UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM10-QSB

|        |                                                                                 |
|--------|---------------------------------------------------------------------------------|
|   | QUARTERLYREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934 |

For the Quarterly Period Ended March 31, 2005

|        |                                                                                   |
|--------|-----------------------------------------------------------------------------------|
|   | TRANSITION REPORT UNDER SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |

For thetransition period from             to          

Commissionfile number: 0-27556

YOUTHSTREAM MEDIANETWORKS, INC.

(Exact name of small businessissuer as specified in itscharter)

|                                                             |  |                                      |  |  |  |  |
|-------------------------------------------------------------|--|--------------------------------------|--|--|--|--|
| Delaware                                                    |  | 13-4082185                           |
| (Stateor other jurisdiction ofincorporation ororganization) |  | (I.R.S.EmployerIdentificationNumber) |
|                                                        |  |                                 |
| 244Madison Avenue, PMB #358, New York, NewYork              |  | 10016                                |
| (Address of principal executiveoffices)                     |  | (Zip Code)                           |
|                                                             |

(212)883-0083

(Issuer's telephone number,including area code)

Not applicable

(Former name, former address and former fiscalyear, if changed since last report.)

Checkwhether the issuer (1) filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act during the past 12 months (orsuch shorter period that the issuer was required to file such reports),and (2) has been subject to such filing requirements for the past 90days.    Yes       No   

As ofMay 30, 2005, the issuer had 39,242,251 shares of common stock, $0.01par value, issued and outstanding.

Transitional SmallBusiness DisclosureFormat.    Yes       No   

Documents incorporated byreference:   None.

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YOUTHSTREAM MEDIANETWORKS, INC. AND SUBSIDIARIES

The Company elected to file aQuarterly Report on Form 10-QSB beginning with the quarterly periodended December 31, 2004, as the Company qualified as a Small BusinessIssuer in accordance with Regulation S-B. The Company intends to filesubsequent periodic reports under Regulation S-B.

This QuarterlyReport on Form 10-QSB for the quarterly period ended March 31, 2005contains "forward-looking statements" withinthe meaning of Section 27A of the Securities Act of 1933, as amended,including statements that include the words"believes","expects","anticipates", or similar expressions. Theseforward-looking statements include, but are not limited to, statementsconcerning the Company's expectations regarding its business,growth prospects, revenue trends, operating costs, working capitalrequirements, financing requirements, and other statements ofexpectations, beliefs, future plans and strategies, anticipated eventsor trends, and similar expressions concerning matters that are nothistorical facts. The forward-looking statements in this QuarterlyReport on Form 10-QSB for the quarterly period ended March 31, 2005involve known and unknown risks, uncertainties and other factors thatcould cause the actual results, performance or achievements of theCompany to differ materially from those expressed in or implied by theforward-looking statements contained herein. Except as required byapplicable law or regulation, the Company undertakes no obligation torevise or update these forward-looking statements to reflect any futureevents or circumstances.

2

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INDEX

|                                                                                                                                |  |            |        |        |  |  |  |  |  |  |
|--------------------------------------------------------------------------------------------------------------------------------|--|------------|--------|--------|--|--|--|--|--|--|
|                                                                                                                           |  | PageNumber |        |
| **PARTI.  FINANCIALINFORMATION**                                                                                     |  |
|                                                                                                                           |  |
| ITEM1.  FINANCIALSTATEMENTS                                                                                          |  |       |   |   |  |
|                                                                                                                           |  |
| CondensedConsolidated Balance Sheets — March 31, 2005 (Unaudited) andSeptember 30,2004                                   |  |       | 4      |   |  |
|                                                                                                                           |  |
| CondensedConsolidated Statements of Operations (Unaudited) — ThreeMonths and Six Months Ended March 31, 2005 and2004     |  |       | 5      |   |  |
|                                                                                                                           |  |
| CondensedConsolidated Statement of Stockholders' Deficiency (Unaudited)— Six Months Ended March 31,2005                  |  |       | 6      |   |  |
|                                                                                                                           |  |
| CondensedConsolidated Statements of Cash Flows (Unaudited) — SixMonths Ended March 31, 2005 and2004                      |  |       | 7      |   |  |
|                                                                                                                           |  |
| Notes toCondensed Consolidated Financial Statements (Unaudited)—Three Months and Six Months Ended March 31, 2005 and2004 |  |       | 8      |   |  |
|                                                                                                                           |  |
| ITEM2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF  OPERATION                                         |  |       | 23     |   |  |
|                                                                                                                           |  |
| ITEM3.  CONTROLS ANDPROCEDURES                                                                                       |  |       | 33     |   |  |
|                                                                                                                           |  |
| **PARTII.  OTHERINFORMATION**                                                                                        |  |
|                                                                                                                           |  |
| ITEM1.  LEGAL PROCEEDINGS                                                                                            |  |       | 34     |   |  |
| ITEM2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF  PROCEEDS                                       |  |       | 34     |   |  |
| ITEM3.  DEFAULTS UPON SENIORSECURITIES                                                                               |  |       | 34     |   |  |
| ITEM 4.  SUBMISSION OFMATTERS TO A VOTE OF SECURITYHOLDERS                                                           |  |       | 34     |   |  |
| ITEM 5.  OTHERINFORMATION                                                                                            |  |       | 34     |   |  |
| ITEM6.  EXHIBITS                                                                                                     |  |       | 34     |   |  |
|                                                                                                                           |  |
| SIGNATURES                                                                                                                     |  |       | 35     |   |  |
|                                                                                                                                |

3

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YOUTHSTREAM MEDIANETWORKS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCESHEETS

|                                                                                                                                                                                                                                                                                                      |  |               |              |                   |  |        |              |         |  |  |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|---------------|--------------|-------------------|--|--------|--------------|---------|--|--|
|                                                                                                                                                                                                                                                                                                 |  | March31, 2005 |              | September 30,2004 |
|                                                                                                                                                                                                                                                                                                 |  | (Unaudited)   |              |              |
|                                                                                                                                                                                                                                                                                                 |  |          |         |              |  |   |         |    |
| ASSETS                                                                                                                                                                                                                                                                                               |  |          |         |              |  |   |         |    |
| Currentassets:                                                                                                                                                                                                                                                                                       |  |          |         |              |  |   |         |    |
| Cash and cashequivalents                                                                                                                                                                                                                                                                             |  | $             | 1,001,817    |              |  | $      | 674,880      |    |
| Current portion of note receivable,including accruedinterest                                                                                                                                                                                                                                         |  |          | 214,094      |              |  |   | 242,189      |    |
| Accountsreceivable, less allowance for doubtful accounts of$344,822                                                                                                                                                                                                                                  |  |          | 10,816,711   |              |  |   | —      |    |
| Inventories                                                                                                                                                                                                                                                                                          |  |          | 18,434,532   |              |  |   | —      |    |
| Prepaidexpenses and other currentassets                                                                                                                                                                                                                                                              |  |          | 933,728      |              |  |   | 16,624       |    |
| Totalcurrentassets                                                                                                                                                                                                                                                                                   |  |          | 31,400,882   |              |  |   | 933,693      |    |
| Property,plant and equipment,net                                                                                                                                                                                                                                                                     |  |          | 4,178,262    |              |  |   | 25,410       |    |
| Notereceivable, including accrued interest, less currentportion                                                                                                                                                                                                                                      |  |          | 47,732       |              |  |   | 245,465      |    |
| Unamortizedloancosts                                                                                                                                                                                                                                                                                 |  |          | 578,963      |              |  |   | —      |    |
| Deposits                                                                                                                                                                                                                                                                                             |  |          | 216,035      |              |  |   | —      |    |
| Deferredcosts related to KEStransaction                                                                                                                                                                                                                                                              |  |          | —      |              |  |   | 175,144      |    |
| Investmentin KESHoldings                                                                                                                                                                                                                                                                             |  |          | —      |              |  |   | 125,000      |    |
| Totalassets                                                                                                                                                                                                                                                                                          |  | $             | 36,421,874   |              |  | $      | 1,504,712    |    |
| LIABILITIESAND STOCKHOLDERS'DEFICIENCY                                                                                                                                                                                                                                                               |  |          |         |              |  |   |         |    |
| Currentliabilities:                                                                                                                                                                                                                                                                                  |  |          |         |              |  |   |         |    |
| Accountspayable                                                                                                                                                                                                                                                                                      |  | $             | 9,357,817    |              |  | $      | 910,074      |    |
| Accruedemployeecompensation                                                                                                                                                                                                                                                                          |  |          | 225,948      |              |  |   | 225,948      |    |
| Accruedexpenses                                                                                                                                                                                                                                                                                      |  |          | 1,985,987    |              |  |   | 752,043      |    |
| Lineofcredit                                                                                                                                                                                                                                                                                         |  |          | 16,625,470   |              |  |   | —      |    |
| Currentportion of equipment contractpayable                                                                                                                                                                                                                                                          |  |          | 73,152       |              |  |   | —      |    |
| Currentliabilities of discontinuedoperations                                                                                                                                                                                                                                                         |  |          | 2,476,741    |              |  |   | 2,498,468    |    |
| Totalcurrentliabilities                                                                                                                                                                                                                                                                              |  |          | 30,745,115   |              |  |   | 4,386,533    |    |
| Non-currentliabilities:                                                                                                                                                                                                                                                                              |  |          |         |              |  |   |         |    |
| Accruedinterest payable to relatedparties                                                                                                                                                                                                                                                            |  |          | 932,939      |              |  |   | —      |    |
| Deferredrent                                                                                                                                                                                                                                                                                         |  |          | 162,405      |              |  |   | —      |    |
| Notepayable toinvestor                                                                                                                                                                                                                                                                               |  |          | 3,952,775    |              |  |   | 3,952,775    |    |
| Notepayable to investor, net of unamortizeddiscount                                                                                                                                                                                                                                                  |  |          | 962,659      |              |  |   | 961,436      |    |
| 12%subordinated promissory notes payable to relatedparties                                                                                                                                                                                                                                           |  |          | 7,000,000    |              |  |   | —      |    |
| 8%subordinated secured promissory notes payable to relatedparties                                                                                                                                                                                                                                    |  |          | 39,493,000   |              |  |   | —      |    |
| Equipmentcontract payable, less currentportion                                                                                                                                                                                                                                                       |  |          | 212,080      |              |  |   | —      |    |
| Preferredstock of subsidiary subject to mandatory redemption; issued andoutstanding at March 31, 2005 – 24,733 shares of Series A13% cumulative, non-convertible, redeemable preferred stock,mandatory redemption and liquidation value of $1,000.00 per share, pluscumulativedividends        |  |          | 25,006,079   |              |  |   | —      |    |
| Preferredstock subject to mandatory redemption; issued and outstanding at March31, 2005 and September 30, 2004 – 1,000,000 shares of Series A4% cumulative, non-convertible, redeemable preferred stock,mandatory redemption and liquidation value of $4.00 per share, pluscumulativedividends |  |          | 5,269,333    |              |  |   | 5,269,333    |    |
| Minorityinterest – relatedparties                                                                                                                                                                                                                                                              |  |          | 182,452      |              |  |   | —      |    |
| Totalliabilities                                                                                                                                                                                                                                                                                     |  |          | 113,918,837  |              |  |   | 14,570,077   |    |
| Commitmentsandcontingencies                                                                                                                                                                                                                                                                          |  |          |         |              |  |   |         |    |
| Stockholders'deficiency:                                                                                                                                                                                                                                                                             |  |          |         |              |  |   |         |    |
| Preferredstock, $0.01 par value; authorized – 5,000,000 shares; issued andoutstanding at March 31, 2005 and September 30, 2004 – 1,000,000shares of Series A preferred stock (classified in long-term liabilitiesas preferred stock subject to mandatoryredemption)                      |  |          | —      |              |  |   | —      |    |
| Commonstock, $0.01 par value; authorized – 100,000,000 shares;39,849,751 shares issued and 39,242,251 shares outstanding at March 31,2005 and September 30,2004                                                                                                                                |  |          | 398,486      |              |  |   | 398,486      |    |
| Additionalpaid-incapital                                                                                                                                                                                                                                                                             |  |          | 268,168,896  |              |  |   | 331,200,561  |    |
| Accumulateddeficit                                                                                                                                                                                                                                                                                   |  |          | (345,234,769 | )            |  |   | (343,834,836 | )  |
| Treasurystock – 607,500 shares, atcost                                                                                                                                                                                                                                                         |  |          | (829,576     | )            |  |   | (829,576     | )  |
| Totalstockholders'deficiency                                                                                                                                                                                                                                                                         |  |          | (77,496,963  | )            |  |   | (13,065,365  | )  |
| Totalliabilities and stockholders'deficiency                                                                                                                                                                                                                                                         |  | $             | 36,421,874   |              |  | $      | 1,504,712    |    |
|                                                                                                                                                                                                                                                                                                      |

Seeaccompanying notes to condensed consolidated financialstatements.

