**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
      10-QSB**





**ý**
            **QUARTERLY
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934****For
                the Quarterly Period Ended June 30, 2006****o**
            **TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934****For
                the transition period from _____  to _____****Commission
                file number: 0-27556**





**YOUTHSTREAM
      MEDIA NETWORKS, INC.**


(Exact
      name of small business issuer as specified in its charter)





**Delaware**
            
            **13-4082185**(State
                or other jurisdiction of
              incorporation
                or organization)
            
            (I.R.S.
                Employer
              Identification
                Number)**244
                Madison Avenue, PMB #358, New York, New York**
            
            **10016**(Address
                of principal executive offices)
            
            (Zip
                Code)**(212)
                883-0083**(Issuer’s
                telephone number, including area
                code)








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





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





As
      of
      August 31, 2006, the issuer had 39,242,251 shares of common stock, $0.01 par
      value, issued and outstanding.





Transitional
      Small Business Disclosure Format. Yes o No x




Documents
      incorporated by reference: None.











**YOUTHSTREAM
      MEDIA NETWORKS, INC. AND SUBSIDIARIES**





**EXPLANATORY
      NOTES**







The
      statements included in this Quarterly Report on Form 10-QSB for the quarterly
      period ended June 30, 2006 (the “Report”) regarding future financial performance
      and results and other statements that are not historical facts constitute
      forward-looking statements. The words "believes," "intends," "expects,"
      "anticipates," "projects," "estimates," "predicts," and similar expressions
      are
      also intended to identify forward-looking statements. These forward-looking
      statements are based on current expectations and are subject to risks and
      uncertainties. In connection with the "safe harbor" provisions of the Private
      Securities Litigation Reform Act of 1995, the Company cautions the reader that
      actual results or events could differ materially from those set forth or implied
      by such forward-looking statements and related assumptions due to certain
      important factors, including, without limitation, the following: (i) cyclical
      changes in market supply and demand for steel, (ii) general economic conditions
      affecting steel consumption, (iii) U.S. or foreign trade policy affecting the
      price of imported steel, (iv) governmental monetary or fiscal policy in the
      U.S.
      and other major international economies, (v) increased price competition brought
      about by excess domestic and global steelmaking capacity and imports of low
      priced steel, (vi) continued consolidation in the domestic and global steel
      industry, resulting in larger producers with much greater market power to affect
      price and/or supply, (vii) changes in the availability or cost of steel scrap,
      which has risen dramatically over the past few years, (viii) periodic
      fluctuations in the availability and cost of electricity, natural gas or other
      utilities, (ix) the occurrence of unanticipated equipment failures and plant
      outages or the occurrences of extraordinary operating expenses, (x) competitive
      actions by the Company’s domestic and foreign competitors, (xi)
      margin squeeze or compression resulting from the Company’s inability to pass
      through to its customers, price increases or surcharges, the increased cost
      of
      raw materials and supplies, (xii) loss of business from one or more major
      customers or end-users, (xiii) labor unrest, work stoppages and/or strikes
      involving the Company’s workforce, those of its important suppliers or
      customers, or those affecting the steel industry in general, (xiv) the effect
      of
      the elements upon the Company’s production or upon the production or needs of
      its important suppliers or customers, (xv) the impact of, or changes in,
      environmental laws or in the application of other legal or regulatory
      requirements upon the Company’s production processes or costs of production or
      upon those of its suppliers or customers, including actions by government
      agencies, such as the U.S. Environmental Protection Agency or the Kentucky
      Department for Environmental Protection, (xvi) private or governmental liability
      claims or litigation, or the impact of any adverse outcome of any litigation
      on
      the adequacy of the Company’s reserves, the availability or adequacy of its
      insurance coverage, its financial well-being or its business and assets, (xvii)
      changes in interest rates or other borrowing costs, or the effect of existing
      loan covenants or restrictions upon the cost or availability of credit to fund
      operations or take advantage of other business opportunities, (xviii) changes
      in
      the Company’s business strategies or development plans which it may adopt or
      which may be brought about in response to actions by its suppliers or customers,
      and any difficulty or inability to successfully consummate or implement as
      planned any planned or potential projects, acquisitions, joint ventures or
      strategic alliances; and (xix) the impact of regulatory or other governmental
      permits or approvals, litigation, construction delays, cost overruns, technology
      risk or operational complications upon the Company’s ability to complete,
      start-up or continue to profitably operate a project or a new business, or
      to
      complete, integrate and operate any potential acquisitions as anticipated.
      The
      Company is also subject to general business risks, including management's
      success in continuing to settle the Company's outstanding obligations from
      its
      prior business activities, results of tax audits, adverse state, federal or
      foreign legislation and regulation, changes in general economic factors, the
      Company's ability to retain and attract key employees, acts of war or global
      terrorism, and unexpected natural disasters. Any forward-looking statements
      included in this Report are made as of the date hereof, based on information
      available to the Company as of the date hereof, and, subject to applicable
      law,
      the Company assumes no obligation to update any forward-looking
      statements.





i


**INDEX**





PageNumber**PART
                I. FINANCIAL INFORMATION**
            1ITEM
                1.
            FINANCIAL
                STATEMENTS
            1Condensed
                Consolidated Balance Sheets —
              June
                30, 2006 (Unaudited) and September 30, 2005
            1Condensed
                Consolidated Statements of Operations (Unaudited) —
              Three
                Months and Nine Months Ended June 30, 2006 and 2005
            3Condensed
                Consolidated Statement of Stockholders’ Deficiency (Unaudited) —
              Nine
                Months Ended June 30, 2006
            4Condensed
                Consolidated Statements of Cash Flows (Unaudited) —
              Nine
                Months Ended June 30, 2006 and 2005
            5Notes
                to Condensed Consolidated Financial Statements (Unaudited) —
              Three
                Months and Nine Months Ended June 30, 2006 and 2005
            6




ITEM
                2.
            MANAGEMENT’S
                DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
            21ITEM
                3.
            CONTROLS
                AND PROCEDURES
            36**PART
                II. OTHER INFORMATION**
            II-1ITEM
                1.
            LEGAL
                PROCEEDINGS
            II-1ITEM
                2.
            UNREGISTERED
                SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
            II-1ITEM
                3.
            DEFAULTS
                UPON SENIOR SECURITIES
            II-1ITEM
                4.
            SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY HOLDERS
            II-1ITEM
                5.
            OTHER
                INFORMATION
            II-1ITEM
                6.
            EXHIBITS
            II-1SIGNATURES
            II-2




ii





**YOUTHSTREAM
      MEDIA NETWORKS, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**








**June
                30,****2006**
            
            **September
                30, 2005****(Unaudited)**ASSETSCurrent
                assets:Cash
                and cash equivalents
            
            $
            933,747
            
            $
            998,835Accounts
                receivable, less allowance for doubtful accounts of $932,019
                at
              June
                30, 2006 and $747,399 at September 30, 2005
            
            
            12,277,210
            
            
            14,668,539Inventories
            
            
            19,242,246
            
            
            17,880,805Prepaid
                expenses and other current assets
            
            
            1,103,507
            
            
            2,167,382Total
                current assets
            
            
            33,556,710
            
            
            35,715,561Property,
                plant and equipment
            
            
            6,630,012
            
            
            6,630,012Less
                accumulated depreciation and amortization
            
            
            (1,609,892
            )
            
            (1,062,267
            )Property,
                plant and equipment, net
            
            
            5,020,120
            
            
            5,567,745Other
                assets:Deferred
                loan costs, net of amortization of $690,130 at
              June
                30, 2006 and $438,913 at September 30, 2005
            
            
            246,695
            
            
            422,913Deposits
            
            
            215,435
            
            
            216,035Total
                other assets
            
            
            462,130
            
            
            638,948Total
                assets
            
            $
            39,038,960
            
            $
            41,922,254





(continued)








1


**YOUTHSTREAM
      MEDIA NETWORKS, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS (continued)**








**June
                30,****2006**
            
            **September
                30, 2005****(Unaudited)**LIABILITIES
                AND STOCKHOLDERS’ DEFICIENCYCurrent
                liabilities:Accounts
                payable
            
            $
            8,883,565
            
            $
            9,008,612Accrued
                expenses
            
            
            3,380,003
            
            
            2,048,481Accrued
                interest payable:12%
                subordinated promissory notes payable to related parties
            
            
            209,425
            
            
            1,085,7538%
                subordinated promissory notes payable to related parties
            
            
            1,149,862
            
            
            ---Notes
                payable to directors
            
            
            ---
            
            
            50,000Secured
                line of credit
            
            
            9,890,679
            
            
            19,009,37912%
                subordinated promissory notes payable to related parties
            
            
            7,000,000
            
            
            ---8%
                subordinated promissory notes payable to related parties
            
            
            3,159,416
            
            
            ---Current
                portion of 8% subordinated promissory notes payable to related
                parties
            
            
            1,849,300
            
            
            ---Current
                portion of equipment contract payable
            
            
            82,652
            
            
            77,091Current
                portion of capital lease obligation
            
            
            416,291
            
            
            372,256Liabilities
                related to discontinued operations
            
            
            2,984,660
            
            
            2,984,660Total
                current liabilities
            
            
            39,005,853
            
            
            34,636,232Non-current
                liabilities:Accrued
                interest payable:4%
                note payable to investor
            
            
            137,419
            
            
            107,4198%
                subordinated promissory notes payable to related parties
            
            
            ---
            
            
            1,852,3844%
                note payable to related party, plus cumulative interest of
                $952,775
            
            
            3,952,775
            
            
            3,952,7754%
                note payable to investor, net of unamortized discount
            
            
            967,082
            
            
            964,1948%
                subordinated secured promissory notes payable to related parties,
                less
                current portion
            
            
            37,643,700
            
            
            39,493,00012%
                subordinated promissory notes payable to related parties
            
            
            ---
            
            
            7,000,000Equipment
                contract payable, less current portion
            
            
            109,977
            
            
            172,714Capital
                lease obligation, less current portion
            
            
            994,102
            
            
            1,312,064Deferred
                rent
            
            
            117,188
            
            
            144,360Preferred
                stock of subsidiary subject to mandatory redemption; issued and
                outstanding at June 30, 2006 - 25,000 shares, and at September 30,
                2005 -
                24,733 shares of Series A 13% cumulative, non-convertible, redeemable
                preferred stock, mandatory redemption and liquidation value of $1,000.00
                per share, plus cumulative dividends of $4,336,301 at June 30, 2006
                and
                $1,885,129 at September 30, 2005
            
            
            29,336,301
            
            
            26,618,129Preferred
                stock subject to mandatory redemption; issued and outstanding at
                June 30,
                2006 and September 30, 2005 - 1,000,000 shares of Series A 4% cumulative,
                non-convertible, redeemable preferred stock, mandatory redemption
                and
                liquidation value of $4.00 per share, plus cumulative dividends of
                $1,269,333
            
            
            5,269,333
            
            
            5,269,333Minority
                interest - related parties
            
            
            ---
            
            
            ---Total
                liabilities
            
            
            117,533,730
            
            
            121,522,604Commitments
                and contingenciesStockholders’
                deficiency:Preferred
                stock, $0.01 par value; authorized - 5,000,000 shares; issued and
                outstanding at June 30, 2006 and September 30, 2005 - 1,000,000 shares
                of
                Series A preferred stock (classified in long-term liabilities as
                preferred
                stock subject to mandatory redemption)
            
            
            ---
            
            
            ---Common
                stock, $0.01 par value; authorized - 100,000,000 shares; issued -
                39,849,751 shares; outstanding -39,242,251 shares at June 30, 2006
                and
                September 30, 2005
            
            
            398,486
            
            
            398,486Additional
                paid-in capital
            
            
            267,835,888
            
            
            268,096,138Accumulated
                deficit
            
            
            (345,899,568
            )
            
            (347,265,398
            )Treasury
                stock - 607,500 shares, at cost
            
            
            (829,576
            )
            
            (829,576
            )Total
                stockholders’ deficiency
            
            
            (78,494,770
            )
            
            (79,600,350
            )Total
                liabilities and stockholders’ deficiency
            
            $
            39,038,960
            
            $
            41,922,254




See
      accompanying notes to condensed consolidated financial statements.




2




**YOUTHSTREAM
      MEDIA NETWORKS, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)**








**Three
                Months Ended**
              **June
                30,**
            
            **Nine
                Months Ended**
              **June
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**NET
                SALES
            
            $
            34,284,157
            
            $
            29,127,566
            
            $
            104,287,949
            
            $
            38,261,343COSTS
                AND EXPENSESCost
                of sales
            
            
            29,407,919
            
            
            27,194,477
            
            
            89,887,425
            
            
            35,666,705Selling
            
            
            389,025
            
            
            300,486
            
            
            1,184,781
            
            
            412,544General
                and administrative
            
            
            1,559,607
            
            
            994,051
            
            
            4,557,136
            
            
            1,593,20831,356,551
            
            
            28,489,014
            
            
            95,629,342
            
            
            37,672,457Income
                from operations
            
            
            2,927,606
            
            
            638,552
            
            
            8,658,607
            
            
            588,886OTHER
                INCOME (EXPENSE)Interest
                income
            
            
            119
            
            
            9,944
            
            
            321
            
            
            35,478Interest
                expense:
              13%
                Series A Preferred Stock
            
            
            (810,274
            )
            
            (801,621
            )
            
            (2,451,172
            )
            
            (1,074,700
            )Notes
                payable to related parties
            
            
            (1,060,135
            )
            
            (997,121
            )
            
            (3,085,168
            )
            
            (1,336,799
            )Other
            
            
            (454,385
            )
            
            (573,146
            )
            
            (1,570,806
            )
            
            (797,455
            )Transaction
                costs related to KES acquisition
            
            
            ---
            
            
            (280,773
            )
            
            ---
            
            
            (1,073,727
            )Other
                income (expense), net
            
            
            2,249
            
            
            4,216
            
            
            88,048
            
            
            (26,489
            )Other
                income (expense), net
            
            
            (2,322,426
            )
            
            (2,638,501
            )
            
            (7,018,777
            )
            
            (4,273,692
            )INCOME
                (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST
            
            
            605,180
            
            
            (1,999,949
            )
            
            1,639,830
            
            
            (3,684,806
            )Income
                taxes
            
            
            146,000
            
            
            ---
            
            
            274,000
            
            
            ---INCOME
                (LOSS) BEFORE MINORITY INTEREST
            
            
            459,180
            
            
            (1,999,949
            )
            
            1,365,830
            
            
            (3,684,806
            )MINORITY
                INTEREST - related parties
            
            
            ---
            
            
            162,820
            
            
            ---
            
            
            430,931NET
                INCOME (LOSS)
            
            $
            459,180
            
            $
            (1,837,129
            )
            $
            1,365,830
            
            $
            (3,253,875
            )NET
                INCOME (LOSS) PER COMMON SHARE -Basic
            
            $
            0.01
            
            $
            (0.05
            )
            $
            0.03
            
            $
            (0.08
            )Diluted
            
            $
            0.01
            
            $
            (0.05
            )
            $
            0.03
            
            $
            (0.08
            )WEIGHTED
                AVERAGE NUMBER OF COMMON SHARES OUTSTANDING -Basic
            
            
            39,242,251
            
            
            39,242,251
            
            
            39,242,251
            
            
            39,242,251Diluted
            
            
            39,971,097
            
            
            39,242,251
            
            
            40,067,251
            
            
            39,242,251





See
      accompanying notes to condensed consolidated financial statements.




3


**YOUTHSTREAM
      MEDIA NETWORKS, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY
      (UNAUDITED)**


**NINE
      MONTHS ENDED JUNE 30, 2006**




**Common
                Stock****Shares**
            
            **Amount**
            
            **Additional**
                **Paid-in****Capital**
            
            **Accumulated****Deficit**
            
            **Treasury**
              **Stock**
            
            **Total**Balances
                at October 1, 2005
            
            
            39,849,751
            
            $
            398,486
            
            $
            268,096,138
            
            $
            (347,265,398
            )
            $
            (829,576
            )
            $
            (79,600,350
            )Fair
                value of stock options
            
            
            --
            
            
            --
            
            
            6,750
            
            
            --
            
            
            --
            
            
            6,750Deemed
                distribution to sellers of KES Acquisition Company, LLC
            
            
            --
            
            
            --
            
            
            (267,000
            )
            
            --
            
            
            --
            
            
            (267,000
            )


Net
                income
            
            
            --
            
            
            --
            
            
            --
            
            
            1,365,830
            
            
            --
            
            
            1,365,830


Balances
                at June 30, 2006
            
            
            39,849,751
            
            $
            398,486
            
            $
            267,835,888
            
            $
            (345,899,568
            )
            $
            (829,576
            )
            $
            (78,494,770
            )





See
      accompanying notes to condensed consolidated financial statements.








