10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2011

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 000-32451

LIGHTYEAR NETWORK SOLUTIONS, INC.

(Exact name of registrant as specified in its charter)

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)

Registrant’s telephone number, including area code: 502-244-6666

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x  No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ¨     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): Yes  ¨   No  x

As of August 12, 2011, there were 22,089,888 shares of the issuer’s common stock outstanding.

Lightyear Network Solutions, Inc. and Subsidiaries

Table of Contents

PART I
FINANCIAL INFORMATION
ITEM 1. Financial Statements.
Condensed Consolidated Balance Sheets as of June 30, 2011 (Unaudited) and December 31, 2010	1
Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2011 and 2010	2
Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Deficiency for the Six Months Ended June 30, 2011	3
Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010	4
Notes to Unaudited Condensed Consolidated Financial Statements	6
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.	16
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.	24
ITEM 4. Controls and Procedures.	24
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings.	25
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.	25
ITEM 3. Defaults Upon Senior Securities.	25
ITEM 4. (Removed and Reserved)	25
ITEM 5. Other Information.	26
ITEM 6. Exhibits.	26
Signatures.	27

Lightyear Network Solutions, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

	June 30,			December 31,
	2011			2010
	(unaudited)
Assets
Current Assets:
Cash	$	284,261		$	1,009,209
Accounts receivable, net		6,877,424			6,150,424
Vendor deposits		1,897,346			1,686,911
Inventories, net		286,739			333,555
Deferred tax asset - current portion, net		-			56,939
Prepaid expenses and other current assets		2,129,872			2,287,875
Total Current Assets		11,475,642			11,524,913
Property and equipment, net		7,519,448			7,202,904
Intangible assets, net		2,489,614			2,763,666
Other assets		-			311,482
Total Assets	$	21,484,704		$	21,802,965
Liabilities and Stockholders' Deficiency
Current Liabilities:
Accounts payable	$	7,113,068		$	7,160,116
Interest payable - related parties		65,282			113,818
Accrued agent commissions		517,753			569,833
Accrued agent commissions - related parties		11,632			25,036
Deferred revenue		2,064,565			2,017,188
Other liabilities		2,122,928			1,886,224
Other liabilities - related parties		78,600			97,383
Short term borrowings		-			320,428
Current portion of notes payable		1,074,645			529,899
Current portion of capital lease obligations		315,602			348,178
Total Current Liabilities		13,364,075			13,068,103
Notes payable, non-current portion		3,535,872			2,227,987
Capital lease obligation, non-current portion		854,883			985,871
Obligations payable  - related party, non-current portion		6,250,000			7,250,000
Deferred tax liability, non-current portion, net		326,683			507,422
Total Liabilities		24,331,513			24,039,383
Commitments and contingencies		-			-
Stockholders' Deficiency:
Convertible preferred stock, $.001 par value; 9,500,000 shares authorized; 9,500,000 shares issued and outstanding at June 30, 2011 and December 31, 2010; aggregate liquidation preference of $20,848,986 at June 30, 2011		9,500			9,500
Common stock, $.001 par value; 70,000,000 shares authorized; 22,089,888 and 20,306,292 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively		22,090			20,306
Notes and receivables from affiliate		(13,857,223	)		(13,478,920	)
Additional paid-in capital		9,221,469			8,898,069
Retained earnings		1,757,355			2,314,627
Total Stockholders' Deficiency		(2,846,809	)		(2,236,418	)
Total Liabilities and Stockholders' Deficiency	$	21,484,704		$	21,802,965

See Notes to these Condensed Consolidated Financial Statements

- 1 -

Lightyear Network Solutions, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(unaudited)

	For The Three Months						For The Six Months
	Ended June 30,						Ended June 30,
	2011			2010			2011			2010
Revenues	$	17,846,656		$	11,272,870		$	36,477,047		$	22,540,565
Cost of revenues		11,603,934			7,693,386			23,646,048			15,315,828
Gross Profit		6,242,722			3,579,484			12,830,999			7,224,737
Operating Expenses
Commission expense		1,482,261			1,194,188			3,036,403			2,368,364
Commission expense - related parties		(54,621	)		59,135			(16,568	)		137,352
Depreciation and amortization		425,712			56,978			845,788			117,374
Bad debt expense		193,771			321,418			503,508			716,941
Transaction expenses		-			72,836			-			428,923
Selling, general and administrative expenses		4,445,129			2,926,457			9,292,828			5,437,303
Total Operating Expenses		6,492,252			4,631,012			13,661,959			9,206,257
Loss From Operations		(249,530	)		(1,051,528	)		(830,960	)		(1,981,520	)
Other Income (Expense)
Interest income		8,040			8,056			16,032			21,424
Interest income - related parties		190,570			104,412			378,303			104,412
Interest expense		(75,102	)		(17,686	)		(157,698	)		(18,755	)
Interest expense - related parties		(97,389	)		(98,113	)		(197,817	)		(301,005	)
Amortization of deferred financing costs		-			-			-			(68,423	)
Amortization of deferred financing costs
- related parties		-			-			-			(69,345	)
Amortization of debt discount - related parties		-			-			-			(100,860	)
Change in fair value of derivative liabilities
- related parties		-			-			-			83,097
Other income		1,845			-			111,068			-
Other expense - related parties		-			(259,891	)		-			(259,891	)
Total Other Income (Expense)		27,964			(263,222	)		149,888			(609,346	)
Loss before income taxes		(221,566	)		(1,314,750	)		(681,072	)		(2,590,866	)
Income tax benefit		-			-			123,800			-
Net Loss		(221,566	)		(1,314,750	)		(557,272	)		(2,590,866	)
Cumulative Preferred Stock Dividends		(378,959	)		(328,986	)		(753,755	)		(328,986	)
Loss Attributable to Common Stockholders	$	(600,525	)	$	(1,643,736	)	$	(1,311,027	)	$	(2,919,852	)
Net Loss Per Common Share - Basic and Diluted	$	(0.03	)	$	(0.09	)	$	(0.06	)	$	(0.18	)
Weighted Average Number of Common Shares
Outstanding - Basic and Diluted		22,076,127			18,755,627			21,335,947			16,673,459

See Notes to these Condensed Consolidated Financial Statements

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Lightyear Network Solutions, Inc. and Subsidiaries

Condensed Consolidated Statement of Changes in Stockholders' Deficiency

For the Six Months Ended June 30, 2011

(unaudited)

									Notes
									And
	Convertible								Receivables			Additional
	Preferred Stock				Common Stock				From			Paid-In			Retained
	Shares		Amount		Shares		Amount		Affiliate			Capital			Earnings			Total
Balance - December 31, 2010		9,500,000	$	9,500		20,306,292	$	20,306	$	(13,478,920	)	$	8,898,069		$	2,314,627		$	(2,236,418	)
Interest receivable associated with notes receivable from affiliate		-		-		-		-		(378,303	)		-			-			(378,303	)
Issuance of common stock in connection with the exercise of milestone warrants		-		-		1,783,596		1,784		-			(1,784	)		-			-
Stock-based compensation		-		-		-		-		-			325,184			-			325,184
Net loss		-		-		-		-		-			-			(557,272	)		(557,272	)
Balance - June 30, 2011		9,500,000	$	9,500		22,089,888	$	22,090	$	(13,857,223	)	$	9,221,469		$	1,757,355		$	(2,846,809	)

See Notes to these Condensed Consolidated Financial Statements

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Lightyear Network Solutions, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(unaudited)

	For The
	Six Months Ended June 30,
	2011			2010
Cash Flows From Operating Activities
Net loss	$	(557,272	)	$	(2,590,866	)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization		845,788			117,374
Provision for bad debt expense		503,508			716,941
Stock-based compensation		325,184			47,176
Interest income from affiliate		(378,303	)		(104,412	)
Amortization of deferred financing costs		-			68,423
Amortization of deferred financing costs - related party		-			69,345
Amortization of debt discount - related party		-			100,860
Change in fair value of derivative liabilities - related party		-			(83,097	)
Deferred taxes		(123,800	)		-
Gain on sale of fixed asset		(109,315	)		(109	)
Changes in operating assets and liabilities:
Accounts receivable		(1,230,508	)		(315,156	)
Other assets		(5,254	)		(14,417	)
Vendor deposits		(210,435	)		115,000
Inventories		46,816			(5,800	)
Prepaid expenses and other current assets		158,003			(76,571	)
Accounts payable		(47,048	)		(904,207	)
Interest payable - related parties		(48,536	)		187,864
Accrued agent commissions		(52,080	)		(18,838	)
Accrued agent commissions - related parties		(13,404	)		(3,627	)
Deferred revenue		47,377			22,589
Other liabilities		236,704			321,231
Other liabilities - related parties		(18,783	)		-
Total Adjustments		(74,086	)		240,569
Net Cash Used in Operating Activities		(631,358	)		(2,350,297	)
Cash Flows From Investing Activities
Purchases of property and equipment		(826,856	)		(16,119	)
Proceeds from sale of fixed asset		191,261			712
Net Cash Used in Investing Activities		(635,595	)		(15,407	)
Cash Flows From Financing Activities
Repayments of obligations payable - related party		(1,000,000	)		(250,000	)
Repayments of capital lease obligations		(163,564	)		(21,426	)
Repayments of short term borrowings		(320,428	)		(500,000	)
Repayments of notes payable		(290,739	)		-
Proceeds from notes payable		2,000,000			-
Proceeds from cash surrender value of life insurance		316,736			-
Proceeds from obligations payable - related party, net [1]		-			1,826,980
Proceeds from issuance of common stock and warrants, net [2]		-			1,861,652
Proceeds from short term borrowings		-			987,100
Payments of deferred debt financing costs		-			(94,300	)
Net Cash Provided by Financing Activities		542,005			3,810,006
Net (Decrease) Increase In Cash		(724,948	)		1,444,302
Cash - Beginning		1,009,209			440
Cash - Ending	$	284,261		$	1,444,742

See Notes to these Condensed Consolidated Financial Statements

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Lightyear Network Solutions, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows—Continued

(unaudited)

	For The
	Six Months Ended June 30,
	2011		2010
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest	$	408,506	$	218,143
Non-cash financing activites:
Forgiveness of indebtedness to LY Holdings	$	-	$	25,292,175
Stock issued in exchange for note receivable from affiliate	$	-	$	5,149,980
Convertible preferred stock issuance	$	-	$	9,500
Offering costs incurred but not paid	$	-	$	150,818
Obligations payable to related party issued in exchange for note receivable from affiliate	$	-	$	7,750,000
Purchase of property and equipment in exchange for notes payable	$	143,370	$	-

[1] Face value of obligations payable to LY Holdings of $2,099,980, less selling commissions withheld of $273,000 during the six months ended June 30, 2010.