4

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YOUTHSTREAM MEDIA NETWORKS, INC. ANDSUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(UNAUDITED)

|                                                                                                                                                                                                       |  |                            |            |                          |  |        |            |         |  |        |            |         |  |        |            |         |  |  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|----------------------------|------------|--------------------------|--|--------|------------|---------|--|--------|------------|---------|--|--------|------------|---------|--|--|
|                                                                                                                                                                                                  |  | ThreeMonths EndedMarch 31, |            | Six Months EndedMarch31, |
|                                                                                                                                                                                                  |  | 2005                       |            | 2004                     |  | 2005   |            | 2004    |
| NETSALES                                                                                                                                                                                              |  | $                          | 9,133,777  |                     |  | $      | —    |    |  | $      | 9,133,777  |    |  | $      | —    |    |
| COSTSAND EXPENSES                                                                                                                                                                                     |  |
| Cost ofsales                                                                                                                                                                                          |  |                       | 8,487,199  |                     |  |   | —    |    |  |   | 8,487,199  |    |  |   | —    |    |
| Selling,general andadministrative                                                                                                                                                                     |  |                       | 516,544    |                     |  |   | 376,414    |    |  |   | 711,215    |    |  |   | 709,957    |    |
|                                                                                                                                                                                                  |  |                       | 9,003,743  |                     |  |   | 376,414    |    |  |   | 9,198,414  |    |  |   | 709,957    |    |
| Operatingincome(loss)                                                                                                                                                                                 |  |                       | 130,034    |                     |  |   | (376,414   | )  |  |   | (64,637    | )  |  |   | (709,957   | )  |
| OTHERINCOME (EXPENSE)                                                                                                                                                                                 |  |
| Interestincome                                                                                                                                                                                        |  |                       | 11,169     |                     |  |   | 11,149     |    |  |   | 25,534     |    |  |   | 11,448     |    |
| Interestexpense, including $273,079 related to 13% Series A PreferredStock and $339,678 related to 8% and 12% notes payable torelated parties for the three months and six months ended March 31,2005 |  |                       | (793,029   | )                   |  |   | (10,338    | )  |  |   | (803,601   | )  |  |   | (20,598    | )  |
| Transactioncosts related to KESacquisition                                                                                                                                                            |  |                       | (792,954   | )                   |  |   | —    |    |  |   | (792,954   | )  |  |   | —    |    |
| Otherexpense,net                                                                                                                                                                                      |  |                       | (12,967    | )                   |  |   | —    |    |  |   | (30,705    | )  |  |   | —    |    |
| Otherincome (expense),net                                                                                                                                                                             |  |                       | (1,587,781 | )                   |  |   | 811        |    |  |   | (1,601,726 | )  |  |   | (9,150     | )  |
| LOSSBEFORE INCOME TAXES AND MINORITYINTEREST                                                                                                                                                          |  |                       | (1,457,747 | )                   |  |   | (375,603   | )  |  |   | (1,666,363 | )  |  |   | (719,107   | )  |
| Incometaxbenefit                                                                                                                                                                                      |  |                       | —    |                     |  |   | 12,173     |    |  |   | —    |    |  |   | 12,113     |    |
| LOSSBEFORE MINORITYINTEREST                                                                                                                                                                           |  |                       | (1,457,747 | )                   |  |   | (363,430   | )  |  |   | (1,666,363 | )  |  |   | (706,994   | )  |
| MINORITYINTEREST – relatedparties                                                                                                                                                               |  |                       | 266,430    |                     |  |   | —    |    |  |   | 266,430    |    |  |   | —    |    |
| LOSSFROM CONTINUINGOPERATIONS                                                                                                                                                                         |  |                       | (1,191,317 | )                   |  |   | (363,430   | )  |  |   | (1,399,933 | )  |  |   | (706,994   | )  |
| LOSSFROM DISCONTINUED OPERATIONS                                                                                                                                                                      |  |
| Discontinuedoperations                                                                                                                                                                                |  |                       | —    |                     |  |   | (155,668   | )  |  |   | —    |    |  |   | (476,776   | )  |
| Disposalof discontinuedoperations                                                                                                                                                                     |  |                       | —    |                     |  |   | (821,721   | )  |  |   | —    |    |  |   | (821,721   | )  |
| LOSSFROM DISCONTINUEDOPERATIONS                                                                                                                                                                       |  |                       | —    |                     |  |   | (977,389   | )  |  |   | —    |    |  |   | (1,298,497 | )  |
| NETLOSS                                                                                                                                                                                               |  | $                          | (1,191,317 | )                   |  | $      | (1,340,819 | )  |  | $      | (1,399,933 | )  |  | $      | (2,005,491 | )  |
| NET LOSS PER COMMON SHARE – BASIC ANDDILUTED                                                                                                                                                    |  |
| Loss from continuingoperations                                                                                                                                                                        |  | $                          | (0.03      | )                   |  | $      | (0.01      | )  |  | $      | (0.04      | )  |  | $      | (0.02      | )  |
| Lossfrom discontinuedoperations                                                                                                                                                                       |  |                       | —    |                     |  |   | (0.02      | )  |  |   | —    |    |  |   | (0.03      | )  |
| NETLOSS PER COMMON SHARE – BASIC ANDDILUTED                                                                                                                                                     |  | $                          | (0.03      | )                   |  | $      | (0.03      | )  |  | $      | (0.04      | )  |  | $      | (0.05      | )  |
| WEIGHTEDAVERAGE NUMBER OF COMMON SHARES OUTSTANDING – BASIC ANDDILUTED                                                                                                                          |  |                       | 39,242,251 |                     |  |   | 39,242,251 |    |  |   | 39,242,251 |    |  |   | 39,242,251 |    |
|                                                                                                                                                                                                       |

Seeaccompanying notes to condensed consolidated financialstatements.

5

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YOUTHSTREAM MEDIA NETWORKS, INC. ANDSUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OFSTOCKHOLDERS' DEFICIENCY (UNAUDITED) SIX MONTHS ENDED MARCH31,2005

|                                                                                                      |  |             |            |                          |  |                    |         |               |  |        |             |         |  |        |              |         |  |        |          |         |  |        |             |         |  |  |
|------------------------------------------------------------------------------------------------------|--|-------------|------------|--------------------------|--|--------------------|---------|---------------|--|--------|-------------|---------|--|--------|--------------|---------|--|--------|----------|---------|--|--------|-------------|---------|--|--|
|                                                                                                 |  | CommonStock |            | AdditionalPaid-inCapital |  | AccumulatedDeficit |         | TreasuryStock |  | Total  |
|                                                                                                 |  | Shares      |            | Amount                   |  |
| Balancesat October 1,2004                                                                            |  |        | 39,849,751 |                     |  | $                  | 398,486 |          |  | $      | 331,200,561 |    |  | $      | (343,834,836 | )  |  | $      | (829,576 | )  |  | $      | (13,065,365 | )  |
| Deemeddistribution to sellers of KES Acquisition Company, LLC in excess ofpredecessor company'sbasis |  |        | —    |                     |  |               | — |          |  |   | (63,031,665 | )  |  |   | —      |    |  |   | —  |    |  |   | (63,031,665 | )  |
| Netloss                                                                                              |  |        | —    |                     |  |               | — |          |  |   | —     |    |  |   | (1,399,933   | )  |  |   | —  |    |  |   | (1,399,933  | )  |
| Balancesat March 31,2005                                                                             |  |        | 39,849,751 |                     |  | $                  | 398,486 |          |  | $      | 268,168,896 |    |  | $      | (345,234,769 | )  |  | $      | (829,576 | )  |  | $      | (77,496,963 | )  |
|                                                                                                      |

Seeaccompanying notes to condensed consolidated financialstatements.

6

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YOUTHSTREAM MEDIA NETWORKS, INC. ANDSUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)

|                                                                                                  |  |                         |            |         |  |        |            |         |  |  |
|--------------------------------------------------------------------------------------------------|--|-------------------------|------------|---------|--|--------|------------|---------|--|--|
|                                                                                             |  | SixMonths EndedMarch31, |
|                                                                                             |  | 2005                    |            | 2004    |
| CASHFLOWS FROM OPERATING ACTIVITIES                                                              |  |
| Netloss                                                                                          |  | $                       | (1,399,933 | )  |  | $      | (2,005,491 | )  |
| Adjustmentsto reconcile net loss to net cash used in operatingactivities:                        |  |
| Loss from discontinuedoperations                                                                 |  |                    | —    |    |  |   | 476,776    |    |
| Losson disposal of discontinuedoperations                                                        |  |                    | —    |    |  |   | 821,721    |    |
| Netchange in assets and liabilities of discontinuedoperations                                    |  |                    | (21,727    | )  |  |   | (196,620   | )  |
| Depreciationandamortization                                                                      |  |                    | 31,006     |    |  |   | 9,960      |    |
| Amortizationof original issue discount on subordinatednotes                                      |  |                    | 1,223      |    |  |   | 599        |    |
| Amortizationof loancosts                                                                         |  |                    | 51,395     |    |  |   | —    |    |
| Write-offof fixedassets                                                                          |  |                    | 20,430     |    |  |   | —    |    |
| Write-offof KES acquisitioncosts                                                                 |  |                    | 792,954    |    |  |   | —    |    |
| Minorityinterest – relatedparties                                                          |  |                    | (266,430   | )  |  |   | —    |    |
| Changesin operating assets and liabilities, net of effect of KESacquisition:                     |  |
| (Increase) decrease in−                                                                    |  |
| Accountsreceivable,net                                                                           |  |                    | (156,294   | )  |  |   | —    |    |
| Inventories                                                                                      |  |                    | (584,061   | )  |  |   | —    |    |
| Accruedinterestreceivable                                                                        |  |                    | (21,399    | )  |  |   | —    |    |
| Prepaidexpenses                                                                                  |  |                    | (12,833    | )  |  |   | 146,194    |    |
| Increase(decrease) in −                                                                    |  |
| Accountspayable                                                                                  |  |                    | (206,837   | )  |  |   | 22,703     |    |
| Accruedemployeecompensation                                                                      |  |                    | —    |    |  |   | (8,778     | )  |
| Accruedinterestpayable                                                                           |  |                    | 614,867    |    |  |   | —    |    |
| Accruedexpenses                                                                                  |  |                    | (240,004   | )  |  |   | 78,501     |    |
| Deferredrent                                                                                     |  |                    | (3,008     | )  |  |   | —    |    |
| NETCASH USED IN OPERATINGACTIVITIES                                                              |  |                    | (1,400,651 | )  |  |   | (654,435   | )  |
| CASHFLOWS FROM INVESTING ACTIVITIES                                                              |  |
| Proceeds from saleof BTWassets                                                                   |  |                    | —    |    |  |   | 820,000    |    |
| Principal andinterest payments on notereceivable                                                 |  |                    | 247,227    |    |  |   | —    |    |
| Deferredcosts related to KEStransaction                                                          |  |                    | (430,108   | )  |  |   | —    |    |
| NETCASH PROVIDED BY (USED IN) INVESTINGACTIVITIES                                                |  |                    | (182,881   | )  |  |   | 820,000    |    |
| CASHFLOWS FROM FINANCING ACTIVITIES                                                              |  |
| Net increase in lineofcredit                                                                     |  |                    | 1,005,374  |    |  |   | —    |    |
| Principalpayments on equipment contractpayable                                                   |  |                    | (8,099     | )  |  |   | —    |    |
| NETCASH PROVIDED BY FINANCINGACTIVITIES                                                          |  |                    | 997,275    |    |  |   | —    |    |
| NETCASH PROVIDED BY (USED IN) OPERATING, INVESTING AND FINANCINGACTIVITIES                       |  |                    | (586,257   | )  |  |   | 165,565    |    |
| CASHACQUIRED IN CONNECTION WITH KESACQUISITION                                                   |  |                    | 913,194    |    |  |   | —    |    |
| CASHAND CASH EQUIVALENTS                                                                         |  |
| Netincrease                                                                                      |  |                    | 326,937    |    |  |   | 165,565    |    |
| Balance atbeginning ofperiod                                                                     |  |                    | 674,880    |    |  |   | 531,466    |    |
| Balanceat end ofperiod                                                                           |  | $                       | 1,001,817  |    |  | $      | 697,031    |    |
| SUPPLEMENTALCASH FLOW INFORMATION                                                                |  |
| Cash paid for–                                                                             |  |
| Interest                                                                                         |  | $                       | 167,569    |    |  | $      | —    |    |
| Incometaxes                                                                                      |  | $                       | —    |    |  | $      | —    |    |
| NON-CASHINVESTING AND FINANCING ACTIVITIES                                                       |  |
| Preferred stockissued in connection with acquisition of KES Acquisition Company,LLC              |  | $                       | 24,733,000 |    |  | $      | —    |    |
| Notes payable issued in connection withacquisition of KES Acquisition Company,LLC                |  | $                       | 39,493,000 |    |  | $      | —    |    |
| Assets acquired in connection withacquisition of KES Acquisition Company, LLC, less cashacquired |  | $                       | 34,528,542 |    |  | $      | —    |    |
| Liabilities assumed in connection withacquisition of KES Acquisition Company,LLC                 |  | $                       | 33,673,519 |    |  | $      | —    |    |
| Deemed distribution to sellers of KESAcquisition Company, LLC in excess of predecessor'sbasis    |  | $                       | 63,031,665 |    |  | $      | —    |    |
| Loan fees capitalized and added to noteprincipal                                                 |  | $                       | 125,000    |    |  | $      | —    |    |
|                                                                                                  |

See accompanying notes to condensedconsolidated financialstatements.

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YOUTHSTREAM MEDIANETWORKS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS (UNAUDITED) THREE MONTHS AND SIX MONTHS ENDEDMARCH 31, 2005 AND 2004

1.    Organization and Basis ofPresentation

Basis of Presentation

The accompanyingcondensed consolidated financial statements include the accounts ofYouthStream Media Networks,  Inc.("YouthStream"), and its direct and indirectwholly and majority-owned subsidiaries: Network Event Theater,Inc. ("NET"), American Passage Media,Inc. ("American Passage"), Beyond theWall,  Inc. ("Beyond the Wall" or"BTW"), and W3T.com,  Inc.("Teen.com") (all inactive); and YouthStreamAcquisition Corp., Atacama KES Holding Corporation and KES AcquisitionCompany, LLC (see Note 2) (collectively, the"Company").

The condensed consolidatedfinancial statements have been prepared in accordance with generallyaccepted accounting principles in the United States of America.Intercompany items and transactions have been eliminated inconsolidation.

During fiscal 2001, the Company reorganized intotwo market segments: media and retail.

In August 2002, theCompany sold substantially all of its remaining media assets andassigned certain liabilities of its NET and American Passagesubsidiaries to Alloy, Inc. and ceased operating the media segment.

In February 2004, the Company sold the assets and operations of itsBeyond the Wall subsidiary and ceased operating the retail segment.Beyond the Wall had been engaged in the sale of decorative wall postersthrough on-campus sales events, retail stores and internet sales,primarily to teenagers and young adults. During the three months andsix months ended March 31, 2004, Beyond the Wall operated 17 stores in12 states, plus Washington, D.C., throughout the East and mid-West, aswell as a warehouse and distribution center in Stroudsburg,Pennsylvania, and was the Company's only revenue-generatingbusiness operation. The condensed consolidated financial statements forthe three months and six months ended March 31, 2004 present Beyond theWall's operations as a discontinued operation as a result of thedisposal of its assets and operations on February 25, 2004 (see Note3).

Commencing March 1, 2005, the Company has included theoperations of a steel mini-mill located in Ashland, Kentucky in itsconsolidated financial statements (see Note 2), which represents theonly business segment in which the Company currently operates.