4





**YOUTHSTREAM
      MEDIA NETWORKS, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)**





**Nine
                Months Ended**
              **June
                30,****2006**
            
            **2005**CASH
                FLOWS FROM OPERATING ACTIVITIESNet
                income (loss)
            
            $
            1,365,830
            
            $
            (3,253,875
            )Adjustments
                to reconcile net income (loss) to net cash provided by (used in)
                operating
                activities:Net
                change in liabilities related to discontinued operations
            
            
            ---
            
            
            (27,727
            )Depreciation
                and amortization
            
            
            547,625
            
            
            245,452Stock-based
                compensation
            
            
            6,750
            
            
            ---Amortization
                of original issue discount on subordinated notes payable
            
            
            2,888
            
            
            1,951Amortization
                of deferred loan costs
            
            
            251,218
            
            
            152,456Write-off
                of fixed assets
            
            
            ---
            
            
            20,430Write-off
                of KES acquisition costs
            
            
            ---
            
            
            362,846Minority
                interest - related parties
            
            
            ---
            
            
            (430,931
            )Changes
                in operating assets and liabilities:(Increase)
                decrease in -Accounts
                receivable, net
            
            
            2,391,329
            
            
            (2,202,051
            )Inventories
            
            
            (1,361,441
            )
            
            3,294,122Accrued
                interest receivable
            
            
            ---
            
            
            (31,259
            )Prepaid
                expenses
            
            
            1,063,875
            
            
            (258,264
            )Deposits
            
            
            600
            
            
            ---Increase
                (decrease) in -Accounts
                payable
            
            
            (125,047
            )
            
            (2,326,412
            )Accrued
                interest and dividends payable
            
            
            4,061,738
            
            
            2,411,499Accrued
                expenses
            
            
            1,331,522
            
            
            (575,794
            )Deferred
                rent
            
            
            (27,172
            )
            
            (12,030
            )NET
                CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
            
            
            9,509,715
            
            
            (2,629,587
            )CASH
                FLOWS FROM INVESTING ACTIVITIESPrincipal
                and interest payments on BTW note receivable
            
            
            ---
            
            
            247,227NET
                CASH PROVIDED BY INVESTING ACTIVITIES
            
            
            ---
            
            
            247,227CASH
                FLOWS FROM FINANCING ACTIVITIESNet
                borrowings (repayments) under secured line of credit
            
            
            (9,193,700
            )
            
            1,410,683Repayment
                of notes payable to directors
            
            
            (50,000
            )
            
            ---Principal
                payments on equipment contract payable and capital lease
                obligation
            
            
            (331,103
            )
            
            (131,440
            )NET
                CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
            
            
            (9,574,803
            )
            
            1,279,243NET
                CASH USED IN OPERATING, INVESTING AND FINANCING ACTIVITIES
            
            
            (65,088
            )
            
            (1,103,117
            )CASH
                ACQUIRED IN CONNECTION WITH KES ACQUISITION
            
            
            ---
            
            
            913,194CASH
                AND CASH EQUIVALENTSNet
                decrease
            
            
            (65,088
            )
            
            (189,923
            )Balance
                at beginning of period
            
            
            998,835
            
            
            674,880Balance
                at end of period
            
            $
            933,747
            
            $
            484,957SUPPLEMENTAL
                CASH FLOW INFORMATIONCash
                paid for -Interest
            
            $
            3,045,408
            
            $
            777,455Income
                taxes
            
            $
            ---
            
            $
            ---NON-CASH
                INVESTING AND FINANCING ACTIVITIESDeemed
                distribution to sellers of KES Acquisition Company, LLC
            
            $
            267,000
            
            $
            ---8%
                promissory notes payable to related parties issued in payment of
                accrued
                interest
            
            $
            3,159,416
            
            $
            ---Preferred
                stock issued in connection with acquisition of KES Acquisition Company,
                LLC
            
            $
            ---
            
            $
            24,733,000Notes
                payable issued in connection with acquisition of KES Acquisition
                Company,
                LLC
            
            $
            ---
            
            $
            39,493,000Non-cash
                assets acquired in connection with acquisition of KES Acquisition
                Company,
                LLC
            
            $
            ---
            
            $
            37,019,827Liabilities
                assumed in connection with acquisition of KES Acquisition Company,
                LLC
            
            $
            ---
            
            $
            36,255,513Deemed
                distribution to sellers of KES Acquisition Company, LLC in excess
                of
                predecessor’s basis
            
            $
            ---
            
            $
            63,104,423Loan
                fees capitalized and added to note principal
            
            $
            75,000
            
            $
            125,000




See
      accompanying notes to condensed consolidated financial statements.




5


**YOUTHSTREAM
      MEDIA NETWORKS, INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS****(UNAUDITED)**


**THREE
      MONTHS AND NINE MONTHS ENDED JUNE 30, 2006 AND 2005**








**1.
      Organization and Basis of Presentation**





Basis
      of
      Presentation





The
      accompanying consolidated financial statements include the accounts of
      YouthStream Media Networks, Inc. (“YouthStream”), and its direct and
      indirect wholly and majority-owned subsidiaries: Network Event
      Theater, Inc. (“NET”), American Passage Media, Inc. (“American
      Passage”), Beyond the Wall, Inc. (“Beyond the Wall” or “BTW”), and
      W3T.com, Inc. (“Teen.com”) (all inactive); and, commencing March 1, 2005,
      YouthStream Acquisition Corp. (“Acquisition Corp.”), Atacama KES Holding
      Corporation (“Atacama KES”) and KES Acquisition Company, LLC (“KES Acquisition”)
      (see Note 2) (collectively, the “Company”).





The
      consolidated financial statements have been prepared in accordance with
      generally accepted accounting principles in the United States of
      America. All
      intercompany items and transactions have been eliminated in
      consolidation.





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





The
      accompanying condensed consolidated financial statements are unaudited, but
      in
      the opinion of management of the Company, contain all adjustments, which include
      normal recurring accruals, necessary to present fairly the financial position
      at
      June 30, 2006, the results of operations for the three months and nine months
      ended June 30, 2006 and 2005, and the cash flows for the nine months ended
      June
      30, 2006 and 2005. The balance sheet as of September 30, 2005 is derived from
      the Company’s audited financial statements included in the Company’s Annual
      Report on Form 10-KSB for the fiscal year ended September 30, 2005.





Certain
      information and footnote disclosures normally included in financial statements
      that have been prepared in accordance with generally accepted accounting
      principles have been condensed or omitted pursuant to the rules and regulations
      of the Securities and Exchange Commission, although management of the Company
      believes that the disclosures contained in these financial statements are
      adequate to make the information presented therein not misleading. For further
      information, refer to the financial statements and the notes thereto included
      in
      the Company’s Annual Report on Form 10-KSB for the fiscal year ended September
      30, 2005, as filed with the Securities and Exchange Commission.





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities, disclosure of contingent assets and liabilities at the date of
      the
      financial statements, and the reported amounts of revenues and expenses during
      the reporting period. Actual results could differ from those
      estimates.





The
      results of operations for the three months and nine months ended June 30, 2006
      are not necessarily indicative of the results of operations to be expected
      for
      the full fiscal year ending September 30, 2006.





Going
      Concern





The
      Company has incurred recurring operating losses since its inception. The
      Company incurred
      a net loss of $3,430,562 and a negative cash flow from operating activities
      of
      $4,300,395 for the year ended September 30, 2005, and had an accumulated deficit
      of $347,265,398 and a stockholders' deficiency of $79,600,350 at September
      30,
      2005. As
      of
      September 30, 2005, the Company had insufficient capital to fund all of its
      obligations on a consolidated basis. These factors raise substantial doubt
      about
      the Company’s ability to continue as a going concern. The consolidated financial
      statements do not include any adjustments to reflect the possible future effect
      of the recoverability and classification of assets or the amounts and
      classifications of liabilities that may result from the outcome of this
      uncertainty.





6


On
      March
      9, 2005, the Company completed the acquisition of a steel mini-mill located
      in
      Ashland, Kentucky (see Note 2). The Company utilized substantially all of its
      available cash resources to fund such acquisition and will require additional
      operating capital to fund corporate general and administrative expenses, which
      the Company expects to obtain primarily through periodic tax sharing payments
      from Acquisition Corp. and Atacama KES (see Note 2). In addition, the steel
      mini-mill restarted operations in late January 2004 after being acquired by
      the
      previous owners, and until recently has incurred losses. For the year ended
      September 30, 2005, operating income was $2,691,955 (which included the
      operations of the steel mini-mill for the seven month period March through
      September 2005), exclusive of interest expense. For the three months and nine
      months ended June 30, 2006, operating income was $2,927,606 and $8,658,607,
      respectively, exclusive of interest expense. The steel mini-mill relies on
      cash
      flows from operations to support a secured line of credit with General Electric
      Capital Corporation to fund its separate operations. As a result of improved
      operating performance of the steel mini-mill beginning in late 2005, the Company
      has been able to increase borrowing availability under this line of credit.





Based
      on
      its current level of operations, the Company believes that its current cash
      resources provided by operations and the secured line of credit will be adequate
      to fund its operations through September 30, 2006. However, to the extent the
      Company’s estimates are inaccurate or its assumptions are incorrect, the Company
      may not have sufficient cash resources to fund its operations. In such event,
      the Company may have to consider a formal or informal restructuring or
      reorganization, including a sale or other disposition of its
      assets.





The
      Company’s management may also consider various strategic alternatives in the
      future, including the acquisition of new business opportunities, which may
      be
      from related or unrelated parties.  However, there can be no assurances
      that such efforts will ultimately be successful.  The Company may finance
      any acquisitions through a combination of debt and/or equity
      securities.





Stock-Based
      Compensation





Through
      December 31, 2005, the Company accounted for stock-based employee compensation
      in accordance with the provisions of Accounting Principles Board (“APB”) Opinion
      No. 25 and FASB Interpretation No. 44, “Accounting for Certain
      Transactions Involving Stock Compensation”, and complied with the disclosure
      requirements of SFAS No. 123 (as modified by SFAS No. 48), “Accounting for
      Stock-Based Compensation”. Under APB No. 25, compensation expense was
      recorded based on the difference, if any, between the fair value of the
      Company’s stock and the exercise price on the measurement date. The Company
      accounted for stock issued to non-employees in accordance with SFAS
      No. 123, which required entities to recognize as expense over the service
      period the fair value of all stock-based awards on the date of grant and EITF
      No. 96-18, “Accounting for Equity Investments that are Issued to Other Than
      Employees for Acquiring, or in Conjunction with Selling, Goods or Services”,
      which addressed the measurement date and recognition approach for such
      transactions.




The
      Company recognized compensation expense related to variable awards in accordance
      with FASB Interpretation No. 28, “Accounting for Stock Appreciation Rights
      and Other Variable Stock Option or Award Plans”. For fixed awards, the Company
      recognized expense over the vesting period or the period of
      service.




On
      January 1, 2006, the Company adopted Statement of Financial Accounting Standards
      No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”), a
      revision to SFAS No. 123, “Accounting for Stock-Based Compensation”. SFAS
      No. 123R superseded APB Opinion No. 25, “Accounting for Stock Issued
      to Employees”, and amended SFAS No. 95, “Statement of Cash Flows”. SFAS
      No. 123R requires that the Company measure the cost of employee services
      received in exchange for equity awards based on the grant date fair value of
      the
      awards. The cost will be recognized as compensation expense over the vesting
      period of the awards.





Under
      this method, the Company began recognizing compensation cost for equity-based
      compensation for all new or modified grants after the date of adoption. The
      pro
      forma disclosures previously permitted under SFAS No. 123 are no longer an
      alternative to financial statement recognition. In addition, the Company will
      recognize the unvested portion of the grant date fair value of awards issued
      prior to adoption based on the fair values previously calculated for disclosure
      purposes over the remaining vesting period of the outstanding options and
      warrants.




7


Accordingly,
      the Company recognizes compensation cost for equity-based compensation for
      all
      new or modified grants issued after December 31, 2005.





In
      addition, commencing January 1, 2006, the Company is required to recognize
      the
      unvested portion of the grant date fair value of awards issued prior to the
      adoption of SFAS No. 123R based on the fair values previously calculated for
      disclosure purposes over the remaining vesting period of the outstanding stock
      options and warrants. The Company had one partially vested stock option
      outstanding at December 31, 2005 (see Note 6). This option fully vested during
      the six months ended June 30, 2006 and compensation cost of $6,750 was
      recognized during the period. On
      June
      26, 2006, the Company issued an option to purchase 200,000 shares of common
      stock to a new director, exercisable through June 26, 2013 at $0.12 per share,
      which was the fair market value on the date of issuance. The fair value of
      the
      option, calculated pursuant to the Black-Scholes option-pricing model, was
      $24,000 ($0.12 per share). The option vests over a 12-month period in equal
      monthly installments beginning July 1, 2006 (see Note 6).





Although
      the expense for stock options that may be vested or granted in future
      periods cannot be determined at this time due to the uncertainty of the vesting
      or timing of future grants, the Company’s future stock price, and the related
      fair value calculation, the adoption of SFAS No. 123R could have a material
      effect on the Company’s future financial statements.





Pro
      forma
      information regarding net loss per share is required by SFAS No. 123 as if
      the
      Company had accounted for its employee stock options under the fair value method
      of such statement. The fair value of these options was estimated on the grant
      date using the Black-Scholes option-pricing model.





For
      purposes of pro forma disclosures, the estimated fair value of the options
      is
      amortized to operations over the vesting period of the options or the expected
      period of benefit. The Company’s unaudited pro forma information is summarized
      as follows:





Nine
                Months Ended June 30,
              2006
            
            Three
                Months Ended June 30,
              2005
            
            Nine
                Months
              Ended
                June 30,
              2005Net
                income (loss) - as reported
            
            $
            1,365,830
            
            $
            (1,837,129
            )
            $
            (3,253,875
            )Less:
                Total stock-based compensation expense determined under the fair
                value
                method for all awards
            
            
            (13,500
            )
            
            (13,500
            )
            
            (20,250
            )Net
                income (loss) - pro forma
            
            $
            1,352,330
            
            $
            (1,850,629
            )
            $
            (3,274,125
            )Net
                income (loss) per share - basic:As
                reported
            
            $
            0.03
            
            $
            (0.05
            )
            $
            (0.08
            )Pro
                forma
            
            $
            0.03
            
            $
            (0.05
            )
            $
            (0.08
            )Net
                income (loss) per share - diluted:As
                reported
            
            $
            0.03
            
            $
            (0.05
            )
            $
            (0.08
            )Pro
                forma
            
            $
            0.03
            
            $
            (0.05
            )
            $
            (0.08
            )





8





Earnings
      Per Share





The
      Company calculates net income (loss) per share as required by SFAS No. 128,
      "Earnings per Share". Basic earnings (loss) per share excludes any dilution
      for
      common stock equivalents and is computed by dividing net income (loss) by the
      weighted average number of common shares outstanding during the relevant period.
      Diluted earnings per share reflects the potential dilution that could occur
      if
      options or other securities or contracts entitling the holder to acquire shares
      of common stock were exercised or converted, resulting in the issuance of
      additional shares of common stock that would then share in earnings. However,
      diluted loss per share does not consider such dilution as its effect would
      be
      anti- dilutive.





At
      June
      30, 2006 and 2005, potentially dilutive securities entitling the holder thereof
      to acquire shares of common stock are summarized as follows:





**2006**
            
            **2005**Stock
                options
            
            
            1,605,404
            
            
            1,405,404Common
                stock purchase warrants
            
            
            1,000,000
            
            
            1,000,000





Concentrations





The
      Company’s cash balances exceeded federally-insured levels at June 30, 2006 and
      September 30, 2005. The Company minimizes its credit risk by investing its
      cash
      and cash equivalents with major banks and financial institutions located in
      the
      United States, as a result of which the Company believes that it had nominal
      risk with respect to its concentration of balances in cash and cash equivalents
      at such date.





During
      the three months ended June 30, 2006, the Company had two suppliers that
      accounted for approximately 53% of raw materials purchases, one supplier
      providing approximately 30% and the other supplier providing approximately
      23%,
      of which $2,624,138 was included in accounts payable at June 30, 2006. During
      the three months ended June 30, 2006, the Company had two customers that
      accounted for approximately 21% of net sales, one customer providing
      approximately 11% and the other customer providing approximately 10%, of which
      $2,933,411 was included in accounts receivable at June 30, 2006.





During
      the nine months ended June 30, 2006, the Company had two suppliers that
      accounted for approximately 54% of raw materials purchases, one supplier
      providing approximately 35% and the other supplier providing approximately
      19%,
      of which $2,624,138 was included in accounts payable at June 30, 2006. During
      the nine months ended June 30, 2006, the Company had one customer that accounted
      for approximately 11% of net sales, of which $2,724,484 was included in accounts
      receivable at June 30, 2006.





Discontinued
      Operations





As
      of
      June 30, 2006 and September 30, 2005, the Company has accrued liabilities
      $2,984,660 remaining from its discontinued businesses. The accrued liabilities
      consist primarily of severance, lease payments and other costs related to the
      operations of the discontinued businesses.





