UNITEDSTATESSECURITIES AND EXCHANGECOMMISSIONWASHINGTON, D.C.20549

FORM10-QSB/AAmendment No.1

|        |                                                                                 |
|--------|---------------------------------------------------------------------------------|
|   | QUARTERLY REPORT UNDERSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934 |

For the Quarterly Period Ended March31,2005

|        |                                                                                  |
|--------|----------------------------------------------------------------------------------|
|   | TRANSITION REPORTUNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934 |

For the transition period from             to            

Commission file number:   0-27556

YOUTHSTREAM MEDIA NETWORKS,INC.

(Exact name of small business issuer asspecified in itscharter)

|                                                                      |  |                                                 |  |  |  |  |
|----------------------------------------------------------------------|--|-------------------------------------------------|--|--|--|--|
| Delaware(Stateor other jurisdiction of incorporation ororganization) |  | 13-4082185(I.R.S.Employer IdentificationNumber) |
| 244Madison Avenue, PMB #358, New York, NewYork                       |  | 10016                                           |
| (Addressof principal executive offices)                              |  | (ZipCode)                                       |
|                                                                      |

(212)883-0083

(Issuer’s telephone number,including area code)

Notapplicable

(Former name, former address andformer fiscal year, if changed since lastreport.)

Check whether the issuer (1) filed allreports required to be filed by Section 13 or 15(d) of the Exchange Actduring the past 12 months (or such shorter period that the issuer wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90days.    Yes   [    ]   No   [x]

Indicate by check mark whetherthe registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).    Yes    [    ]   No   [x]

As of February  28,  2006, theissuer had 39,242,251 shares of common stock, $0.01 par value, issuedand outstanding.

Transitional Small Business DisclosureFormat.    Yes   [    ]   No   [x]

Documentsincorporated by reference: None.

----

YOUTHSTREAMMEDIA NETWORKS, INC. AND SUBSIDIARIES

EXPLANATORYNOTES

This Amendment No. 1 to theCompany’s Quarterly Report on Form 10-QSB for thequarterly period ended March  31,  2005 reflects changes tothe March  31,  2005 consolidated financial statements as aresult of a determination by management to re-characterize a lease forcertain equipment utilized by KES Acquisition Company, LLC (which wasacquired by the Company effective March  1,  2005) as acapital lease rather than an operating lease. The Company also recordedadditional interest expense with respect to notes payable of $10,000for the three months ended March  31,  2005. Theseadjustments did not have a significant effect on the Company’sresults of operations or cash flows. In addition, the Companyreclassified an accrued liability as a reduction to accounts receivableat March  31,  2005, which had no effect on theCompany’s results of operations, net working capital or net cashflows. The Company also made several minor changes and revisions toimprove various disclosures. Except as required to reflect the changesand revisions noted above, this Form 10-QSB/A does not attemptto modify or update any other disclosures as set forth in the documentas originally filed. Additionally, except with respect to thedisclosure set forth in Part II, Item 3 hereto, thisForm 10-QSB/A does not purport to provide a general update ordiscussion of any other developments at the Company subsequent to theoriginal filing. The filing of this Form 10-QSB/A shall not bedeemed an admission that the original filing, when made, included anyuntrue statement of material fact or omitted to state a material factnecessary to make a statement not misleading.

The Companyelected to file a Quarterly Report on Form 10-QSB beginning with thequarterly period ended December  31,  2004, as the Companyqualified as a Small Business Issuer in accordance with Regulation S-B.The Company intends to file subsequent periodic reports underRegulation S-B.