The accompanying condensed consolidated financial statements areunaudited, but in the opinion of management of the Company, contain alladjustments, which include normal recurring accruals, necessary topresent fairly the financial position at March 31, 2005, the results ofoperations for the three months and six months ended March 31, 2005 and2004, and the cash flows for the six months ended March 31, 2005 and2004. The balance sheet as of September 30, 2004 is derived from theCompany's audited financial statements included in theCompany's Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2004.

Certain information and footnote disclosuresnormally included in financial statements that have been prepared inaccordance with generally accepted accounting principles have beencondensed or omitted pursuant to the rules and regulations of theSecurities and Exchange Commission, although management of the Companybelieves that the disclosures contained in these financial statementsare adequate to make the information presented therein not misleading.For further information, refer to the financial statements and thenotes thereto included in the Company's Annual Report on Form10-K for the fiscal year ended September 30, 2004, as filed with theSecurities and Exchange Commission.

The preparation of financialstatements in conformity with accounting principles generally acceptedin the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets andliabilities, disclosure of contingent assets and liabilities

8

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at the date of the financial statements, andthe reported amounts of revenues and expenses during the reportingperiod. Actual results could differ from those estimates.

Theresults of operations for the three months and six months ended March31, 2005 are not necessarily indicative of the results of operations tobe expected for the full fiscal year ending September 30, 2005.

Going Concern

The Company has incurred recurring operatinglosses since its inception. As of September 30, 2004, the Company hadan accumulated deficit of $343,834,836, a stockholders'deficiency of $13,065,365, a working capital deficiency of $3,452,840,and had incurred a net loss and negative cash flows from operatingactivities for the year ended September 30, 2004 of $2,365,620 and$901,443, respectively. As of March  31, 2005, the Company had anaccumulated deficit of $345,234,769, a stockholders' deficiencyof $77,496,963 and had incurred a net loss and negative cash flows fromoperating activities for the six months ended March  31, 2005 of$1,399,933 and $1,400,651, respectively. As of September 30, 2004 andMarch 31, 2005, the Company had insufficient capital to fund all of itsobligations. These conditions raise substantial doubt about theCompany's ability to continue as a going concern. The condensedconsolidated financial statements do not include any adjustments toreflect the possible future effect of the recoverability andclassification of assets or the amounts and classifications ofliabilities that may result from the outcome of this uncertainty. TheCompany's independent registered public accounting firm, in itsreport dated December 17, 2004, included an explanatory paragraphstating that the Company's recurring losses and accumulateddeficit, working capital deficiency and negative cash flow, among otherthings, raise substantial doubt about the Company's ability tocontinue as a going concern.

On March 9, 2005, the Companycompleted the acquisition of a steel mini-mill located in Ashland,Kentucky (see Note 2). The Company utilized substantially all of itsavailable cash resources to fund such acquisition, and will thereforeneed to obtain additional operating capital to fund corporate generaland administrative expenses either through internal or externalresources. In addition, the steel mini-mill restarted operations inlate January 2004 after being acquired by the previous owners, and hasincurred losses to date. The steel mini-mill relies on cash flows fromoperations and a line of credit with General Electric CapitalCorporation to fund its separate operations. The Company has borrowedthe maximum amount available under its line of credit with GeneralElectric Capital Corporation and is attempting to restructure the termsof the line of credit to be able to increase its borrowingsthereunder.

The Company believes that its current internal andexternal cash resources will be adequate to fund its operations throughSeptember 30, 2005. However, to the extent the Company'sestimates and assumptions are inaccurate, the Company may not havesufficient cash resources to fund its operations. In such event, theCompany may be required to consider a formal or informal restructuringor reorganization.

The Company's management may alsoconsider various strategic alternatives in the future, including theacquisition of new business opportunities, which may be from related orunrelated parties.   However, there can be no assurances thatsuch efforts will ultimately be successful.   The Company mayfinance any acquisitions through a combination of debt and/or equitysecurities.

Stock-Based Compensation

The Companygenerally grants stock options to management and employees for a fixednumber of shares with an exercise price equal to or greater than thefair value of the shares at the date of grant. The Company accounts forstock option grants in accordance with Accounting Principles Board("APB") Opinion No. 25,"Accounting for Stock Issued to Employees",and, accordingly, recognizes compensation expense only if the fairvalue of the underlying common stock exceeds the exercise price of thestock option on the date of grant. As permitted by Statement ofFinancial Accounting Standards ("SFAS") No.123, the Company continues to account for stock-based compensation inaccordance with APB Opinion No. 25 and has elected the pro formadisclosure alternative of SFAS No. 123, as amended by SFAS No. 148 (seeNote 5).

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Net Loss Per Share

The Companycalculates net loss per share as required by SFAS No. 128,"Earnings per Share". Basic earnings pershare excludes any dilution for common stock equivalents and iscomputed by dividing net loss by the weighted average number of commonshares outstanding during the relevant period. Diluted earnings pershare reflects the potential dilution that could occur if options orother securities or contracts entitling the holder to acquire shares ofcommon stock were exercised or converted, resulting in the issuance ofadditional shares of common stock that would then share in earnings.However, diluted earnings per share does not consider such dilution ifits effect would be anti-dilutive. Accordingly, basic and diluted lossper share is the same for all periods presented.

RecentAccounting Pronouncements

In December 2004, the FASB issuedSFAS No. 123(Revised 2004), "Share-BasedPayment". SFAS No. 123(R) revises SFAS No. 123,"Accounting for Stock-Based Compensation" andsupersedes APB Opinion No. 25, "Accounting for StockIssued to Employees" and amends SFAS No. 95,"Statement of Cash Flows". SFAS No. 123(R)focuses primarily on the accounting for transactions in which an entityobtains employee services in share-based payment transactions. SFAS No.123(R) requires companies to recognize in the statement of operationsthe cost of employee services received in exchange for awards of equityinstruments based on the grant-date fair value of those awards (withlimited exceptions). SFAS No. 123(R) is effective as of theCompany's first interim or annual reporting period that beginsafter December 15, 2005. Accordingly, the Company will adopt SFAS No.123(R) in its quarter ending March 31, 2006. The Company is currentlyevaluating the provisions of SFAS No. 123(R) and has not yet determinedthe impact, if any, that SFAS No. 123(R) will have on its financialstatement presentation or disclosures.

In November 2004, theFASB issued SFAS  No.  151, "InventoryCosts  — An Amendment of ARB No.  43, Chapter4" (SFAS  No. 151). SFAS  No. 151 clarifiesthat abnormal amounts of idle facility expense, freight, handling costsand spoilage should be expensed as incurred and not included inoverhead. Further, SFAS  No. 151 requires that allocation offixed and production facilities overhead to conversion costs should bebased on normal capacity of the production facilities. The provisionsin SFAS  No. 151 are effective for inventory costs incurredduring fiscal years beginning after June  15, 2005. The Companyis currently evaluating the provisions of SFAS No. 151 and has not yetdetermined the impact, if any, that SFAS No. 151 will have on itsfinancial statement presentation or disclosures.

In December2004, the FASB issued SFAS No.  153, "Exchanges ofNonmonetary Assets, an amendment to APB Opinion No. 29"("SFAS  153"). SFAS  153 amendsAccounting Principles Board Opinion No.  29,"Accounting for Nonmonetary Transactions", torequire that exchanges of nonmonetary assets be measured and accountedfor at fair value, rather than at carryover basis, of the assetsexchanged. Nonmonetary exchanges that lack commercial substance areexempt from this requirement. SFAS  No. 153 is effective fornonmonetary exchanges entered into in fiscal periods beginning afterJune  15, 2005. The Company is currently evaluating theprovisions of SFAS  No. 153, and has not yet determined theimpact, if any, that it will have on the Company's financialstatement presentation or disclosures.

2.    Acquisition ofSteel Mini-Mill

In September  2003, YouthStreaminvested $125,000 to acquire a 1.00% membership interest in KESHoldings, LLC, a Delaware limited liability company ("KESHoldings"), which was formed to acquire certain assets ofKentucky Electric Steel,  Inc., a Delaware company("KES"), consisting of a steel mini-milllocated in Ashland, Kentucky (the "Mill"). OnSeptember  2, 2003, KES Holdings, through its subsidiary, KESAcquisition Company, LLC, a Delaware limited liability company("KES Acquisition"), completed theacquisition of the Mill pursuant to Section  363 of the UnitedStates Bankruptcy Code for cash consideration of $2,650,000, which wasfunded through the contributions of the members of KES Holdings.Members' contributions were also used for start-up costs, workingcapital purposes and payment of deferred maintenance of the Mill. KEShad ceased production on or about December  16, 2002 and filed avoluntary petition for relief under Chapter 11 of the United StatesBankruptcy Code on February  5, 2003.

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The Mill had been in operation forapproximately forty years and was refurbished by KES Acquisitionsubsequent to its acquisition.   The refurbished Mill has beengenerating revenues since late January 2004. As currently configured,the Mill has an annual production capacity of 240,000 tons of steel,and is currently operating at approximately 80% of suchannualized capacity. Management is focusing on developing the businessand improving operating efficiencies.

The Mill produces barflats that are produced to a variety of specifications and fallprimarily into two general quality levels – merchant bar qualitysteel bar flats ("MBQ Bar Flats") for generictypes of applications, and special bar quality steel bar flats("SBQ Bar Flats"), when more precise customerspecifications require the use of alloys, customized equipment andspecial production procedures to insure that the finished product meetscritical end-use performance characteristics. The Mill is a leadingmanufacturer of SBQ Bar Flats for the cold draw bar converter and trucktrailer support beam markets.

The Mill manufactures over 2,600different Bar Flat items which are sold to the leaf-spring suspensionmarket for light- and heavy-duty trucks, mini-vans and utilityvehicles, cold drawn bar converters, certain specialty applications forsteel service centers, truck trailer manufacturers and othermiscellaneous markets. The Mill was specifically designed tomanufacture wider and thicker bar flats up to three inches in thicknessand twelve inches in width that are required by these markets. Inaddition, the Mill employs a variety of specially designed equipmentwhich is required in order to manufacture SBQ Bar Flats to thespecifications of the Mill's customers.

On March 9, 2005,YouthStream completed the acquisition of KES Acquisition (the"Acquisition"), which was deemed effectiveMarch 1, 2005. Pursuant to definitive agreements executed with KESHoldings and Atacama Capital Holdings, Ltd., a British Virgin Islandscompany ("Atacama", and together with KESHoldings, collectively, the "Sellers"),YouthStream, through its newly-formed subsidiary, YouthStreamAcquisition Corp., a Delaware corporation ("AcquisitionCorp."), acquired 100% of the membership interestsof KES Acquisition by acquiring (i) a 37.45% membership interestfrom KES Holdings and (ii) all of the capital stock of Atacama KESHolding Corporation, a wholly-owned subsidiary of Atacama("Atacama KES"), the owner of the remaining62.55% membership interest in KES Acquisition. As considerationfor the Acquisition, Acquisition Corp. issued to the Sellers (i) $40million in promissory notes (the "Notes"),(ii) 25,000 shares of 13% Series A Non-Convertible PreferredStock with an aggregate liquidation value of $25 million (the"13% Series A Preferred Stock") and(iii) 100% of its authorized shares of Series B Non-VotingCommon Stock. With respect to the $65,000,000 of purchaseconsideration, $19,000,000 of the Notes and $10,000,000 of the13% Series A Preferred Stock were issued to KES Holdings and$21,000,000 of the Notes and $15,000,000 of the 13% Series APreferred Stock were issued to Atacama. YouthStream also contributed anaggregate of $500,000 of cash to Acquisition Corp. as consideration forthe issuance by Acquisition Corp. of 100% of its Series A VotingCommon Stock. In addition, YouthStream will periodically be required topurchase shares of Series B Preferred Stock of Acquisition Corp.

As a result of these transactions, YouthStream owns 80.01% ofthe common stock, and 100% of the voting stock, of AcquisitionCorp. The remaining 19.99% common stock interest in AcquisitionCorp. is owned 62.55% by Atacama and 37.45% by KESHoldings. YouthStream has a 2.67% equity interest in KESHoldings, as a result of which the Company has eliminated its $507,000interest in the Notes and $267,000 interest in the 13% Series APreferred Stock in the condensed consolidated balance sheet at March31, 2005. YouthStream has consolidated the operations of the Millthrough its ownership of KES Acquisition commencing March 1, 2005. As aresult of the Acquisition, the financial statements from March 1, 2005on are materially different from and are not comparable to thefinancial statements prior to that date.

Subsequent to theAcquisition, the management of the Mill remained intact. Thistransaction did not result in any change in the Mill's businessoperations or financial condition, and, other than as set forth herein,the working capital, operating cash flow, debt service obligations andcredit profile of the Mill were not affected in any way by thistransaction.

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As described herein, the Notes and13% Series A Preferred Stock were issued by Acquisition Corp.,the parent company of KES Acquisition. KES Acquisition is a separatelegal entity that owns and operates the Mill. The Notes are legalobligations solely of Acquisition Corp., and are not obligations of KESAcquisition, nor are they secured by the assets or cash flows of theMill. In the future, Acquisition Corp. may grant liens to securerepayment of the Notes, upon the consent of any senior lender to KESAcquisition at that time. In addition, the Notes are non-recourse tothe assets of YouthStream, except for the shares of capital stock ofAcquisition Corp. that have been pledged by YouthStream to the holdersof the Notes.

The Notes are structurally subordinate in rightand payment of up to $40,000,000 of senior debt, including existingdebt obligations in favor of General Electric Capital Corporation("GECC"). Scheduled principal paymentscommence in (i) February 2007 with respect to the $19,000,000 principalamount of Notes issued in favor of KES Holdings and (ii) February 2011with respect to the $21,000,000 principal amount of Notes issued infavor of Atacama. In addition, the Notes require additional quarterlyprincipal payments out of "free cash" as thatterm is defined in the Note Purchase Agreement. The Notes bear interestat the rate of 8% per annum, payable annually during the firsttwo years of the Note (or earlier if consented to by GECC or any othersenior lender) and quarterly thereafter. The obligations of AcquisitionCorp. under the Notes are secured by a limited guaranty by YouthStream,which guaranty is secured by and limited in recourse solely to a pledgeby YouthStream of all of its interest in Acquisition Corp. As of March31, 2005, the balance outstanding on the Notes was $39,493,000, andrelated accrued interest payable was $268,336.