Recent
      Accounting Pronouncements and Developments





In
      May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error
      Corrections” (“SFAS No. 154”). SFAS No. 154 is a replacement of APB
      Opinion No. 20, “Accounting Changes” and SFAS No. 3, “Reporting
      Accounting Changes in Interim Financial Statements - (an Amendment of APB
      Opinion No. 28)” and provides guidance on the accounting for and reporting
      of accounting changes and error corrections. SFAS No. 154 establishes
      retrospective application as the required method for reporting a change in
      accounting principle, and provides guidance for determining whether
      retrospective application of a change in accounting principle is impracticable
      and for reporting a change when retrospective application is impracticable.
      Retrospective application is the application of a different accounting principle
      to a prior accounting period as if that principle had always been used or as
      the
      adjustment of previously issued financial statements to reflect a change in
      the
      reporting entity. SFAS No. 154 also addresses the reporting of the
      correction of an error by restating previously issued financial statements.
      SFAS
      No. 154 is effective for accounting changes and error corrections occurring
      in fiscal years beginning after December 15, 2005. The adoption of SFAS No.
      154 is not expected to have any impact on the Company’s financial statement
      presentation or disclosures.





9


In
      June
      2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48
      provides criteria for the recognition, measurement, presentation and disclosure
      of uncertain tax positions that has an effect on a company’s financial
      statements accounted for in accordance with SFAS No. 109, “Accounting for Income
      Taxes”, as a result of positions taken or expected to be taken in a company’s
      tax return. A tax benefit from an uncertain position may be recognized only
      if
      it is “more likely than not” that the position is sustainable based on its
      technical merits. The provisions of FIN 48 are effective for fiscal years
      beginning after December 15, 2006. The Company is currently evaluating the
      potential effect that the adoption of FIN 48 will have on the Company's
      financial statement presentation and disclosures.





On
      September 22, 2005, the Securities and Exchange Commission ("SEC") issued rules
      to delay by one year the required reporting by management on internal controls
      over financial reporting for non-accelerated filers. The new SEC rule extends
      the compliance date for such registrants to fiscal years ending on or after
      July
      15, 2007. Accordingly, the Company qualifies for the deferral to comply with
      the
      internal control reporting requirements until its fiscal year ending September
      30, 2007. On August 9, 2006, the SEC issued two releases that when adopted
      are
      designed to grant smaller public companies further relief from compliance with
      Section 404 of the Sarbanes-Oxley Act of 2002.








**2.
      Acquisition of Steel Mini-Mill**





In
      September 2003, YouthStream invested $125,000 to acquire a 1.00% membership
      interest in KES Holdings, LLC, a Delaware limited liability company ("KES
      Holdings"), which was formed to acquire certain assets of Kentucky Electric
      Steel, Inc., a Delaware corporation ("KES"), consisting of a steel
      mini-mill located in Ashland, Kentucky (the “Mill”). On September 2, 2003,
      KES Holdings, through its subsidiary, KES Acquisition Company, LLC, a Delaware
      limited liability company ("KES Acquisition"), completed the acquisition of
      the
      Mill pursuant to Section 363 of the United States Bankruptcy Code for cash
      consideration of $2,650,000, which was funded through the capital contributions
      of the members of KES Holdings. Members’ capital contributions were also used
      for start-up costs, working capital purposes and payment of deferred maintenance
      of the Mill. KES had ceased production on or about December 16, 2002 and
      filed a voluntary petition for relief under Chapter 11 of the United States
      Bankruptcy Code on February 5, 2003.





The
      Mill
      had been in operation for approximately forty years and was refurbished by
      KES
      Acquisition subsequent to its acquisition.  The refurbished Mill has been
      generating revenues since late January 2004. The current production capacity
      of
      the Mill for finished products, based on the current operating structure and
      man-hours worked, is approximately 200,000 short-tons per year, and the Mill
      is
      currently operating at approximately 99% of such annualized
      capacity.  Management
      is focusing on developing the business and improving operating
      efficiencies.





The
      Mill
      produces bar flats that are produced to a variety of specifications and fall
      primarily into two general quality levels - merchant bar quality steel bar
      flats
      (“MBQ Bar Flats”) for generic types of applications, and special bar quality
      steel bar flats (“SBQ Bar Flats”), where more precise customer specifications
      require the use of alloys, customized equipment and special production
      procedures to insure that the finished product meets critical end-use
      performance characteristics.





The
      Mill
      manufactures over 2,600 different Bar Flat items which are sold to volume niche
      markets, including original equipment manufacturers (“OEMs”), cold drawn bar
      converters, steel service centers and the leaf-spring suspension market for
      light- and heavy-duty trucks, mini-vans and utility vehicles. The Mill was
      specifically designed to manufacture wider and thicker bar flats up to three
      inches in thickness and twelve inches in width that are required by these
      markets. In addition, the Mill employs a variety of specially designed equipment
      which is necessary to manufacture SBQ Bar Flats to the specifications of the
      Mill’s customers.





10


On
      March
      9, 2005, YouthStream completed the acquisition of KES Acquisition (the
      "Acquisition"), which was deemed effective March 1, 2005. Pursuant to definitive
      agreements executed with KES Holdings and Atacama Capital Holdings, Ltd., a
      British Virgin Islands company ("Atacama", and together with KES Holdings,
      collectively, the "Sellers"), YouthStream, through its newly-formed subsidiary,
      YouthStream Acquisition Corp., a Delaware corporation ("Acquisition Corp."),
      acquired 100% of the membership interests of KES Acquisition by acquiring (i)
      a
      37.45% membership interest from KES Holdings and (ii) all of the capital stock
      of Atacama KES Holding Corporation, a wholly-owned subsidiary of Atacama
      (“Atacama KES”), the owner of the remaining 62.55% membership interest in KES
      Acquisition. As consideration for the Acquisition, Acquisition Corp. issued
      to
      the Sellers (i) $40,000,000 in promissory notes (the “Notes”), (ii) 25,000
      shares of 13% Series A Non-Convertible Preferred Stock with an aggregate
      liquidation value of $25,000,000 (the “13% Series A Preferred Stock”) and (iii)
      100% of its authorized shares of Series B Non-Voting Common Stock. With respect
      to the $65,000,000 of purchase consideration, $19,000,000 of the Notes and
      $10,000,000 of the 13% Series A Preferred Stock were issued to KES Holdings,
      and
      $21,000,000 of the Notes and $15,000,000 of the 13% Series A Preferred Stock
      were issued to Atacama. YouthStream also contributed an aggregate of $500,000
      of
      cash to Acquisition Corp. as consideration for the issuance by Acquisition
      Corp.
      of 100% of its Series A Voting Common Stock. In addition, YouthStream will
      periodically be required to purchase shares of Series B Preferred Stock of
      Acquisition Corp. in amounts equal to distributions it receives on its KES
      Holdings membership interest.





As
      a
      result of these transactions, YouthStream owns 80.01% of the common stock,
      and
      100% of the voting stock, of Acquisition Corp. The remaining 19.99% common stock
      interest in Acquisition Corp. is owned 62.55% by Atacama and 37.45% by KES
      Holdings. YouthStream currently has a 2.67% equity interest in KES Holdings
      (this percentage has increased from 1.00% as a result of the redemption of
      another member’s interest), as a result of which the Company has eliminated its
      $507,000 equity interest in the Notes and $267,000 equity interest in the 13%
      Series A Preferred Stock in the consolidated balance sheet at September 30,
      2005, and its $507,000 equity interest in the Notes and $0 equity interest
      in
      the 13% Series A Preferred Stock in the consolidated balance sheet at March
      31,
      2006 (see Note 6). YouthStream has consolidated the operations of the Mill
      through its ownership of KES Acquisition commencing March 1, 2005. As a result
      of the Acquisition, the Company’s financial statements for periods ending after
      March 1, 2005 are materially different from and are not comparable to its
      financial statements prior to that date.





Subsequent
      to the Acquisition, the management of the Mill continued unchanged. The
      Acquisition did not result in any change in the Mill’s business operations or
      financial condition, and, other than as set forth herein, the working capital,
      operating cash flow, debt service obligations and credit profile of the Mill
      were not affected in any way by the Acquisition.





As
      described herein, the Notes and 13% Series A Preferred Stock were issued by
      Acquisition Corp., the parent company of KES Acquisition. KES Acquisition is
      a
      separate legal entity that owns and operates the Mill. The Notes are legal
      obligations solely of Acquisition Corp., and are not obligations of KES
      Acquisition, nor are they secured by the assets or cash flows of the Mill.
      In
      the future, Acquisition Corp. may grant liens to secure repayment of the Notes,
      upon the consent of any senior lender to KES Acquisition at that time. In
      addition, the Notes are non-recourse to the assets of YouthStream, except for
      the shares of capital stock of Acquisition Corp. that have been pledged by
      YouthStream to the holders of the Notes. Pursuant to the terms of the
      transaction documentation in connection with the Acquisition and the loan
      facility with General Electric Capital Corporation (“GECC”), YouthStream and
      Acquisition Corp. are currently limited in their ability to receive cash
      distributions from KES Acquisition, but are permitted to receive tax sharing
      payments as described below. Any change in control of Acquisition Corp. in
      the
      future as a result of the holders of the Notes exercising their legal rights
      would not reasonably be expected to have a material impact on the operations
      or
      financial position of the Mill.




The
      Notes
      are structurally subordinate in right and payment of up to $40,000,000 of senior
      debt, including existing debt obligations in favor of GECC. Scheduled principal
      payments commence in (i) February 2007 with respect to the $19,000,000 principal
      amount of Notes issued in favor of KES Holdings and (ii) February 2011 with
      respect to the $21,000,000 principal amount of Notes issued in favor of Atacama.
      In addition, the Notes require additional quarterly principal payments out
      of
      "free cash", as that term is defined in the Note Purchase Agreement. The Notes
      bear interest at the rate of 8% per annum, payable annually during the first
      two
      years of the Note, as provided for in a letter agreement dated as of July 14,
      2005 and effective as of February 28, 2005 by and among Acquisition Corp. and
      the Note holders, and quarterly thereafter. The obligations of Acquisition
      Corp.
      under the Notes are secured by a limited guaranty by YouthStream, which guaranty
      is secured by and limited in recourse solely to a pledge by YouthStream of
      all
      of its interest in Acquisition Corp. As of September 30, 2005, the balance
      outstanding on the Notes was $39,493,000, and related accrued interest payable
      was $1,852,384. As of June 30, 2006, the balance outstanding on the notes was
      $39,493,000 (of which $1,849,300 was classified as a current liability) and
      the
      related accrued interest payable was $1,064,688 (which was classified as a
      current liability).





11


Future
      scheduled principal payments on the Notes are summarized as
      follows:





**KES
                Holdings -**
              **$19,000,000
                Note**
            
            **Atacama
                -**
              **$21,000,000
                Note**Years
                Ending September 30,2006
            
            $
            ---
            
            $
            ---2007
            
            
            1,900,000
            
            
            ---2008
            
            
            950,000
            
            
            ---2009
            
            
            950,000
            
            
            ---2010
            
            
            950,000
            
            
            ---2011
            
            
            2,850,000
            
            
            4,200,0002012
            
            
            2,850,000
            
            
            4,200,0002013
            
            
            2,850,000
            
            
            4,200,0002014
            
            
            ---
            
            
            1,264,0002015
            
            
            5,700,000
            
            
            7,136,000Total
            
            $
            19,000,000
            
            $
            21,000,000





Pursuant
      to a further letter agreement dated April 11, 2006 and effective as of February
      27, 2006 by and among Acquisition Corp. and the Note holders, the interest
      payment of $3,200,000 due on February 27, 2006 was paid by the delivery of
      short-term notes due February 27, 2007 in the principal amount of $3,200,000,
      with interest at 8% per annum. The balance outstanding on the notes, net of
      eliminations, was $3,159,416 at June 30, 2006. Accrued interest payable was
      $85,174 at June 30, 2006.





For
      the
      nine months ending September 30, 2005, Acquisition Corp., KES Acquisition and
      Atacama KES were collectively required to have, on a consolidated basis, in
      excess of $4,000,000 of earnings before interest, taxes, depreciation and
      amortization, calculated in accordance with generally accepted accounting
      principles ("EBITDA").  For each of the fiscal years ending on and
      after September 30, 2006, Acquisition Corp., KES Acquisition and Atacama KES
      are
      collectively required to have, on a consolidated basis, in excess of $7,200,000
      of EBITDA.  At March 31 of each fiscal year following the fiscal year
      ending September 30, 2005 in which the obligations under the Notes remain
      outstanding, Acquisition Corp., KES Acquisition and Atacama KES are collectively
      required to have, on a consolidated basis, in excess of $3,000,000 of EBITDA
      for
      the six months then ended. Effective September 23, 2005, the holders of the
      Notes executed an agreement to amend the Notes to eliminate the requirement
      that
      Acquisition Corp., KES Acquisition and Atacama KES collectively have, on a
      consolidated basis, in excess of $4,000,000 of EBITDA for the nine months ending
      September 30, 2005. The Company was in compliance with this minimum EBITDA
      requirement for the nine months ended June 30, 2006.




The
      holders of each share of 13% Series A Preferred Stock are entitled to receive
      a
      cumulative dividend at an annual rate of 13% of the sum 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 redeemable out of, and to the extent of, legally available
      funds, at a redemption price equal to the sum of $1,000 and all accrued but
      unpaid dividends on the earlier to occur of (i) any liquidation of Acquisition
      Corp., (ii) the occurrence of an event of default under the Note Purchase
      Agreement pursuant to which the Notes were issued or (iii) the first anniversary
      of





12


Acquisition
      Corp.’s full and complete repayment of the Notes. As of September 30, 2005, the
      balance outstanding on the 13% Series A Preferred Stock was $24,733,000, and
      related accrued dividends payable were $1,885,129. As of June 30, 2006, the
      balance outstanding on the 13% Series A Preferred Stock was $25,000,000 and
      related accrued dividends payable were $4,336,301.





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





Subsequent
      to the acquisition of the Mill by the Sellers, KES Acquisition issued an
      aggregate of $7,000,000 of subordinated promissory notes to the Sellers and
      certain of their respective affiliates (the “Subordinated Promissory Notes”).
      The proceeds from the Subordinated Promissory Notes were used to accelerate
      the
      development and expansion of the Mill’s operations. The Subordinated Promissory
      Notes bear interest at the rate of 12% per annum, with interest payable monthly,
      subject to compliance with various agreements and covenants, are secured by
      a
      subordinated security interest in all of the assets of KES Acquisition, and
      are
      subject to an Intercreditor and Subordination Agreement dated March 24, 2004
      with GECC. When originally issued, principal and interest were due and payable
      upon the earlier to occur of (i) an event of default under the Loan and Security
      Agreement with GECC or (ii) each note’s respective due date, which ranged from
      March 31, 2005 to December 31, 2005. As of September 30, 2005, the due dates
      of
      the notes had all been extended to December 31, 2006, if not repaid earlier.
      At
      September 30, 2005, accrued interest payable with respect to the Subordinated
      Promissory Notes was $1,085,753. At June 30, 2006, accrued interest payable
      with
      respect to the Subordinated Promissory Notes was $209,425.




Related
      parties with respect to this transaction are summarized as follows: Robert
      Scott
      Fritz, a director of YouthStream, is an investor in KES Holdings. Hal G. Byer,
      another director of YouthStream, is an employee of affiliates of Libra/KES
      Investment I, LLC ("Libra/KES"), the Manager of KES Holdings, and has an
      economic interest in KES Holdings through his relationship with Libra
      Securities, LLC ("Libra Securities"). Jess M. Ravich, a director of YouthStream
      effective as of June 26, 2006, is a principal of Libra/KES. In addition,
      affiliates of Mr. Ravich, including a trust for the benefit of Mr. Ravich and
      certain of his family members (the “Ravich Trust”) are investors in KES
      Holdings. Mr. Ravich, either directly or through the Ravich Trust, holds
      1,860,000 shares of YouthStream's common stock, warrants to purchase 500,000
      shares of YouthStream's common stock exercisable through August 31, 2008,
      1,000,000 shares of YouthStream's redeemable preferred stock and an option
      to
      purchase 200,000 shares of YouthStream’s common stock exercisable through June
      26, 2013, which was issued to Mr. Ravich under YouthStream’s 2000 Stock Option
      Incentive Plan in connection with his election to the Board of Directors.
      Through his positions at Libra/KES, Mr. Ravich managed the business of KES
      Acquisition through February 28, 2005. Subordinated Promissory Notes with a
      principal amount of $1,650,000 and $450,000 are payable to the Ravich Trust
      and
      Libra Securities Holdings, LLC, the parent of Libra Securities,
      respectively. Mr. Fritz and Mr. Byer have each previously acquired an option
      from the Ravich Trust for $2,500 ($0.04 per share) to purchase 62,500 shares
      of
      YouthStream's redeemable preferred stock issued to the Ravich Trust in January
      2003, exercisable at $0.36 per share until December 31, 2006 or earlier upon
      the
      occurrence of certain events.





The
      Acquisition was accounted for as a purchase in accordance with SFAS No. 141,
      “Business Combinations”, and in accordance with Emerging Issues Task Force
      (“EITF”) No. 88-16, “Basis in Leveraged Buyout Transactions”. As a result of the
      substantial and continuing relationships between YouthStream and the Sellers,
      and the provisions of EITF 88-16 that are required to be considered when
      determining the extent of fair value/predecessor basis to be used in recording
      the transaction, the Acquisition has been recorded at predecessor basis. Since
      the debt and equity held by the Sellers represented almost the entire amount
      of
      capital at risk both before and after the Acquisition, the application of the
      “monetary test” specified in Section 3 of EITF 88-16, which limits the portion
      of the purchase consideration that can be valued at fair value to the percentage
      of the total consideration that is monetary, was utilized by the Company in
      determining to record the transaction at predecessor basis. The excess of the
      purchase price over predecessor basis of the net assets acquired has been
      reflected as a deemed distribution of $63,104,423 to the Sellers at the date
      of
      acquisition in the consolidated financial statements.