[2]  Gross proceeds from issuance of common stock and warrants of $2,343,200, less selling commissions, financial advisory fees, expense reimbursement and bank escrow fees withheld of $481,548.

See Notes to these Condensed Consolidated Financial Statements

- 5 -

Lightyear Network Solutions, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note A—Organization, Operations, and Basis of Presentation

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair presentation of the condensed consolidated financial statements of Lightyear Network Solutions, Inc. and Subsidiaries (“Lightyear,” or the “Company”) as of June 30, 2011. The results of operations for the three and six months ended June 30, 2011 are not necessarily indicative of the operating results for the full year.  It is suggested that these unaudited condensed consolidated financial statements be read in conjunction with the consolidated financial statements and related disclosures of Lightyear for the year ended December 31, 2010 which were filed with the Securities and Exchange Commission on March 30, 2011. The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the evaluation, the Company did not identify any recognized or nonrecognized subsequent events that would have required further adjustment or disclosure in the unaudited condensed consolidated financial statements.

Organization and Operations

Lightyear Network Solutions, Inc. (“LNSI”) was incorporated in 1997 and operates through its wholly owned subsidiaries, Lightyear Network Solutions, LLC,  organized in 2003 (“Lightyear LLC”), and SE Acquisitions, LLC d/b/a SouthEast Telephone, organized June 22, 2010, (“SouthEast”). The Company was organized for the purpose of selling and marketing telecommunication services and solutions, and owning other companies which sell and market telecommunication services and solutions. Lightyear provides telecommunications services throughout the United States and Puerto Rico primarily through a distribution network of authorized independent agents. Lightyear is a licensed local carrier in 44 states and provides long distance service in 49 states. Lightyear delivers service to approximately 60,000 customer locations with a significant concentration in the five state area of Kentucky, Ohio, Indiana, Florida and Georgia. In addition to long distance and local service, Lightyear currently offers a wide array of telecommunications services including internet/intranet, calling cards, advanced data, wireless, Voice over Internet Protocol (“VoIP”) and conference calling. Lightyear maintains its own network infrastructure and is a telecommunications reseller and competes, both directly at the wholesale level and through agents, at the retail level. Lightyear is subject to regulatory requirements imposed by the Federal Communications Commission (“FCC”), state and local governmental agencies. Regulations by the FCC as well as state agencies include limitations on types of services and service areas offered to the public.

Note B—Summary of Significant Accounting Policies

Principles of Consolidation

The balance sheet, results of operations and cash flows of the Company have been included in our condensed consolidated financial statements. All intercompany accounts and transactions have been eliminated.The Company is managed as a single business and a single segment.   Activity of the Company’s wholly-owned subsidiary, Lightyear Alliance of Puerto Rico, LLC, is insignificant.

Estimates

The preparation of consolidated financial statements in accordance with 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, the valuation allowance related to deferred tax assets, the valuation of equity and derivative instruments, and the valuation of assets acquired in connection with SouthEast’s October 1, 2010 purchase of the business and assets of SouthEast Telephone, Inc. (“SETEL”).

- 6 -

Lightyear Network Solutions, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note B—Summary of Significant Accounting Policies—Continued

Accounts Receivable

Accounts receivable are shown net of an allowance for doubtful accounts of $1,044,950 and $559,468 as of June 30, 2011 and December 31, 2010, respectively. The Company’s management has established an allowance for doubtful accounts sufficient to cover probable and reasonably estimable losses. The allowance for doubtful accounts considers a number of factors, including collection experience, current economic trends, estimates of forecasted write-offs, aging of the accounts receivable portfolios, industry norms, regulatory decisions and other factors. Management’s policy is to fully reserve all accounts that are 180-days past due. Accounts are written off after use of a collection agency is deemed to be no longer effective.

Income Taxes

Effective February 12, 2010, the date of the Company’s recapitalization, LNSI began being taxed as a corporation. The Company’s subsidiaries are organized as limited liability companies, and have elected to be treated as disregarded entities for income tax purposes, with taxable income or loss passing through to LNSI, the parent.  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. As of June 30, 2011 and December 31, 2010, the Company has recorded a valuation allowance for the amount of deferred tax assets that are not more likely than not to be realized.

The Company accounts for uncertain tax positions based upon authoritative guidance that 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 and related disclosure.

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 June 30, 2011. The Company files income tax returns with most states. As of August 15, 2011, the tax returns for the year ended December 31, 2010 have not yet been filed. The Lightyear LLC tax returns for the prior three years remain open.

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.

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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

Revenue Recognition—Continued

The Company pays certain agents an initial lump sum commission.  A portion of this commission is deferred and is amortized over a three month period.

Cost of revenues 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.

The accounting standards guidance provides for how taxes collected from customers and remitted to governmental authorities should be presented in the income statement. The guidance states that if taxes are reported on a gross basis (included as revenue) a company should disclose those amounts, if significant. The Company does not include excise and other sales related taxes in its revenues.

Fair Value of Financial Instruments

The Company’s financial instruments are cash, accounts receivable, short term borrowings and accounts payable each of which approximate their fair values based upon their short term nature.  The Company’s other financial instruments include notes payable, capital lease obligations and obligations payable.  The carrying value, of these instruments, approximate fair value, as they bear terms and conditions comparable to market, for obligations with similar terms and maturities.

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 June 30, 2011 and December 31, 2010, the Company had reserves for obsolete inventory of approximately $25,000.

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 re-measured 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.

Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04, “Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs." This ASU addresses fair value measurement and disclosure requirements within Accounting Standards Codification ("ASC") Topic 820 for the purpose of providing consistency and common meaning between U.S. GAAP and IFRSs. Generally, this ASU is not intended to change the application of the requirements in Topic 820. Rather, this ASU primarily changes the wording to describe many of the requirements in U.S. GAAP for measuring fair value or for disclosing information about fair value measurements. This ASU is effective for periods beginning after December 15, 2011. It is not expected to have any impact on the Company’s condensed consolidated financial statements or disclosures.

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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

Net Loss Per Common Share

Basic net loss per common share is computed by dividing the loss attributable to common stockholders, after deducting the cumulative undeclared dividends on the Company’s convertible preferred stock, by the weighted average number of shares of common stock outstanding during the period. Weighted average shares outstanding for the three and six months ended June 30, 2011 includes the weighted average underlying shares exercisable with respect to the issuance of 152,352 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 June 30, 2011, 9,500,000 shares of convertible preferred stock, 12,987 shares of unvested restricted stock, plus outstanding stock options and warrants to purchase 722,000 and 1,045,720 shares of common stock, respectively, an aggregate of 11,280,707 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 June 30, 2010, 9,500,000 shares of convertible preferred stock, plus outstanding stock options and warrants to purchase 778,500 and 1,552,370 shares of common stock, respectively, an aggregate of 11,830,870 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.

Liquidity Plan

Since the Company began operations in 2004, it has historically incurred significant operating losses. Through the date of the Company’s recapitalization on February 12, 2010, Lightyear LLC had an accumulated member’s deficit of approximately $26.6 million. As of June 30, 2011, Lightyear had a cash balance of $0.3 million and a working capital deficit of $1.9 million.

Based on the Company’s internal forecasts and assumptions regarding its short term cash requirements, the Company believes that it has sufficient working capital to support its operations through June 30, 2012. The Company’s future capital requirements are expected to be driven by (i) network build-out costs; (ii) debt reduction and debt service; (iii) public/investor relations costs; (iv) acquisition opportunities; and (v) the need to supplement working capital levels.  The Company is currently investigating the capital markets for sources of funding, which could take the form of additional debt or equity financings. There can be no assurance that the Company will be successful in securing additional capital on commercially acceptable terms, if needed. If the Company is unable to raise additional funds, it may need to take measures to conserve cash and the Company might (a) initiate additional cost reductions; (b) forego acquisition or network build-out opportunities; and/or (c) seek additional extensions of the scheduled payment obligations, including the obligations payable – related parties.

Reclassifications

Certain 2010 amounts have been reclassified for comparative purposes to conform to the fiscal 2011 presentation. These reclassifications have no impact on previously reported earnings.

Note C—Acquisition

Acquisition of SETEL Net Assets

On October 1, 2010, SouthEast purchased substantially all of the business and assets of SETEL. The purchase price paid consisted of 200,000 shares of common stock of LNSI, valued at $950,000, based upon the Company’s closing stock price of $4.75 on September 30, 2010, the assumption of certain liabilities and a cash payment of $436,656 in order to pay any administrative and priority claims of SETEL. The Company paid the $436,656 in claims with a portion of the cash acquired from SETEL. SouthEast also assumed SETEL’s remaining obligations under certain notes payable and capital leases. The Company began consolidating the results of operations of SouthEast beginning October 1, 2010.

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Lightyear Network Solutions, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)
 

Note C—Acquisition—Continued

Unaudited Pro-Forma Financial Information

The following presents the unaudited pro-forma combined results of operations of the Company and SETEL for the three and six months ended June 30, 2010, as if the acquisition occurred on January 1, 2010.