The holders ofeach share of 13% Series A Preferred Stock are entitled toreceive a cumulative dividend at an annual rate of 13% of thesum of $1,000 and all accrued but unpaid dividends. The 13%Series A Preferred Stock contains a liquidation preference equal to$1,000 per share, plus accrued but unpaid dividends, and is redeemableout of, and to the extent of, legally available funds, at a redemptionprice equal to the sum of $1,000 and all accrued but unpaid dividendson the earlier to occur of (i) any liquidation of Acquisition Corp. or(ii) the occurrence of an event of default under the Note PurchaseAgreement. In addition, beginning with the second anniversary of theinitial issuance of the 13% Series A Preferred Stock,Acquisition Corp. will be required to use "freecash" (as that term is defined in the Securities PurchaseAgreement) to commence redeeming shares of 13% Series APreferred Stock in increments of at least $4,000,000, with limitedexceptions.

Since the acquisition of the Mill by the Sellers,the Mill has been operating under a Management Services Agreement withPinnacle Steel, LLC (the "PinnacleAgreement"), which agreement remained in effect followingthe closing. The principals of Pinnacle Steel LLC that manage the Millhave significant experience and expertise in the steel industry. ThePinnacle Agreement will remain in effect through January 31, 2009,subject to earlier termination or extension based on the financialperformance of the Mill. Pinnacle is entitled to a monthly managementfee and a management incentive fee as provided in the PinnacleAgreement.

Subsequent to the acquisition of the Mill by theSellers, KES Acquisition issued an aggregate of $7,000,000 ofsubordinated promissory notes to the Sellers and certain of theirrespective affiliates (the "Subordinated PromissoryNotes"). Cash proceeds from the Subordinated PromissoryNotes were used to accelerate and expand the operations of the Mill.The Subordinated Promissory Notes bear interest at the rate of12% per annum, with principal and interest due and payable uponthe earlier to occur of (i) an event of default under the Loan andSecurity Agreement with GECC or (ii) December 31, 2006.

Relatedparties are summarized as follows: Robert Scott Fritz, a director ofYouthStream, is an investor in KES Holdings. Hal G. Byer, anotherdirector of YouthStream, is an employee of affiliates of Libra/KESInvestment I, LLC (collectively, "Libra"),the Manager of KES Holdings and has an economic interest in KESHoldings through his relationship with Libra. Certain other affiliatesof Libra are also investors in KES Holdings, including trusts for thebenefit of Jess M. Ravich (the "RavichTrusts") and certain of his family members. Mr. Ravich isa principal of Libra and holds 1,860,000 shares of YouthStream'scommon stock and warrants to purchase 500,000 shares ofYouthStream's common stock exercisable through August 31, 2008,as well as 1,000,000 shares of 

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YouthStream's redeemable preferredstock. Through his positions at Libra, Mr. Ravich has managed thebusiness of KES Acquisition through February 28, 2005. SubordinatedPromissory Notes with a principal amount of $1,650,000 and $450,000 arepayable to the Ravich Trusts and Libra, respectively. Mr. Fritz and Mr.Byer have each previously acquired an option from the Ravich Trusts for$2,500 ($0.04 per share) to purchase 62,500 shares ofYouthStream's redeemable preferred stock issued to the RavichTrusts in January 2003, exercisable at $0.36 per share until December31, 2006 or earlier upon the occurrence of certain events.

TheAcquisition was accounted for as a purchase in accordance with SFAS No.141, "Business Combinations", and inaccordance with Emerging Issues Task Force (EITF) No. 88-16,"Basis in Leveraged Buyout Transactions." Asa result of the substantial and continuing relationships betweenYouthStream and the Sellers, and the provisions of EITF 88-16 that mustbe considered when determining the extent of fair value/predecessorbasis to be used in recording the transaction, the Acquisition has beenrecorded at predecessor basis. Since the debt and equity held by theSellers represented almost the entire amount of capital at risk bothbefore and after the Acquisition, the application of the"monetary test" specified in Section 3 ofEITF 88-16, which limits the portion of the purchase consideration thatcan be valued at fair value to the percentage of the totalconsideration that is monetary, was utilized by the Company indetermining to record the transaction at predecessor basis. The excessof the purchase price over predecessor basis of the net assets acquiredhas been reflected as a deemed distribution of $63,031,665 to theSellers at the date of acquisition in the consolidated financialstatements.

For taxable periods beginning after February 28,2005, Acquisition Corp. and Atacama KES will be includible in theconsolidated federal income tax return to be filed by YouthStream asthe common parent.   Acquisition Corp. and Atacama KES haveentered into a Tax Sharing Agreement with YouthStream, pursuant towhich they have agreed to pay YouthStream an amount equal to 50%of their respective "separate company taxliability."   The term "separatecompany tax liability" is defined as the amount, if any,of the federal income tax liability (including, without limitation,liability for any penalty, fine, additions to tax, interest, minimumtax and other items applicable to  such subsidiary in connectionwith the determination of the subsidiary's tax liability),which  such subsidiary would have incurred if its federal incometax liability for the periods during which it is includible in aconsolidated federal income tax return with YouthStream  weredetermined generally in the same manner in which its separate returnliability would have been calculated under Section 1552(a)(2) of theInternal Revenue Code of 1986, as amended.   YouthStream hasapproximately $250,000,000 of federal net operating loss carryoverscurrently available to offset the consolidated federal taxable incomeof the affiliated group in the future.

The total purchase priceof $65,000,000, as well as the terms and conditions of the Notes and13% Series A Preferred Stock issued to the Sellers, wasdetermined to be at fair value based on reports prepared by anindependent valuation firm. The following table summarizes the assetsacquired and liabilities assumed at February 28, 2005.

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|                                                                 |  |        |             |         |  |  |
|-----------------------------------------------------------------|--|--------|-------------|---------|--|--|
| AssetsAcquired:                                                 |  |   |        |    |
| Cash                                                            |  | $      | 913,194     |    |
| Accountsreceivable,net                                          |  |   | 10,660,417  |    |
| Inventories                                                     |  |   | 17,850,471  |    |
| Prepaidexpenses and other currentassets                         |  |   | 904,271     |    |
| Property, plant andequipment, net                               |  |   | 4,204,288   |    |
| Due fromYouthStream Acquisition Corp.                           |  |   | 187,702     |    |
| Othernon-current assets                                         |  |   | 721,393     |    |
| Totalassetsacquired                                             |  |   | 35,441,736  |    |
|                                                            |  |   |        |    |
| LiabilitiesAssumed:                                             |  |   |        |    |
| Accountspayable                                                 |  |   | 8,654,580   |    |
| Accruedexpenses                                                 |  |   | 1,473,948   |    |
| Accrued interestpayable                                         |  |   | 593,260     |    |
| Deferredrent                                                    |  |   | 165,413     |    |
| Subordinated promissory notespayable                            |  |   | 7,000,000   |    |
| Line ofcredit                                                   |  |   | 15,495,095  |    |
| Equipment contractpayable                                       |  |   | 291,223     |    |
| Total liabilitiesassumed                                        |  |   | 33,673,519  |    |
|                                                            |  |   |        |    |
| Netassetsacquired                                               |  |   | 1,768,217   |    |
|                                                            |  |   |        |    |
| Adjustmentto recognize minorityinterest                         |  |   | (349,931    | )  |
|                                                            |  | $      | 1,418,286   |    |
|                                                            |  |   |        |    |
| Totalpurchase consideration:                                    |  |   |        |    |
| Subordinatedsecured promissory notes payable, net ofelimination |  | $      | 39,493,000  |    |
| 13%Series A preferred stock, net ofelimination                  |  |   | 24,733,000  |    |
|                                                            |  |   | 64,226,000  |    |
|                                                            |  |   |        |    |
| Minorityinterests inequity                                      |  |   | 223,951     |    |
|                                                            |  |   |        |    |
| Adjustmentto record deemed distribution toSellers               |  |   | (63,031,665 | )  |
|                                                            |  | $      | 1,418,286   |    |
|                                                                 |

Theamount due from YouthStream Acquisition Corp. of $187,702 representscosts incurred by KES Acquisition with respect to the Acquisition,which were included in the $792,954 of transaction costs related to theKES Acquisition charged to operations during the three months and sixmonths ended March 31, 2005.

As of December 31, 2004 andSeptember 30, 2004, the Company had incurred $335,146 and $175,144,respectively, of costs with respect to the Acquisition, which werepresented as deferred costs in the Company's condensedconsolidated balance sheets at such dates. These costs were included inthe $792,954 of transaction costs related to the KES Acquisitioncharged to operations during the three months and six months endedMarch 31, 2005.

The following pro forma operating data presentsthe results of operations for the three months ended March 31, 2004 and2005 as if the Acquisition had occurred on December 31, 2003 and 2004,respectively, and for the six months ended March 31, 2004 and 2005, asif the Acquisition had occurred on September 30, 2003 and 2004,respectively. Accordingly, transaction costs of $792,954 

14

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related to the KES Acquisition are notincluded in the net loss from continuing operations shown below. Inaddition, discontinued operations for the three months and six monthsended March 31, 2004 and 2005 are not included. The Mill commencedgenerating revenues in late January 2004. The pro forma results are notnecessarily indicative of the financial results that might haveoccurred had the Acquisition actually taken place on the respectivedates, or of future results of operations. The Company'sunaudited pro forma information is summarized asfollows:

|                                           |  |                            |            |                          |  |        |            |         |  |        |            |         |  |        |            |         |  |  |
|-------------------------------------------|--|----------------------------|------------|--------------------------|--|--------|------------|---------|--|--------|------------|---------|--|--------|------------|---------|--|--|
|                                      |  | ThreeMonths EndedMarch 31, |            | Six Months EndedMarch31, |
|                                      |  | 2005                       |            | 2004                     |  | 2005   |            | 2004    |
| Netrevenues                               |  | $                          | 26,250,401 |                     |  | $      | 3,559,708  |    |  | $      | 53,738,048 |    |  | $      | 3,559,708  |    |
| Operatingincome(loss)                     |  |                       | (34,117    | )                   |  |   | (2,734,237 | )  |  |   | 258,276    |    |  |   | (3,997,991 | )  |
| Interestexpense                           |  |                       | (2,225,715 | )                   |  |   | (1,605,033 | )  |  |   | (4,468,434 | )  |  |   | (3,226,815 | )  |
| Minorityinterest                          |  |                       | 291,956    |                     |  |   | 291,956    |    |  |   | 291,956    |    |  |   | 291,956    |    |
| Netloss from continuingoperations         |  |                       | (1,968,142 | )                   |  |   | (3,982,823 | )  |  |   | (3,834,842 | )  |  |   | (6,795,116 | )  |
| Basicand diluted net loss per commonshare |  | $                          | (0.05      | )                   |  | $      | (0.10      | )  |  | $      | (0.10      | )  |  | $      | (0.17      | )  |
| Weightedaverage common sharesoutstanding  |  |                       | 39,242,251 |                     |  |   | 39,242,251 |    |  |   | 39,242,251 |    |  |   | 39,242,251 |    |
|                                           |

Asummary of significant accounting policies with respect to theoperations of the Mill is presented below.

Cash and CashEquivalents

Cash and equivalents include all cash, demanddeposits and money market accounts with original maturities of threemonths or less.

Accounts Receivable

In order todetermine the value of the Company's accounts receivable, theCompany records a provision for doubtful accounts to cover estimatedcredit losses. Management reviews and adjusts this allowanceperiodically based on historical experience and its evaluation of thecollectibility of outstanding accounts receivable. The Companyevaluates the credit risk of its customers utilizing historical dataand estimates of future performance.

Inventories

Inventories consist of raw materials, semi-finished goods andfinished goods. Inventory costs include material, labor andmanufacturing overhead. Inventories are valued at the lower of averagecost or market.

Property, Plant and Equipment

Property,plant and equipment are recorded at cost. Expenditures for routinemaintenance and repairs are charged to expense as incurred.Expenditures for equipment renewals and improvements, which extend theuseful life of an asset, are capitalized.

Depreciation isprovided on the straight-line method over the estimated useful lives ofthe assets, generally 3 to 20 years for machinery and equipment, and 20to 40 years for buildings and improvements.

Impairment ofLong-Lived Assets

Long-lived assets are evaluated forimpairment whenever events or changes in circumstances indicate thatthe carrying amount of an asset may not be recoverable in accordancewith SFAS No. 144, "Accounting for the Impairment orDisposal of Long-Lived Assets".

An asset isconsidered impaired if its carrying amount exceeds the future net cashflow the asset is expected to generate. If an asset is considered to beimpaired, the impairment to be recognized is 

15

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measured by the amount by which the carryingamount of the asset exceeds its fair market value. The recoverabilityof long-lived assets is assessed by determining whether the unamortizedbalances can be recovered through undiscounted future net cash flows ofthe related assets. The amount of impairment, if any, is measured basedon projected discounted future net cash flows using a discount ratereflecting the Company's average cost of capital.

LoanCosts

Direct costs and fees associated with the establishmentof debt financing are capitalized and amortized on a straight-linebasis over the term of the underlying debt.

RevenueRecognition

The Company recognizes revenues when title passes,the earnings process is substantially complete, and the Company isreasonably assured of the collection of the proceeds from the exchange,all of which generally occur either upon shipment of theCompany's products or delivery of the product at the destinationspecified by the customer.

Shipping and Handling Fees andCosts

In accordance with EITF No. 00-10,"Accounting for Shipping and Handling Fees andCosts", shipping and handling fees and costs billed tocustomers are included in net sales and the actual costs incurred bythe Company are included in cost of sales.

OperatingLeases

Leases where substantially all the rewards and risks ofownership of the assets remain with the leasing company are accountedfor as operating leases. Rent payable under operating leases isrecorded in the statement of operations on a straight-line basis overthe lease terms.

Income Taxes

The Company accounts forincome taxes in accordance with Statement of Financial AccountingStandards No.  109, "Accounting for IncomeTaxes". Under this method, deferred income taxes areprovided for differences between the carrying amounts of theCompany's assets and liabilities for financial reporting purposesand the amounts used for income tax purposes using expected tax ratesin effect for the year in which those temporary differences areexpected to be recovered or settled. KES Acquisition is treated as alimited liability company for federal and state income taxes.Consequently, federal and state income taxes are not provided for, butrather, are taxed to its sole member.

Asset RetirementObligations

The Company accounts for its asset retirementobligations in accordance with SFAS No. 143, "Accountingfor Asset Retirement Obligations", which addressesfinancial accounting and reporting for obligations associated with theretirement of tangible long-lived assets and associated costs. SFAS 143requires that the discounted fair value of a liability for an assetretirement obligation be recognized in the period in which it isincurred if a reasonable estimate of the fair value can be made. Theassociated asset retirement costs are capitalized as part of thecarrying amount of the long-lived asset.