13


For
      taxable periods beginning after February 28, 2005, Acquisition Corp. and Atacama
      KES are included in the consolidated federal income tax return filed by
      YouthStream as the common parent.  Acquisition Corp. and Atacama KES have
      entered into a Tax Sharing Agreement with YouthStream, pursuant to which they
      have agreed to pay YouthStream an amount equal to 50% of their respective
      "separate company tax liability", subject to compliance with the GECC secured
      line of credit.  The term "separate company 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, minimum
      tax and other items applicable to such subsidiary in connection with the
      determination of the subsidiary's tax liability), which such subsidiary
      would have incurred if its federal income tax liability for the periods during
      which it is includible in a consolidated federal income tax return with
      YouthStream were determined generally in the same manner in which its
      separate return liability would have been calculated under Section 1552(a)(2)
      of
      the Internal Revenue Code of 1986, as amended.  YouthStream has
      approximately $255,000,000 of federal net operating loss carryovers currently
      available to offset the consolidated federal taxable income of the affiliated
      group in the future.





The
      total
      purchase price of $65,000,000, as well as the terms and conditions of the Notes
      and 13% Series A Preferred Stock issued to the Sellers, was determined to be
      at
      fair value based on reports prepared by an independent valuation firm.





The
      following is a summary of the assets acquired and liabilities assumed at
      predecessor basis at February 28, 2005.





Assets
                Acquired:Cash
            
            $
            913,194Accounts
                receivable
            
            
            10,781,836Allowance
                for doubtful accounts
            
            
            (328,351
            )Inventories
            
            
            18,762,218Prepaid
                expenses and other current assets
            
            
            904,271Property,
                plant and equipment
            
            
            6,630,012Accumulated
                depreciation and amortization
            
            
            (639,254
            )Due
                from YouthStream Acquisition Corp.
            
            
            187,702Other
                non-current assets
            
            
            721,393Total
                assets acquired
            
            
            37,933,021





Liabilities
                Assumed:Accounts
                payable
            
            
            9,566,327Accrued
                expenses
            
            
            1,267,016Accrued
                interest payable
            
            
            593,260Deferred
                rent
            
            
            165,413Subordinated
                promissory notes payable
            
            
            7,000,000Line
                of credit
            
            
            15,495,095Equipment
                contract payable
            
            
            291,223Capital
                lease obligation
            
            
            1,877,179Total
                liabilities assumed
            
            
            36,255,513Net
                assets acquired
            
            
            1,677,508Adjustment
                to recognize minority interest
            
            
            (331,981
            )$
            1,345,527Total
                purchase consideration, net of intercompany eliminations of 2.67%
                interest
                held by KES Holdings:8%
                Subordinated secured promissory notes payable
            
            $
            39,493,00013%
                Series A preferred stock
            
            
            24,733,000Net
                purchase consideration
            
            
            64,226,000Minority
                interests in equity
            
            
            223,950Adjustment
                to record deemed distribution to Sellers
            
            
            (63,104,423
            )$
            1,345,527





14


The
      amount due from Acquisition Corp. of $187,702 represents costs incurred by
      KES
      Acquisition with respect to the Acquisition, which were included in the
      $1,171,406 of transaction costs related to the Acquisition charged to operations
      during the year ended September 30, 2005.





As
      of
      September 30, 2004, the Company had incurred $175,144 of costs with respect
      to
      the Acquisition, which were presented as deferred costs in the Company’s
      consolidated balance sheet at such date. These costs were included in the
      $1,171,406 of transaction costs related to the Acquisition charged to operations
      during the year ended September 30, 2005.





Minority
      interest - related parties was $430,931 on February 28, 2005. For the year
      ended
      September 30, 2005, the net loss of Acquisition Corp. (an 80.01% consolidated
      subsidiary) allocable to the 19.99% minority shareholders was $681,698, but
      the
      reduction to minority interest - related parties was limited to the balance
      at
      February 28, 2005 of $430,931. Accordingly, the remainder of the net loss of
      Acquisition Corp. allocable to the 19.99% minority shareholders for the year
      ended September 30, 2005 of $250,767 was included in the Company’s consolidated
      statement of operations for the year ended September 30, 2005, and will be
      recovered to the extent that Acquisition Corp. generates net income in future
      periods. For the three months and nine months ended June 30, 2006, net income
      allocable to the 19.99% minority shareholders was $26,210 and $56,439,
      respectively.





The
      following pro forma operating data shown below presents the results of
      operations for the three months and nine months ended June 30, 2005, as if
      the
      Acquisition had occurred on the last day of the immediately preceding fiscal
      period. Accordingly, transaction costs related to the Acquisition are not
      included in the net loss from continuing operations shown below. The pro forma
      results are not necessarily indicative of the financial results that might
      have
      occurred had the Acquisition actually taken place on the respective dates,
      or of
      future results of operations. P ro
      forma
      information for the three months and nine months ended June 30, 2005 is
      summarized as follows:





**Three**
              **Months**
              **Ended**
              **June
                30,**
              **2005**
            
            **Nine**
              **Months**
              **Ended**
              **June
                30,**
              **2005**Net
                sales
            
            $
            29,127,566
            
            $
            82,865,839Cost
                of sales
            
            
            27,194,477
            
            
            77,993,132Gross
                margin
            
            
            1,933,089
            
            
            4,872,707Operating
                income
            
            
            638,552
            
            
            1,066,767Interest
                expense
            
            
            (2,371,888
            )
            
            (7,075,831
            )Minority
                interest
            
            
            218,439
            
            
            218,439Net
                loss from continuing operations
            
            $
            (1,500,737
            )
            $
            (5,693,104
            )Basic
                and diluted net loss per common share
            
            $
            (0.04
            )
            $
            (0.15
            )Weighted
                average common shares outstanding
            
            
            39,242,251
            
            
            39,242,251








15


Almost
      all of the Company's net assets are owned by KES Acquisition, a consolidated
      subsidiary.  As a result of various contractual restrictions contained in
      various financing agreements (as previously described) and documents relating
      to
      the Acquisition, there are limits on the Company’s ability to transfer assets
      from KES Acquisition to Youthstream, whether in the form of loans and advances,
      cash dividends, tax-sharing payments, or otherwise, without notice to and/or
      consent of one or more third parties.





A
      summary
      of the Company's restricted and unrestricted assets, liabilities and equity
      at
      June 30, 2006 (unaudited) and at September 30, 2005 is presented
      below.





June
                30, 2006
            
            **Unrestricted**
            
            **Restricted**
            
            **As
                Reported**Current
                assets
            
            $
            878,875
            
            $
            32,677,835
            
            $
            33,556,710Property,
                plant and equipment, net
            
            
            -
            
            
            5,020,120
            
            
            5,020,120Other
                assets
            
            
            -
            
            
            462,130
            
            
            462,130Total
                assets
            
            $
            878,875
            
            $
            38,160,085
            
            $
            39,038,960Current
                liabilities
            
            $
            10,182,245
            
            $
            28,823,608
            
            $
            39,005,853Non-current
                liabilities
            
            
            77,306,610
            
            
            1,221,267
            
            
            78,527,877Equity:Retained
                earnings (accumulated deficit)
            
            
            (352,337,270
            )
            
            6,437,702
            
            
            (345,899,568
            )Other
            
            
            265,727,290
            
            
            1,677,508
            
            
            267,404,798Total
                liabilities and equity
            
            $
            878,875
            
            $
            38,160,085
            
            $
            39,038,960








September
                30, 2005
            
            **Unrestricted**
            
            **Restricted**
            
            **As
                Reported**Current
                assets
            
            $
            261,740
            
            $
            35,453,821
            
            $
            35,715,561Property,
                plant and equipment, net
            
            
            -
            
            
            5,567,745
            
            
            5,567,745Other
                assets
            
            
            -
            
            
            638,948
            
            
            638,948Total
                assets
            
            $
            261,740
            
            $
            41,660,514
            
            $
            41,922,254Current
                liabilities
            
            $
            4,224,995
            
            $
            30,411,237
            
            $
            34,636,232Non-current
                liabilities
            
            
            78,257,234
            
            
            8,629,138
            
            
            86,886,372Equity:Retained
                earnings (accumulated deficit)
            
            
            (348,435,183
            )
            
            1,169,785
            
            
            (347,265,398
            )Other
            
            
            266,214,694
            
            
            1,450,354
            
            
            267,665,048Total
                liabilities and equity
            
            $
            261,740
            
            $
            41,660,514
            
            $
            41,922,254








16


**3.
      Inventories**





Inventories
      are comprised of the following at June 30, 2006 and September 30,
      2005:





**June
                30,**
              **2006**
            
            **September
                30,****2005****(Unaudited)**Raw
                materials and scrap
            
            $
            3,669,997
            
            $
            2,954,405Semi-finished
                goods
            
            
            6,251,028
            
            
            6,556,006Finished
                goods
            
            
            9,321,221
            
            
            8,370,394Total
            
            $
            19,242,246
            
            $
            17,880,805








Inventories
      are comprised of raw materials (consisting of billets and scrap metal),
      semi-finished goods and finished goods. Inventory costs include material, labor
      and manufacturing overhead. Inventories are valued at the lower of average
      cost
      or market. The average cost of the billets and scrap metal is adjusted
      periodically to reflect current changes in cost inputs.








**4.
      Notes Payable and Long-Term Debt**





**Notes
      Payable to Related Parties**





During
      September 2005, the Company borrowed $50,000 from certain directors under
      short-term unsecured notes due December 31, 2005, with interest at 4% per annum,
      to fund corporate general and administrative expenses. The notes were subject
      to
      mandatory prepayment based on any proceeds received by the Company from, among
      other sources, the note that the Company received in February 2004 from the
      sale
      of the assets and operations of its subsidiary, Beyond the Wall, Inc., and
      any
      tax sharing payments received under the Tax Sharing Agreement with Acquisition
      Corp. and Atacama KES (see Note 2). On
      September 30, 2005, the Company received a cash payment of $258,922 as
      settlement in full of the outstanding note receivable from the sale of the
      assets and operations of Beyond the Wall, Inc., and repaid the notes payable
      to
      directors in October 2005.





**Subordinated
      Secured Promissory Notes Payable to Related Parties**





Subordinated
      secured promissory notes payable consist
      of seven notes payable aggregating $7,000,000 issued by KES Acquisition to
      three
      related parties. The proceeds from these notes were used to accelerate the
      development and expansion of the steel mini-mill’s operations prior to its
      acquisition by the Company. The notes bear interest at 12% per annum, with
      interest payable monthly, subject to compliance with various agreements and
      covenants, are secured by a subordinated security interest in all of the assets
      of KES Acquisition, and are subject to an Intercreditor and Subordination
      Agreement dated March 24, 2004 with GECC. When originally issued, principal
      and
      interest were due and payable upon the earlier to occur of (i) an event of
      default under the Loan and Security Agreement with GECC or (ii) each note’s
      respective due date, which ranged from March 31, 2005 to December 31, 2005.
      As
      of September 30, 2005, the due dates of the notes had all been extended to
      December 31, 2006, if not repaid earlier. At June 30, 2006 and September 30,
      2005, accrued interest payable with respect to the subordinated secured
      promissory notes payable was $209,425 and $1,085,753, respectively.





At
      June
      30, 2006, KES Acquisition was in compliance with all terms and covenants
      relating to its subordinated secured promissory notes payable.





On
      August
      29, 2006, the subordinated secured promissory notes were amended and restated
      to
      extend their maturity date to March 31, 2010, with all other terms and
      conditions described above remaining substantially the same.





On
      August
      31, 2006, the Company made a principal payment on the subordinated secured
      promissory notes of $4,000,000.





17


**Secured
      Line of Credit**





Effective
      March 24, 2004, KES Acquisition entered into a loan and security agreement,
      as
      amended, with GECC. Under the terms of the agreement, KES Acquisition has the
      ability to borrow up to $23,000,000, subject to limitations under the lender’s
      borrowing base formula and compliance with a minimum fixed charge coverage
      ratio. Interest is payable monthly in arrears on the outstanding principal
      balance at the index rate (defined as the thirty-day dealer commercial paper
      rate) plus 3.5% per annum. The line of credit originally matured on March 24,
      2007, however, was extended to March 24, 2010 on August 27, 2006 (see below),
      and is secured by all of the assets of KES Acquisition and a pledge of (i)
      the
      membership interests of KES Acquisition owned by Acquisition Corp. and (ii)
      the
      capital stock of Atacama KES owned by Acquisition Corp. As of June 30, 2006
      and
      September 30, 2005, the balance outstanding on the line of credit was $9,890,679
      and $19,009,379, respectively, which has been presented as a current liability
      in the consolidated balance sheet at such date due to the collateral securing
      such line of credit consisting primarily of current assets and the continuing
      uncertainty with respect to the Company’s ability to maintain compliance under
      the terms and conditions of the line of credit.





At
      March
      31, 2005, KES Acquisition was not in compliance with the fixed charge coverage
      ratio based on its consolidated financial statements as originally filed, in
      part relating to changes to its accounting procedures as a result of the review
      of its financial statements conducted in conjunction with its acquisition by
      YouthStream (see Note 2), and subsequently received a waiver of default from
      the
      lender. At June 30, 2005, KES Acquisition was in compliance with the fixed
      charge coverage ratio based on its consolidated financial statements as
      originally filed. However, KES Acquisition was not in compliance with the fixed
      charge coverage ratio at June 30, 2005 based on its revised consolidated
      financial statements, as a result of a determination by management to
      re-characterize a lease for certain equipment used by KES Acquisition as a
      capital lease rather than an operating lease. In addition, KES Acquisition
      was
      not in compliance with its obligation to deliver audited financial statements
      in
      the form and time period as set forth in the loan agreement. On June 26,
      2006, the Company received a waiver of default from the lender with respect
      to
      the fixed charge coverage ratio for the restated March 31, 2005 and June 30,
      2005 interim financial statements, as well as with respect to the form and
      timeliness of the September 30, 2005 annual audited financial statements being
      provided to GECC.





At
      June
      30, 2006, March 31, 2006, December 31, 2005 and September 30, 2005, KES
      Acquisition was in compliance with the fixed charge coverage ratio based on
      its
      consolidated financial statements.





In
      the
      event that KES Acquisition is not in compliance with the fixed charge coverage
      ratio in any future period, the Company intends to seek a further waiver of
      any
      default from the lender, and if no such waiver is received, the lender would
      have the right to accelerate the maturity of the line of credit at that time.





On
      August
      29, 2006, the loan and security agreement with GECC was amended and restated
      to
      extend its maturity date to March 24, 2010, and to allow the payment of
      principal on the Company’s subordinated secured promissory notes, subject to
      compliance with various agreements and covenants, with all other terms and
      conditions described above remaining substantially the same.








**5.
      Commitments and Contingencies**





Legal
      Proceedings





The
      Company and/or its subsidiary that owned its former operating business, Beyond
      the Wall, Inc., have periodically been defendants in various lawsuits and claims
      from various trade creditors and former landlords. Based on the Company’s
      contract relating to the sale of the Beyond the Wall, Inc. assets, certain
      of
      these claims are the responsibility of the buyer of the Beyond the Wall, Inc.
      business. The Company evaluates its response in each situation based on the
      particular facts and circumstances of a claim. Accordingly, the ultimate outcome
      of these matters cannot be determined at this time and may ultimately result
      in
      judgments and liens against the Company or its assets. The Company has made
      sufficient accruals for the exposure related to such matters that have been
      deemed probable and reasonably estimable at June 30, 2006 and September 30,
      2005.





KES
      Acquisition was named in a wrongful death lawsuit before the Circuit Court
      of
      Cabell County, West Virginia (the “Court”), which was filed in December 2004.
      The action was brought by Stephanie Harshbarger, individually and as
      Administratrix of the Estate of Chad Harshbarger against Aero-Fab, Inc. and
      KES
      Acquisition. Mr. Harshbarger was an employee of Aero-Fab, Inc., an unaffiliated
      contractor, who died while working at the Mill in April 2004. KES Acquisition
      was defended by its insurance carrier in this action. On July 3, 2006, the
      Court
      dismissed KES Acquisition from the lawsuit, ruling that KES Acquisition was
      not
      within the Court’s jurisdiction. Notwithstanding such Court ruling, the
      plaintiff may appeal the ruling, or file an action against KES Acquisition
      in
      the State of Kentucky, neither of which has occurred to date. The Company does
      not believe that the resolution of this litigation will have a material adverse
      effect on its financial condition or results of operations.