	Three Months			Six Months
	Ended			Ended
	June 30, 2010			June 30, 2010
Revenues	$	19,687,832		$	37,952,894
Net loss attributable to common stockholders	$	(1,445,582	)	$	(2,696,085	)
Pro-forma net loss per common share - basic and diluted	$	(0.08	)	$	(0.16	)
Pro-forma weighted average shares outstanding – basic and diluted		18,955,627			16,873,459

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

Note D—Other Liabilities

Other liabilities consist of the following:

	June 30,		December 31,
	2011		2010
	(unaudited)
Excise, state and local taxes payable	$	865,196	$	701,757
Other accrued expenses		258,056		442,367
Payroll, payroll taxes and bonuses		421,018		507,542
Deferred rent		290,096		-
Customer security deposits		288,562		234,558
Totals	$	2,122,928	$	1,886,224

Note E—Notes Payable

On January 21, 2011, the Company entered into a $2,000,000 secured promissory note (the “Note”) arrangement with a bank.  The Note is secured by Lightyear LLC’s lockbox bank account, business operating bank account, other tangible and intangible assets, the pledge of two million shares of the Company’s convertible preferred stock owned by LY Holdings, LLC (“LY Holdings”), as well as the personal guaranties of certain directors of the Company and a guaranty by Lightyear LLC. The Note matures on January 21, 2013, and bears interest at a rate equal to the Prime Rate plus 4.0%, but not less than 7.0% per annum. Pursuant to the terms of the Note, the Company will make monthly interest payments through January 21, 2013, as well as $500,000 principal payments on January 21, 2012, and July 21, 2012.  The final $1,000,000 principal payment is due on January 21, 2013. On January 25, 2011, from the proceeds of this Note, $1,000,000 was paid to a bank on behalf of Chris T. Sullivan (“Sullivan”) to repay a portion of the $7,250,000 obligations payable – related parties. Pursuant to an agreement, in consideration for his personal guaranty, the Company will pay one of its directors $60,000 for each year in which the guaranty is in effect, payable in monthly installments of $5,000.

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Lightyear Network Solutions, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)
 

Note F—Related Party Transactions

Lightyear has significant transactions with its former parent, LY Holdings and its members, 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 LY Holdings, by directors of the Company or by relatives of members of LY Holdings or by directors of the Company. Aggregate related party transactions are segregated on the faces of the balance sheets and statements of operations.

Obligations Payable

On April 29, 2010, as amended on August 12, 2010, the Company purchased a $7,750,000 LY Holdings demand note receivable resulting in an obligation payable of $7,750,000 to a related party, Sullivan, a director of the Company (the “Settlement Agreement”). The obligation payable – related party bears interest at a rate of 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. Principal payments of $250,000 are scheduled to be paid on the first day of each quarter beginning October 1, 2010, until and including the maturity date. The maturity date was the sooner of (a) July 1, 2011, or (b) the maturity date of Sullivan’s underlying bank loan.

On February 7, 2011, Lightyear LLC, along with Sullivan and other parties, entered into the Second Amendment to Settlement Agreement. Under this amendment, the parties acknowledged (a) the aggregate $1,500,000 in payments previously made on the underlying bank loan under the Settlement Agreement, as well as (b) the extension of the maturity date of the underlying bank loan to January 10, 2013 (the “Maturity Date”). The amendment also modified and extended the maturity date of the obligation payable – related party to January 10, 2013 and modified and amended the payment schedule as follows:

· On February 10, 2011 and on the first day of each quarter year thereafter (through and including the Maturity Date) Lightyear LLC will make payment of all accrued but unpaid interest.

· On January 10, 2012, Lightyear LLC will make a payment of $1,000,000 on Sullivan’s underlying bank loan, as directed by Sullivan.

· On the Maturity Date, Lightyear LLC will make a final payment of all remaining principal of $5,250,000.

At June 30, 2011 and December 31, 2010, the Company had outstanding $6,250,000 and $7,250,000 on this obligation payable – related party, respectively.

On August 9, 2011, Sullivan agreed to forbear from demanding payment until January 10, 2013 of the $1,000,000 payment currently scheduled to be paid on January 10, 2012.

Other

A director of the Company owns an indirect interest in a Lightyear agency. The agency has a standard Lightyear agent agreement and earned approximately $3,000 and $7,000 in commissions from Lightyear during the three and six months ended June 30, 2011, respectively, and $5,000 and $10,000 during the three and six months ended June 30, 2010, respectively.

Since 2008, a former employee (and son of a director) of the Company, has maintained a representative position in a direct selling entity which earned approximately $7,000 and $20,000 in commissions from Lightyear during the three and six months ended June 30, 2011 and $20,000 and $53,000 during the three and six months ended June 30, 2010, respectively.

Commission expense – related parties includes certain VoIP and wireless revenue override payments due to certain directors of the Company. On June 22, 2011, certain holders of the override rights waived their right to such payments for the second half of 2010 and the full year 2011, which resulted in the Company reversing approximately $86,000 of liabilities. During the three and six months ended June 30, 2011, Lightyear recorded approximately $55,000 and $17,000 of VoIP and wireless revenue override net credits, respectively. During the three and six months ended June 30, 2010, Lightyear recorded approximately $34,000 and $69,000 of VoIP and wireless revenue override expense, respectively.

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Lightyear Network Solutions, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)
 

Note F—Related Party Transactions—Continued

Other—Continued

Pursuant to a former officer’s employment agreement, Lightyear provided life insurance coverage consisting of $3,000,000 under a whole life policy and $5,000,000 under a term life policy. Lightyear also maintained $5,000,000 under a key man life policy on the same former officer. The proceeds from $2,000,000 of the term life policy and the full proceeds of the key man life policy had been assigned to Sullivan as collateral for the obligations payable – related parties, but Sullivan waived those rights concurrent with the actions described below. Pursuant to a Consulting and Non-Competition Agreement dated April 21, 2011 (see Note I, Commitments and Contingencies, Consulting and Non-Competition Agreement, for additional details), J. Sherman Henderson, III (“Henderson”) was assigned the term life policy, and Henderson will be responsible for all premiums due on the policy following the assignment. On May 5, 2011, (a) the Company transferred the whole life policy to Henderson who will be responsible for all premiums due on the policy following the assignment; (b) the Company elected to withdraw the cash surrender value from the whole life policy; and prior to June 30, 2011 collected the $0.3 million in cash surrender value included in other assets at December 31, 2010. On July 27, 2011, the Company terminated the key man life policy. Aggregate insurance premium expense for these policies was approximately $17,000 and $36,000 for the three and six months ended June 30, 2011 and $19,000 and $44,000 for the three and six months ended June 30, 2010, respectively.

Note G—Supplier Concentration

Of the telecommunications services used in its operations, Lightyear acquired approximately 30% and 24% during the three months ended June 30, 2011 from two suppliers and 28%, 24% and 10% during the six months ended June 30, 2011 from three suppliers. The Company acquired approximately 41% and 13% during the three months ended June 30, 2010 and 42% and 12% during the six months ended June 30, 2010 from two suppliers. Although there are other suppliers of these services, a change in suppliers could have an adverse effect on the business which could ultimately negatively affect operating results.

Note H—Stockholders’ Deficiency

Convertible Preferred Stock Dividends

Holders of convertible preferred stock are entitled to receive dividends at the rate of 5% per annum of the aggregate stated value of convertible preferred stock held by them, which accrue from and after the date of issuance and become payable when, as and if declared by the Company’s board of directors. If the Company fails to pay dividends on convertible preferred stock on a quarterly basis, the dividend payment rate increases to 8% per annum on all accrued but unpaid dividends. Through June 30, 2011, 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 convertible preferred stock, $0.001 par value per share. Undeclared dividends on the Company’s convertible preferred stock at the rate of 8% per annum total $378,959 and $753,755 or $0.04 and $0.08 per share for the three and six months ended June 30, 2011, respectively, and are cumulatively $1,848,986 or $0.19 per share as of June 30, 2011.

Warrants

Milestone Warrants

In connection with a pre-2011 equity financing, the Company issued warrants to investors to purchase shares of common stock at an exercise price of $0.01 per share with a three year term, which become exercisable if specified milestones are not met (the “Milestone Warrants”). In the event that the specified milestones are not met, the Company will issue to the selling agent exercisable five-year warrants to purchase shares of common stock at an exercise price of $4.00 per share (the “Selling Agent Milestone Warrants”).

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Lightyear Network Solutions, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)
 

Note H—Stockholders’ Deficiency—Continued

Warrants—Continued

Milestone Warrants—Continued

On February 26, 2011, the Company did not meet the third milestone included in the outstanding Milestone Warrants. As a result of not meeting the third milestone, the warrants associated with that milestone were immediately vested and automatically exercised on a cashless basis. In addition, the Company issued 42,201 Selling Agent Milestone Warrants. The Company issued 445,564 shares of its common stock to investors on February 26, 2011 in connection with the exercise of these Milestone Warrants.

On March 28, 2011, the Company did not meet the fourth and fifth milestones included in the outstanding Milestone Warrants. As a result of not meeting the fourth and fifth milestones, the warrants associated with those milestones were immediately vested and automatically exercised on a cashless basis. In addition, the Company issued 84,542 Selling Agent Milestone Warrants. The Company issued 892,456 shares of its common stock to investors on March 28, 2011 in connection with the exercise of these Milestone Warrants.

On April 27, 2011, the Company did not meet the sixth milestone included in the outstanding Milestone Warrants. As a result of not meeting the sixth milestone, the warrants associated with this milestone were immediately vested and automatically exercised on a cashless basis. In addition, the Company issued 42,332 Selling Agent Milestone Warrants. The Company issued 445,576 shares of its common stock to investors on April 28, 2011 in connection with the exercise of these Milestone Warrants.

As of June 30, 2011, there were no remaining Milestone Warrants outstanding. As of June 30, 2011, there were 169,084 Selling Agent Milestone Warrants outstanding.

Fixed Warrants

In connection with a pre-2011 equity financing, the Company issued exercisable five-year warrants to purchase shares of common stock to investors and selling agents with an exercise price of $4.00 per share (the “Fixed Warrants”). As of June 30, 2011, there were 861,401 Fixed Warrants outstanding, of which 671,271 were issued to investors and 190,130 were issued to selling agents.

Additional Warrants

In connection with a pre-2011 equity financing, the Company periodically issues exercisable five-year warrants to purchase shares of common stock to investors with an exercise price of $0.01 per share and to selling agents with an exercise price of $4.00 per share (the “Additional Warrants”). The Additional Warrants are issued pursuant to a pre-determined formula at the end of each calendar quarter during which shares originally purchased in the equity financing are held by the original investor. The Additional Warrants are eligible to be issued for a period of five years from the equity financing. The Company issued 87,491 Additional Warrants (79,537 were issued to investors and 7,954 were issued to selling agents) during the six months ended June 30, 2011. As of June 30, 2011, there were 167,587 Additional Warrants outstanding, of which 152,352 were issued to investors and 15,235 were issued to selling agents.

