form 8-K dated June 28, 2010)

4.4		Form of Additional Warrant (incorporated by reference to Exhibit 4.4 to Registrant’s Quarterly Report on Form 10-Q filed on August 16, 2010)

4.5		Form of Selling Agent Warrant (incorporated by reference to Exhibit 4.5 to Registrant’s Quarterly Report on Form 10-Q filed on August 16, 2010)

10.1		Modification of Note, executed August 3, 2010, but effective as of March 17, 2010, by and between Lightyear Network Solutions, LLC and First Savings Bank, F.S.B., (incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated July 30, 2010)

10.2		Registration Rights Agreement by and among Lightyear Network Solutions, Inc. and Certain Purchasers (incorporated by reference to Exhibit 4.3 to Registrant’s Quarterly Report on Form 10-Q filed on August 16, 2010)

10.3		First Amendment to Settlement Agreement by and among LY Holdings, LLC, Lightyear Network Solutions, LLC, Chris Sullivan, LANJK, LLC, Rice Realty Company, LLC, Rigdon O. Dees III, CTS Equities Limited Partnership, and Ron Carmicle executed August 12, 2010, but effective as of April 29, 2010 (incorporated by reference to Exhibit 10.7 to Registrant’s Quarterly Report on Form 10-Q filed on August 16, 2010)

10.4		Second Modification of Note, executed November 10, 2010, but effective as of March 17, 2010, by and between Lightyear Network Solutions, LLC and First Savings Bank, F.S.B.

10.5		Forbearance Agreement by and among LY Holdings, LLC and Lightyear Network Solutions, Inc., dated as of November 11, 2010

- 35 -

10.6		Form of Restricted Stock Award Agreement pursuant to the 2010 Stock and Incentive Compensation Plan

31.1		Chief Executive Officer Certification

31.2		Chief Financial Officer Certification

32.1		Section 1350 Certification

- 36 -

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized

LIGHTYEAR NETWORK SOLUTIONS, INC.

By:	/s/ J. Sherman Henderson III
	J. Sherman Henderson III, CEO

By:	/s/ Elaine G. Bush
	Elaine G. Bush, CFO

Date: November 12, 2010

- 37 -

Nevada		91-1829866
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

1901 Eastpoint Parkway Louisville, Kentucky		40223
(Address of Principal Executive Offices)		(Zip Code)

Large accelerated filer	¨	Accelerated filer	¨

Non-accelerated filer	¨ (Do not check if a smaller reporting company)	Smaller reporting company	x

PART I

FINANCIAL INFORMATION

ITEM 1. Financial Statements.

Condensed Consolidated Balance Sheets as of
September 30, 2010 (Unaudited) and December 31, 2009		1

Unaudited Condensed Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 2010 and 2009		2

Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Deficiency for the
Nine Months Ended September 30, 2010		3

Unaudited Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2010 and 2009		4

Notes to Unaudited Condensed Consolidated Financial Statements		6

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.		23

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.		33

ITEM 4. Controls and Procedures.		33

PART II

OTHER INFORMATION

ITEM 1. Legal Proceedings.		34

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.		34

ITEM 3. Defaults Upon Senior Securities.		34

ITEM 4. (Removed and Reserved)		34

ITEM 5. Other Information.		34

ITEM 6. Exhibits.		35

Signatures.		37

	As of
	September 30,			December 31,
	2010			2009
	(unaudited)
Assets

Current Assets:
Cash	$	170,060		$	440
Accounts receivable (net of allowance of $1,538,948 and $1,439,770 as of September 30, 2010 and December 31, 2009)		3,990,911			4,096,884
Vendor deposits		955,661			916,211
Inventories, net		236,407			214,257
Deferred financing costs, net		-			435,520
Prepaid expenses and other current assets		795,238			801,952

Total Current Assets		6,148,277			6,465,264

Property and equipment, net		173,872			306,080
Deferred financing costs, net		-			77,235
Intangible assets, net		1,164,583			1,164,583
Other assets		304,511			282,725