All materialenvironmental remediation liabilities for non-capital expenditures,which are probable and estimable, are recorded in the financialstatements based on current technologies and current environmentalstandards at the time of evaluation. Adjustments are made whenadditional information is available that suggests different remediationmethods or periods may be required and affect the total cost.

Self-Insurance

The Company is self-insured for health carecosts up to $25,000 per subscriber annually. Insurance coverage iscarried for risks in excess of this amount. The Company recognizedself-insured health 

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care expense of approximately $122,000 forthe three months and six months ended March 31, 2005. Estimated claimsincurred but not reported were approximately $112,000 as of March 31,2005, which are included in accrued liabilities in the condensedconsolidated balance sheet at March 31, 2005.

Fair Value ofFinancial Instruments

The Company believes that the carryingvalue of its cash, accounts receivable, accounts payable, accruedliabilities, and line of credit as of March 31, 2005 approximates theirrespective fair values due to the demand or short-term nature of thoseinstruments. The carrying value of long-term obligations approximatesthe fair value based on the effective interest rates compared tocurrent market rates.

Concentrations and Commitments

The Company's cash balances exceeded federally-insured levelsat March 31, 2005. The Company minimizes its credit risk by investingits cash and cash equivalents with major banks and financialinstitutions located in the United States, as a result of which theCompany believes that it had nominal risk with respect to itsconcentration of balances in cash and cash equivalents at suchdate.

For the three months and six months ended March 31, 2005,the Company has two suppliers that account for approximately 90%of raw materials purchases, one providing approximately 40% andthe other providing approximately 50%, of which approximately$5,100,000 was included in accounts payable at March 31, 2005. For thethree months and six months ended March 31, 2005, the Company has twocustomers that each accounted for 10% or more of net sales(aggregate 22%), of which approximately $2,000,000 was includedin accounts receivable at March 31, 2005.

The Mill has beenoperating under a Management Services Agreement with Pinnacle Steel,LLC ("Pinnacle") effective through October31, 2009 that provides for Pinnacle to provide, at its expense,employees to serve as the General Manager of the Mill and provideoversight and general management of the operations of the Mill, forwhich Pinnacle receives an annual fee of $700,000, payable monthly, andbonus payments based on 16.6% of defined earnings beforeinterest, taxes, depreciation and amortization("EBITDA") in excess of $4,500,000 for thenine months ending September 30, 2005 and $6,000,000 for the fiscalyears ending September 30, 2006 and thereafter.

The Company hasvarious short-term commitments for the purchase of materials, suppliesand energy arising in the ordinary course of business which aggregatedapproximately $8,300,000 at March 31, 2005.

The Company leases aladle metallurgy furnace facility and certain other machinery andequipment. At March 31, 2005, future minimum annual payments for alloperating leases are as follows:

|                              |  |        |           |        |  |  |
|------------------------------|--|--------|-----------|--------|--|--|
| TwelveMonths Ending March31, |  |   |
| 2006                         |  | $      | 990,363   |   |
| 2007                         |  |   | 990,363   |   |
| 2008                         |  |   | 990,363   |   |
| 2009                         |  |   | 990,363   |   |
| 2010                         |  |   | 225,610   |   |
| Totalminimum leasepayments   |  | $      | 4,187,062 |   |
|                              |

Equipmentrental expense for the three months and six months ended March 31, 2005was $94,132.

3.    Discontinued Operations

OnAugust  5, 2002, the Company sold substantially all of its mediaassets and assigned certain liabilities to Cass Communications,Inc., a subsidiary of Alloy,  Inc. and, as a result of the sale,the media segment of the Company's operations was discontinuedduring the three months ended September  30, 2002.

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In early fiscal 2003 the Company followedthrough on its previously announced plans to close a number of underperforming retail stores within its Beyond the Wall chain and incurredapproximately $989,000 of store-closing costs during the three monthsended December 31, 2002.   The loss from discontinued operationsfor the six months ended March 31, 2004 of $476,776 consists of anoperating loss of $976,776, offset by a gain of $500,000 resulting fromthe reduction of a prior accrual with respect to the closing of retailstores. The reduction in the accrual was a result of the Companycompleting settlements with landlords below what had been originallyaccrued.

Effective February 25, 2004, the Company'swholly-owned subsidiary, Beyond the Wall, Inc.("BTW"),  sold substantially all of itsassets and operations to a group unaffiliated with the Company (whichincluded certain former management of BTW), for $1,920,000, consistingof a cash payment of $820,000 and a subordinated secured promissorynote (the "Note") for $1,100,000, withinterest at 10% per annum, due October 31, 2006.   Thebuyer had the right to make certain optional principal pre-payments onthe Note by June 30, 2004, which would result in the principal balanceof the Note being adjusted downward, in excess of such principalpre-payments, based on an agreed-upon sliding scale as set forth in theNote.

On April 30, 2004, the buyer made an optional principalpre-payment on the Note of $400,000.   Accordingly, under theprovisions of the sale agreement, the buyer received a credit of$107,000 against the $1,100,000 note (in excess of the $400,000payment), as well as an additional $150,000 back-end credit on theNote. On October 31, 2004, the buyer made its scheduled principalpayment on the Note of $197,734, plus accrued interest of $49,493.Remaining scheduled principal payments at March 31, 2005 with respectto the Note totaling $245,466 are as follows: October 31, 2005 –$197,734; October 31, 2006 – $47,732.

The Companyinitially recognized a loss of $565,000 with respect to this salebefore taking into consideration the effect of the $400,000 principalpre-payment made on April 30, 2004.   Inclusive of such payment,the effect of the accelerated payment credit and the back-end creditresulted in an additional loss of $257,000, which decreased thecarrying value of the note receivable from $1,100,000 to $843,000 andincreased the loss on the BTW sale from $565,000 to $822,000.The loss on the BTW sale was reported as a loss on the disposal ofdiscontinued operations for the three months and six months ended March31, 2004.   As a result of the sale, the retail segmentoperations have been presented as a discontinued operation for thethree months and six months ended March 31, 2004.

TheCompany's unaudited net revenues and loss from discontinuedoperations are summarized as follows:

|                                           |  |                            |                                 |                          |  |        |           |         |  |        |                                 |        |  |        |            |         |  |  |
|-------------------------------------------|--|----------------------------|---------------------------------|--------------------------|--|--------|-----------|---------|--|--------|---------------------------------|--------|--|--------|------------|---------|--|--|
|                                      |  | ThreeMonths EndedMarch 31, |                                 | Six Months EndedMarch31, |
|                                      |  | 2005                       |                                 | 2004                     |  | 2005   |           | 2004    |
| Netrevenues                               |  | $                          |     — |                     |  | $      | 1,459,433 |    |  | $      |     — |   |  | $      | 2,513,000  |    |
| Lossfrom discontinuedoperations           |  | $                          | —                         |                     |  | $      | (155,668  | )  |  | $      | —                         |   |  | $      | (476,776   | )  |
| Losson disposal of discontinuedoperations |  |                       | —                         |                     |  |   | (821,721  | )  |  |   | —                         |   |  |   | (821,721   | )  |
| Lossfrom discontinuedoperations           |  | $                          | —                         |                     |  | $      | (977,389  | )  |  | $      | —                         |   |  | $      | (1,298,497 | )  |
|                                           |

Asof March 31, 2005 and September  30, 2004, the Company hasaccrued liabilities of $2,476,741 and $2,498,468, respectively,remaining from its discontinued businesses. The accrued liabilitiesconsist primarily of severance, lease payments and other costs relatedto the operations of the discontinued businesses.

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4.    Inventories

Inventoriesare comprised of the following at March 31,2005:

|                    |
|--------------------|
|                    |  |  |  |  |  |  |
| Rawmaterials       |  | $ | 3,290,350 |   |
| Semi-finishedgoods |  |   | 5,347,329 |   |
| Finishedgoods      |  |   | 10,696,853 |   |
| Total              |  | $ | 18,434,532 |   |
|                    |

5.    Stock-BasedCompensation

On February 15, 2005, the Company issued an optionto purchase 200,000 shares of common stock to new director, exercisablethrough October 2012 at $0.30 per share, which was the fair marketvalue on the date of issuance. The option vests over a 12-month periodin equal monthly installments beginning March 1, 2005.

DuringOctober 2003, the Company issued an option to purchase 50,000 shares ofcommon stock to its Chief Executive Officer, exercisable throughOctober 2010 at $0.26 per share, which was the fair market value on thedate of issuance.

The Company accounts for stock-based employeecompensation in accordance with the provisions of Accounting PrinciplesBoard ("APB") Opinion No.  25 and FASBInterpretation No.  44 ("FIN 44"),"Accounting for Certain Transactions Involving StockCompensation", and complies with the disclosurerequirements of SFAS No.  123, "Accounting forStock-Based Compensation". Under APB No.  25,compensation expense is recorded based on the difference, if any,between the fair value of the Company's stock and the exerciseprice on the measurement date. The Company accounts for stock issued tonon-employees in accordance with SFAS No.  123, which requiresentities to recognize as expense over the service period the fair valueof all stock-based awards on the date of grant and EITF 96-18,"Accounting for Equity Investments that are Issued toOther Than Employees for Acquiring, or in Conjunction with Selling,Goods or Services", which addresses the measurement dateand recognition approach for such transactions.

Pro formainformation regarding net loss per share is required by SFAS No. 123,and has been determined as if the Company had accounted for itsemployee stock options under the fair value method of such statement.The fair value for these options was estimated at the date of grantusing the Black-Scholes option-pricing model.

For purpose of proforma disclosures, the estimated fair value of the options is amortizedto operations over the vesting period of the options or the expectedperiod of benefit. The Company's unaudited pro forma informationis summarized as follows:

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|                                                                                               |  |                            |            |                          |  |        |            |         |  |        |            |         |  |        |            |         |  |  |
|-----------------------------------------------------------------------------------------------|--|----------------------------|------------|--------------------------|--|--------|------------|---------|--|--------|------------|---------|--|--------|------------|---------|--|--|
|                                                                                          |  | ThreeMonths EndedMarch 31, |            | Six Months EndedMarch31, |
|                                                                                          |  | 2005                       |            | 2004                     |  | 2005   |            | 2004    |
| Netloss attributable to common shares – asreported                                      |  | $                          | (1,191,317 | )                   |  | $      | (1,340,819 | )  |  | $      | (1,399,933 | )  |  | $      | (2,005,491 | )  |
| Add:Total stock-based compensation expense included in reported netloss                       |  |                       | —    |                     |  |   | —    |    |  |   | —    |    |  |   | —    |    |
| Deduct:Total stock-based compensation expense determined under fair valuemethod for allawards |  |                       | (6,750     | )                   |  |   | —    |    |  |   | (6,750     | )  |  |   | (13,000    | )  |
| Netloss – proforma                                                                      |  | $                          | (1,198,067 | )                   |  | $      | (1,340,819 | )  |  | $      | (1,406,683 | )  |  | $      | (2,018,491 | )  |
| Basicand diluted net loss per common share – asreported                                 |  | $                          | (0.03      | )                   |  | $      | (0.03      | )  |  | $      | (0.04      | )  |  | $      | (0.05      | )  |
| Basicand diluted net loss per common share – proforma                                   |  | $                          | (0.03      | )                   |  | $      | (0.03      | )  |  | $      | (0.04      | )  |  | $      | (0.05      | )  |
|                                                                                               |

Securitiesentitling the holder to acquire shares of common stock that have beenexcluded from the calculation of diluted earnings per share due totheir anti-dilutive effect are summarized as follows:

|                              |  |               |           |                    |  |        |           |        |  |  |
|------------------------------|--|---------------|-----------|--------------------|--|--------|-----------|--------|--|--|
|                         |  | March31, 2005 |           | September 30, 2004 |
| Stockoptions                 |  |          | 1,405,404 |               |  |   | 1,205,404 |   |
| Commonstock purchasewarrants |  |          | 1,000,000 |               |  |   | 1,000,000 |   |
|                              |

AtMarch 31, 2005, the weighted average exercise price of the stockoptions and common stock purchase warrants was $0.18 per share and$0.12 per share, respectively.

6.    Property, Plant andEquipment

Property, plant and equipment consisted of thefollowing at March 31, 2005 and September 30, 2004:

|                                         |  |              |           |                   |  |        |          |         |  |  |
|-----------------------------------------|--|--------------|-----------|-------------------|--|--------|----------|---------|--|--|
|                                    |  | March31,2005 |           | September 30,2004 |
|                                    |  | (Unaudited)  |           |              |
| Land                                    |  | $            | 142,487   |              |  | $      | —  |    |
| Buildingsandimprovements                |  |         | 672,529   |              |  |   | —  |    |
| Machineryandequipment                   |  |         | 3,713,267 |              |  |   | —  |    |
| Officeequipment                         |  |         | —   |              |  |   | 140,068  |    |
| Total                                   |  |         | 4,528,283 |              |  |   | 140,068  |    |
| Accumulateddepreciation andamortization |  |         | (350,021  | )            |  |   | (114,658 | )  |
| Property,plant and equipment,net        |  | $            | 4,178,262 |              |  | $      | 25,410   |    |
|                                         |

Depreciationexpense for the three months ended March 31, 2005 and 2004 was $31,006and $4,980, respectively, and for the six months ended March 31, 2005and 2004 was $31,006 and $9,960, respectively.

At December 31,2004, in conjunction with the restructuring of its corporate andadministrative offices, the Company wrote off the remaining balance ofits office equipment of $20,429.

7.    Non-CurrentLiabilities

Non-current liabilities assumed by YouthStream inconjunction with the acquisition of KES Acquisition (see Note 2) aresummarized below.

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Subordinated Secured Promissory NotesPayable to Related Parties

Subordinated secured promissorynotes payable consist of seven notes payable aggregating $7,000,000issued by KES Acquisition to three related parties. The notes bearinterest at 12% per annum, are secured by subordinated securityinterest in all of the assets of KES Acquisition, and are subject to anIntercreditor and Subordination Agreement dated March 24, 2004 withGeneral Electric Capital Corporation. When originally issued, the noteswere due, with interest, upon the earlier to occur of (i) an event ofdefault under the Loan and Security Agreement with General ElectricCapital Corporation or (ii) each note's respective due date,which ranged from March 31, 2005 to December 31, 2005. As of June 3,2005, all seven of the notes have been extended to December 31, 2006.Proceeds from these notes were used to accelerate and expand theoperations of the steel mini-mill. At March 31, 2005, accrued interestpayable with respect to the subordinated secured promissory notespayable was $664,603.