Summary

As of June 30, 2011, in the aggregate there were 1,198,072 warrants outstanding and exercisable which had a weighted average exercise price of $3.49, a weighted average remaining contractual life of 4.23 years and an aggregate intrinsic value of approximately $151,000.

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Lightyear Network Solutions, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)
 

Note H—Stockholders’ Deficiency—Continued

Stock Option Grants

On June 7, 2011, the Company’s board of directors approved the repricing of each of the outstanding stock options under the Company’s 2010 Stock and Incentive Compensation Plan to an exercise price of $1.25 per share, subject to shareholder approval, which was obtained on July 19, 2011. Since the members of the board of directors control enough votes to ensure shareholder approval, the shareholder approval is a formality. As such, the modification was recognized on the date of board approval. As a result of the modification, the Company recorded incremental expense of approximately $84,000 immediately and will record another incremental $185,000 over the remaining vesting period.

The Company recognized approximately $184,000 and $298,000 of stock-based compensation expense during the three and six months ended June 30, 2011, respectively, related to employee stock option grants, which is reflected as selling, general and administrative expense in the condensed consolidated statements of operations. The Company recognized approximately $47,000 of stock-based compensation expense during each of the three and six months ended June 30, 2010, related to employee stock option grants. During the six months ended June 30, 2011, options to purchase 190,500 shares of common stock at a weighted average exercise price of $3.40 per share were forfeited. As of June 30, 2011, there were 722,000 outstanding stock options with a weighted average exercise price of $1.25 per share, a weighted average remaining contractual life of 8.9 years and no intrinsic value. As of June 30, 2011, there were 241,314 exercisable stock options with a weighted average exercise price of $1.25 per share, a weighted average remaining contractual life of 8.9 years and no intrinsic value. As of June 30, 2011, there was approximately $1,055,000 of unrecognized employee stock-based compensation expense that will be amortized over a weighted average period of 1.9 years.

Restricted Stock Grants

The Company recognized approximately $9,000 and $28,000 of stock-based compensation expense during the three and six months ended June 30, 2011, respectively, related to director restricted stock grants, which is reflected as professional fees expense in the condensed consolidated statements of operations. As of June 30, 2011, there was approximately $26,000 of unrecognized director stock-based compensation expense related to 12,987 unvested restricted stock grants with a weighted average grant date fair value of $4.75 that will be amortized over a weighted average period of 0.3 years. Through June 30, 2010, there was no stock-based compensation expense, as there were no restricted stock grants.

Notes Receivable from Affiliate

On February 12, 2010, certain investors contributed a note to LNSI in exchange for an aggregate of 3,242,533 shares of LNSI stock. The principal of $5,149,980 and the related interest receivable of $355,560 at June 30, 2011, are recorded as a contra-equity item because they represent receivables from an affiliate, LY Holdings. The maturity date of this note receivable is December 31, 2011 and interest accrues at the rate of 5% and quarter end interest payments were scheduled beginning June 30, 2010. On May 11, 2011, LNSI agreed to continue to forbear from demanding payment of past due interest under this note receivable or commencing any action until June 30, 2011. The Company is currently in discussions with LY Holdings to work out a mutually acceptable, near term method of interest payment. Interest income on the note receivable was approximately $64,000 and $128,000 for the three and six months ended June 30, 2011, respectively.

The $7,750,000 note receivable from LY Holdings and the related interest receivable of $601,683 at June 30, 2011 are recorded as contra-equity items because they represent receivables from an affiliate. The principal and the related interest receivable are due on demand. The note receivable bears interest at a rate of LIBOR plus 5.75% on the balance up to $7,000,000 and LIBOR plus 8.75% on the balance in excess of $7,000,000, neither of which will exceed 10% per annum. Interest income on the note receivable was approximately $126,000 and $251,000 for the three and six months ended June 30, 2011, respectively, and approximately $104,000 for each of the three and six months ended June 30, 2010, respectively.

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Lightyear Network Solutions, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

Note I—Commitments and Contingencies

Litigation

As of June 30, 2011, 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 condensed consolidated financial statements of the Company.

Billing Disputes

As of June 30, 2011, 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 condensed consolidated financial statements of the Company.

Consulting and Non-Competition Agreement

On April 21, 2011, the Company entered into an agreement with Henderson, who was, at the time of the agreement, the Company’s Chief Executive Officer.  Under the agreement, Henderson will serve in an advisory capacity and with the honorary title of Founder and Chair Emeritus and will provide consulting services to the Company commencing on May 1, 2011 and terminating on April 30, 2012. Henderson will receive a stipend of $296,000, paid ratably over the term of the agreement, which contains certain provisions relating to confidentiality, noncompetition and other covenants on confidential materials and related matters. The term of the agreement will end earlier upon the occurrence of either (i) a change in control of Lightyear, (ii) the material breach of the agreement by either party, which is not cured within fifteen days upon written notice, or (iii) upon the resignation by Henderson as a consultant.  Henderson has not been released from any pledges or personal guarantees previously made by him for the benefit of the Company or any of its affiliates.  The agreement terminates Henderson’s employment agreement with the Company.  Henderson will remain a director of the Company for the remainder of his current term, and LY Holdings has agreed to vote its shares of Company stock in favor of Henderson as a director of the Company during the term of the agreement. See Note F for additional details.

Operating Lease

The Company leases its office space in Louisville, Kentucky under terms classified as an operating lease. In April 2009, the Company entered into a new lease agreement. The term of the lease was for six years, ending on March 31, 2015. Commencing in October 2009, the Company and the landlord informally agreed to reduce the rent by $15,000 per month.

On June 30, 2011, the Company and the landlord agreed to formalize this understanding by modifying the lease agreement. The modified lease agreement has a monthly base rent of approximately $60,000 and the lease term was extended until September 30, 2015. In addition, the landlord formally agreed to forgive the previously taken unpaid rent and maintenance charges as a lease concession. The resulting deferred rent will be recognized over the life of the lease.

See Note D, Other Liabilities for additional details.

Note J—Subsequent Events

Stock Option Grants

On July 19, 2011, the Company granted incentive stock options to purchase an aggregate of 100,000 shares of common stock at an exercise price of $1.25 per share to two employees, pursuant to the 2010 Plan. The options vest ratably over a three year period and expire after ten years. The aggregate $36,000 grant date fair value will be amortized over the three year vesting term.

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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 (“Lightyear” or the “Company”) for the three and six months ended June 30, 2011 and 2010 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 Lightyear. References to Lightyear LLC refer to the Company’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 Lightyear’s Form   10-K filed March 30, 2011. 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, through its wholly owned subsidiaries, Lightyear Network Solutions, LLC, a Kentucky limited liability company (“Lightyear LLC”), and SE Acquisitions, LLC d/b/a SouthEast Telephone, a Kentucky limited liability company (“SouthEast”), provides telecommunications services throughout the United States primarily through a distribution network of authorized agents.  In addition to long distance and local service, Lightyear currently offers a wide array of telecommunications products and services including internet/intranet, calling cards, advanced data, conferencing, VoIP services and wireless services.  Lightyear LLC also operates in Puerto Rico through its wholly-owned subsidiary, Lightyear Alliance of Puerto Rico, LLC, a Kentucky limited liability company.

Lightyear provides telecommunications services in 49 states and Puerto Rico and is a licensed local carrier in 44 states.  We sell our products and services primarily through a distribution network of more than 6,000 authorized independent agents and representatives.

Lightyear provides service to approximately 60,000 customer locations as of June 30, 2011, with a significant concentration in the five state area of Kentucky, Ohio, Indiana, Florida and Georgia.  We have built regional customer concentrations which provide a contiguous service area and operational efficiencies, as well as a nationwide distribution network through which additional new concentrations may be built, which are expected to result in higher margins than previously reported.

In Q4 2010, Lightyear and its wholly-owned subsidiary, SouthEast, completed the acquisition of the business and assets of SouthEast Telephone, Inc. (“SETEL”).  SETEL filed for bankruptcy under Chapter 11 in September 2009.  SouthEast, with approximately 30,000 customer lines, provides us with voice and data telecommunications products and services, including local and long distance phone service, DSL and paging, to primarily residential customers.

Many of the same economic conditions and market pressures which affected our results of operations in 2010, continued to persist in the first half of 2011.  In 2010, major challenges we faced were heightened competition and bad debt expense.  By developing a more robust pre-paid product and increasing customer credit requirements, we were able to reduce our provision for bad debt expense to $1.0 million for the year ended December 31, 2010 from $3.8 million for the year ended December 31, 2009. For the three and six months ended June 30, 2011, our provisions for bad debt expense were $0.2 million and $0.5 million, which were $0.1 million and $0.2 million below the provisions for bad debt expense for the three and six months ended June 30, 2010, respectively.

Impact of SouthEast

Our acquisition of SouthEast provides us with additional network infrastructure which we believe will enable us to lower our costs on our existing business.  From SouthEast alone, we expect to increase our 2011 annual revenues by over $22.0 million over the levels for the year ended December 31, 2010.  Furthermore, we have implemented steps that will enable us to lower our operating costs as a percentage of our revenues.  These steps have included the consolidation of our back office and bill printing functions and the implementation of improved credit standards upon the granting of credit to our customers.

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Results of Operations

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; and

· selling, general and administrative expenses which consists 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 LYH Notes (See discussion – Liquidity and Capital Resources – Overview); and

· Interest expense – related parties currently represents interest payable on the LNS Obligation (see discussion – Liquidity and Capital Resources – Overview) and formerly on the loans payable to LY Holdings, LLC (“LY Holdings”);

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Quarter Ended June 30, 2011 Compared to Quarter Ended June 30, 2010

The table below summarizes the results of operations for the quarters ended June 30, 2011 and 2010.  The operating results of SouthEast are shown separately in order to quantify the impact of the acquisition of SouthEast on consolidated results.