18


Operating
      Commitments





The
      Mill
      has been operating under a the Pinnacle Agreement effective through October
      31,
      2009 that provides for Pinnacle Steel, LLC to provide, at its expense, employees
      to serve as the General Manager of the Mill and provide oversight and general
      management of the operations of the Mill, for which the management company
      receives an annual fee of $700,000, payable monthly, and bonus payments based
      on
      16.6% of defined earnings before interest, taxes, depreciation and amortization
      (“EBITDA”) in excess of $6,000,000 for the fiscal years ending September 30,
      2006 and thereafter. Management bonus charged to operations was $437,000
      and $1,101,000 for the three months and nine months ended June 30, 2006,
      respectively.





The
      Company has various short-term commitments for the purchase of materials,
      supplies and energy arising in the ordinary course of business which aggregated
      approximately $7,900,000 and $7,962,000 at June 30, 2006 and September 30,
      2005,
      respectively.








**6.
      Common and Preferred Stock**





On
      December 22, 2005, 10,000 shares of 13% Series A Preferred Stock with a face
      amount of $10,000,000 that were originally issued by Acquisition Corp. to KES
      Holdings in February 2005 (see Note 2) were transferred to two independent
      charities. Since the Company owned a 2.67% interest in KES Holdings, the pro
      rata portion of the face amount of such 13% Series A Preferred Stock and the
      related accrued dividends had previously been eliminated in consolidation.
      However, as a result of the transfer of such preferred shares to the two
      charities in December 2005, the Company recorded the previously eliminated
      portion of the face amount of the 13% Series A Preferred Stock ($267,000) as
      a
      deemed distribution to the Sellers of KES Acquisition, consistent with the
      accounting for the Acquisition as described at Note 2, and the previously
      eliminated portion of the preferred stock dividends ($28,243) through December
      22, 2005, as interest expense.





On
      February 15, 2005, the Company issued an option to purchase 200,000 shares
      of
      common stock to a new director, exercisable through February 15, 2012 at $0.30
      per share, which was the fair market value on the date of issuance. The fair
      value of the option, calculated pursuant to the Black-Scholes option-pricing
      model, was $54,000 ($0.27 per share). The option vests over a 12-month period
      in
      equal monthly installments beginning March 1, 2005.





On
      June
      26, 2006, the Company issued an option to purchase 200,000 shares of common
      stock to a new director, exercisable through June 26, 2013 at $0.12 per share,
      which was the fair market value on the date of issuance. The fair value of
      the
      option, calculated pursuant to the Black-Scholes option-pricing model, was
      $24,000 ($0.12 per share). The option vests over a 12-month period in equal
      monthly installments beginning July 1, 2006.








**7.
      Income Taxes**





Income
      tax expense was $146,000 and $274,000 for the three months and nine months
      ended
      June 30, 2006, respectively, consisting of a provision for state income taxes.
      No federal income tax provision was provided for the three months and nine
      months ended June 30, 2006 as a result of the utilization of the Company’s net
      operating loss carryforwards as described below. No federal or state income
      tax
      provision was provided for the three months and nine months ended June 30,
      2005
      due to the Company reporting a pre-tax operating loss for such
      periods.





At
      September 30, 2005, the Company had net operating loss carryforwards for
      federal income tax purposes of approximately $291,060,000 that expire from
      2012
      through 2025. The use of approximately $36,000,000 of this net operating loss
      in
      future years may be restricted under Section 382 of the Internal Revenue
      Code.





19


In
      assessing the potential realization of deferred tax assets, management considers
      whether it is more likely than not that some portion or all of the deferred
      tax
      assets will be realized. The ultimate realization of deferred tax assets is
      dependent upon the Company attaining future taxable income during the periods
      in
      which those temporary differences become deductible. As of September 30, 2005,
      management was unable to determine if it was more likely than not that the
      deferred tax assets would be realized. Accordingly, due to the uncertainty
      surrounding the realization of the benefits of the Company’s tax attributes
      (primarily net operating loss carryforwards), as of September 30, 2005, the
      Company recorded a 100% valuation allowance against its net deferred tax assets
      for financial reporting purposes.





The
      Company is subject to periodic audits by federal, state and local tax
      authorities for various tax liabilities incurred in prior periods from the
      parent entity and its subsidiaries, including previously discontinued
      businesses. The amount of any tax assessments and penalties may be material
      and
      may negatively impact the Company’s operations. Given the uncertainty in the
      amount and the difficulty in estimating the probability of the assessments
      arising from future tax audits, the Company has not made any accruals for such
      tax contingencies.





For
      taxable periods beginning after February 28, 2005, Acquisition Corp. and Atacama
      KES (see Note 2) are included in the consolidated federal income tax return
      filed by YouthStream as the common parent.  Acquisition Corp. and Atacama
      KES have entered into a Tax Sharing Agreement with YouthStream, pursuant to
      which they have agreed to pay YouthStream an amount equal to 50% of their
      respective "separate company tax liability", subject to compliance with the
      GECC
      secured line of credit.  The term "separate company 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,
      minimum tax and other items applicable to such subsidiary in connection
      with the determination of the subsidiary's tax liability), which such
      subsidiary would have incurred if its federal income tax liability for the
      periods during which it is includible in a consolidated federal income tax
      return with YouthStream were determined generally in the same manner in
      which its separate return liability would have been calculated under Section
      1552(a)(2) of the Internal Revenue Code of 1986, as amended.  YouthStream
      has approximately $255,000,000 of federal net operating loss carryovers
      currently available to offset the consolidated federal taxable income of the
      affiliated group in the future.








**8.
      Subsequent Events**





**Investment
      in Planet Hollywood (Alabama), LLC**





In
      August
      2006, YouthStream invested $75,000 to acquire an 8.82% membership interest
      in
      Planet Hollywood (Alabama), LLC, a Florida limited liability company, to pursue
      a licensing and merchandising arrangement with Planet Hollywood International,
      Inc., or one or more of its subsidiaries (“PHI”). Planet Hollywood (Alabama),
      LLC was formed by PHI on June 22, 2005 and assigned certain rights held by
      PHI
      in connection with PHI’s role in the development of a charitable bingo facility,
      restaurant and entertainment venue in Shorter, Alabama with Lucky Palace, LLC
      (“Lucky”), a subsidiary of Lucky Palace, Inc. Libra Securities Holdings, LLC
      (“Libra Holdings”) is also involved in this business enterprise.





Related
      parties with respect to this transaction are summarized as follows: Robert
      Scott
      Fritz, a director of YouthStream, is expected to be an investor in Lucky. Hal
      G.
      Byer, another director of YouthStream, is an employee of affiliates of Libra
      Holdings,and has an economic interest in Lucky. Jess M. Ravich, a director
      of
      YouthStream, is a principal of Libra Securities, a subsidiary of Libra Holdings.
      In addition, affiliates of Mr. Ravich, including a trust for the benefit of
      Mr.
      Ravich and certain of his family members (the “Ravich Trust”) are investors in
      Planet Hollywood (Alabama), LLC and are expected to be investors in Lucky.
      Mr.
      Ravich, either directly or through the Ravich Trust, holds 1,860,000 shares
      of
      YouthStream's common stock, warrants to purchase 500,000 shares of YouthStream's
      common stock exercisable through August 31, 2008, 1,000,000 shares of
      YouthStream's redeemable preferred stock and an option to purchase 200,000
      shares of YouthStream’s common stock exercisable through June 26, 2013, which
      was issued to Mr. Ravich under YouthStream’s 2000 Stock Option Incentive Plan.
      Subordinated Promissory Notes with a principal amount of $1,650,000 and $450,000
      are payable to the Ravich Trust and Libra Holdings, respectively. Mr. Fritz
      and Mr. Byer have each previously acquired an option from the Ravich Trust
      for
      $2,500 ($0.04 per share) to purchase 62,500 shares of YouthStream's redeemable
      preferred stock issued to the Ravich Trust in January 2003, exercisable at
      $0.36
      per share until December 31, 2006 or earlier upon the occurrence of certain
      events (see Note 2).




**Renegotiated
      Debt Agreements**





On
      August
      29, 2006, the loan and security agreement with GECC was amended and restated
      to
      extend its maturity date to March 24, 2010, and to allow the payment of
      principal on the Company’s subordinated secured promissory notes, subject to
      compliance with various agreements and covenants, with all other terms and
      conditions described above remaining substantially the same (See Note
      4).





On
      August
      29, 2006, the subordinated secured promissory notes were amended and restated
      to
      extend their maturity date to March 31, 2010, with all other terms and
      conditions described above remaining substantially the same (See Note
      4).




20







**ITEM
      2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**





**General
      Overview**





Commencing
      March 1, 2005, the Company has included the operations of a steel mini-mill
      located in Ashland, Kentucky, which represents the only business segment in
      which the Company currently operates, in its consolidated financial statements.
      The Company completed the acquisition of this steel mini-mill on March 9, 2005
      (see “Acquisition of Steel Mini-Mill” below).





During
      September 2005, the Company borrowed $50,000 from certain directors under
      short-term unsecured notes due December 31, 2005, with interest at 4% per annum,
      to fund corporate general and administrative expenses. The notes were subject
      to
      mandatory prepayment based on any proceeds received by the Company from, among
      other sources, the note that the Company received in February 2004 from the
      sale
      of the assets and operations of its subsidiary, Beyond the Wall, Inc., and
      any
      tax sharing payments received under the Tax Sharing Agreement with Acquisition
      Corp. and Atacama KES (see “Acquisition of Steel Mini-Mill” below). On
      September 30, 2005, the Company received a cash payment of $258,922 as
      settlement in full of the outstanding note receivable from the sale of the
      assets and operations of Beyond the Wall, Inc., and repaid the notes payable
      to
      directors in October 2005.





**Acquisition
      of Steel Mini-Mill**





In
      September 2003, YouthStream invested $125,000 to acquire a 1.00% membership
      interest in KES Holdings, LLC, a Delaware limited liability company ("KES
      Holdings"), which was formed to acquire certain assets of Kentucky Electric
      Steel, Inc., a Delaware corporation ("KES"), consisting of a steel
      mini-mill located in Ashland, Kentucky (the “Mill”). On September 2, 2003,
      KES Holdings, through its subsidiary, KES Acquisition Company, LLC, a Delaware
      limited liability company ("KES Acquisition"), completed the acquisition of
      the
      Mill pursuant to Section 363 of the United States Bankruptcy Code for cash
      consideration of $2,650,000, which was funded through the capital contributions
      of the members of KES Holdings. Members’ capital contributions were also used
      for start-up costs, working capital purposes and payment of deferred maintenance
      of the Mill. KES had ceased production on or about December 16, 2002 and
      filed a voluntary petition for relief under Chapter 11 of the United States
      Bankruptcy Code on February 5, 2003.





The
      Mill
      had been in operation for approximately forty years and was refurbished by
      KES
      Acquisition subsequent to its acquisition.  The refurbished Mill has been
      generating revenues since late January 2004. The current production capacity
      of
      the Mill for finished products, based on the current operating structure and
      man-hours worked, is approximately 200,000 short-tons per year, and the Mill
      is
      currently operating at approximately 99% of such annualized
      capacity.  Management
      is focusing on developing the business and improving operating
      efficiencies.





The
      Mill
      produces bar flats that are produced to a variety of specifications and fall
      primarily into two general quality levels - merchant bar quality steel bar
      flats
      (“MBQ Bar Flats”) for generic types of applications, and special bar quality
      steel bar flats (“SBQ Bar Flats”), where more precise customer specifications
      require the use of alloys, customized equipment and special production
      procedures to insure that the finished product meets critical end-use
      performance characteristics.





The
      Mill
      manufactures over 2,600 different Bar Flat items which are sold to volume niche
      markets, including original equipment manufacturers (“OEMs”), cold drawn bar
      converters, steel service centers and the leaf-spring suspension market for
      light- and heavy-duty trucks, mini-vans and utility vehicles. The Mill was
      specifically designed to manufacture wider and thicker bar flats up to three
      inches in thickness and twelve inches in width that are required by these
      markets. In addition, the Mill employs a variety of specially designed equipment
      which is necessary to manufacture SBQ Bar Flats to the specifications of the
      Mill’s customers.





On
      March
      9, 2005, YouthStream completed the acquisition of KES Acquisition (the
      "Acquisition"), which was deemed effective March 1, 2005. Pursuant to definitive
      agreements executed with KES Holdings and Atacama Capital Holdings, Ltd., a
      British Virgin Islands company ("Atacama", and together with KES Holdings,
      collectively, the "Sellers"), YouthStream, through its newly-formed subsidiary,
      YouthStream Acquisition Corp., a Delaware corporation ("Acquisition Corp."),
      acquired 100% of the membership interests of KES Acquisition by acquiring (i)
      a
      37.45% membership interest from KES Holdings and (ii) all of the capital stock
      of Atacama KES Holding Corporation, a wholly-owned subsidiary of Atacama
      (“Atacama KES”), the owner of the remaining 62.55% membership interest in KES
      Acquisition. As consideration for the Acquisition, Acquisition Corp. issued
      to
      the Sellers (i) $40,000,000 in promissory notes (the “Notes”), (ii) 25,000
      shares of 13% Series A Non-Convertible Preferred Stock with an aggregate
      liquidation value of $25,000,000 (the “13% Series A Preferred Stock”) and (iii)
      100% of its authorized shares of Series B Non-Voting Common Stock. With respect
      to the $65,000,000 of purchase consideration, $19,000,000 of the Notes and
      $10,000,000 of the 13% Series A Preferred Stock were issued to KES Holdings,
      and
      $21,000,000 of the Notes and $15,000,000 of the 13% Series A Preferred Stock
      were issued to Atacama. YouthStream also contributed an aggregate of $500,000
      of
      cash to Acquisition Corp. as consideration for the issuance by Acquisition
      Corp.
      of 100% of its Series A Voting Common Stock. In addition, YouthStream will
      periodically be required to purchase shares of Series B Preferred Stock of
      Acquisition Corp. in amounts equal to distributions it receives on its KES
      Holdings membership interest.





21


As
      a
      result of these transactions, YouthStream owns 80.01% of the common stock,
      and
      100% of the voting stock, of Acquisition Corp. The remaining 19.99% common
      stock
      interest in Acquisition Corp. is owned 62.55% by Atacama and 37.45% by KES
      Holdings. YouthStream currently has a 2.67% equity interest in KES Holdings
      (this percentage has increased from 1.00% as a result of the redemption of
      another member’s interest), as a result of which the Company has eliminated its
      $507,000 equity interest in the Notes and $267,000 equity interest in the 13%
      Series A Preferred Stock in the consolidated balance sheet at September 30,
      2005, and its $507,000 equity interest in the Notes and $0 equity interest
      in
      the 13% Series A Preferred Stock in the consolidated balance sheet at March
      31,
      2006. YouthStream has consolidated the operations of the Mill through its
      ownership of KES Acquisition commencing March 1, 2005. As a result of the
      Acquisition, the Company’s financial statements for periods ending after March
      1, 2005 are materially different from and are not comparable to its financial
      statements prior to that date.





Subsequent
      to the Acquisition, the management of the Mill continued unchanged. The
      Acquisition did not result in any change in the Mill’s business operations or
      financial condition, and, other than as set forth herein, the working capital,
      operating cash flow, debt service obligations and credit profile of the Mill
      were not affected in any way by the Acquisition.





As
      described herein, the Notes and 13% Series A Preferred Stock were issued by
      Acquisition Corp., the parent company of KES Acquisition. KES Acquisition is
      a
      separate legal entity that owns and operates the Mill. The Notes are legal
      obligations solely of Acquisition Corp., and are not obligations of KES
      Acquisition, nor are they secured by the assets or cash flows of the Mill.
      In
      the future, Acquisition Corp. may grant liens to secure repayment of the Notes,
      upon the consent of any senior lender to KES Acquisition at that time. In
      addition, the Notes are non-recourse to the assets of YouthStream, except for
      the shares of capital stock of Acquisition Corp. that have been pledged by
      YouthStream to the holders of the Notes. Pursuant to the terms of the
      transaction documentation in connection with the Acquisition and the loan
      facility with General Electric Capital Corporation (“GECC”), YouthStream and
      Acquisition Corp. are currently limited in their ability to receive cash
      distributions from KES Acquisition, but are permitted to receive tax sharing
      payments as described below. Any change in control of Acquisition Corp. in
      the
      future as a result of the holders of the Notes exercising their legal rights
      would not reasonably be expected to have a material impact on the operations
      or
      financial position of the Mill.




The
      Notes
      are structurally subordinate in right and payment of up to $40,000,000 of senior
      debt, including existing debt obligations in favor of GECC. Scheduled principal
      payments commence in (i) February 2007 with respect to the $19,000,000 principal
      amount of Notes issued in favor of KES Holdings and (ii) February 2011 with
      respect to the $21,000,000 principal amount of Notes issued in favor of Atacama.
      In addition, the Notes require additional quarterly principal payments out
      of
      "free cash", as that term is defined in the Note Purchase Agreement. The Notes
      bear interest at the rate of 8% per annum, payable annually during the first
      two
      years of the Note, as provided for in a letter agreement dated as of July 14,
      2005 and effective as of February 28, 2005 by and among Acquisition Corp. and
      the Note holders, and quarterly thereafter. The obligations of Acquisition
      Corp.
      under the Notes are secured by a limited guaranty by YouthStream, which guaranty
      is secured by and limited in recourse solely to a pledge by YouthStream of
      all
      of its interest in Acquisition Corp. As of September 30, 2005, the balance
      outstanding on the Notes was $39,493,000, and related accrued interest payable
      was $1,852,384. As of June 30, 2006, the balance outstanding on the notes was
      $39,493,000 (of which $1,849,300 was classified as a current liability) and
      the
      related accrued interest payable was $1,149,862 (which was classified as a
      current liability).