This Quarterly Report on Form 10-QSB/Afor the quarterly period ended March  31,  2005 contains‘‘forward-looking statements’’ within themeaning of Section 27A of the Securities Act of 1933, as amended,including statements that include the words‘‘believes’’,‘‘expects’’,‘‘anticipates’’, or similar expressions.These forward-looking statements include, but are not limited to,statements concerning the Company’s expectations regarding itsbusiness, growth prospects, revenue trends, operating costs, workingcapital requirements, financing requirements, and other statements ofexpectations, beliefs, future plans and strategies, anticipated eventsor trends, and similar expressions concerning matters that are nothistorical facts. The forward-looking statements in this QuarterlyReport on Form 10-QSB/A for the quarterly period ended March31,  2005 involve known and unknown risks, uncertainties andother factors that could cause the actual results, performance orachievements of the Company to differ materially from those expressedin or implied by the forward-looking statements contained herein.Except as required by applicable law or regulation, the Companyundertakes no obligation to revise or update these forward-lookingstatements to reflect any future events orcircumstances.

----

INDEX

|                                                                                                                               |  |                                                                |        |            |    |  |  |  |  |  |
|-------------------------------------------------------------------------------------------------------------------------------|--|----------------------------------------------------------------|--------|------------|----|--|--|--|--|--|
|                                                                                                                          |  |                                                           |        | PageNumber |
| **PARTI.**                                                                                                                    |  | **FINANCIALINFORMATION**                                       |        |       |
| ITEM1.                                                                                                                        |  | FINANCIALSTATEMENTS                                            |        |       |
| CondensedConsolidated Balance Sheets—March  31,  2005(Unaudited) and September 30,2004                                  |  |                                                           | 2      |
| CondensedConsolidated Statements of Operations (Unaudited)—ThreeMonths and Six Months Ended March  31,  2005 and2004    |  |                                                           | 3      |
| CondensedConsolidated Statement of Stockholders’ Deficiency(Unaudited)—Six Months Ended March  31,2005            |  |                                                           | 4      |
| CondensedConsolidated Statements of Cash Flows (Unaudited)—SixMonths Ended March  31,  2005 and2004                     |  |                                                           | 5      |
| Notesto Condensed Consolidated Financial Statements(Unaudited)—Three Months and Six Months Ended March31,  2005 and2004 |  |                                                           | 6      |
| ITEM2.                                                                                                                        |  | MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OFOPERATION |        |       | 22 |
| ITEM3.                                                                                                                        |  | CONTROLS ANDPROCEDURES                                         |        |       | 31 |
| **PARTII. OTHERINFORMATION**                                                                                                  |  |                                                           |   |
| ITEM1.                                                                                                                        |  | LEGAL PROCEEDINGS                                              |        |       | 32 |
| ITEM2.                                                                                                                        |  | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OFPROCEEDS     |        |       | 32 |
| ITEM 3.                                                                                                                       |  | DEFAULTS UPONSENIOR SECURITIES                                 |        |       | 32 |
| ITEM4.                                                                                                                        |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS             |        |       | 32 |
| ITEM 5.                                                                                                                       |  | OTHERINFORMATION                                               |        |       | 32 |
| ITEM6.                                                                                                                        |  | EXHIBITS                                                       |        |       | 32 |
| SIGNATURES                                                                                                                    |  |                                                           | 33     |
|                                                                                                                               |

1

----

YOUTHSTREAM MEDIANETWORKS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCESHEETS

|                                                                                                                                                                                                                                                                                                          |  |                                    |              |                   |  |        |              |         |  |  |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|------------------------------------|--------------|-------------------|--|--------|--------------|---------|--|--|
|                                                                                                                                                                                                                                                                                                     |  | March31, 2005                      |              | September 30,2004 |
|                                                                                                                                                                                                                                                                                                     |  | (Unaudited)(Restated—Note10) |              |              |
| ASSETS                                                                                                                                                                                                                                                                                                   |  |                               |         |              |  |   |         |    |
| Currentassets:                                                                                                                                                                                                                                                                                           |  |                               |         |              |  |   |         |    |
| Cash and cashequivalents                                                                                                                                                                                                                                                                                 |  | $                                  | 1,001,817    |              |  | $      | 674,880      |    |
| Currentportion of note receivable, including accruedinterest                                                                                                                                                                                                                                             |  |                               | 214,094      |              |  |   | 242,189      |    |
| Accountsreceivable, less allowance for doubtful accounts of$344,822                                                                                                                                                                                                                                      |  |                               | 10,494,999   |              |  |   | —      |    |
| Inventories                                                                                                                                                                                                                                                                                              |  |                               | 18,434,532   |              |  |   | —      |    |
| Prepaidexpenses and other currentassets                                                                                                                                                                                                                                                                  |  |                               | 933,728      |              |  |   | 16,624       |    |
| Totalcurrentassets                                                                                                                                                                                                                                                                                       |  |                               | 31,079,170   |              |  |   | 933,693      |    |
| Property,plant and equipment,net                                                                                                                                                                                                                                                                         |  |                               | 5,929,703    |              |  |   | 25,410       |    |
| Notereceivable, including accrued interest, less currentportion                                                                                                                                                                                                                                          |  |                               | 47,732       |              |  |   | 245,465      |    |
| Unamortizedloancosts                                                                                                                                                                                                                                                                                     |  |                               | 578,963      |              |  |   | —      |    |
| Deposits                                                                                                                                                                                                                                                                                                 |  |                               | 216,035      |              |  |   | —      |    |
| Deferredcosts related to KEStransaction                                                                                                                                                                                                                                                                  |  |                               | —      |              |  |   | 175,144      |    |
| Investmentin KESHoldings                                                                                                                                                                                                                                                                                 |  |                               | —      |              |  |   | 125,000      |    |
| Totalassets                                                                                                                                                                                                                                                                                              |  | $                                  | 37,851,603   |              |  | $      | 1,504,712    |    |
| LIABILITIESAND STOCKHOLDERS’DEFICIENCY                                                                                                                                                                                                                                                             |  |                               |         |              |  |   |         |    |
| Currentliabilities:                                                                                                                                                                                                                                                                                      |  |                               |         |              |  |   |         |    |
| Accountspayable                                                                                                                                                                                                                                                                                          |  | $                                  | 9,357,817    |              |  | $      | 910,074      |    |
| Accruedemployeecompensation                                                                                                                                                                                                                                                                              |  |                               | 225,948      |              |  |   | 225,948      |    |
| Accruedexpenses                                                                                                                                                                                                                                                                                          |  |                               | 1,674,275    |              |  |   | 752,043      |    |
| Lineofcredit                                                                                                                                                                                                                                                                                             |  |                               | 16,625,470   |              |  |   | —      |    |
| Currentportion of equipment contract payable and capital leaseobligation                                                                                                                                                                                                                                 |  |                               | 418,671      |              |  |   | —      |    |