	Quarter Ended June 30, 2011											Quarter Ended June 30, 2010
	Consolidated			Eliminations			SouthEast		Lightyear LLC			Lightyear LLC
Revenues	$	17,846,656		$	(970,492	)	$	7,476,171	$	11,340,977		$	11,272,870
Cost of revenues		11,603,934			(970,492	)		5,146,475		7,427,951			7,693,386
Gross Profit		6,242,722			-			2,329,696		3,913,026			3,579,484
Operating Expenses
Commission expense		1,427,640			-			89,953		1,337,687			1,253,323
Depreciation expense		425,712			-			390,523		35,189			56,978
Bad debt expense		193,771			-			118,802		74,969			321,418
Selling, general and administrative expenses		4,445,129			-			1,605,741		2,839,388			2,999,293
		6,492,252			-			2,205,019		4,287,233			4,631,012
Income (Loss) From Operations	$	(249,530	)	$	-		$	124,677	$	(374,207	)	$	(1,051,528	)

Revenues

Revenues were approximately $17.8 million and $11.3 million, respectively, for the quarters ended June 30, 2011 and 2010, an increase of $6.5 million or 58%. The SouthEast acquisition (net of eliminations) accounted for $6.5 million or 99% of the total revenue increase.  The following table presents our operating revenues by product category for the quarters ended June 30, 2011 and 2010.

	(in millions)
										Quarter Ended
	Quarter Ended June 30, 2011									June 30, 2010
	Consolidated		Eliminations			SouthEast		Lightyear LLC		Lightyear LLC
Voice service	$	4.3	$	(1.0	)	$	0.4	$	4.9	$	5.1
Local service		5.6		-			3.7		1.9		2.1
VoIP		0.9		-			-		0.9		1.0
Data services		1.9		-			1.0		0.9		1.0
Wireless services		0.9		-			-		0.9		0.7
CABS		2.0		-			2.0		-		-
Other services		2.2		-			0.4		1.8		1.4
TOTAL	$	17.8	$	(1.0	)	$	7.5	$	11.3	$	11.3

Cost of Revenues

Cost of revenues for the quarters ended June 30, 2011 and 2010 amounted to approximately $11.6 million (65% of revenue) and $7.7 million (68% of revenue), respectively, an increase of $3.9 million or 51%. The acquisition of SouthEast (net of eliminations) accounted for $4.2 million of the total cost of revenues increase, partially offset by a $0.3 million decrease in cost of revenues related to Lightyear LLC.

Gross Margin

Gross margins were approximately $6.2 million (35% of revenue) and $3.6 million (32%), respectively for the quarters ended June 30, 2011 and 2010, an increase of $2.6 million or 74%, or a 3% increase in the gross margin percentage as a result of a shift in business towards higher margin products. The acquisition of SouthEast accounted for $2.3 million (87%) of the dollar increase, while Lightyear LLC contributed an incremental $0.3 million.

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Operating Expenses

Operating expenses related solely to Lightyear LLC decreased $0.3 million or 7% to $4.3 million from $4.6 million for the quarters ended June 30, 2011 and 2010, respectively. The decrease was primarily attributable to a decrease of $0.2 million in the bad debt provision. Operating expenses related to SouthEast have been excluded from this discussion for comparability purposes, and can be seen in the table above.

Other Income (Expense)

Interest income increased to $0.2 million from $0.1 million due to a full quarter of recording interest income on the LYH Notes.  Interest expense increased $0.1 million or 100% to $0.2 million from $0.1 million, due to interest expense associated with the new $2.0 million credit facility. Other expense decreased from $0.3 million to none because of a $0.3 million charge incurred in 2010 in connection with the acquisition of the LNS Obligation.

Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010

The table below summarizes the results of operations for the quarters ended June 30, 2011 and 2010.  The operating results of SouthEast are shown separately in order to quantify the impact of the acquisition of SouthEast on consolidated results.

	Six Months Ended June 30, 2011											Six Months Ended June 30, 2010
	Consolidated			Eliminations			SouthEast		Lightyear LLC			Lightyear LLC
Revenues	$	36,477,047		$	(2,087,714	)	$	14,948,701	$	23,616,060		$	22,540,565
Cost of revenues		23,646,048			(2,087,714	)		10,142,363		15,591,399			15,315,828
Gross Profit		12,830,999			-			4,806,338		8,024,661			7,224,737
Operating Expenses
Commission expense		3,019,835			-			194,459		2,825,376			2,505,716
Depreciation expense		845,788			-			765,725		80,063			117,374
Bad debt expense		503,508			-			184,824		318,684			716,941
Selling, general and administrative expenses		9,292,828			-			3,572,834		5,719,994			5,866,226
		13,661,959			-			4,717,842		8,944,117			9,206,257
Income (Loss) From Operations	$	(830,960	)	$	-		$	88,496	$	(919,456	)	$	(1,981,520	)

Revenues

Revenues were approximately $36.5 million and $22.5 million, respectively, for the six months ended June 30, 2011 and 2010, an increase of $14.0 million or 62%. The SouthEast acquisition (net of eliminations) accounted for $12.9 million (92%) of the revenue increase.

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The following table presents our operating revenues by product category for the six months ended June 30, 2011 and 2010.

	(in millions)
	Six Months Ended June 30, 2011									Six Months Ended June 30, 2010
	Consolidated		Eliminations			SouthEast		Lightyear LLC		Lightyear LLC
Voice service	$	9.3	$	(2.1	)	$	0.8	$	10.6	$	10.2
Local service		11.1		-			7.3		3.8		4.1
VoIP		1.8		-			-		1.8		2.0
Data services		3.7		-			1.9		1.8		2.0
Wireless services		1.8		-			-		1.8		1.3
CABS		4.3		-			4.3		-		-
Other services		4.5		-			0.7		3.8		2.9
TOTAL	$	36.5	$	(2.1	)	$	15.0	$	23.6	$	22.5

Cost of Revenues

Cost of revenues for the six months ended June 30, 2011 and 2010 amounted to approximately $23.6 million (65% of revenue) and $15.3 million (68% of revenue), respectively, an increase of $8.3 million or 54%.  The acquisition of SouthEast (net of eliminations) accounted for $8.1 million (97%) of the total cost of sales increase.

Gross Margin

Gross margins were approximately $12.8 million (35% of revenue) and $7.2 million (32% of revenue), respectively, for the six months ended June 30, 2011 and 2010, an increase of $5.6 million or 78%, or a 3% increase in the gross margin percentage as a result of a shift in business towards higher margin products. The acquisition of SouthEast accounted for $4.8 million (86%) of the dollar increase.

Operating Expenses

Operating expenses related solely to Lightyear LLC decreased by $0.3 million to $8.9 million from $9.2 million for the six months ended June 30, 2011 and 2010, respectively. The decrease was primarily attributable to a decrease of $0.4 million in the bad debt provision and a $0.2 million decrease in selling, general and administrative expenses partially offset by a $0.3 million increase in commission expense. Operating expenses related to SouthEast have been excluded from this discussion for comparability purposes, and can be seen in the table above.

Other Income (Expense)

Interest income increased to $0.4 million from $0.1 million due to full six months of recording interest income on the LYH Notes. Other income in 2011 includes a gain on the sale of an asset of $0.1 million. Other expense decreased from $0.3 million to none because of a $0.3 million charge incurred in connection with the acquisition of the LNS Obligation in 2010. Interest expense increased to $0.4 million from $0.3 million.

Liquidity and Capital Resources

Overview

Since Lightyear began operations in 2004, we have incurred significant operating losses.  Through the date of the Company’s recapitalization on February 12, 2010, Lightyear LLC had an accumulated member’s deficit of approximately $26.6 million.  As a result, we have managed our cash receipts and disbursements, as well as our operating costs in order to maintain an adequate level of cash.  As of June 30, 2011, Lightyear had a cash balance of $0.3 million and a working capital deficit of $1.9 million.

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Historically, Lightyear’s working capital had come from loans from LY Holdings.  In connection with the recapitalization, our debt and interest obligations to LY Holdings 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 24 months, all toward the goal of achieving positive cash flow from operations within the coming six months.

Based on our internal forecasts and assumptions regarding our short term cash requirements, we believe that we have sufficient working capital to support our operations through June 30, 2012. Our future capital requirements are expected to be driven by (i) network build-out costs; (ii) debt reduction and debt service; (iii) public/investor relations costs; (iv) acquisition opportunities; and (v) the need to supplement working capital levels.  We are currently investigating the capital markets for sources of funding, which could take the form of additional debt or equity financings. There can be no assurance that we will be successful in securing additional capital on commercially acceptable terms, if needed.  If we are unable to raise additional funds, we may need to take measures to conserve cash and we might (a) initiate additional cost reductions; (b) forego acquisition or network build-out opportunities; and/or (c) seek extensions of the scheduled payment obligations, including the obligations payable – related parties.

Currently, the significant items impacting Lightyear’s liquidity are aggregate notes and interest receivable from LY Holdings of $13.9 million (see items (a) and (b), below), aggregate obligations and interest payable to Chris T. Sullivan (“Sullivan”), who is a director of the Company, of $6.3 million, $2.0 million of a secured note payable to a bank (see item (d), below) and $2.6 million of secured notes payable (see item (e), below). LY Holdings’ 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.

The notes and interest receivable from LY Holdings are reflected as contra-equity items, and reported within “Stockholders’ Deficiency” on the balance sheet.  The obligations to Sullivan are reflected as current and non-current liabilities on the balance sheet and the current liability of $1.0 million is reflected in the working capital deficit cited above.

(a) These receivables due from LY Holdings include a $5.15 million note receivable (“First LYH Note”) and a related $0.4 million interest receivable as of June 30, 2011.  The First LYH Note was contributed to Lightyear by the LY Holdings Convertible Debtholders in exchange for shares of our 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 May 11, 2011, Lightyear agreed to continue to forbear from demanding payment of past due interest under the First LYH Note or commencing any action until June 30, 2011. The Company is currently in discussions with LY Holdings to work out a mutually acceptable, near term method of interest payment. The obligations under the First LYH Note are secured by a subordinated security interest in certain assets of LY Holdings, specifically including its interests in Lightyear’s common stock and convertible preferred stock.