22


Future
      scheduled principal payments on the Notes are summarized as
      follows:





**KES
                Holdings -**
              **$19,000,000
                Note**
            
            **Atacama
                -**
              **$21,000,000
                Note**Years
                Ending September 30,2006
            
            $
            ---
            
            $
            ---2007
            
            
            1,900,000
            
            
            ---2008
            
            
            950,000
            
            
            ---2009
            
            
            950,000
            
            
            ---2010
            
            
            950,000
            
            
            ---2011
            
            
            2,850,000
            
            
            4,200,0002012
            
            
            2,850,000
            
            
            4,200,0002013
            
            
            2,850,000
            
            
            4,200,0002014
            
            
            ---
            
            
            1,264,0002015
            
            
            5,700,000
            
            
            7,136,000Total
            
            $
            19,000,000
            
            $
            21,000,000





Pursuant
      to a further letter agreement dated April 11, 2006 and effective as of February
      27, 2006 by and among Acquisition Corp. and the Note holders, the interest
      payment of $3,200,000 due on February 27, 2006 was paid by the delivery of
      short-term notes due February 27, 2007 in the principal amount of $3,200,000,
      with interest at 8% per annum. The balance outstanding on the notes, net of
      eliminations, was $3,159,416 at June 30, 2006. Accrued interest payable was
      $85,174 at June 30, 2006.





Pursuant
      to the Notes, for the nine months ending September 30, 2005, Acquisition Corp.,
      KES Acquisition and Atacama KES were collectively required to have, on a
      consolidated basis, in excess of $4,000,000 of earnings before interest, taxes,
      depreciation and amortization, calculated in accordance with generally accepted
      accounting principles ("EBITDA").  For each of the fiscal years ending
      on and after September 30, 2006, Acquisition Corp., KES Acquisition and
      Atacama KES are collectively required to have, on a consolidated basis, in
      excess of $7,200,000 of EBITDA.  At March 31 of each fiscal year
      following the fiscal year ending September 30, 2005 in which the obligations
      under the Notes remain outstanding, Acquisition Corp., KES Acquisition and
      Atacama KES are collectively required to have, on a consolidated basis, in
      excess of $3,000,000 of EBITDA for the six months then ended. Effective
      September 23, 2005, the holders of the Notes executed an agreement to amend
      the
      Notes to eliminate the requirement that Acquisition Corp., KES Acquisition
      and
      Atacama KES collectively have, on a consolidated basis, in excess of $4,000,000
      of EBITDA for the nine months ending September 30, 2005. The Company was in
      compliance with this minimum EBITDA requirement for the nine months ended June
      30, 2006.




The
      holders of each share of 13% Series A Preferred Stock are entitled to receive
      a
      cumulative dividend at an annual rate of 13% of the sum 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 redeemable out of, and to the extent of, legally available
      funds, at a redemption price equal to the sum of $1,000 and all accrued but
      unpaid dividends on the earlier to occur of (i) any liquidation of Acquisition
      Corp., (ii) the occurrence of an event of default under the Note Purchase
      Agreement pursuant to which the Notes were issued or (iii) the first anniversary
      of Acquisition Corp.’s full and complete repayment of the Notes. As of September
      30, 2005, the balance outstanding on the 13% Series A Preferred Stock was
      $24,733,000, and related accrued dividends payable were $1,885,129. As of June
      30, 2006, the balance outstanding on the 13% Series A Preferred Stock was
      $25,000,000 and related accrued dividends payable were $4,336,301.





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





23


Subsequent
      to the acquisition of the Mill by the Sellers, KES Acquisition issued an
      aggregate of $7,000,000 of subordinated promissory notes to the Sellers and
      certain of their respective affiliates (the “Subordinated Promissory Notes”).
      The proceeds from the Subordinated Promissory Notes were used to accelerate
      the
      development and expansion of the Mill’s operations. The Subordinated Promissory
      Notes bear interest at the rate of 12% per annum, with interest payable monthly,
      subject to compliance with various agreements and covenants, are secured by
      a
      subordinated security interest in all of the assets of KES Acquisition, and
      are
      subject to an Intercreditor and Subordination Agreement dated March 24, 2004
      with GECC. When originally issued, principal and interest were due and payable
      upon the earlier to occur of (i) an event of default under the Loan and Security
      Agreement with GECC or (ii) each note’s respective due date, which ranged from
      March 31, 2005 to December 31, 2005. As of September 30, 2005, the due dates
      of
      the notes had all been extended to December 31, 2006, if not repaid earlier.
      At
      September 30, 2005, accrued interest payable with respect to the Subordinated
      Promissory Notes was $1,085,753. At June 30, 2006, accrued interest payable
      with
      respect to the Subordinated Promissory Notes was $209,425.




Related
      parties with respect to this transaction are summarized as follows: Robert
      Scott
      Fritz, a director of YouthStream, is an investor in KES Holdings. Hal G. Byer,
      another director of YouthStream, is an employee of affiliates of Libra/KES
      Investment I, LLC ("Libra/KES"), the Manager of KES Holdings, and has an
      economic interest in KES Holdings through his relationship with Libra
      Securities, LLC ("Libra Securities"). Jess M. Ravich, a director of YouthStream
      effective as of June 26, 2006, is a principal of Libra/KES. In addition,
      affiliates of Mr. Ravich, including a trust for the benefit of Mr. Ravich and
      certain of his family members (the “Ravich Trust”) are investors in KES
      Holdings. Mr. Ravich, either directly or through the Ravich Trust, holds
      1,860,000 shares of YouthStream's common stock, warrants to purchase 500,000
      shares of YouthStream's common stock exercisable through August 31, 2008,
      1,000,000 shares of YouthStream's redeemable preferred stock and an option
      to
      purchase 200,000 shares of YouthStream’s common stock exercisable through June
      26, 2013, which was issued to Mr. Ravich under YouthStream’s 2000 Stock Option
      Incentive Plan in connection with his election to the Board of Directors.
      Through his positions at Libra/KES, Mr. Ravich managed the business of KES
      Acquisition through February 28, 2005. Subordinated Promissory Notes with a
      principal amount of $1,650,000 and $450,000 are payable to the Ravich Trust
      and
      Libra Securities Holdings, LLC, the parent of Libra Securities,
      respectively. Mr. Fritz and Mr. Byer have each previously acquired an option
      from the Ravich Trust for $2,500 ($0.04 per share) to purchase 62,500 shares
      of
      YouthStream's redeemable preferred stock issued to the Ravich Trust in January
      2003, exercisable at $0.36 per share until December 31, 2006 or earlier upon
      the
      occurrence of certain events.





The
      Acquisition was accounted for as a purchase in accordance with SFAS No. 141,
      “Business Combinations”, and in accordance with Emerging Issues Task Force
      (EITF) No. 88-16, “Basis in Leveraged Buyout Transactions”. As a result of the
      substantial and continuing relationships between YouthStream and the Sellers,
      and the provisions of EITF 88-16 that are required to be considered when
      determining the extent of fair value/predecessor basis to be used in recording
      the transaction, the Acquisition has been recorded at predecessor basis. Since
      the debt and equity held by the Sellers represented almost the entire amount
      of
      capital at risk both before and after the Acquisition, the application of the
      “monetary test” specified in Section 3 of EITF 88-16, which limits the portion
      of the purchase consideration that can be valued at fair value to the percentage
      of the total consideration that is monetary, was utilized by the Company in
      determining to record the transaction at predecessor basis. The excess of the
      purchase price over predecessor basis of the net assets acquired has been
      reflected as a deemed distribution of $63,104,423 to the Sellers at the date
      of
      acquisition in the consolidated financial statements.





For
      taxable periods beginning after February 28, 2005, Acquisition Corp. and Atacama
      KES are included in the consolidated federal income tax return filed by
      YouthStream as the common parent.  Acquisition Corp. and Atacama KES have
      entered into a Tax Sharing Agreement with YouthStream, pursuant to which they
      have agreed to pay YouthStream an amount equal to 50% of their respective
      "separate company tax liability", subject to compliance with the GECC secured
      line of credit.  The term "separate company 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, minimum
      tax and other items applicable to such subsidiary in connection with the
      determination of the subsidiary's tax liability), which such subsidiary
      would have incurred if its federal income tax liability for the periods during
      which it is includible in a consolidated federal income tax return with
      YouthStream were determined generally in the same manner in which its
      separate return liability would have been calculated under Section 1552(a)(2)
      of
      the Internal Revenue Code of 1986, as amended.  YouthStream has
      approximately $255,000,000 of federal net operating loss carryovers currently
      available to offset the consolidated federal taxable income of the affiliated
      group in the future.





24


The
      total
      purchase price of $65,000,000, as well as the terms and conditions of the Notes
      and 13% Series A Preferred Stock issued to the Sellers, was determined to be
      at
      fair value based on reports prepared by an independent valuation firm.





The
      following is a summary of the assets acquired and liabilities assumed at
      predecessor basis at February 28, 2005.





Assets
                Acquired:Cash
            
            $
            913,194Accounts
                receivable
            
            
            10,781,836Allowance
                for doubtful accounts
            
            
            (328,351
            )Inventories
            
            
            18,762,218Prepaid
                expenses and other current assets
            
            
            904,271Property,
                plant and equipment
            
            
            6,630,012Accumulated
                depreciation and amortization
            
            
            (639,254
            )Due
                from YouthStream Acquisition Corp.
            
            
            187,702Other
                non-current assets
            
            
            721,393Total
                assets acquired
            
            
            37,933,021








Liabilities
                Assumed:Accounts
                payable
            
            
            9,566,327Accrued
                expenses
            
            
            1,267,016Accrued
                interest payable
            
            
            593,260Deferred
                rent
            
            
            165,413Subordinated
                promissory notes payable
            
            
            7,000,000Line
                of credit
            
            
            15,495,095Equipment
                contract payable
            
            
            291,223Capital
                lease obligation
            
            
            1,877,179Total
                liabilities assumed
            
            
            36,255,513Net
                assets acquired
            
            
            1,677,508Adjustment
                to recognize minority interest
            
            
            (331,981
            )$
            1,345,527Total
                purchase consideration, net of intercompany eliminations of 2.67%
                interest
                held by KES Holdings:8%
                Subordinated secured promissory notes payable
            
            $
            39,493,00013%
                Series A preferred stock
            
            
            24,733,000Net
                purchase consideration
            
            
            64,226,000Minority
                interests in equity
            
            
            223,950Adjustment
                to record deemed distribution to Sellers
            
            
            (63,104,423
            )$
            1,345,527





25


The
      amount due from YouthStream Acquisition Corp. of $187,702 represents costs
      incurred by KES Acquisition with respect to the Acquisition, which were included
      in the $1,171,406 of transaction costs related to the Acquisition charged to
      operations during the year ended September 30, 2005.





As
      of
      September 30, 2004, the Company had incurred $175,144 of costs with respect
      to
      the Acquisition, which were presented as deferred costs in the Company’s
      consolidated balance sheet at such date. These costs were included in the
      $1,171,406 of transaction costs related to the Acquisition charged to operations
      during the year ended September 30, 2005.





Minority
      interest - related parties was $430,931 on February 28, 2005. For the year
      ended
      September 30, 2005, the net loss of Acquisition Corp. (an 80.01% consolidated
      subsidiary) allocable to the 19.99% minority shareholders was $681,698, but
      the
      reduction to minority interest - related parties was limited to the balance
      at
      February 28, 2005 of $430,931. Accordingly, the remainder of the net loss of
      Acquisition Corp. allocable to the 19.99% minority shareholders for the year
      ended September 30, 2005 of $250,767 was included in the Company’s consolidated
      statement of operations for the year ended September 30, 2005, and will be
      recovered to the extent that Acquisition Corp. generates net income in future
      periods. For the three months and nine months ended June 30, 2006, net income
      allocable to the 19.99% minority shareholders was $26,210 and $56,439,
      respectively.





**Pro
      Forma Information**





The
      following pro forma operating data shown below presents the results of
      operations for the three months and nine months ended June 30, 2005, as if
      the
      Acquisition had occurred on the last day of the immediately preceding fiscal
      period. Accordingly, transaction costs related to the Acquisition are not
      included in the net loss from continuing operations shown below. The pro forma
      results are not necessarily indicative of the financial results that might
      have
      occurred had the Acquisition actually taken place on the respective dates,
      or of
      future results of operations. P ro
      forma
      information for the three months and nine months ended June 30, 2005 is
      summarized as follows:





**Three**
              **Months**
              **Ended**
              **June
                30,**
              **2005**
            
            **Nine**
              **Months**
              **Ended**
              **June
                30,**
              **2005**Net
                sales
            
            $
            29,127,566
            
            $
            82,865,839Cost
                of sales
            
            
            27,194,499
            
            
            77,993,132Gross
                margin
            
            
            1,933,089
            
            
            4,872,707Operating
                income
            
            
            638,552
            
            
            1,066,767Interest
                expense
            
            
            (2,371,888
            )
            
            (7,075,831
            )Minority
                interest
            
            
            218,439
            
            
            218,439Net
                loss from continuing operations
            
            $
            (1,500,737
            )
            $
            (5,693,104
            )Basic
                and diluted net loss per common share
            
            $
            (0.04
            )
            $
            (0.15
            )Weighted
                average common shares outstanding
            
            
            39,242,251
            
            
            39,242,251








**Critical
      Accounting Policies and Estimates**





The
      Company prepared its financial statements in accordance with accounting
      principles generally accepted in the United States. The preparation of these
      financial statements requires the use of estimates and assumptions that affect
      the reported amounts of assets and liabilities and the disclosure of contingent
      assets and liabilities at the date of the financial statements and the reported
      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 experience and on various factors that
      are
      believed to be reasonable under the circumstances. Actual results may differ
      from these estimates as a result of different assumptions or
      conditions.





26


The
      following critical accounting policies affect the more significant judgments
      and
      estimates used in the preparation of the Company’s financial statements.




Revenue
      Recognition




The
      Company recognizes revenue when there is persuasive evidence that an arrangement
      exists, delivery of the product has occurred and title has passed, the selling
      price is both fixed and determinable, and collectibility is reasonably assured,
      all of which generally occur either upon shipment of the Company’s product or
      delivery of the product to the destination specified by the
      customer.





Accounts
      Receivable





The
      Company grants credit to its customers generally in the form of short-term
      trade
      accounts receivable. Management evaluates the credit risk of its customers
      utilizing historical data and estimates of future performance. Accounts
      receivable are stated at the amount management expects to collect from
      outstanding balances. When appropriate, management provides for probable
      uncollectible amounts through a provision for doubtful accounts and an
      adjustment to a valuation allowance. Management reviews and adjusts this
      allowance periodically based on the aging of accounts receivable balances,
      historical write-off experience, customer concentrations, customer
      creditworthiness, and current industry and economic trends. Balances that are
      still outstanding after management has used reasonable collection efforts are
      written off through a charge to the valuation allowance and a credit to accounts
      receivable.





Inventories





Inventories
      are comprised of raw materials (consisting of billets and scrap metal),
      semi-finished goods and finished goods. Inventory costs include material, labor
      and manufacturing overhead. Inventories are valued at the lower of average
      cost
      or market. The average cost of the billets and scrap metal is adjusted
      quarterly.





Impairment
      of Assets





Long-lived
      assets are evaluated for impairment whenever events or changes in circumstances
      indicate that the carrying amount of an asset may not be recoverable in
      accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
      Long-Lived Assets”. An asset is considered impaired if its carrying amount
      exceeds the future net cash flow the asset is expected to generate. If an asset
      is considered to be impaired, the impairment to be recognized is measured by
      the
      amount by which the carrying amount of the asset exceeds its fair market value.
      The recoverability of long-lived assets is assessed by determining whether
      the
      unamortized balances can be recovered through undiscounted future net cash
      flows
      of the related assets. The amount of impairment, if any, is measured based
      on
      projected discounted future net cash flows using a discount rate reflecting
      the
      Company’s average cost of capital.





Income
      Taxes





The
      Company accounts for income taxes in accordance with SFAS No. 109,
“Accounting for Income Taxes”. Under this method, deferred income taxes are
      provided for differences between the carrying amounts of the Company’s assets
      and liabilities for financial reporting purposes and the amounts used for income
      tax purposes using expected tax rates in effect for the year in which those
      temporary differences are expected to be recovered or settled. KES Acquisition
      Company is a limited liability company and as such does not provide for federal
      and state income taxes. Rather, its income is taxed to its members.





The
      Company records a valuation allowance to reduce its deferred tax assets to
      the
      amount that is more likely than not to be realized. In the event the Company
      was
      to determine that it would be able to realize its deferred tax assets in the
      future in excess of its recorded amount, an adjustment to the deferred tax
      assets would be credited to operations in the period such determination was
      made. Likewise, should the Company determine that it would not be able to
      realize all or part of its deferred tax assets in the future, an adjustment
      to
      the deferred tax assets would be charged to operations in the period such
      determination was made.