Line of Credit

Effective March24, 2004, KES Acquisition entered into a loan and security agreement,as amended, with General Electric Capital Corporation. Under the termsof the agreement, KES Acquisition has the ability to borrow up to$23,000,000, subject to limitations under the lender's borrowingbase formula and compliance with a minimum fixed charge coverage ratio.Interest is payable monthly in arrears on the outstanding principalbalance at the index rate (defined as the thirty-day dealer commercialpaper rate) plus 5.5% per annum. The line of credit matures onMarch 24, 2007, and is secured by all of the assets of KES Acquisitionand a pledge of (i) the membership interests of KES Acquisition ownedby Acquisition Corp. and (ii) the capital stock of Atacama KES owned byAcquisition Corp. As of March 31, 2005, the balance outstanding on theline of credit was $16,625,470, which has been presented as a currentliability in the condensed consolidated balance sheet at such date dueto continuing uncertainty with respect to the Company's abilityto maintain compliance with the minimum fixed charge coverageratio.

At March 31, 2005, KES Acquisition was not in compliancewith the fixed charge coverage ratio, in part relating to changes toits accounting procedures as a result of the review of its financialstatements conducted in conjunction with its acquisition by YouthStream(see Note 2), and has since received a waiver of default from thelender. In the event that KES Acquisition is not in compliance with thefixed charge coverage ratio in future periods, the Company will seek afurther waiver of any default from the lender, and if no such waiver isreceived, the lender would have the right to accelerate the maturity ofthe line of credit.

Equipment Contract Payable

Theequipment contract payable is due in 47 equal monthly installments of$8,099, including interest at 9.35% per annum, with a balloonpayment of $35,252 due on May 8, 2008. The equipment contract payableis secured by the related equipment. As of March 31, 2005, the balanceoutstanding on the equipment contract payable was $285,232. Futurescheduled principal payments on the equipment contract payable aresummarized as follows:

|                              |  |        |         |        |  |  |
|------------------------------|--|--------|---------|--------|--|--|
| TwelveMonths Ending March31, |  |   |
| 2006                         |  | $      | 73,152  |   |
| 2007                         |  |   | 80,735  |   |
| 2008                         |  |   | 88,602  |   |
| 2009                         |  |   | 42,743  |   |
| Totalprincipalpayments       |  | $      | 285,232 |   |
|                              |

8.    LegalProceedings

The Company and/or its former subsidiary, Beyondthe Wall, are defendants in various lawsuits and claims from varioustrade creditors and former landlords seeking damages aggregatingapproximately $300,000. Certain of these claims are the responsibilityof the buyer of the Beyond the 

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Wall business. The Company evaluates itsresponse in each situation based on the particular facts andcircumstances of a claim. Accordingly, the ultimate outcome of thesematters cannot be determined at this time and may ultimately result injudgments and liens against the Company or its assets. The Company hasmade sufficient accruals for the exposure related to such matters thathave been deemed probable and reasonably estimable at March 31, 2005and September  30, 2004.

KES Acquisition has been named ina wrongful death lawsuit in West Virginia with respect to an employeeof a contractor who died while working at the Mill in April 2004. KESAcquisition is being defended by its insurance carrier. The Companydoes not believe that the resolution of this litigation will have amaterial adverse effect on its financial condition or results ofoperations.

9.    Income Taxes

No federal taxprovision has been provided for the three months and six months endedMarch 31, 2005 and 2004 due to the significant losses incurred todate.

At March 31, 2005, the Company had net operating losscarryovers for federal income tax purposes of approximately$286,000,000 that expire from 2012 through 2024. The use ofapproximately $36,000,000 of this net operating loss in future yearsmay be restricted under Section 382 of the Internal Revenue Code. Forfinancial reporting purposes, a 100% valuation allowance hasbeen recognized to offset the net deferred tax asset principallyrelated to the net operating loss carryovers for all periodspresented.

The Company is subject to periodic audits by federal,state and local tax authorities for various tax liabilities incurred inprior periods from the parent entity and its subsidiaries, includingany discontinued businesses. The amount of any tax assessments andpenalties may be material and may negatively impact the Company'soperations. Given the uncertainty in the amount and the difficulty inestimating the probability of the assessments arising from future taxaudits, the Company has not made accruals for such taxcontingencies.

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ITEM2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OFOPERATION

General Overview:

During fiscal 2001, theCompany reorganized into two market segments: media and retail. InAugust 2002, the Company sold substantially all of its remaining mediaassets and assigned certain liabilities of its NET and American Passagesubsidiaries to Alloy, Inc. and ceased operating the media segment.

In February 2004, the Company sold the assets and operations of itsBeyond the Wall subsidiary and ceased operating the retail segment.Beyond the Wall had been engaged in the sale of decorative wall postersthrough on-campus sales events, retail stores and internet sales,primarily to teenagers and young adults. During the three months andsix months ended March 31, 2004, Beyond the Wall operated 17 stores in12 states, plus Washington, D.C., throughout the East and mid-West, aswell as a warehouse and distribution center in Stroudsburg,Pennsylvania, and was the Company's only revenue-generatingbusiness operation. The condensed consolidated financial statements forthe three months and six months ended March 31, 2004 present Beyond theWall's operations as a discontinued operation as a result of thedisposal of its assets and operations on February 25, 2004.

Commencing March 1, 2005, the Company has included the operations ofa steel mini-mill located in Ashland, Kentucky in its consolidatedfinancial statements, which represents the only business segment inwhich the Company currently operates.

Going Concern:

The Company has incurred recurring operating losses since itsinception. As of September 30, 2004, the Company had an accumulateddeficit of $343,834,836, a stockholders' deficiency of$13,065,365, a working capital deficiency of $3,452,840, and hadincurred a net loss and negative cash flows from operating activitiesfor the year ended September 30, 2004 of $2,365,620 and $901,443,respectively. As of March  31, 2005, the Company had anaccumulated deficit of $345,234,769, a stockholders' deficiencyof $77,496,963 and had incurred a net loss and negative cash flows fromoperating activities for the six months ended March  31, 2005 of$1,399,933 and $1,400,651, respectively. As of September 30, 2004 andMarch 31, 2005, the Company had insufficient capital to fund all of itsobligations. These conditions raise substantial doubt about theCompany's ability to continue as a going concern. The condensedconsolidated financial statements do not include any adjustments toreflect the possible future effect of the recoverability andclassification of assets or the amounts and classifications ofliabilities that may result from the outcome of this uncertainty. TheCompany's independent registered public accounting firm, in itsreport dated December 17, 2004, included an explanatory paragraphstating that the Company's recurring losses and accumulateddeficit, working capital deficiency and negative cash flow, among otherthings, raise substantial doubt about the Company's ability tocontinue as a going concern.

On March 9, 2005, the Companycompleted the acquisition of a steel mini-mill located in Ashland,Kentucky. The Company utilized substantially all of its available cashresources to fund such acquisition, and will therefore need to obtainadditional operating capital to fund corporate general andadministrative expenses either through internal or external resources.In addition, the steel mini-mill restarted operations in late January2004 after being acquired by the previous owners, and has incurredlosses to date. The steel mini-mill relies on cash flows fromoperations and a line of credit with General Electric CapitalCorporation to fund its separate operations. The Company has borrowedthe maximum amount available under its line of credit with GeneralElectric Capital Corporation and is attempting to restructure the termsof the line of credit to be able to increase its borrowingsthereunder.

The Company believes that its current internal andexternal cash resources will be adequate to fund its operations throughSeptember 30, 2005. However, to the extent the Company'sestimates and assumptions are inaccurate, the Company may not havesufficient cash resources to fund its operations. In such event, theCompany may be required to consider a formal or informal restructuringor reorganization.

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The Company's management may alsoconsider various strategic alternatives in the future, including theacquisition of new business opportunities, which may be from related orunrelated parties.   However, there can be no assurances thatsuch efforts will ultimately be successful.   The Company mayfinance any acquisitions through a combination of debt and/or equitysecurities.

Sale of Assets and Operations of Beyond the Wall,Inc.:

Effective February 25, 2004, the Company'swholly-owned subsidiary, Beyond the Wall, Inc.("BTW"),  sold substantially all of itsassets and operations to a group unaffiliated with the Company (whichincluded certain former management of BTW), for $1,920,000, consistingof a cash payment of $820,000 and a subordinated secured promissorynote (the "Note") for $1,100,000, withinterest at 10% per annum, due October 31, 2006.   Thebuyer had the right to make certain optional principal pre-payments onthe Note by June 30, 2004, which would result in the principal balanceof the Note being adjusted downward, in excess of such principalpre-payments, based on an agreed-upon sliding scale as set forth in theNote.

On April 30, 2004, the buyer made an optional principalpre-payment on the Note of $400,000.   Accordingly, under theprovisions of the sale agreement, the buyer received a credit of$107,000 against the $1,100,000 note (in excess of the $400,000payment), as well as an additional $150,000 back-end credit on theNote. On October 31, 2004, the buyer made its scheduled principalpayment on the Note of $197,734, plus accrued interest of $49,493.Remaining scheduled principal payments at March 31, 2005 with respectto the Note totaling $245,466 are as follows: October 31, 2005 –$197,734; October 31, 2006 – $47,732.

The Companyinitially recognized a loss of $565,000 with respect to this salebefore taking into consideration the effect of the $400,000 principalpre-payment made on April 30, 2004.   Inclusive of such payment,the effect of the accelerated payment credit and the back-end creditresulted in an additional loss of $257,000, which decreased thecarrying value of the note receivable from $1,100,000 to $843,000 andincreased the loss on the BTW sale from $565,000 to $822,000.The loss on the BTW sale was reported as a loss on the disposal ofdiscontinued operations for the three months ended March 31,2004.   As a result of the sale, the retail segment operationshave been presented as a discontinued operation for the three monthsand six months ended March 31, 2004.

Acquisition of SteelMini-Mill:

In September  2003, YouthStream invested$125,000 to acquire a 1.00% membership interest in KES Holdings,LLC, a Delaware limited liability company ("KESHoldings"), which was formed to acquire certain assets ofKentucky Electric Steel,  Inc., a Delaware company("KES"), consisting of a steel mini-milllocated in Ashland, Kentucky (the "Mill"). OnSeptember  2, 2003, KES Holdings, through its subsidiary, KESAcquisition Company, LLC, a Delaware limited liability company("KES Acquisition"), completed theacquisition of the Mill pursuant to Section  363 of the UnitedStates Bankruptcy Code for cash consideration of $2,650,000, which wasfunded through the contributions of the members of KES Holdings.Members' contributions were also used for start-up costs, workingcapital purposes and payment of deferred maintenance of the Mill. KEShad ceased production on or about December  16, 2002 and filed avoluntary petition for relief under Chapter 11 of the United StatesBankruptcy Code on February  5, 2003.

The Mill had been inoperation for approximately forty years and was refurbished by KESAcquisition subsequent to its acquisition.   The refurbished Millhas been generating revenues since late January 2004. As currentlyconfigured, the Mill has an annual production capacity of 240,000 tonsof steel, and is currently operating at approximately 80% ofsuch annualized capacity. Management is focusing on developing thebusiness and improving operating efficiencies.

The Mill producesbar flats that are produced to a variety of specifications and fallprimarily into two general quality levels – merchant bar qualitysteel bar flats ("MBQ Bar Flats") for generictypes of applications, and special bar quality steel bar flats("SBQ Bar Flats"), where more precisecustomer specifications require the use of alloys, customized equipmentand special production procedures to 

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insure that the finished product meetscritical end-use performance characteristics. The Mill is a leadingmanufacturer of SBQ Bar Flats for the cold draw bar converter and trucktrailer support beam markets.

The Mill manufactures over 2,600different Bar Flat items which are sold to the leaf-spring suspensionmarket for light- and heavy-duty trucks, mini-vans and utilityvehicles, cold drawn bar converters, certain specialty applications forsteel service centers, truck trailer manufacturers and othermiscellaneous markets. The Mill was specifically designed tomanufacture wider and thicker bar flats up to three inches in thicknessand twelve inches in width that are required by these markets. Inaddition, the Mill employs a variety of specially designed equipmentwhich is required in order to manufacture SBQ Bar Flats to thespecifications of the Mill's customers.

On March 9, 2005,YouthStream completed the acquisition of KES Acquisition (the"Acquisition"), which was deemed effectiveMarch 1, 2005. Pursuant to definitive agreements executed with KESHoldings and Atacama Capital Holdings, Ltd., a British Virgin Islandscompany ("Atacama", and together with KESHoldings, collectively, the "Sellers"),YouthStream, through its newly-formed subsidiary, YouthStreamAcquisition Corp., a Delaware corporation ("AcquisitionCorp."), acquired 100% of the membership interestsof KES Acquisition by acquiring (i) a 37.45% membership interestfrom KES Holdings and (ii) all of the capital stock of Atacama KESHolding Corporation, a wholly-owned subsidiary of Atacama, the owner ofthe remaining 62.55% membership interest in KES Acquisition. Asconsideration for the Acquisition, Acquisition Corp. issued to theSellers (i) $40 million in promissory notes (the"Notes"), (ii) 25,000 shares of Series ANon-Convertible Preferred Stock with an aggregate liquidation value of$25 million (the "13% Series A PreferredStock") and (iii) 100% of its authorized shares ofSeries B Non-Voting Common Stock. With respect to the $65,000,000 ofpurchase consideration, $19,000,000 of the Notes and $10,000,000 of the13% Series A Preferred Stock were issued to KES Holdings and$21,000,000 of the Notes and $15,000,000 of the 13% Series APreferred Stock were issued to Atacama. YouthStream also contributed anaggregate of $500,000 of cash to Acquisition Corp. as consideration forthe issuance by Acquisition Corp. of 100% of its Series A VotingCommon Stock. In addition, YouthStream will periodically be required topurchase shares of Series B Preferred Stock of Acquisition Corp.