(b) The LY Holdings receivables also include a $7.75 million note receivable (“Second LYH Note,” and collectively with the First LYH Note, the “LYH Notes”) and a related $0.6 million interest receivable as of June 30, 2011, 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 principal and related interest of the Second LYH Note are payable on demand. The obligations under this note are secured by a security interest in LY Holdings’ interests in Lightyear’s common stock and convertible preferred stock and certain interests in LY Holdings, excluding Sullivan’s interest.

(c) The amount payable to Sullivan which represents Lightyear’s consideration for the purchase of the Second LYH Note pursuant to the Settlement Agreement (the “LNS Obligation”) as of June 30, 2011, is $6.3 million plus an interest payable of $0.1 million. Pursuant to the Second Amendment to Settlement Agreement, effective February 7, 2011, $1.0 million of the principal will be due on January 10, 2012, with the remainder of the principal, $5.3 million, to be paid on January 20, 2013. Interest is payable on a quarterly basis. On August 9, 2011, Sullivan agreed to forbear from demanding payment until January 10, 2013 of the $1,000,000 payment currently scheduled to be paid on January 10, 2012.

(d) On January 21, 2011, the Company entered into a $2 million secured promissory note (the “Note”) arrangement with a bank. The Note is secured by Lightyear LLC’s accounts receivable and lockbox account, the pledge of two million shares of the Company’s convertible preferred stock owned by LY Holdings, as well as the personal guaranties of certain directors of the Company, and a guaranty by Lightyear LLC. The Note matures on January 21, 2013, will bear interest at a rate equal to the Prime Rate plus 4.0%, but the rate will never be less than 7.0%. Pursuant to the terms of the Note, the Company will make monthly interest payments through January 21, 2013, as well as $500,000 principal payments on January 21, 2012 and July 21, 2012. The final $1,000,000 principal payment is due on January 21, 2013. 

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(e) Other secured notes payable in the amount of $0.6 million are classified as current on the condensed consolidated balance sheets as of June 30, 2011, while $2.0 million is long term.

Holders of convertible preferred stock are entitled to receive dividends at the rate of 5% of the aggregate stated value of convertible preferred stock held by them per annum, which accrue from the date of issuance and become payable when, as, and if declared by our board of directors. If we fail to pay dividends on convertible 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 June 30, 2011, our board of directors did not declare, and we did not pay, a dividend on the issued and outstanding shares of our convertible preferred stock, $0.001 par value per share. Therefore, the dividend payment rate on our convertible preferred stock increased from 5% to 8% per annum on all accrued but unpaid dividends on our convertible preferred stock. Cumulative undeclared dividends on our convertible preferred stock at the rate of 8% per annum total $1.8 million or $0.19 per share of convertible preferred stock at June 30, 2011.

Six Months Ended June 30, 2011 and 2010

Operating Activities

Net cash used in operating activities was $0.6 million for the six months ended June 30, 2011 compared to $2.4 million for the six months ended June 30, 2010. The amount used during the six months ended June 30, 2011 was primarily due to funding of deposits and payment arrangements related to SouthEast vendors and an increase in accounts receivable. The amount used during the six months ended June 30, 2010 was primarily due to operating losses and payment of accounts payable.

Investing Activities

Net cash used in investing activities was $0.6 million for the six months ended June 30, 2011 compared to $0.02 million for the six months ended June 30, 2010. The usage of cash during the six months ended June 30, 2011 was attributable to $0.8 million for purchases of property and equipment offset by $0.2 million received for the sale of certain SouthEast net assets.

Financing Activities

Net cash provided by financing activities was $0.5 million for the six months ended June 30, 2011 compared to $3.8 million for the six months ended June 30, 2010.  The cash provided by financing for the six months ended June 30, 2011 included $2.0 million of net proceeds from a new credit facility and $0.3 million of proceeds from the cash surrender value of a life insurance policy offset by repayments of $1.0 million and $0.8 million against the obligation to related party and other obligations, respectively.

Potential Future Requirements and Sources of Liquidity

Based on the Company’s internal forecasts and assumptions regarding its short term cash requirements, the Company believes that it has sufficient working capital to support its current operating plans through June 30, 2012. Our future capital requirements are expected to be driven by (i) network build-out costs; (ii) debt reduction and debt service; (iii) public/investor relations costs; (iv) acquisition opportunities; and (v) the need to supplement working capital levels.  We are currently investigating the capital markets for sources of funding, which could take the form of additional debt or equity financings.  There can be no assurance that the Company will be successful in securing additional capital.  If the Company is unable to raise additional funds, the Company might (a) initiate additional cost reductions; (b) forego acquisition or network build-out opportunities; and/or (c) seek additional extensions of our scheduled payment obligations, including the LNS Obligation.

Off Balance Sheet Arrangements

As of June 30, 2011, we have provided irrevocable standby letters of credit, aggregating approximately $0.2 million to five states and two vendors, which automatically renew for terms not longer than one year, unless notified otherwise. As of June 30, 2011 and December 30, 2010, these letters of credit had not been drawn upon.

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On April 12, 2010, we issued 9,500,000 shares of convertible preferred stock to LY Holdings. Holders of convertible preferred stock are entitled to receive dividends at the rate of 5% of the aggregate stated value of convertible preferred stock held by them per annum, which accrue from the date of issuance and become payable when, as and if declared by our board of directors. If we fail to pay dividends on convertible 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 June 30, 2011, our board of directors did not declare, and we did not pay, a dividend on the issued and outstanding shares of our convertible preferred stock, $0.001 par value per share. Therefore, the dividend payment rate on our convertible preferred stock increased from 5% per annum to 8% per annum on all accrued but unpaid dividends on our convertible preferred stock. Accrued but unpaid dividends on our convertible preferred stock at the rate of 8% per annum total approximately $1.8 million at June 30, 2011.

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, 2010 financial statements filed on Form 10-K dated March 30, 2011. Please refer to that document for disclosures regarding the critical accounting policies related to our business.

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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 June 30, 2011, management, with the participation of our Chief Executive Officer and Chief Financial Officer, has 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 June 30, 2011, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. As reported in the Form 8-K dated April 27, 2011, effective May 1, 2011, Stephen M. Lochmueller replaced J. Sherman Henderson as our Chief Executive Officer. We do not anticipate that this change in management will have a material effect on 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 bankruptcy proceedings associated with Lightyear predecessor entities (certain Lightyear operating assets were purchased out of these bankruptcy proceedings in 2004). 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.

(a) Lightyear previously reported the sale of unregistered securities in a Current Report on Form 8-K filed on April 28, 2011.

(b)  Not applicable.

(c)  Not applicable.

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 convertible preferred stock are entitled to receive dividends at the rate of 5% of the aggregate Stated Value of convertible 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 convertible 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 June 30, 2011, 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 convertible 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 convertible preferred stock increased from 5% per annum to 8% per annum on all accrued but unpaid dividends on the Company’s convertible preferred stock. Cumulative undeclared dividends on the Company’s convertible preferred stock at the rate of 8% per annum total $1,848,986 as of June 30, 2011.

Item 4.  (Removed and Reserved)

Not applicable.

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Item 5.   Other Information.

Forbearance Agreement

As described in Note F to the Condensed Consolidated Financial Statements in Part I of this Form 10-Q, on August 9, 2011, the Company entered into a Forbearance Agreement with Sullivan, whereby Sullivan agreed to forbear from demanding payment until January 10, 2013 of the $1,000,000 payment currently scheduled to be paid on January 10, 2012.

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 10.4 and is incorporated herein by reference.

Item 6.   Exhibits.

Exhibit	Description
10.1	Consulting and Non-Competition Agreement dated as of May 1, 2011 by and between the Company, LY Holdings, LLC and J. Sherman Henderson III. (1)
10.2	Lightyear Forbearance Agreement by and among LY Holdings, LLC and Lightyear Network Solutions, Inc., dated as of May 11, 2011. (2)
10.3	Second Modification to Letter Agreements dated as of June 22, 2011. *
10.4	Lightyear Forbearance Agreement by and among Chris T. Sullivan and Lightyear Network Solutions, LLC, dated as of August 9, 2011. *
31.1	Chief Executive Officer Certification *
31.2	Chief Financial Officer Certification *
32.1	Section 1350 Certification **
99.1	Lightyear Network Solutions, Inc. Press Release, dated August 15, 2011, related to earnings for the three months ended June 30, 2011. *
*	Filed herewith.
**	Furnished herewith.
(1)	Incorporated by reference to the exhibits included with our Current Report on Form 8-K filed with the SEC on April 27, 2011.
(2)	Incorporated by reference to the exhibits included with our Quarterly Report on Form 10-Q filed with the SEC on May 13, 2011.

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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/   Stephen M. Lochmueller
	Stephen M. Lochmueller, CEO
By:	/s/   Elaine G. Bush
	Elaine G. Bush, CFO

Date:  August 15, 2011

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EX-10.3

EXHIBIT 10.3

SECOND MODIFICATION TO LETTER AGREEMENTS

THIS SECOND MODIFICATION TO LETTER AGREEMENTS (this “Agreement”) is made, entered into and effective as of the 22nd day of June, 2011 by and among (i)Lightyear Network Solutions, LLC,a Kentucky limited liability company(“LNS”); and (ii) Rigdon O. Dees, III, individually (“Dees”), Rice Realty Company, LLC, a Kentucky limited liability company (“RRC”), Ron Carmicle, individually (“Carmicle”), LANJK, LLC, a Kentucky limited liability company (“LANJK”), and CTS Equities Limited Partnership, a Nevada limited partnership (“CTS”) (collectively, the “Recipients”).

RECITALS:

A.           Each Recipient and LNS are parties to the Letter Agreements relating to VoIP revenue payments set forth on Exhibit A hereto (the “VoIP Letter Agreements”).

B.           Each Recipient and LNS are parties to the Letter Agreements relating to wireless revenue payments set forth on Exhibit B hereto (the “Wireless Letter Agreements”).

C.           The VoIP Letter Agreements and the Wireless Letter Agreements are collectively referred to as the “Letter Agreements”.

D.           The Recipients and LNS entered into the First Modification to Letter Agreements dated February 10, 2010, whereby the parties (i) released and discharged LY Holdings, LLC from all of its obligations under the Letter Agreements, and (ii) released and discharged LNS from its obligation to pay VoIP Revenue Payments for 2009, and the Wireless Revenue Payments for 2009.