Total Assets	$	7,791,243		$	8,295,887

Liabilities and Stockholders' Deficiency

Current Liabilities:
Accounts payable	$	4,977,240		$	7,441,828
Interest payable - related parties		111,594			4,546,766
Accrued agent commissions		580,709			620,834
Accrued agent commissions - related parties		5,110			6,904
Deferred revenue		424,933			412,901
Other liabilities		1,615,605			1,332,686
Other liabilities - related parties		59,543			137,707
Short term borrowings		653,764			500,000
Current portion of capital lease obligations		5,130			34,028
Current portion of obligations payable - related parties		7,500,000			16,016,262

Total Current Liabilities		15,933,628			31,049,916

Obligations payable - related parties, non-current portion		-			3,000,000
Interest payable - related parties, non-current portion		-			126,233

Total Liabilities		15,933,628			34,176,149

Commitments and contingencies		-			-

Stockholders' Deficiency:
Preferred stock, $.001 par value; 9,500,000 shares authorized;
9,500,000 shares issued and outstanding at
September 30, 2010 and none issued and outstanding
at December 31, 2009; aggregate liquidation preference of
$19,712,110 at September 30, 2010		9,500			-
Common stock, $.001 par value; 70,000,000 shares authorized;
20,090,058 and 10,000,000 shares issued and outstanding at
September 30, 2010 and December 31, 2009, respectively		20,090			10,000
Notes and receivables from affiliate		(13,288,698	)		-
Additional paid-in capital		7,818,157			(10,000	)
Accumulated deficit		(2,701,434	)		(25,880,262	)

Total Stockholders' Deficiency		(8,142,385	)		(25,880,262	)

Total Liabilities and Stockholders' Deficiency	$	7,791,243		$	8,295,887

	For The Three Months						For The Nine Months
	Ended September 30,						Ended September 30,
	2010			2009			2010			2009

Revenues	$	11,588,424		$	12,457,236		$	34,128,989		$	44,107,125

Cost of revenues		7,999,755			8,347,920			23,315,583			29,081,769

Gross Profit		3,588,669			4,109,316			10,813,406			15,025,356

Operating Expenses
Commission expense		1,222,056			986,463			3,590,420			4,083,052
Commission expense - related parties		54,761			5,470			192,113			120,959
Depreciation and amortization		52,387			84,182			169,761			399,494
Bad debt expense		213,925			853,756			930,866			3,029,621
Transaction expenses		324,975			-			753,898			-
Selling, general and administrative expenses		2,707,335			2,997,659			8,144,638			9,922,111

Total Operating Expenses		4,575,439			4,927,530			13,781,696			17,555,237

Loss From Operations		(986,770	)		(818,214	)		(2,968,290	)		(2,529,881	)

Other Income (Expense)
Interest income		7,903			16,968			29,327			68,435
Interest income - related parties		284,306			-			388,718			-
Interest expense		(16,374	)		(2,039	)		(35,129	)		(8,685	)
Interest expense - related parties		(116,404	)		(497,211	)		(417,409	)		(1,412,054	)
Amortization of deferred financing costs		-			(56,324	)		(68,423	)		(58,540	)
Amortization of deferred financing costs - related parties		-			(17,687	)		(69,345	)		(18,206	)
Amortization of debt discount - related parties		-			(125,638	)		(100,860	)		(133,991	)
Change in fair value of derivative liabilities - related parties		-			77,201			83,097			82,507
Other (expense) income		(721	)		8,117			(612	)		8,117
Other expense - related parties		-			-			(260,000	)		-

Total Other Income (Expense)		158,710			(596,613	)		(450,636	)		(1,472,417	)

Net Loss		(828,060	)		(1,414,827	)		(3,418,926	)		(4,002,298	)

Cumulative Preferred Stock Dividends		(383,124	)		-			(712,110	)		-

Net Loss Attributable to Common Stockholders	$	(1,211,184	)	$	(1,414,827	)	$	(4,131,036	)	$	(4,002,298	)

Net Loss Per Common Share - Basic and Diluted	$	(0.06	)	$	(0.14	)	$	(0.23	)	$	(0.40	)

Weighted Average Number of Common Shares Outstanding - Basic and Diluted		19,831,101			10,000,000			17,771,761			10,000,000

