10-Q/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q/A

 (Amendment No. 1)

(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   x     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.

EXPLANATORY NOTE

The sole purpose of this Amendment No. 1 (the “Amendment”) to Lightyear Network Solutions, Inc.’s Quarterly Report on Form 10-Q (the “Form 10-Q”) for the period ended June 30, 2011, as filed with the Securities and Exchange Commission on August 15, 2011 (the “Original Filing”), is to furnish Exhibit 101 to the Form 10-Q in accordance with Rule 405 of Regulation S-T.    This Amendment revises the exhibit index included in Part II, Item 6 of the Original Filing and includes Exhibit 101 formatted in XBRL (eXtensible Business Reporting Language) as an exhibit to the Amendment.

     No other changes have been made to the Form 10-Q.  This Amendment does not reflect events that may have occurred subsequent to the original filing date, and does not modify or update in any way disclosures made in the original Form 10-Q.  Accordingly, this Amendment should be read in conjunction with the Original Filing.

     Pursuant to Rule 406T of Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

Part II – Other Information

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. *
101.INS	XBRL Instance Document **
101.SCH	XBRL Schema Document **
101.CAL	XBRL Calculation Linkbase Document **
101.DEF	XBRL Definition Linkbase Document **
101.LAB	XBRL Label Linkbase Document **
101.PRE	XBRL Presentation Linkbase Document **
*	Filed as an exhibit to the Original Form 10-Q for the quarterly period ended June 30, 2011, filed on August 15, 2011.
**	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.

- 1 -

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:  September 13, 2011

- 2 -

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Condensed Consolidated Balance Sheets (Parenthetical) (USD $)	Jun. 30, 2011	Dec. 31, 2010
Convertible preferred stock, par value	$ 0.001	$ 0.001
Convertible preferred stock, shares authorized	9,500,000	9,500,000
Convertible preferred stock, shares issued	9,500,000	9,500,000
Convertible preferred stock, shares outstanding	9,500,000	9,500,000
Convertible preferred stock, aggregate liquidation preference	$ 20,848,986
Common stock, par value	$ 0.001	$ 0.001
Common stock, shares authorized	70,000,000	70,000,000
Common stock, shares issued	22,089,888	20,306,292
Common stock, shares outstanding	22,089,888	20,306,292

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Condensed Consolidated Statements of Operations (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010	Jun. 30, 2011	Jun. 30, 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

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Document and Entity Information	6 Months Ended
	Jun. 30, 2011	Aug. 12, 2011
Document Information [Line Items]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Jun. 30, 2011
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	Q2
Trading Symbol	LYNS
Entity Registrant Name	LIGHTYEAR NETWORK SOLUTIONS, INC.
Entity Central Index Key	0001130888
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		22,089,888

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Notes Payable

6 Months Ended

Jun. 30, 2011

Notes Payable

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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Subsequent Events

6 Months Ended

Jun. 30, 2011

Subsequent Events

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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Organization, Operations, and Basis of Presentation

6 Months Ended

Jun. 30, 2011

Organization, Operations, and Basis of Presentation

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.

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Supplier Concentration

6 Months Ended

Jun. 30, 2011

Supplier Concentration

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.

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Stockholders' Deficiency

6 Months Ended

Jun. 30, 2011

Stockholders' Deficiency

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”).

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.

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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Related Party Transactions

6 Months Ended

Jun. 30, 2011

Related Party Transactions

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.

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.

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Condensed Consolidated Statements of Cash Flows (USD $)	6 Months Ended
	Jun. 30, 2011	Jun. 30, 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		1,826,980	[1]
Proceeds from issuance of common stock and warrants, net		1,861,652	[2]
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
Cash paid during the period for:
Interest	408,506	218,143
Non-cash financing activites:
Forgiveness of indebtedness to LY Holdings		25,292,175
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
Note Receivable from Affiliate
Non-cash financing activites:
Stock issued		5,149,980
Convertible Preferred Stock
Non-cash financing activites:
Stock issued		$ 9,500

[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.

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Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2011

Summary of Significant Accounting Policies

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”).

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.

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.

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.

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Acquisition

6 Months Ended

Jun. 30, 2011

Acquisition

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.

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.

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Other Liabilities

6 Months Ended

Jun. 30, 2011

Other Liabilities

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

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Condensed Consolidated Statement of Changes in Stockholders' Deficiency (USD $)	6 Months Ended			6 Months Ended
	Jun. 30, 2011	Jun. 30, 2011 Convertible Preferred Stock	Dec. 31, 2010 Convertible Preferred Stock	Jun. 30, 2011 Common Stock	Jun. 30, 2011 Notes And Receivables From Affiliate	Jun. 30, 2011 Additional Paid-In Capital	Jun. 30, 2011 Retained Earnings
Beginning Balance (in shares)		9,500,000	9,500,000	20,306,292
Beginning Balance	$ (2,236,418)	$ 9,500	$ 9,500	$ 20,306	$ (13,478,920)	$ 8,898,069	$ 2,314,627
Interest receivable associated with notes receivable from affiliate	(378,303)				(378,303)
Issuance of common stock in connection with the exercise of milestone warrants (in shares)				1,783,596
Issuance of common stock in connection with the exercise of milestone warrants				1,784		(1,784)
Stock-based compensation	325,184					325,184
Net loss	(557,272)						(557,272)
Ending Balance (in shares)		9,500,000	9,500,000	22,089,888
Ending Balance	$ (2,846,809)	$ 9,500	$ 9,500	$ 22,090	$ (13,857,223)	$ 9,221,469	$ 1,757,355

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Condensed Consolidated Statements of Cash Flows (Parenthetical) (USD $)	6 Months Ended
	Jun. 30, 2010
Face value of obligations payable to LY Holdings	$ 2,099,980
Selling commissions withheld	273,000
Gross proceeds from issuance of common stock and warrants	2,343,200
Selling commissions, financial advisory fees, expense reimbursement and bank escrow fees withheld	$ 481,548

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Commitments and Contingencies

6 Months Ended

Jun. 30, 2011

Commitments and Contingencies

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.

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Condensed Consolidated Balance Sheets (USD $)	Jun. 30, 2011	Dec. 31, 2010
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
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