E.           The VoIP Revenue Payments (as defined in the VoIP Letter Agreements) owed to the Recipients for 2010 are $44,237.65, and through April 2011 are $29,501.35. The Wireless Revenue Payments (as defined in the Wireless Letter Agreements) owed to the Recipients for 2010 are $25,930.36, and for 2011 are $22,247.97.

F.           The Recipients have agreed to release LNS from any obligation to pay (i) the VoIP Revenue Payments for 2010 and 2011, and (ii) the Wireless Revenue Payments for 2010, and 2011.

G.           The Recipients shall be entitled to receive VoIP Revenue Payments and Wireless Revenue Payments beginning in January 2012 and going forward pursuant to the terms of the Letter Agreements.

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows:

1

1.           No Obligation to Pay Revenue Payments.  The Recipients hereby forever release and discharge LNS from (i) any obligation to pay the outstanding VoIP Revenue Payments for 2010 and the outstanding and any future VoIP Revenue Payments for 2011, and (ii) any obligation to pay the outstanding Wireless Revenue Payments for 2010, and the outstanding and any future Wireless Revenue Payments for 2011.

2.           Restatement of Obligations.  Except as otherwise expressly set forth herein, each Letter Agreement shall remain in full force and effect, and the Recipients shall be entitled to receive VoIP Revenue Payments and Wireless Revenue Payments beginning in January 2012 and going forward pursuant to the terms of the Letter Agreements.   LNS hereby reaffirms and restates its obligations under the Letter Agreements as modified herein.

3.           Fees and Expenses.  LNS shall pay all reasonable out-of-pocket expenses (including attorneys’ fees) incurred by the Recipients in connection with the transactions contemplated herein.

4.           Singular and Plural Terms.  Wherever the context requires, the singular number shall include the plural, the plural the singular, and the use of any gender shall include all genders.

5.           Binding Effect.  This Agreement shall bind and inure to the benefit of the parties and their respective successors and permitted assigns.  LNS may not assign this Agreement without the prior written consent of the Recipients.

6.           Governing Law.  This Agreement has been delivered and accepted at and will be deemed to have been made at Louisville, Kentucky and will be interpreted and the rights and liabilities of the parties hereto determined in accordance with the laws of the Commonwealth of Kentucky, without regard to conflicts of law principles.

7.           Jurisdiction.  The parties hereby irrevocably agree and submit to the exclusive jurisdiction of any state or federal court located within Jefferson County, Kentucky, and waive any objection based on forum non conveniens and any objection to venue of any such action or proceeding.

8.           Waiver of Jury Trial.  The parties hereto each waive any right to trial by jury in any action or proceeding relating to this Agreement, or any actual or proposed transaction or other matter contemplated in or relating to any of the foregoing.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

2

IN WITNESS WHEREOF, the parties have executed this Agreement on the date first above written.

Lightyear Network Solutions, LLC
By:	/s/ Steve Lochmueller
Title:	CEO
	(“LNS”)
	Rigdon O. Dees, III, individually
	Rice Realty Company, LLC
By:	/s/ W. Brent Rice
	W. Brent Rice, Member
/s/  Ronald Carmicle
Ron Carmicle, individually
LANJK, LLC
By:	/s/ J. Sherman Henderson, III
Title:	Managing Partner
CTS Equities Limited Partnership
By:	/s/ Chris Sullivan
	Chris T. Sullivan, General Partner
	(“Recipients”)

S-1

EXHIBIT A

VoIP LETTER AGREEMENT

1.            Letter Agreement dated July 23, 2004, among LYH, LNS and LANJK.

2.            Letter Agreement dated July 26, 2004, among LYH, LNS and Carmicle.

3.            Letter Agreement dated July 20, 2004, among LYH, LNS and Dees.

4.            Letter Agreement dated July 30, 2004, among LYH, LNS and RRC.

5.            Letter Agreement dated July 26, 2004, among LYH, LNS and CTS.

EXHIBIT B

WIRELESS LETTER AGREEMENTS

1.            Letter Agreement dated July 1, 2008, among LYH, LNS and LANJK.

2.            Letter Agreement dated July 1, 2008, among LYH, LNS and Carmicle.

3.            Letter Agreement dated July 1, 2008, among LYH, LNS and Dees.

4.            Letter Agreement dated July 1, 2008, among LYH, LNS and RRC.

5.            Letter Agreement dated July 1, 2008, among LYH, LNS and CTS.

EX-10.4

Exhibit 10.4

FORBEARANCE AGREEMENT

This Forbearance Agreement (this “Agreement”) is made and entered into this 9th day of August, 2011, by and among Lightyear Network Solutions, LLC, a Kentucky limited liability company (the “Borrower”)  and  Chris T. Sullivan, an individual resident ofNevada(the “Lender“).

WITNESSETH:

WHEREAS, the Borrower is currently indebted to the Lender in the principal amount of $6,250,000 pursuant to the Settlement Agreement dated April 29, 2010, as amended (the “Settlement Agreement”);

WHEREAS, as of the date hereof, a total of $6,250,000 of principal is currently outstanding under the Settlement Agreement, of which no amount is past due;

WHEREAS, as of the date hereof, no interest is past due and payable;

WHEREAS, the Settlement Agreement requires the Lender to make a $1,000,000 principal payment on January 10, 2012 (the “January 2012 Principal Payment”); and

WHEREAS, the Borrower desires and the Lender agrees to forbear from demanding payment of the January 2012 Principal Payment and from exercising his rights and remedies to collect the January 2012 Principal Payment, pursuant to the terms and conditions set forth herein.

NOW, THEREFORE, in consideration of the foregoing, the mutual promises and understandings of the parties hereto set forth herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Lender and the Borrower each hereby agree as set forth in this Agreement.

1.           Use of Defined Terms.  Except as expressly set forth in this Agreement, all terms which have an initial capital letter where not required by the rules of grammar are defined in the Settlement Agreement.

2.           Forbearance.  For good and valuable consideration, Lender agrees to forbear from demanding payment of January 2012 Principal Payment under the Settlement Agreement or commencing any action against the Borrower with respect to the payment of the January 2012 Principal Payment until January 10, 2013 or as otherwise agreed to by the parties. In accordance with the Settlement Agreement, Borrower reserves the right to repay some or all of the indebtedness without penalty before maturity.

3.           Authority to Execute this Agreement.  The Borrower and the Lender represent and warrant that each has the right, power and capacity and is duly authorized and empowered to enter into, execute, deliver and perform this Agreement.

4.           Reservation of Rights.  Lender continues to reserve all of its rights and remedies set forth on the Settlement Agreement and pursuant to this Agreement, as well as any rights and remedies at law, in equity or otherwise.  Nothing contained in this Agreement shall be or be deemed a waiver of any hereafter arising or occurring breach, default or event of default of the Settlement Agreement or preclude the subsequent exercise of any of Lender’s rights or remedies under the Settlement Agreement, subject to Section 2 hereof.

5.           Construction.

A. This Agreement shall be interpreted, construed and governed by and under the laws of the Commonwealth of Kentucky, without regard to its conflicts of law doctrine.

B.           Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be valid and enforceable under applicable law, but if any provision of this Agreement is held to be invalid or unenforceable by a court of competent jurisdiction, such provision shall be served herefrom and such invalidity or unenforceability shall not affect any other provision of this Agreement, the balance of which shall remain in and have its intended full force and effect; provided, however, if such provision may be reasonably modified so as to be valid and enforceable as a matter of law, such provision shall be deemed to be modified so as to be valid and enforceable to the maximum extent permitted by law.

C.           The paragraph headings contained in this Agreement are solely for the purpose of reference, are not part of the agreement between the Borrower and Lender, and shall not in any way affect the meaning or interpretation of this Agreement, any paragraph or provision thereof.

D.           This Agreement shall be binding on the Borrower and its respective successors and heirs, and shall inure to the benefit of Lender, his successors, assigns, affiliates, divisions and parent.

E.           This Agreement may not be altered, changed, amended or modified, except by written agreement signed by Lender and the Borrower.

F.           Whenever required by context, the masculine pronouns will include the feminine and neuter genders, and the singular will include the plural, and vice versa.

G.           This Agreement constitutes the entire agreement between the Borrower and Lender with regard to the subject matter hereof.

IN WITNESS WHEREOF, the Borrower and Lender have executed this Agreement as of the date first set forth above.

Lender:

/s/ Chris T. Sullivan

 Chris T. Sullivan

Borrower:

LIGHTYEAR NETWORK SOLUTIONS, LLC

By:	/s/ Stephen M. Lochmueller
	Stephen M. Lochmueller, CEO

EX-31.1

EXHIBIT 31.1

SECTION 302 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

I, Stephen M. Lochmueller, certify that:

1) I have reviewed this quarterly report on Form 10-Q of Lightyear Network Solutions, Inc.;

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

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

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

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

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

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

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

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

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

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

Date: August 15, 2011

/s/ Stephen M. Lochmueller

  Stephen M. Lochmueller

  Chief Executive Officer

 

EX-31.2

EXHIBIT 31.2

SECTION 302 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

I, Elaine G. Bush, certify that:

1) I have reviewed this quarterly report on Form 10-Q of Lightyear Network Solutions, Inc.;

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

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

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

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

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

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

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

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

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

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

Date: August 15, 2011

/s/ Elaine G. Bush

  Elaine G. Bush

  Chief Financial Officer

EX-32

EXHIBIT 32

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350

Pursuant to 18 U.S.C. § 1350, the undersigned officers of Lightyear Network Solutions, Inc. (the “Company”), hereby certify that the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: August 15, 2011	/s/ Stephen M. Lochmueller
	Stephen M. Lochmueller
	Chief Executive Officer

Date: August 15, 2011	/s/ Elaine G. Bush
	Elaine G. Bush
	Chief Financial Officer

The foregoing certification is being furnished solely pursuant to 18 U.S.C. § 1350 and is not being filed as part of the Report or as a separate disclosure document.