As a result of these transactions, YouthStream owns 80.01% ofthe common stock, and 100% of the voting stock, of AcquisitionCorp. The remaining 19.99% common stock interest in AcquisitionCorp. is owned 62.55% by Atacama and 37.45% by KESHoldings. YouthStream has a 2.67% equity interest in KESHoldings, as a result of which the Company has eliminated its $507,000interest in the Notes and $267,000 interest in the 13% Series APreferred Stock in the condensed consolidated balance sheet at March31, 2005. YouthStream has consolidated the operations of the Millthrough its ownership of KES Acquisition commencing March 1, 2005. As aresult of the Acquisition, the financial statements for periods endingafter March 1, 2005 are materially different from and are notcomparable to the financial statements prior to that date.

Subsequent to this transaction, the management of the Mill remainedintact. This transaction did not result in any change in theMill's business operations or financial condition, and, otherthan as set forth herein, the working capital, operating cash flow,debt service obligations and credit profile of the Mill were notaffected in any way by this transaction.

As described herein,the Notes and 13% Series A Preferred Stock were issued byAcquisition Corp., the parent company of KES Acquisition. KESAcquisition is a separate legal entity that owns and operates the Mill.The Notes are legal obligations solely of Acquisition Corp., and arenot obligations of KES Acquisition, nor are they secured by the assetsor cash flows of the Mill. In the future, Acquisition Corp. may grantliens to secure repayment of the Notes, upon the consent of any seniorlender to KES Acquisition at that time. In addition, the Notes arenon-recourse to the assets of YouthStream, except for the shares ofcapital stock of Acquisition Corp. that have been pledged byYouthStream to the holders of the Notes.

The following pro formaoperating data presents the results of operations for the three monthsended March 31, 2004 and 2005 as if the Acquisition had occurred onDecember 31, 2003 and 2004, respectively, and for the six months endedMarch 31, 2004 and 2005, as if the Acquisition had 

25

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occurred on September 30, 2003 and 2004,respectively. Accordingly, transaction costs of $792,954 related to theKES Acquisition are not included in the net loss from continuingoperations shown below. In addition, discontinued operations for thethree months and six months ended March 31, 2004 and 2005 are notincluded. The Mill commenced generating revenues in late January 2004.The pro forma results are not necessarily indicative of the financialresults that might have occurred had the Acquisition actually takenplace on the respective dates, or of future results of operations. TheCompany's unaudited pro forma information is summarized asfollows:

|                                           |  |                            |            |                          |  |        |            |         |  |        |            |         |  |        |            |         |  |  |
|-------------------------------------------|--|----------------------------|------------|--------------------------|--|--------|------------|---------|--|--------|------------|---------|--|--------|------------|---------|--|--|
|                                      |  | ThreeMonths EndedMarch 31, |            | Six Months EndedMarch31, |
|                                      |  | 2005                       |            | 2004                     |  | 2005   |            | 2004    |
| Netrevenues                               |  | $                          | 26,250,401 |                     |  | $      | 3,559,708  |    |  | $      | 53,738,048 |    |  | $      | 3,559,708  |    |
| Operatingincome(loss)                     |  |                       | (34,117    | )                   |  |   | (2,734,237 | )  |  |   | 258,276    |    |  |   | (3,997,991 | )  |
| Interestexpense                           |  |                       | (2,225,715 | )                   |  |   | (1,605,033 | )  |  |   | (4,468,434 | )  |  |   | (3,226,815 | )  |
| Minorityinterest                          |  |                       | 291,956    |                     |  |   | 291,956    |    |  |   | 291,956    |    |  |   | 291,956    |    |
| Netloss from continuingoperations         |  |                       | (1,968,142 | )                   |  |   | (3,982,823 | )  |  |   | (3,834,842 | )  |  |   | (6,795,116 | )  |
| Basicand diluted net loss per commonshare |  | $                          | (0.05      | )                   |  | $      | (0.10      | )  |  | $      | (0.10      | )  |  | $      | (0.17      | )  |
| Weightedaverage common sharesoutstanding  |  |                       | 39,242,251 |                     |  |   | 39,242,251 |    |  |   | 39,242,251 |    |  |   | 39,242,251 |    |
|                                           |

CriticalAccounting Policies:

The Company prepared its financialstatements in accordance with accounting principles generally acceptedin the United States. The preparation of these financial statementsrequires the use of estimates and assumptions that affect the reportedamounts of assets and liabilities and the disclosure of contingentassets and liabilities at the date of the financial statements and thereported amount of revenues and expenses during the reporting period.Management periodically evaluates the estimates and judgments made.Management bases its estimates and judgments on historical experienceand on various factors that are believed to be reasonable under thecircumstances. Actual results may differ from these estimates as aresult of different assumptions or conditions.

The followingcritical accounting policies affect the more significant judgments andestimates used in the preparation of the Company's financialstatements. In addition, as a result of the acquisition of the Millduring the three months ended March 31, 2005, the Company adoptedadditional accounting policies as described at Note 2 to the condensedconsolidated financial statements.

Revenue Recognition:

The Company recognizes revenues when title passes, the earningsprocess is substantially complete, and the Company is reasonablyassured of the collection of the proceeds from the exchange, all ofwhich generally occur either upon shipment of the Company'sproducts or delivery of the product at the destination specified by thecustomer.

Accounts Receivable:

In order to determinethe value of the Company's accounts receivable, the Companyrecords a provision for doubtful accounts to cover estimated creditlosses. Management reviews and adjusts this allowance periodicallybased on historical experience and its evaluation of the collectibilityof outstanding accounts receivable. The Company evaluates the creditrisk of its customers utilizing historical data and estimates of futureperformance.

Inventories:

Inventories consist of rawmaterials, semi-finished goods and finished goods. Inventory costsinclude material, labor and manufacturing overhead. Inventories arevalued at the lower of average cost or market.

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Impairment of Assets:

The Companyperiodically evaluates its non-current assets for potential impairmentindicators. The Company's judgments regarding the potentialimpairment are based on legal factors, market conditions andoperational performance indicators, among others. Future events couldcause us to conclude that impairment indicators exist and that suchassets (primarily investments, notes receivable and fixed assets) areimpaired.

Income Taxes:

The Company records a valuationallowance to reduce its deferred tax assets to the amount that is morelikely than not to be realized. In the event the Company was todetermine that it would be able to realize its deferred tax assets inthe future in excess of its recorded amount, an adjustment to thedeferred tax assets would be credited to operations in the period suchdetermination was made. Likewise, should the Company determine that itwould not be able to realize all or part of its deferred tax assets inthe future, an adjustment to the deferred tax assets would be chargedto operations in the period such determination was made.

Results of Operations:

The retail segment operations ofBeyond the Wall have been presented as a discontinued operation for thethree months and six months ended March 31, 2004. Accordingly, for thethree months and six months ended March 31, 2004, the Company did nothave any revenues or cost of revenues from continuing operations.

The operations of the Mill have been consolidated commencing March1, 2005. As a result of the acquisition of the Mill, the financialstatements for periods ending after March 1, 2005 are materiallydifferent from and are not comparable to the financial statements priorto that date.

Three Months Ended March 31, 2005 and 2004:

Net Sales.    Net sales were $9,133,777 for three monthsended March 31, 2005, which reflects Mill operations for the month ofMarch 2005.

Cost of Sales.    Cost of sales was$8,487,199 for the three months ended March 31, 2005, which reflectsMill operations for the month of March 2005.

Selling, Generaland Administrative Expenses.    For the three months ended March31, 2005, selling, general and administrative expenses were $516,544,which includes the operations of the Mill for the month of March 2005.For the three months ended March 31, 2004, selling, general andadministrative expenses were $376,414, which reflected corporategeneral and administrative expenses, including management compensation,legal and accounting fees and insurance costs.

OperatingIncome (Loss).    Operating income was $130,034 for the threemonths ended March 31, 2005, as compared to an operating loss of$376,414 for the three months ended March 31, 2004.

InterestIncome.    For the three months ended March 31, 2005, interestincome was $11,169, as compared to $11,149 for the three months endedMarch 31, 2004.

Interest Expense.    For the threemonths ended March 31, 2005, interest expense was $793,029, whichincluded interest expense for the month of March 2005 related to the8% notes payable ($268,336) and the 13% Series APreferred Stock ($273,079) issued in conjunction with the acquisitionof the Mill, and the 12% notes payable ($71,342). For the threemonths ended March 31, 2004, interest expense was $10,338.

Transaction Costs Related to KES Acquisition.    TheCompany incurred $792,954 of costs with respect to the acquisition ofthe Mill, which were charged to operations during the three monthsended March 31, 2005. Included in such costs was $187,702 oftransaction costs incurred by KES Acquisition.

OtherExpense.    For the three months ended March 31, 2005, otherexpense was $12,967. There was no other expense for the three monthsended March 31, 2004.

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Loss before Income Taxes and MinorityInterest.    The loss before income taxes and minority interestwas $1,457,747 for the three months ended March 31, 2005, as comparedto $375,603 for the three months ended March 31, 2004.

IncomeTaxes.    For the three months ended March 31, 2004, the Companyrecorded a benefit from income taxes of $12,173. The Company did notrecord any provision for or benefit from income taxes for the threemonths ended March 31, 2005.

Loss before MinorityInterest.    The loss before minority interest was $1,457,747 forthe three months ended March 31, 2005, as compared to $363,430 for thethree months ended March 31, 2004.

MinorityInterest.    For the three months ended March 31, 2005, minorityinterest was $266,430, reflecting the minority interest's sharein the loss of YouthStream Acquisition Corp., an 80.01%-ownedconsolidated subsidiary.

Loss from ContinuingOperations.    The loss from continuing operations was $1,191,317for the three months ended March 31, 2005, as compared to $363,430 forthe three months ended March 31, 2004.

Loss from DiscontinuedOperations.    For the three months ended March 31, 2004, theCompany had a loss from discontinued operations of $155,668, reflectingthe operations of Beyond the Wall. The Company also had a loss on thedisposal of discontinued operations of $821,721 for the three monthsended March 31, 2004, as a result of the sale of the assets andoperations of Beyond the Wall in February 2004.

NetLoss.    Net loss was $1,191,317 for the three months ended March31, 2005, as compared $1,340,819 for the three months ended March 31,2004.

Six Months Ended March 31, 2005 and 2004:

NetSales.    Net sales were $9,133,777 for six months ended March31, 2005, which reflects Mill operations for the month of March2005.

Cost of Sales.    Cost of sales was $8,487,199for the six months ended March 31, 2005, which reflects Mill operationsfor the month of March 2005.

Selling, General andAdministrative Expenses.    For the six months ended March 31,2005, selling, general and administrative expenses were $711,215, whichincludes the operations of the Mill for the month of March 2005. Forthe six months ended March 31, 2004, selling, general andadministrative expenses were $709,957, which reflected corporategeneral and administrative expenses, including management compensation,legal and accounting fees and insurance costs.

OperatingLoss.    Operating loss was $64,637 for the six months endedMarch 31, 2005, as compared to an operating loss of $709,957 for thesix months ended March 31, 2004.

InterestIncome.    For the six months ended March 31, 2005, interestincome was $25,534, as compared to $11,448 for the six months endedMarch 31, 2004.

Interest Expense.    For the six monthsended March 31, 2005, interest expense was $803,601, which includedinterest expense for the month of March 2005 related to the 8%notes payable ($268,336) and the 13% Series A Preferred Stock($273,079) issued in conjunction with the acquisition of the Mill, andthe 12% notes payable ($71,342). For the six months ended March31, 2004, interest expense was $20,598.

Transaction CostsRelated to KES Acquisition.    The Company incurred $792,954 ofcosts with respect to the acquisition of the Mill, which were chargedto operations during the six months ended March 31, 2005. Included insuch costs was $187,702 of transaction costs incurred by KESAcquisition.

Other Expense.    For the six months endedMarch 31, 2005, other expense was $30,705. There was no other expensefor the six months ended March 31, 2004.

Loss before IncomeTaxes and Minority Interest.    The loss before income taxes andminority interest was $1,666,363 for the six months ended March 31,2005, as compared to $719,107 for the six months ended March 31,2004.

28

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Income Taxes.    For the sixmonths ended March 31, 2004, the Company recorded a benefit from incometaxes of $12,113. The Company did not record any provision for orbenefit from income taxes for the six months ended March 31, 2005.

Loss before Minority Interest.    The loss before minorityinterest was $1,666,363 for the six months ended March 31, 2005, ascompared to $706,994 for the six months ended March 31, 2004.

Minority Interest.    For the six months ended March 31,2005, minority interest was $266,430, reflecting the minorityinterest's share in the loss of YouthStream Acquisition Corp., an80.01%-owned consolidated subsidiary.

Loss fromContinuing Operations.    The loss from continuing operations was$1,399,933 for the six months ended March 31, 2005, as compared to$706,994 for the six months ended March 31, 2004.

Loss fromDiscontinued Operations.    For the six months ended March 31,2004, the Company had a loss from discontinued operations of $476,776,reflecting the operations of Beyond the Wall. The loss fromdiscontinued operations for the six months ended March 31, 2004consisted of an operating loss of $976,776, offset by a gain of$500,000 resulting from the reduction of a prior accrual with respectto the closing of retail stores. The reduction in the accrual was aresult of the Company completing settlements with landlords below whathad been originally accrued. The Company also had a loss on thedisposal of discontinued operations of $821,721 for the six monthsended March 31, 2004, as a result of the sale of the assets andoperations of Beyond the Wall in February 2004.

NetLoss.    Net loss was $1,399,933 for the six months ended March31, 2005, as compared $2,005,491 for the six months ended March 31,2004.

Liquidity and Capital Resources — March 31,2005:

On March 9, 2005, YouthStream completed the acquisitionof the Mill. YouthStream owns 80.01% of the common stock, and100% of the voting stock, of Acquisition Corp, which owns,directly and indirectly, 100% of KES Acquisition, the legalentity that owns and operates the Mill. Accordingly, YouthStream hasconsolidated the operations of the Mill commencing March 1, 2005. As aresult of this transaction, the financial statements from March 1, 2005on are materially different from and are not comparable to thefinancial statements prior to that date.

The Company utilizedsubstantially all of its available cash resources to complete theacquisition of the Mill, including its contribution of an aggregate of$500,000 of cash to Acquisition Corp. and the payment of the costsrelated to the transaction. Accordingly, the Company will thereforeneed to obtain additional operating capital to fund corporate generaland administrative expenses either through internal or externalresources. The Mill relies on cash flows from operations and a line ofcredit with General Electric Capital Corporation to fund its separateoperations. The Company has borrowed the maximum amount available underits line of credit with General Electric Capital Corporation and isattempting to restructure the terms of line of credit to be able toincrease its borrowings thereunder.