| Currentliabilities of discontinuedoperations                                                                                                                                                                                                                                                             |  |                               | 2,476,741    |              |  |   | 2,498,468    |    |
| Totalcurrentliabilities                                                                                                                                                                                                                                                                                  |  |                               | 30,778,922   |              |  |   | 4,386,533    |    |
| Non-currentliabilities:                                                                                                                                                                                                                                                                                  |  |                               |         |              |  |   |         |    |
| Accruedinterest payable to relatedparties                                                                                                                                                                                                                                                                |  |                               | 932,939      |              |  |   | —      |    |
| Deferredrent                                                                                                                                                                                                                                                                                             |  |                               | 162,405      |              |  |   | —      |    |
| 4%note payable to related party, plus cumulativeinterest                                                                                                                                                                                                                                                 |  |                               | 3,952,775    |              |  |   | 3,952,775    |    |
| 4%note payable to investor, net of unamortizeddiscount                                                                                                                                                                                                                                                   |  |                               | 962,659      |              |  |   | 961,436      |    |
| 12%subordinated promissory notes payable to relatedparties                                                                                                                                                                                                                                               |  |                               | 7,000,000    |              |  |   | —      |    |
| 8%subordinated secured promissory notes payable to relatedparties                                                                                                                                                                                                                                        |  |                               | 39,493,000   |              |  |   | —      |    |
| Equipmentcontract payable, less current portion                                                                                                                                                                                                                                                          |  |                               | 212,080      |              |  |   | —      |    |
| Capitallease obligation, less currentportion                                                                                                                                                                                                                                                             |  |                               | 1,505,125    |              |  |   | —      |    |
| Preferredstock of subsidiary subject to mandatory redemption; issued andoutstanding at March  31,  2005 – 24,733 shares ofSeries A 13% cumulative, non-convertible, redeemable preferredstock, mandatory redemption and liquidation value of $1,000.00 pershare, plus cumulativedividends          |  |                               | 25,006,079   |              |  |   | —      |    |
| Preferredstock subject to mandatory redemption; issued and outstanding atMarch  31,  2005 and September  30,  2004– 1,000,000 shares of Series A 4% cumulative,non-convertible, redeemable preferred stock, mandatory redemption andliquidation value of $4.00 per share, plus cumulativedividends |  |                               | 5,269,333    |              |  |   | 5,269,333    |    |
| Minorityinterest – relatedparties                                                                                                                                                                                                                                                                  |  |                               | 162,820      |              |  |   | —      |    |
| Totalliabilities                                                                                                                                                                                                                                                                                         |  |                               | 115,438,137  |              |  |   | 14,570,077   |    |
| Commitmentsandcontingencies                                                                                                                                                                                                                                                                              |  |                               |         |              |  |   |         |    |
| Stockholders’deficiency:                                                                                                                                                                                                                                                                           |  |                               |         |              |  |   |         |    |
| Preferredstock, $0.01 par value; authorized – 5,000,000 shares; issued andoutstanding at March  31,  2005 and September30,  2004 – 1,000,000 shares of Series A preferred stock(classified in long-term liabilities as preferred stock subject tomandatoryredemption)                        |  |                               | —      |              |  |   | —      |    |
| Commonstock, $0.01 par value; authorized – 100,000,000 shares; issued– 39,849,751 shares; outstanding – 39,242,251 shares atMarch  31,  2005 and September  30,2004                                                                                                                    |  |                               | 398,486      |              |  |   | 398,486      |    |
| Additionalpaid-incapital                                                                                                                                                                                                                                                                                 |  |                               | 268,096,138  |              |  |   | 331,200,561  |    |
| Accumulateddeficit                                                                                                                                                                                                                                                                                       |  |                               | (345,251,582 | )            |  |   | (343,834,836 | )  |
| Treasurystock – 607,500 shares, atcost                                                                                                                                                                                                                                                             |  |                               | (829,576     | )            |  |   | (829,576     | )  |
| Totalstockholders’deficiency                                                                                                                                                                                                                                                                       |  |                               | (77,586,534  | )            |  |   | (13,065,365  | )  |
| Totalliabilities and stockholders’deficiency                                                                                                                                                                                                                                                       |  | $                                  | 37,851,603   |              |  | $      | 1,504,712    |    |
|                                                                                                                                                                                                                                                                                                          |