EX-99.1

EXHIBIT 99.1

Contact: Steve Rush, Marketing Manager 502-410-1397 steve.rush@lightyear.net

Lightyear Network Solutions Reports

Improved Revenue, EBITDA for Q2 2011

- EBITDA Positive in the Second Quarter -

- Gross Profits up 74% –

LOUISVILLE, Ky. -- August 15, 2011- Lightyear Network Solutions, Inc. (OTCBB: LYNS),  a provider of data, voice and wireless telecommunication services to business and residential customers throughout North America, today announced its financial results for the quarter ended June 30, 2011.  Results for the second quarter of 2011 include Lightyear’s acquisition of SouthEast Telephone, which was completed on October 1, 2010.

Financial highlights for the Second Quarter include:

· Revenue of $17.8 million for the second quarter 2011 increased 58.3% from $11.3 million in the year-ago quarter;

· Gross profit of $6.2 million increased 74.4% over the second quarter 2010;

· Gross profit margins increased 3.2% for the quarter to 35.0% from 31.8% in the year-ago quarter;

· Loss from operations was reduced to $250 thousand from $1.052 million in the year-ago quarter;

· EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) improved to a gain of $178 thousand compared with an EBITDA loss of $1.254 million in the year-ago second quarter;  

● Net loss of $222 thousand compared with a net loss of $1.315 million in the year-ago second quarter;

· Loss attributable to common stockholders, including $379 thousand of cumulative preferred stock dividends, was $601 thousand, compared  with a net loss of $1.644 million, including a $329 thousand cumulative preferred stock dividend in the year-ago second quarter;

· Net loss per common share, including the cumulative preferred stock dividends, was $0.03 for the quarter, compared with a net loss of $0.09 per share for the year-ago second quarter.

“Our financial results for the second quarter 2011 showed several positive trends,” said Stephen M. Lochmueller, Chief Executive Officer of Lightyear. “We were EBITDA positive in the second quarter compared with a loss in the same period in 2010, and our gross profit increased nearly 75 percent to $6.2 million compared with the year-ago quarter.”

“Also in the second quarter, we completed the integration of the approximately 30,000 customers from our subsidiary, SouthEast Telephone, into Lightyear’s Portal System, our in-house client service and account management system. We expect to continue to see positive results in our operating efficiencies as we move forward.”

“We are pleased with our company’s progress and believe we’ll see continued improvement in our financial results in 2011.”

About Lightyear Network Solutions, Inc.

Through its wholly owned subsidiaries, Lightyear Network Solutions provides telecommunication services to large, medium and small businesses and to residential consumers throughout North America. Lightyear’s product offerings include local PRI and digital T1, enhanced Internet services, MPLS, Ethernet, Voice over Internet Protocol (VoIP), local and long distance service, and conferencing. Lightyear also offers wireless services to customers in the U.S. through wholesale contracts with multiple wireless providers. Lightyear built its own VoIP network in 2004 to enhance its product offerings and has partnered with some of the most prominent names in telecom including: Sprint, Verizon, AT&T, Level 3, PAETEC, CenturyLink, XO Communications, Intelliverse, BroadSoft, Cisco and ADTRAN. Lightyear Network Solutions is headquartered in Louisville, Ky. Additional information can be found at: www.lightyear.net.

Forward-Looking Statements

This press release contains "forward-looking statements" for purposes of the Securities and Exchange Commission's "safe harbor" provisions under the Private Securities Litigation Reform Act of 1995 and Rule 3b-6 under the Securities Exchange Act of 1934.  These forward-looking statements are subject to various risks and uncertainties that could cause Lightyear’s actual results to differ materially from those currently anticipated.  These forward-looking statements may include, without limitation, statements about our marketing and acquisition opportunities, business strategies, competition, expected activities and expenditures as we pursue our business plan.  Although we believe that the expectations reflected in any forward-looking statements are reasonable, the risks and uncertainties which could cause our actual results to differ materially from those currently anticipated includes changes in market conditions, our ability to integrate acquired operations, the ability to obtain additional financing on satisfactory terms, customer acceptance of products, regulatory issues, competitive factors, or other business circumstances and risk factors described in our filings with the Securities and Exchange Commission.  Lightyear undertakes no obligation to revise or update any forward-looking statements in order to reflect events or circumstances that may arise after the date of this press release.

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Lightyear Network Solutions, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

	June 30,			December 31,
	2011			2010
	(unaudited)
Assets
Current Assets:
Cash	$	284,261		$	1,009,209
Accounts receivable, net		6,877,424			6,150,424
Vendor deposits		1,897,346			1,686,911
Inventories, net		286,739			333,555
Deferred tax asset - current portion, net		-			56,939
Prepaid expenses and other current assets		2,129,872			2,287,875
Total Current Assets		11,475,642			11,524,913
Property and equipment, net		7,519,448			7,202,904
Intangible assets, net		2,489,614			2,763,666
Other assets		-			311,482
Total Assets	$	21,484,704		$	21,802,965
Liabilities and Stockholders' Deficiency
Current Liabilities:
Accounts payable	$	7,113,068		$	7,160,116
Interest payable - related parties		65,282			113,818
Accrued agent commissions		517,753			569,833
Accrued agent commissions - related parties		11,632			25,036
Deferred revenue		2,064,565			2,017,188
Other liabilities		2,122,928			1,886,224
Other liabilities - related parties		78,600			97,383
Short term borrowings		-			320,428
Current portion of notes payable		1,074,645			529,899
Current portion of capital lease obligations		315,602			348,178
Total Current Liabilities		13,364,075			13,068,103
Notes payable, non-current portion		3,535,872			2,227,987
Capital lease obligation, non-current portion		854,883			985,871
Obligations payable  - related party, non-current portion		6,250,000			7,250,000
Deferred tax liability, non-current portion, net		326,683			507,422
Total Liabilities		24,331,513			24,039,383
Commitments and contingencies		-			-
Stockholders' Deficiency:
Convertible preferred stock, $.001 par value; 9,500,000 shares
authorized; 9,500,000 shares issued and outstanding at
June 30, 2011 and December 31, 2010; aggregate liquidation
preference of $20,848,986 at June 30, 2011		9,500			9,500
Common stock, $.001 par value; 70,000,000 shares authorized;
22,089,888 and 20,306,292 shares issued and outstanding at
June 30, 2011 and December 31, 2010, respectively		22,090			20,306
Notes and receivables from affiliate		(13,857,223	)		(13,478,920	)
Additional paid-in capital		9,221,469			8,898,069
Retained earnings		1,757,355			2,314,627
Total Stockholders' Deficiency		(2,846,809	)		(2,236,418	)
Total Liabilities and Stockholders' Deficiency	$	21,484,704		$	21,802,965

-3-

Lightyear Network Solutions, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(unaudited)

	For The Three Months						For The Six Months
	Ended June 30,						Ended June 30,
	2011			2010			2011			2010
Revenues	$	17,846,656		$	11,272,870		$	36,477,047		$	22,540,565
Cost of revenues		11,603,934			7,693,386			23,646,048			15,315,828
Gross Profit		6,242,722			3,579,484			12,830,999			7,224,737
Operating Expenses
Commission expense		1,482,261			1,194,188			3,036,403			2,368,364
Commission expense - related parties		(54,621	)		59,135			(16,568	)		137,352
Depreciation and amortization		425,712			56,978			845,788			117,374
Bad debt expense		193,771			321,418			503,508			716,941
Transaction expenses		-			72,836			-			428,923
Selling, general and administrative expenses		4,445,129			2,926,457			9,292,828			5,437,303
Total Operating Expenses		6,492,252			4,631,012			13,661,959			9,206,257
Loss From Operations		(249,530	)		(1,051,528	)		(830,960	)		(1,981,520	)
Other Income (Expense)
Interest income		8,040			8,056			16,032			21,424
Interest income - related parties		190,570			104,412			378,303			104,412
Interest expense		(75,102	)		(17,686	)		(157,698	)		(18,755	)
Interest expense - related parties		(97,389	)		(98,113	)		(197,817	)		(301,005	)
Amortization of deferred financing costs		-			-			-			(68,423	)
Amortization of deferred financing costs
- related parties		-			-			-			(69,345	)
Amortization of debt discount - related parties		-			-			-			(100,860	)
Change in fair value of derivative liabilities
- related parties		-			-			-			83,097
Other income		1,845			-			111,068			-
Other expense - related parties		-			(259,891	)		-			(259,891	)
Total Other Income (Expense)		27,964			(263,222	)		149,888			(609,346	)
Loss before income taxes		(221,566	)		(1,314,750	)		(681,072	)		(2,590,866	)
Income tax benefit		-			-			123,800			-
Net Loss		(221,566	)		(1,314,750	)		(557,272	)		(2,590,866	)
Cumulative Preferred Stock Dividends		(378,959	)		(328,986	)		(753,755	)		(328,986	)
Loss Attributable to Common Stockholders	$	(600,525	)	$	(1,643,736	)	$	(1,311,027	)	$	(2,919,852	)
Net Loss Per Common Share - Basic and Diluted	$	(0.03	)	$	(0.09	)	$	(0.06	)	$	(0.18	)
Weighted Average Number of Common Shares       Outstanding - Basic and Diluted		22,076,127			18,755,627			21,335,947			16,673,459

-4-

Non-U.S. GAAP Financial Measures

The Company has utilized the non-GAAP information set forth below as an additional device to aid in understanding and analyzing its financial results for the three months ended June 30, 2011 and the three months ended June 30, 2010.  Management believes that these non-GAAP measures will allow for a better evaluation of the operating performance of the Company’s business and facilitate meaningful comparison of the results in the current period to those in prior and future periods.  Reference to these non-GAAP measures should not be considered a substitute for results that are presented in a manner consistent with GAAP.

A limitation of utilizing these non-GAAP measures is that GAAP accounting does in fact reflect the underlying financial results of the Company’s business.  Therefore, management believes that the GAAP measures as well as the corresponding non-GAAP measures of the Company’s financial performance should be considered together.

A reconciliation of the Company’s GAAP  net loss for the second quarter of 2011 and the second quarter of 2010 to its non-GAAP EBITDA for the same periods is set forth below:

	For The Three Months
	Ended June 30,
	2011			2010
Net Loss	$	(221,566	)	$	(1,314,750	)
Depreciation and Amortization		425,712			56,978
Interest		(26,119	)		3,331
EBITDA	$	178,027		$	(1,254,441	)

-5-