As of March 31, 2005, thebalance outstanding on the line of credit was $16,625,470, which hasbeen presented as a current liability in the condensed consolidatedbalance sheet at such date due to continuing uncertainty with respectto the Company's ability to maintain compliance with the minimumfixed charge coverage ratio. At March 31, 2005, KES Acquisition was notin compliance with the fixed charge coverage ratio, in part relating tochanges to its accounting procedures as a result of the review of itsfinancial statements conducted in conjunction with its acquisition byYouthStream, and has since received a waiver of default from thelender. In the event that KES Acquisition is not in compliance with thefixed charge coverage ratio in future periods, the Company will seek afurther waiver of any default from the lender, and if no such waiver isreceived, the lender would have the right to accelerate the maturity ofthe line of credit.

To the extent that the Mill generatestaxable income in the future, the Tax Sharing Agreement withAcquisition Corp. and Atacama KES will generate cash payments toYouthStream equal to 50% of their respective"separate company tax liability". YouthStreamhas approximately $250,000,000 of 

29

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federal net operating loss carryoverscurrently available to offset any federal income tax liability ofAcquisition Corp and Atacama KES subsequent to February 28, 2005.YouthStream expects that its federal net operating loss carryovers willbe sufficient to absorb most of any future federal income tax liabilityof Acquisition Corp. and Atacama KES.

The Mill restartedoperations in January 2004 after being acquired by the previous owners,and has incurred losses to date. The long-term economic viability ofthe Mill and its ability to fund its operations, as well as to servicethe interest and principal obligations on the Notes and the dividendsand redemption features on the 13% Series A Preferred Stockissued in connection with the acquisition of the Mill, is dependent onvarious internal and external factors, including the Mill'sability to operate on a sustained basis at 80% or more of itsannual capacity of 240,000 tons per year, as currently configured. Tothe extent that the Mill is not able to maintain this operatingthreshold, the ability of the Mill to generate sufficient cash flows tofund its operations may be impaired, and the Company may have toconsider a formal or information restructuring or reorganization,including a sale of its assets.

OperatingActivities.    During the six months ended March 31, 2005, theCompany used $1,400,651 of cash in operating activities, both to fundthe corporate overhead of YouthStream for the six months ended March31, 2005 and to fund the operations of the Mill for the month of March2005. During the six months ended March 31, 2004, the Company used$654,435 of cash in operating activities, primarily to fund its lossfrom continuing operations in 2004 of $706,994, which consisted ofcorporate general and administrative expenses.

InvestingActivities.    During the six months ended March 31, 2005, netcash used in investing activities was $182,881, consisting of theOctober 31, 2004 scheduled principal payment of $197,734, plus accruedinterest of $49,493, on the note that the Company received in theFebruary 2004 sale of the assets and operations of Beyond the Wall,offset by an increase of $430,108 of deferred costs with respect to theKES transaction. During the six months ended March 31, 2004, net cashprovided by investing activities of $820,000 consisted of the proceedsreceived from the sale of the Beyond the Wall assets and operations inFebruary 2004.

Financing Activities.    During the sixmonths ended March 31, 2005, net cash provided by financing activitieswas $997,275, consisting of $1,005,374 from an increase in the line ofcredit with General Electric Capital Corporation, reduced by paymentson long-term debt of $8,099. During the six months ended March 31,2004, the Company did not generate or use any cash in financingtransactions.

The Company acquired $913,194 of cash inconnection with the acquisition of KES Acquisition, LLC.

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Principal Commitments:

At March31, 2005, the Company's principal commitments consisted of thefollowing obligations:

|                                                                                                      |  |                       |             |                |  |                  |            |                 |  |              |            |        |  |        |            |        |  |        |            |        |  |  |
|------------------------------------------------------------------------------------------------------|--|-----------------------|-------------|----------------|--|------------------|------------|-----------------|--|--------------|------------|--------|--|--------|------------|--------|--|--------|------------|--------|--|--|
|                                                                                                 |  | PaymentsDue by Period |
| Contractual cashobligations                                                                          |  | Total                 |             | Less than1year |  | Between2-3 years |            | Between4-5years |  | After5 years |
| Notes payable toinvestors                                                                            |  | $                     | 4,915,434   |           |  | $                | —    |            |  | $            | —    |   |  | $      | —    |   |  | $      | 4,915,434  |   |
| 12%subordinated promissory notespayable                                                              |  |                  | 7,000,000   |           |  |             | —    |            |  |         | 7,000,000  |   |  |   | —    |   |  |   | —    |   |
| 8%subordinated secured promissory notespayable                                                       |  |                  | 39,493,000  |           |  |             | —    |            |  |         | 18,493,000 |   |  |   | —    |   |  |   | 21,000,000 |   |
| Lineofcredit                                                                                         |  |                  | 16,625,470  |           |  |             | 16,625,470 |            |  |         | —    |   |  |   | —    |   |  |   | —    |   |
| Operatingleases                                                                                      |  |                  | 4,187,062   |           |  |             | 990,363    |            |  |         | 1,980,726  |   |  |   | 1,215,973  |   |  |   | —    |   |
| Equipmentcontactpayable                                                                              |  |                  | 285,232     |           |  |             | 73,152     |            |  |         | 169,337    |   |  |   | 42,743     |   |  |   | —    |   |
| Managementservicesagreement                                                                          |  |                  | 3,208,333   |           |  |             | 700,000    |            |  |         | 1,400,000  |   |  |   | 1,108,333  |   |  |   | —    |   |
| 4%Series A Preferred Stock subject to mandatoryredemption                                            |  |                  | 5,269,333   |           |  |             | —    |            |  |         | —    |   |  |   | —    |   |  |   | 5,269,333  |   |
| 13%Series A Preferred Stock of subsidiary subject to mandatory redemption,excluding accrueddividends |  |                  | 24,733,000  |           |  |             | —    |            |  |         | 7,916,000  |   |  |   | 7,916,000  |   |  |   | 8,901,000  |   |
| Total                                                                                                |  | $                     | 105,716,864 |           |  | $                | 18,388,985 |            |  | $            | 36,959,063 |   |  | $      | 10,283,049 |   |  | $      | 40,085,767 |   |
|                                                                                                      |

AtMarch 31, 2005, the Company does not have any material commitments forcapital expenditures.

At March 31, 2005, the Company has variousshort-term commitments for the purchase of materials, supplies andenergy arising in the ordinary course of business which aggregatedapproximately $8,300,000.

Off-Balance Sheet Arrangements:

The Company does not have any transactions, obligations orrelationships that could be considered off-balance sheet arrangementsat March 31, 2005.

Recent Accounting Pronouncements:

InDecember 2004, the FASB issued SFAS No. 123(Revised 2004),"Share-Based Payment". SFAS No. 123(R)revises SFAS No. 123, "Accounting for Stock-BasedCompensation" and supersedes APB Opinion No. 25,"Accounting for Stock Issued to Employees"and amends SFAS No. 95, "Statement of CashFlows". SFAS No. 123(R) focuses primarily on theaccounting for transactions in which an entity obtains employeeservices in share-based payment transactions. SFAS No. 123(R) requirescompanies to recognize in the statement of operations the cost ofemployee services received in exchange for awards of equity instrumentsbased on the grant-date fair value of those awards (with limitedexceptions). SFAS No. 123(R) is effective as of the Company'sfirst interim or annual reporting period that begins after December 15,2005. Accordingly, the Company will adopt SFAS No. 123(R) in itsquarter ending March 31, 2006. The Company is currently evaluating theprovisions of SFAS No. 123(R) and has not yet determined the impact, ifany, that SFAS No. 123(R) will have on its financial statementpresentation or disclosures.

In November 2004, the FASB issuedSFAS  No.  151, "Inventory Costs— An Amendment of ARB No.  43, Chapter4" (SFAS  No. 151). SFAS  No. 151 clarifiesthat abnormal amounts of idle facility expense, freight, handling costsand spoilage should be expensed as incurred and not included inoverhead. Further, SFAS  No. 151 requires that allocation offixed and production facilities overheads to conversion costs should bebased on normal capacity of the production facilities. The provisionsin SFAS  No. 151 are effective for inventory costs incurredduring fiscal years beginning 

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after June  15, 2005. The Company iscurrently evaluating the provisions of SFAS No. 151 and has not yetdetermined the impact, if any, that SFAS No. 151 will have on itsfinancial statement presentation or disclosures.

In December2004, the FASB issued SFAS No.  153, "Exchanges ofNonmonetary Assets, an amendment to APB Opinion No. 29"("SFAS  153"). SFAS  153 amendsAccounting Principles Board Opinion No.  29,"Accounting for Nonmonetary Transactions", torequire that exchanges of nonmonetary assets be measured and accountedfor at fair value, rather than at carryover basis, of the assetsexchanged. Nonmonetary exchanges that lack commercial substance areexempt from this requirement. SFAS  No. 153 is effective fornonmonetary exchanges entered into in fiscal periods beginning afterJune  15, 2005. The Company is currently evaluating theprovisions of SFAS  No. 153, and has not yet determined theimpact, if any, that it will have on the Company's financialstatement presentation or disclosures.

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ITEM 3.    CONTROLS ANDPROCEDURES

(a)    Evaluation of Disclosure Controls andProcedures

The certifications of the principal executiveofficer and the principal financial officer (or persons performingsimilar functions) required by Rules 13a-14 and 15d-14 of theSecurities Exchange Act of 1934, as amended are filed as exhibits tothis report. This section of the report contains the informationconcerning the evaluation of the Company's disclosure controlsand procedures (as defined in Securities Exchange Act Rules 13a-15(e)and 15d-15(e)) and changes to internal controls over financialreporting (as defined in Securities Exchange Act Rules 13a-15(f) and15d-15(f)) referred to in the certifications and this informationshould be read in conjunction with the certifications for a morecomplete understanding of the topics presented herein.

Disclosure controls and procedures are designed to ensure thatinformation required to be disclosed in the reports filed or submittedby the Company under the Securities Exchange Act of 1934 is recorded,processed, summarized and reported, within the time periods specifiedin the rules and forms of the Securities and Exchange Commission.Disclosure controls and procedures include, without limitation,controls and procedures designed to ensure that information required tobe disclosed in the reports filed under the Securities Exchange Act of1934 is accumulated and communicated to management, including itsprincipal executive and financial officers, as appropriate, to allowtimely decisions regarding required disclosure.

The Companycarried out an evaluation, under the supervision and with theparticipation of its management, including its principal executive andfinancial officers, of the effectiveness of the design and operation ofthe Company's disclosure controls and procedures as of the end ofthe period covered by this report. Based upon and as of the date ofthat evaluation, the Company's principal executive and financialofficers concluded that there were material weaknesses in the internalcontrols at the Company's steel mini-mill acquired effectiveFebruary 28, 2005, the financial statements of which are included inthe consolidated financial statements of the Company from that dateforward. In addition, as a result of this evaluation, theCompany's consolidated financial reporting and disclosurecontrols were also determined to have material weaknesses.

Specifically, the steel mini-mill lacks adequate accounting systemsand controls and procedures to process information for inclusion in theCompany's reports filed with the Securities and ExchangeCommission. Furthermore, the steel mini-mill also lacks adequateaccounting personnel in general and adequately trained accountingpersonnel in particular in order to be able to process and generate therequired financial information to be included in the Company'sconsolidated financial statements on a timely basis. The Company isaddressing these issues by reviewing and revising its internalaccounting policies and procedures. The Company also intends toincrease the resources and personnel allocated to the steelmini-mill's accounting department. The Company expects that theresolution of these issues will take several months.

(b)    Changes in Internal Controls

There were no changesin the Company's internal controls or in other factors that couldhave significantly affected those controls subsequent to the date ofthe Company's most recent evaluation.

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PART II. OTHER INFORMATION

ITEM1.    LEGAL PROCEEDINGS

Not applicable.

ITEM2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OFPROCEEDS

Not applicable.

ITEM 3.    DEFAULTS UPONSENIOR SECURITIES

Not applicable.

ITEM4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Notapplicable.

ITEM 5.    OTHER INFORMATION

Notapplicable.

ITEM 6.    EXHIBITS

A list of exhibitsrequired to be filed as part of this report is set forth in the Indexto Exhibits, which immediately precedes such exhibits, and isincorporated herein by reference.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) the SecuritiesExchange Act of 1934, the registrant has caused this report to besigned on its behalf by the undersigned, thereunto dulyauthorized.

|                                           |  |                                                                   |  |  |  |  |
|-------------------------------------------|--|-------------------------------------------------------------------|--|--|--|--|
|                                      |  | YOUTHSTREAMMEDIA NETWORKS,INC.                                    |
|                                      |  | (Registrant)                                            |
|                                      |  |                                                              |
| DATE:    July15, 2005 |  | By:   /s/ JONATHAN V.DIAMOND                       |
|                                      |  |   Jonathan V.Diamond  Chief ExecutiveOfficer  |
|                                      |  |                                                              |
| DATE:    July15, 2005 |  | By:   /s/ ROBERT N.WEINGARTEN                      |
|                                      |  |   Robert N.Weingarten  Chief FinancialOfficer |
|                                           |

35

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INDEX TOEXHIBITS

|        |  |                                                                                                                                                |  |  |  |  |
|--------|--|------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| 10.88  |  | Loanand Security Agreement dated as of March 24, 2004, as amended, betweenGeneral Electric Capital Corporation and KES Acquisition Company,LLC |
|   |  |                                                                                                                                           |
| 10.89  |  | LetterAgreement, dated July 14, 2005, regarding 8% subordinatedsecured promissorynotes                                                         |
|   |  |                                                                                                                                           |
| 31.1   |  | Certificationof the Chief Executive Officer pursuant to Section 302 of theSarbanes-Oxley Act of2002                                            |
|   |  |                                                                                                                                           |
| 31.2   |  | Certificationof the Chief Financial Officer pursuant to Section 302 of theSarbanes-Oxley Act of2002                                            |
|   |  |                                                                                                                                           |
| 32.1   |  | Certificationof the Chief Executive Officer pursuant to Section 906 of theSarbanes-Oxley Act of2002                                            |
|   |  |                                                                                                                                           |
| 32.2   |  | Certificationof the Chief Financial Officer pursuant to Section 906 of theSarbanes-Oxley Act of2002                                            |
|        |

36

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