									Notes
									And
									Receivables			Additional
	Preferred Stock				Common Stock				From			Paid-In			Accumulated
	Shares		Amount		Shares		Amount		Affiliate			Capital			Deficit			Total

Balance - December 31, 2009		-	$	-		10,000,000	$	10,000	$	-		$	(10,000	)	$	(25,880,262	)	$	(25,880,262	)

Common stock issued in exchange for note receivable		-		-		3,242,533		3,243		(5,149,980	)		5,146,737			-			-

Forgiveness of indebtedness to Former Parent in conjunction with the exchange		-		-		-		-		-			25,292,175			-			25,292,175

Outstanding common stock of Lightyear Network Solutions, Inc. at the time of the exchange		-		-		5,505,000		5,505		-			(5,505	)		-			-

Recapitalization of Lightyear Network Solutions, LLC's accumulated deficit at the time of the exchange		-		-		-		-		-			(26,597,754	)		26,597,754			-

Note receivable from affiliate purchased from related party		-		-		-		-		(7,750,000	)		-			-			(7,750,000	)

Interest receivable associated with notes receivable from affiliate		-		-		-		-		(388,718	)		-			-			(388,718	)

Issuance of common stock and warrants - private placement, net		-		-		1,342,525		1,342		-			3,849,454			-			3,850,796

Preferred stock issued to Former Parent in conjunction with the exchange		9,500,000		9,500		-		-		-			(9,500	)		-			-

Stock-based compensation		-		-		-		-		-			152,550			-			152,550

Net loss		-		-		-		-		-			-			(3,418,926	)		(3,418,926	)

Balance - September 30, 2010		9,500,000	$	9,500		20,090,058	$	20,090	$	(13,288,698	)	$	7,818,157		$	(2,701,434	)	$	(8,142,385	)

	For The
	Nine Months Ended September 30,
	2010			2009
Cash Flows From Operating Activities
Net loss	$	(3,418,926	)	$	(4,002,298	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		169,761			399,494
Provision for bad debt expense		930,866			3,029,621
Stock-based compensation		152,550			119,000
Interest income from affiliate		(388,718	)		-
Amortization of deferred financing costs		68,423			58,540
Amortization of deferred financing costs - related party		69,345			18,206
Amortization of debt discount - related party		100,860			133,991
Change in fair value of derivative liabilities - related party		(83,097	)		(82,507	)
Gain on sale of fixed asset		(109	)		-
Changes in operating assets and liabilities:
Accounts receivable		(824,893	)		(3,666,624	)
Other assets		(21,786	)		(22,716	)
Vendor deposits		(39,450	)		164,608
Inventories		(22,150	)		(262,781	)
Prepaid expenses and other current assets		6,714			23,814
Accounts payable		(2,464,588	)		1,922,070
Interest payable - related parties		201,345			1,010,972
Accrued agent commissions		(40,125	)		(169,236	)
Accrued agent commissions - related parties		(1,794	)		(837	)
Deferred revenue		12,032			(150,467	)
Other liabilities		282,919			(5,677	)
Other liabilities - related parties		59,543			(43,234	)

Total Adjustments		(1,832,352	)		2,476,237

Net Cash Used in Operating Activities		(5,251,278	)		(1,526,061	)

Cash Flows From Investing Activities
Purchases of property and equipment		(38,156	)		(102,527	)
Proceeds from sale of fixed asset		712			-

Net Cash Used in Investing Activities		(37,444	)		(102,527	)

Cash Flows From Financing Activities
Repayments of obligations payable - related parties		(250,000	)		(750,000	)
Repayments of capital lease obligations		(28,898	)		(68,278	)
Repayments of short term borrowings		(833,336	)		-
Proceeds from obligations payable - related parties, net [1]		1,826,980			2,736,000
Proceeds from issuance of common stock and warrants, net [2]		3,850,796			-
Proceeds from short term borrowings		987,100			-
Payments of deferred debt financing costs		(94,300	)		(287,354	)
Distribution to member		-			(1,780	)

Net Cash Provided by Financing Activities		5,458,342			1,628,588

Net Increase In Cash		169,620			-

Cash - Beginning		440			440

Cash - Ending	$	170,060		$	440