27


**Recent
      Accounting Pronouncements and Developments**





In
      May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error
      Corrections” (“SFAS No. 154”). SFAS No. 154 is a replacement of APB
      Opinion No. 20, “Accounting Changes” and SFAS No. 3, “Reporting
      Accounting Changes in Interim Financial Statements - (an Amendment of APB
      Opinion No. 28)” and provides guidance on the accounting for and reporting
      of accounting changes and error corrections. SFAS No. 154 establishes
      retrospective application as the required method for reporting a change in
      accounting principle, and provides guidance for determining whether
      retrospective application of a change in accounting principle is impracticable
      and for reporting a change when retrospective application is impracticable.
      Retrospective application is the application of a different accounting principle
      to a prior accounting period as if that principle had always been used or as
      the
      adjustment of previously issued financial statements to reflect a change in
      the
      reporting entity. SFAS No. 154 also addresses the reporting of the
      correction of an error by restating previously issued financial statements.
      SFAS
      No. 154 is effective for accounting changes and error corrections occurring
      in fiscal years beginning after December 15, 2005. The adoption of SFAS No.
      154 is not expected to have any impact on the Company’s financial statement
      presentation or disclosures.





In
      June
      2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48
      provides criteria for the recognition, measurement, presentation and disclosure
      of uncertain tax positions that has an effect on a company’s financial
      statements accounted for in accordance with SFAS No. 109, “Accounting for Income
      Taxes”, as a result of positions taken or expected to be taken in a company’s
      tax return. A tax benefit from an uncertain position may be recognized only
      if
      it is “more likely than not” that the position is sustainable based on its
      technical merits. The provisions of FIN 48 are effective for fiscal years
      beginning after December 15, 2006. The Company is currently evaluating the
      potential effect that the adoption of FIN 48 will have on the Company's
      financial statement presentation and disclosures.





On
      September 22, 2005, the Securities and Exchange Commission ("SEC") issued rules
      to delay by one year the required reporting by management on internal controls
      over financial reporting for non-accelerated filers. The new SEC rule extends
      the compliance date for such registrants to fiscal years ending on or after
      July
      15, 2007. Accordingly, the Company qualifies for the deferral to comply with
      the
      internal control reporting requirements until its fiscal year ending September
      30, 2007. On August 9, 2006, the SEC issued two releases that when adopted
      are
      designed to grant smaller public companies further relief from compliance with
      Section 404 of the Sarbanes-Oxley Act of 2002.





**Results
      of Operations**





Effective
      February 25, 2004, the Company’s wholly-owned subsidiary, Beyond the Wall, Inc.
      (“BTW”), sold substantially all of its assets and operations to a group
      unaffiliated with the Company (which included certain former management of
      BTW).
      Effective February 28, 2005, the Company acquired the Mill, and the operations
      of the Mill have been consolidated commencing March 1, 2005. Accordingly, for
      the period from March 2004 through February 2005, the Company did not have
      any
      revenue-generating operations.





For
      the
      nine months ended June 30, 2005, the Company’s results of operations only
      include the operations of the Mill for the four months March through June 2005.





As
      a
      result of the acquisition of the Mill, the Company’s financial statements for
      periods ending after March 1, 2005 are materially different from and are not
      comparable to its financial statements prior to that date.




**Three
      Months Ended June 30, 2006 and 2005**





Net
      Sales. Net sales were $34,284,157 for the three months ended June 30, 2006,
      an
      average of $11,428,052 per month, as compared to net sales of $29,127,566 for
      the three months ended June 30, 2005, an average of $9,709,189 per month. The
      increase in net sales in 2006 as compared to 2005 reflects a general improvement
      in the steel industry as well as the Company’s decision to focus on selling
      higher margin products.





28


Cost
      of
      Sales. Cost of sales was $29,407,919 for the three months ended June 30, 2006,
      resulting in gross profit of $4,876,238 and a gross profit margin of 14.2%.
      Cost
      of sales was $27,194,477 for the three months ended June 30, 2005, resulting
      in
      a gross profit of $1,933,089 and a gross profit margin of 6.6%. The increase
      in
      gross profit margin in 2006 as compared to 2005 reflects the Company’s decision
      to focus on selling higher margin products.





Selling
      Expenses. For the three months ended June 30, 2006, selling expenses were
      $389,025 or 1.1% of sales, as compared to selling expenses of $300,486 or 1.0%
      of sales for the three months ended June 30, 2005. Selling expenses consist
      primarily of sales commissions and personnel-related costs.





General
      and Administrative Expenses. For the three months ended June 30, 2006, general
      and administrative expenses were $1,559,607 or 4.5% of sales, as compared to
      general and administrative expenses of $994,051 or 3.4% of sales for the three
      months ended June 30, 2005. General and administrative expenses consist
      primarily of management and office compensation and related costs, legal and
      accounting fees, and insurance costs at both corporate facilities and the Mill.





Income
      from Operations. Income from operations was $2,927,606 for the three months
      ended June 30, 2006, as compared to income from operations of $638,552 for
      the
      three months ended June 30, 2005.





Interest
      Income. Interest income was $119 for the three months ended June 30, 2006,
      as
      compared to $9,944 for the three months ended June 30, 2005.





Interest
      Expense. For the three months ended June 30, 2006, interest expense was
      $2,324,794, which included interest expense related to the 8% notes payable
      of
      $850,711 and the 13% Series A Preferred Stock of $810,274 issued in conjunction
      with the acquisition of the Mill, the 12% notes payable of $209,325 and the
      4%
      notes payable of $11,040.





For
      the
      three months ended June 30, 2005, interest expense was $2,371,888, which
      included interest expense related to the 8% notes payable of $787,696 and the
      13% Series A Preferred Stock of $801,621 issued in conjunction with the
      acquisition of the Mill, the 12% notes payable of $209,425 and the 4% notes
      payable of $10,416.





Transaction
      Costs Related to KES Acquisition. The
      Company incurred $280,773 of costs with respect to the acquisition of the Mill,
      which were charged to operations during the three months ended June 30,
      2005 .





Other
      Income (Expense). For the three months ended June 30, 2006, other income was
      $2,249, as compared to other income of $4,216 for the three months ended June
      30, 2005.





Income
      (Loss) before Income Taxes and Minority Interest. Income before income taxes
      and
      minority interest was $605,180 for the three months ended June 30, 2006, as
      compared to a loss before income taxes and minority interest of $(1,999,949)
      for
      the three months ended June 30, 2005.





Income
      Taxes. Income
      tax expense was $146,000 for the three months ended June 30, 2006, consisting
      of
      a provision for state income taxes. No federal income tax provision was provided
      for the three months ended June 30, 2006 as a result of the utilization of
      the
      Company’s net operating loss carryforwards. No federal or state income tax
      provision was provided for the three months ended June 30, 2005 due to the
      Company reporting a pre-tax operating loss for such period.





Income
      (Loss) before Minority Interest. Income before minority interest was $459,180
      for the three months ended June 30, 2006, as compared to a loss before minority
      interest of $(1,999,949) for the three months ended June 30, 2005.





29


Minority
      Interest - Related Parties. Minority interest - related parties was $0 for
      the
      three months ended June 30, 2006 and $162,820 for the three months ended June
      30, 2005. Minority
      interest - related parties was $430,931 on February 28, 2005. For the year
      ended
      September 30, 2005, the net loss of Acquisition Corp. (an 80.01% consolidated
      subsidiary) allocable to the 19.99% minority shareholders was $681,698, but
      the
      reduction to minority interest - related parties was limited to the balance
      at
      February 28, 2005 of $430,931. Accordingly, the remainder of the net loss of
      Acquisition Corp. allocable to the 19.99% minority shareholders for the year
      ended September 30, 2005 of $250,767 was included in the Company’s consolidated
      statement of operations for the year ended September 30, 2005, and will be
      recovered to the extent that Acquisition Corp. generates net income in future
      periods. For the three months ended June 30, 2006, net income allocable to
      the
      19.99% minority shareholders was $26,210.





Net
      Income (Loss). Net income was $459,180 for the three months ended June 30,
      2006,
      as compared to a net loss of $(1,837,129) for the three months ended June 30,
      2005.





**Nine
      Months Ended June 30, 2006 and 2005**





Net
      Sales. Net sales were $104,287,949 for the nine months ended June 30, 2006,
      an
      average of $11,587,550 per month, as compared to net sales of $38,261,343 for
      the nine months ended June 30, 2005. If the Company had owned the Mill for
      the
      nine months ended June 30, 2005, pro forma net sales would have been
      $82,865,839, an average of $9,207,315 per month. The increase in net sales
      in
      2006 as compared to 2005 reflects a general improvement in the steel industry
      as
      well as the Company’s decision to focus on selling higher margin products.





Cost
      of
      Sales. Cost of sales was $89,887,425 for the nine months ended June 30, 2006,
      resulting in gross profit of $14,400,524 and a gross profit margin of 13.8%.
      Cost of sales was $35,666,705 for the nine months ended June 30, 2005, resulting
      in a gross profit of $2,594,638 and a gross profit margin of 6.8%. If the
      Company had owned the Mill for the nine months ended June 30, 2005, pro forma
      gross profit would have been $4,872,707 and the gross profit margin would have
      been 5.9%. The increase in gross profit margin in 2006 as compared to 2005
      reflects the Company’s decision to focus on selling higher margin products.





Selling
      Expenses. For the nine months ended June 30, 2006, selling expenses were
      $1,184,781 or 1.1% of sales, as compared to selling expenses of $412,544 or
      1.1%
      of sales for the nine months ended June 30, 2005. Selling expenses consist
      primarily of sales commissions and personnel-related costs.





General
      and Administrative Expenses. For the nine months ended June 30, 2006, general
      and administrative expenses were $4,557,136 or 4.4% of sales, as compared to
      general and administrative expenses of $1,593,208 or 4.2% of sales for the
      nine
      months ended June 30, 2005. General and administrative expenses consist
      primarily of management and office compensation and related costs, legal and
      accounting fees, and insurance costs at both corporate and the Mill.





Income
      from Operations. Income from operations was $8,658,607 for the nine months
      ended
      June 30, 2006, as compared to income from operations of $588,886 for the nine
      months ended June 30, 2005.





Interest
      Income. Interest income was $321 for the nine months ended June 30, 2006, as
      compared to $35,478 for the nine months ended June 30, 2005.





Interest
      Expense. For the nine months ended June 30, 2006, interest expense was
      $7,107,146, which included interest expense related to the 8% notes payable
      of
      $2,456,894 and the 13% Series A Preferred Stock of $2,451,172 issued in
      conjunction with the acquisition of the Mill, the 12% notes payable of $628,174
      and the 4% notes payable of $32,888.





For
      the
      nine months ended June 30, 2005, interest expense was $3,208,954, which included
      interest expense related to the 8% notes payable of $1,056,032 and the 13%
      Series A Preferred Stock of $1,074,700 issued in conjunction with the
      acquisition of the Mill, the 12% notes payable of $280,767 and the 4% notes
      payable of $31,952.





Transaction
      Costs Related to KES Acquisition. The
      Company incurred $1,073,727 of costs with respect to the acquisition of the
      Mill, which were charged to operations during the nine months ended June 30,
      2005. Included in such costs was $187,702 of transaction costs incurred by
      KES
      Acquisition.





30


Other
      Income (Expense). For the nine months ended June 30, 2006, other income was
      $88,048, as compared to other expense of $(29,489) for the nine months ended
      June 30, 2005.





Income
      (Loss) before Income Taxes and Minority Interest. Income before income taxes
      and
      minority interest was $1,639,830 for the nine months ended June 30, 2006, as
      compared to a loss before income taxes and minority interest of $(3,684,806)
      for
      the nine months ended June 30, 2005.





Income
      Taxes. Income
      tax expense was $274,000 for the nine months ended June 30, 2006, consisting
      of
      a provision for state income taxes. No federal income tax provision was provided
      for the nine months ended June 30, 2006 as a result of the utilization of the
      Company’s net operating loss carryforwards. No federal or state income tax
      provision was provided for the nine months ended June 30, 2005 due to the
      Company reporting a pre-tax operating loss for such period.





Income
      (Loss) before Minority Interest. Income before minority interest was $1,365,830
      for the nine months ended June 30, 2006, as compared to a loss before minority
      interest of $(3,684,806) for the nine months ended June 30, 2005.





Minority
      Interest - Related Parties. Minority interest - related parties was $0 for
      the
      nine months ended June 30, 2006 and $430,931 for the nine months ended June
      30,
      2005. Minority
      interest - related parties was $430,931 on February 28, 2005. For the year
      ended
      September 30, 2005, the net loss of Acquisition Corp. (an 80.01% consolidated
      subsidiary) allocable to the 19.99% minority shareholders was $681,698, but
      the
      reduction to minority interest - related parties was limited to the balance
      at
      February 28, 2005 of $430,931. Accordingly, the remainder of the net loss of
      Acquisition Corp. allocable to the 19.99% minority shareholders for the year
      ended September 30, 2005 of $250,767 was included in the Company’s consolidated
      statement of operations for the year ended September 30, 2005, and will be
      recovered to the extent that Acquisition Corp. generates net income in future
      periods. For the nine months ended June 30, 2006, net income allocable to the
      19.99% minority shareholders was $56,439.





Net
      Income (Loss). Net income was $1,365,830 for the nine months ended June 30,
      2006, as compared to a net loss of $(3,253,875) for the nine months ended June
      30, 2005.





**Liquidity
      and Capital Resources - June 30, 2006**





**Overview**





On
      March
      9, 2005, YouthStream completed the acquisition of the Mill. In connection with
      the Company’s acquisition and consolidation of the Mill, the Company also
      acquired $913,194 of cash. The Company used substantially all of its available
      cash resources to fund the acquisition of the Mill, including its contribution
      of an aggregate of $500,000 of cash to Acquisition Corp. and the payment of
      the
      costs related to the transaction. Accordingly, the Company will require
      additional operating capital to fund corporate general and administrative
      expenses, which the Company expects to obtain primarily through periodic tax
      sharing payments from Acquisition Corp. and Atacama KES. The Mill relies on
      cash
      flows from operations to support a secured line of credit with GECC to fund
      its
      separate operations. As a result of improved operating performance of the Mill
      beginning in late 2005, the Company has been able to increase borrowing
      availability under this line of credit.





As
      of
      June 30, 2006 and September 30, 2005, the balance outstanding on the line of
      credit was $9,890,679 and $19,009,379, respectively, which has been presented
      as
      a current liability in the consolidated balance sheet at such date due to the
      collateral securing such line of credit consisting primarily of current assets
      and the continuing uncertainty with respect to the Company’s ability to maintain
      compliance under the terms and conditions of the line of credit.





At
      March
      31, 2005, KES Acquisition was not in compliance with the fixed charge coverage
      ratio based on its consolidated financial statements as originally filed, in
      part relating to changes to its accounting procedures as a result of the review
      of its financial statements conducted in conjunction with its acquisition by
      YouthStream, and subsequently received a waiver of default from the lender.
      At
      June 30, 2005, KES Acquisition was in compliance with the fixed charge coverage
      ratio based on its consolidated financial statements as originally filed.
      However, KES Acquisition was not in compliance with the fixed charge coverage
      ratio at June 30, 2005 based on its revised consolidated financial statements,
      as a result of a determination by management to re-characterize a lease for
      certain equipment used by KES Acquisition as a capital lease rather than an
      operating lease. In addition, KES Acquisition was not in compliance with its
      obligation to deliver audited financial statements in the form and time period
      as set forth in the loan agreement. On June 26, 2006, the Company received
      a waiver of default from the lender with respect to the fixed charge coverage
      ratio for the restated March 31, 2005 and June 30, 2005 interim financial
      statements, as well as with respect to the form and timeliness of the September
      30, 2005 annual audited financial statements being provided to GECC.





31


At
      June
      30, 2006, March 31, 2006, December 31, 2005 and September 30, 2005, KES
      Acquisition was in compliance with the fixed charge coverage ratio based on
      its
      consolidated financial statements.





In
      the
      event that KES Acquisition is not in compliance with the fixed charge coverage
      ratio in any future period, the Company intends to seek a further waiver of
      any
      default from the lender, and if no such waiver is received, the lender would
      have the right to accelerate the maturity of the line of credit at that time.





To
      the
      extent that the Mill generates taxable income in the future, the Tax Sharing
      Agreement with Acquisition Corp. and Atacama KES will generate cash payments
      to
      YouthStream equal to 50% of their respective “separate company tax liability”,
      subject to compliance with the GECC secured line of credit. The tax sharing
      payment due to YouthStream for the three months ended September 30, 2005 was
      $334,826, which was received in December 2005. The tax sharing payment due
      to
      YouthStream for the three months ended December 31, 2005 was $382,290, which
      was
      received in February 2006. The
      tax
      sharing payment due to YouthStream for the three months ended March 31, 2006
      was
      $387,607, which was received, net of certain intercompany offsets, in July
      2006. The tax
      sharing payment due to YouthStream for the three months ended June 30, 2006
      was
      $500,027, which was received, net of certain offsets, in August 2006.
      YouthStream has approximately $255,000,000 of federal net operating loss
      carryovers currently available to offset any federal income tax liability of
      Acquisition Corp and Atacama KES in subsequent periods. YouthStream expects
      that
      its federal net operating loss carryovers will be sufficient to absorb most
      of
      any future federal income tax liability of Acquisition Corp. and Atacama KES.





The
      Mill
      restarted operations in January 2004 after being acquired by the previous
      owners, and has incurred losses until recently. The long-term economic viability
      of the Mill and its ability to fund its operations and debt service
      requirements, including maintaining compliance with various debt covenants
      and
      servicing the interest and principal obligations on the Notes and the dividends
      and redemption features on the 13% Series A Preferred Stock issued in connection
      with the acquisition of the Mill, is dependent on various internal and external
      factors, including the Mill’s ability to operate on a sustained basis at 80% or
      more of its annual capacity of 200,000 tons per year, as currently configured.
      To the extent that the Mill is not able to maintain this operating threshold,
      the ability of the Mill to generate sufficient cash flows to fund its operations
      and debt service requirements and maintain compliance with various debt
      covenants may be impaired. In such event, the Company may have to consider
      a
      formal or informal restructuring or reorganization, including a sale or other
      disposition of its assets.





**Going
      Concern**





The
      Company has incurred recurring operating losses since its inception. The
      Company incurred
      a net loss of $3,430,562 and a negative cash flow from operating activities
      of
      $4,300,395 for the year ended September 30, 2005, and had an accumulated deficit
      of $347,265,398 and a stockholders' deficiency of $79,600,350 at September
      30,
      2005. As
      of
      September 30, 2005, the Company had insufficient capital to fund all of its
      obligations on a consolidated basis. These factors raise substantial doubt
      about
      the Company’s ability to continue as a going concern. The consolidated financial
      statements do not include any adjustments to reflect the possible future effect
      of the recoverability and classification of assets or the amounts and
      classifications of liabilities that may result from the outcome of this
      uncertainty.





On
      March
      9, 2005, the Company completed the acquisition of a steel mini-mill located
      in
      Ashland, Kentucky. The Company utilized substantially all of its available
      cash
      resources to fund such acquisition and will require additional operating capital
      to fund corporate general and administrative expenses, which the Company expects
      to obtain primarily through periodic tax sharing payments from Acquisition
      Corp.
      and Atacama KES. In addition, the steel mini-mill restarted operations in late
      January 2004 after being acquired by the previous owners, and until recently
      has
      incurred losses. For the year ended September 30, 2005, operating income was
      $2,691,955 (which included the operations of the steel mini-mill for the seven
      month period March through September 2005), exclusive of interest expense.
      For
      the three months and nine months ended June 30, 2006, operating income was
      $2,927,606 and $8,658,607, respectively, exclusive of interest expense. The
      steel mini-mill relies on cash flows from operations to support a secured line
      of credit with GECC to fund its separate operations. As a result of improved
      operating performance of the steel mini-mill beginning in late 2005, the Company
      has been able to increase borrowing availability under this line of credit.





32


Based
      on
      its current level of operations, the Company believes that its current cash
      resources provided by operations and the secured line of credit will be adequate
      to fund its operations through September 30, 2006. However, to the extent the
      Company’s estimates are inaccurate or its assumptions are incorrect, the Company
      may not have sufficient cash resources to fund its operations. In such event,
      the Company may have to consider a formal or informal restructuring or
      reorganization, including a sale or other disposition of its
      assets.





The
      Company’s management may also consider various strategic alternatives in the
      future, including the acquisition of new business opportunities, which may
      be
      from related or unrelated parties.  However, there can be no assurances
      that such efforts will ultimately be successful.  The Company may finance
      any acquisitions through a combination of debt and/or equity
      securities.





Operating
      Activities. During the nine months ended June 30, 2006, the Company generated
      $9,509,715 of cash from operating activities . During
      the nine months ended June 30, 2005, the Company used $2,629,587 of cash in
      operating activities, both to fund the corporate overhead of YouthStream and
      to
      fund the operations of the Mill for the four month period March through June
      2005.





Investing
      Activities. During the nine months ended June 30, 2005, net cash provided by
      investing activities was $247,227, which consisted of principal and interest
      payments on the Beyond the Wall note receivable that the Company received in
      the
      February 2004 sale of the assets and operations of Beyond the Wall. During
      the
      nine months ended June 30, 2006, the Company did not have any investing
      activities.





Financing
      Activities. During the nine months ended June 30, 2006, net cash utilized in
      financing activities was $9,574,803, consisting of $9,193,700 to reduce
      borrowings under the secured line of credit with GECC, the repayment of $50,000
      of short-term notes payable to certain directors, and payments on an equipment
      contract payable and capital lease obligation of $331,103. During the nine
      months ended June 30, 2005, net cash generated by financing activities was
      $1,279,243, consisting of $1,410,683 of borrowings under the secured line of
      credit with GECC, reduced by payments on an equipment contract payable and
      capital lease obligation of $131,440.





**Summary
      of Restricted and Unrestricted Assets, Liabilities and
      Equity**





Almost
      all of the Company’s net assets are owned by KES Acquisition, a consolidated
      subsidiary.  As a result of various contractual restrictions contained in
      various financing agreements (as previously described) and documents relating
      to
      the Acquisition, there are limits on the Company’s ability to transfer assets
      from KES Acquisition to Youthstream, whether in the form of loans and advances,
      cash dividends, tax-sharing payments, or otherwise, without notice to and/or
      consent of one or more third parties.





A
      summary
      of the Company's restricted and unrestricted assets, liabilities and equity
      at
      June 30, 2006 (unaudited) and at September 30, 2005 is presented
      below.





June
                30, 2006
            
            **Unrestricted**
            
            **Restricted**
            
            **As
                Reported**Current
                assets
            
            $
            878,875
            
            $
            32,677,835
            
            $
            33,556,710Property,
                plant and equipment, net
            
            
            -
            
            
            5,020,120
            
            
            5,020,120Other
                assets
            
            
            -
            
            
            462,130
            
            
            462,130Total
                assets
            
            $
            878,875
            
            $
            38,160,085
            
            $
            39,038,960Current
                liabilities
            
            $
            10,182,245
            
            $
            28,823,608
            
            $
            39,005,853Non-current
                liabilities
            
            
            77,306,610
            
            
            1,221,267
            
            
            78,527,877Equity:Retained
                earnings (accumulated deficit)
            
            
            (352,337,270
            )
            
            6,437,702
            
            
            (345,899,568
            )Other
            
            
            265,727,290
            
            
            1,677,508
            
            
            267,404,798Total
                liabilities and equity
            
            $
            878,875
            
            $
            38,160,085
            
            $
            39,038,960





33





September
                30, 2005
            
            **Unrestricted**
            
            **Restricted**
            
            **As
                Reported**Current
                assets
            
            $
            261,740
            
            $
            35,453,821
            
            $
            35,715,561Property,
                plant and equipment, net
            
            
            -
            
            
            5,567,745
            
            
            5,567,745Other
                assets
            
            
            -
            
            
            638,948
            
            
            638,948Total
                assets
            
            $
            261,740
            
            $
            41,660,514
            
            $
            41,922,254Current
                liabilities
            
            $
            4,224,995
            
            $
            30,411,237
            
            $
            34,636,232Non-current
                liabilities
            
            
            78,257,234
            
            
            8,629,138
            
            
            86,886,372Equity:Retained
                earnings (accumulated deficit)
            
            
            (348,435,183
            )
            
            1,169,785
            
            
            (347,265,398
            )Other
            
            
            266,214,694
            
            
            1,450,354
            
            
            267,665,048Total
                liabilities and equity
            
            $
            261,740
            
            $
            41,660,514
            
            $
            41,922,254








**Principal
      Commitments**





At
      June
      30, 2006, the Company's principal commitments consisted of the following
      obligations:





**Payments
                Due by 12 Month Periods Ending June 30,**
              **(in
                thousands)**Contractual
                cash obligations
            
            **Total**
            
            **2007**
            
            **2008**
            
            **2009**
            
            **2010**
            
            **2011**
            
            **There-after**4%
                notes payable
            
            $
            4,917
            
            $
            ---
            
            $
            ---
            
            $
            ---
            
            $
            ---
            
            $
            4,917
            
            $
            ---12%
                subordinated promissory notes payable
            
            
            7,000
            
            
            7,000
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---8%
                subordinated secured promissory notes payable
            
            
            39,493
            
            
            1,849
            
            
            925
            
            
            925
            
            
            925
            
            
            6,974
            
            
            27,8958%
                subordinated secured promissory notes payable - interest
            
            
            3,159
            
            
            3,159
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---Secured
                line of credit
            
            
            9,891
            
            
            9,891
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---Operating
                leases
            
            
            1,274
            
            
            416
            
            
            390
            
            
            390
            
            
            78
            
            
            ---
            
            
            ---Capital
                lease obligation
            
            
            1,410
            
            
            416
            
            
            483
            
            
            511
            
            
            ---
            
            
            ---
            
            
            ---Equipment
                contact payable
            
            
            193
            
            
            83
            
            
            110
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---Management
                services agreement
            
            
            2,333
            
            
            700
            
            
            700
            
            
            700
            
            
            233
            
            
            ---
            
            
            ---4%
                Series A Preferred Stock subject to mandatory redemption
            
            
            5,269
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            5,269
            
            
            ---13%
                Series A Preferred Stock of subsidiary subject to mandatory redemption,
                excluding accrued dividends
            
            
            26,618
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            ---
            
            
            26,618Total
                contractual cash obligations
            
            $
            101,557
            
            $
            23,514
            
            $
            2,608
            
            $
            2,526
            
            $
            1,236
            
            $
            17,160
            
            $
            54,513





34





At
      June
      30, 2006 and September 30, 2005, the Company did not have any material
      commitments for capital expenditures.





At
      June
      30, 2006 and September 30, 2005, the Company has various short-term commitments
      for the purchase of materials, supplies and energy arising in the ordinary
      course of business which aggregated approximately $7,900,000 and $7,962,000,
      respectively.





**Off-Balance
      Sheet Arrangements**





The
      Company does not have any transactions, obligations or relationships that could
      be considered off-balance sheet arrangements at June 30, 2006 or September
      30,
      2005.








35




**ITEM
      3. CONTROLS AND PROCEDURES**





(a)
      Evaluation of Disclosure Controls and Procedures





The
      certifications of the principal executive officer and the principal financial
      officer (or persons performing similar functions) required by Rules 13a-14
      and
      15d-14 of the Securities Exchange Act of 1934, as amended are filed as exhibits
      to this report. This section of the report contains the information concerning
      the evaluation of the Company's disclosure controls and procedures (as defined
      in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) and changes to
      internal controls over financial reporting (as defined in Securities Exchange
      Act Rules 13a-15(f) and 15d-15(f)) referred to in the certifications and this
      information should be read in conjunction with the certifications for a more
      complete understanding of the topics presented herein.





Disclosure
      controls and procedures are designed to ensure that information required to
      be
      disclosed in the reports filed or submitted by the Company under the Securities
      Exchange Act of 1934 is recorded, processed, summarized and reported, within
      the
      time periods specified in the rules and forms of the Securities and Exchange
      Commission. Disclosure controls and procedures include, without limitation,
      controls and procedures designed to ensure that information required to be
      disclosed in the reports filed under the Securities Exchange Act of 1934 is
      accumulated and communicated to management, including its principal executive
      and financial officers, as appropriate, to allow timely decisions regarding
      required disclosure.





The
      Company carried out an evaluation, under the supervision and with the
      participation of its management, including its principal executive and financial
      officers, of the effectiveness of the design and operation of the Company’s
      disclosure controls and procedures as of the end of the period covered by this
      report. Based upon and as of the date of that evaluation, the Company’s
      principal executive and financial officers concluded that there were material
      weaknesses in the internal controls at the Company’s steel mini-mill acquired
      effective February 28, 2005, the financial statements of which are included
      in
      the consolidated financial statements of the Company from that date forward.
      In
      addition, as a result of this evaluation, the Company’s consolidated financial
      reporting and disclosure controls were also determined to have material
      weaknesses.





Specifically,
      the steel mini-mill lacks adequate accounting systems and controls and
      procedures to process information for inclusion in the Company’s reports filed
      with the Securities and Exchange Commission. Furthermore, the steel mini-mill
      also lacks adequate accounting personnel in general and adequately trained
      accounting personnel in particular in order to be able to process and generate
      the required financial information to be included in the Company’s consolidated
      financial statements on a timely basis. The Company is addressing these issues
      by reviewing and revising its internal accounting policies and procedures.
      The
      Company also intends to increase the resources and personnel allocated to the
      steel mini-mill’s accounting department. The Company expects that the resolution
      of these issues will take several months.





(b)
      Changes in Internal Controls





There
      were no changes in the Company’s internal controls or in other factors that
      could have significantly affected those controls during the fiscal quarter
      ended
      June 30, 2006.





36


**PART
      II****.
      OTHER INFORMATION**








**ITEM
      1. LEGAL PROCEEDINGS**





The
      Company and/or its subsidiary that owned its former operating business, Beyond
      the Wall, have periodically been defendants in various lawsuits and claims
      from
      various trade creditors and former landlords. Based on the Company’s contract
      relating to the sale of the Beyond the Wall assets, certain of these claims
      are
      the responsibility of the buyer of the Beyond the Wall business. The Company
      evaluates its response in each situation based on the particular facts and
      circumstances of a claim. Accordingly, the ultimate outcome of these matters
      cannot be determined at this time and may ultimately result in judgments and
      liens against the Company or its assets. The Company has made sufficient
      accruals for the exposure related to such matters that have been deemed probable
      and reasonably estimable at June 30, 2006 and September 30,
      2005.




KES
      Acquisition was named in a wrongful death lawsuit before the Circuit Court
      of
      Cabell County, West Virginia (the “Court”), which was filed in December 2004.
      The action was brought by Stephanie Harshbarger, individually and as
      Administratrix of the Estate of Chad Harshbarger against Aero-Fab, Inc. and
      KES
      Acquisition. Mr. Harshbarger was an employee of Aero-Fab, Inc., an unaffiliated
      contractor, who died while working at the Mill in April 2004. KES Acquisition
      was defended by its insurance carrier in this action. On July 3, 2006, the
      Court
      dismissed KES Acquisition from the lawsuit, ruling that KES Acquisition was
      not
      within the Court’s jurisdiction. Notwithstanding such Court ruling, the
      plaintiff may appeal the ruling, or file an action against KES Acquisition
      in
      the State of Kentucky, neither of which has occurred to date. The Company does
      not believe that the resolution of this litigation will have a material adverse
      effect on its financial condition or results of operations.





**ITEM
      2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS**





Not
      applicable.





**ITEM
      3. DEFAULTS UPON SENIOR SECURITIES**





Not
      applicable.





**ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**





Not
      applicable.





**ITEM
      5. OTHER INFORMATION**





Not
      applicable.





**ITEM
      6. EXHIBITS**





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





II-1


**SIGNATURES**








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








YOUTHSTREAM
              MEDIA NETWORKS, INC.(Registrant)DATE:
                September 13, 2006
            By:
            /s/
                JOHN SCHEELJohn
                ScheelChief
                Executive OfficerDATE:
                September 13, 2006
            By:
            /s/
                DONALD A. REISENBERGDonald
                A. ReisenbergChief
                Financial Officer











II-2




**EXHIBIT
      INDEX**





3.1
            
            Certificate
                of Incorporation (incorporated by reference to Exhibit 3.1 to the
                Company's Registration Statement on Form SB-2, Registration No. 33-80935,
                filed on March 6, 1996).3.2
            
            Certificate
                of Amendment of Certificate of Incorporation (incorporated by reference
                to
                Exhibit 3.2 to the Company's Registration Statement on Form SB-2,
                Registration No. 33-80935, filed on March 6, 1996).3.3
            
            Certificate
                of Amendment of Certificate of Incorporation (incorporated by reference
                to
                Exhibit 3.3 to the Company's Form 10-KSB for the fiscal year ended
                June
                30, 1998, filed May 27, 1998).3.4
            
            Certificate
                of Designation for Preferred Stock of YouthStream Media Networks,
                Inc.
                (incorporated by reference to Exhibit 99.3 to the Company's Form
                8K filed
                February 7, 2003).3.5
            
            Certificate
                of Correction to the Certificate of Designation of Series A Preferred
                Stock of YouthStream Media Networks, Inc. (incorporated by reference
                to
                Exhibit 3.5 to the Company’s Amended Form 10-K/A, filed March 5,
                2004).3.6
            
            Bylaws
                (incorporated by reference to Exhibit 4.2 to YouthStream's Registration
                Statement on Form S-8, Registration No. 333-32022, filed on March
                9,
                2000).3.7
            
            Amendment
                to Bylaws (incorporated by reference to Exhibit 3.8 to the Company’s Form
                10-Q for the quarter ended June 30, 2004, filed August 13,
                2004).31.1
            
            Certification
                of the Chief Executive Officer pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.31.2
            
            Certification
                of the Chief Financial Officer pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.32.1
            
            Certification
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.








II-3