Seeaccompanying notes to condensed consolidated financialstatements.

2

----

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

|                                                                              |  |                             |            |                           |  |                          |            |         |  |        |            |         |  |        |            |         |  |  |
|------------------------------------------------------------------------------|--|-----------------------------|------------|---------------------------|--|--------------------------|------------|---------|--|--------|------------|---------|--|--------|------------|---------|--|--|
|                                                                         |  | ThreeMonths Ended March 31, |            | Six Months Ended March31, |
|                                                                         |  | 2005                        |            | 2004                      |  | 2005                     |            | 2004    |
|                                                                         |  | (Restated— Note10)    |            |                      |  | (Restated— Note10) |            |    |
| NETSALES                                                                     |  | $                           | 9,133,777  |                      |  | $                        | —    |    |  | $      | 9,133,777  |    |  | $      | —    |    |
| COSTSANDEXPENSES                                                             |  |                        |       |                      |  |                     |       |    |  |   |       |    |  |   |       |    |
| Costofsales                                                                  |  |                        | 8,472,228  |                      |  |                     | —    |    |  |   | 8,472,228  |    |  |   | —    |    |
| Selling,general andadministrative                                            |  |                        | 516,544    |                      |  |                     | 376,414    |    |  |   | 711,215    |    |  |   | 709,957    |    |
|                                                                         |  |                        | 8,988,772  |                      |  |                     | 376,414    |    |  |   | 9,183,443  |    |  |   | 709,957    |    |
| Operatingincome(loss)                                                        |  |                        | 145,005    |                      |  |                     | (376,414   | )  |  |   | (49,666    | )  |  |   | (709,957   | )  |
| OTHERINCOME(EXPENSE)                                                         |  |                        |       |                      |  |                     |       |    |  |   |       |    |  |   |       |    |
| Interestincome                                                               |  |                        | 11,169     |                      |  |                     | 11,149     |    |  |   | 25,534     |    |  |   | 11,448     |    |
| Interestexpense    13% Series A PreferredStock           |  |                        | (273,079   | )                    |  |                     | —    |    |  |   | (273,079   | )  |  |   | —    |    |
| Notespayable to relatedparties                                               |  |                        | (339,599   | )                    |  |                     | —    |    |  |   | (339,678   | )  |  |   | —    |    |
| Other                                                                        |  |                        | (213,816   | )                    |  |                     | (10,338    | )  |  |   | (224,309   | )  |  |   | (20,598    | )  |
| Transactioncosts related to KESacquisition                                   |  |                        | (792,954   | )                    |  |                     | —    |    |  |   | (792,954   | )  |  |   | —    |    |
| Otherexpense,net                                                             |  |                        | (12,967    | )                    |  |                     | —    |    |  |   | (30,705    | )  |  |   | —    |    |
| Otherincome (expense),net                                                    |  |                        | (1,621,246 | )                    |  |                     | 811        |    |  |   | (1,635,191 | )  |  |   | (9,150     | )  |
| LOSSBEFORE INCOME TAXES AND MINORITYINTEREST                                 |  |                        | (1,476,241 | )                    |  |                     | (375,603   | )  |  |   | (1,684,857 | )  |  |   | (719,107   | )  |
| Incometaxbenefit                                                             |  |                        | —    |                      |  |                     | 12,173     |    |  |   | —    |    |  |   | 12,113     |    |
| LOSSBEFORE MINORITYINTEREST                                                  |  |                        | (1,476,241 | )                    |  |                     | (363,430   | )  |  |   | (1,684,857 | )  |  |   | (706,994   | )  |
| MINORITYINTEREST – relatedparties                                      |  |                        | 268,111    |                      |  |                     | —    |    |  |   | 268,111    |    |  |   | —    |    |
| LOSSFROM CONTINUINGOPERATIONS                                                |  |                        | (1,208,130 | )                    |  |                     | (363,430   | )  |  |   | (1,416,746 | )  |  |   | (706,994   | )  |
| LOSSFROM DISCONTINUEDOPERATIONS                                              |  |                        |       |                      |  |                     |       |    |  |   |       |    |  |   |       |    |
| Discontinuedoperations                                                       |  |                        | —    |                      |  |                     | (155,668   | )  |  |   | —    |    |  |   | (476,776   | )  |
| Disposalof discontinuedoperations                                            |  |                        | —    |                      |  |                     | (821,721   | )  |  |   | —    |    |  |   | (821,721   | )  |
| LOSSFROM DISCONTINUEDOPERATIONS                                              |  |                        | —    |                      |  |                     | (977,389   | )  |  |   | —    |    |  |   | (1,298,497 | )  |
| NETLOSS                                                                      |  | $                           | (1,208,130 | )                    |  | $                        | (1,340,819 | )  |  | $      | (1,416,746 | )  |  | $      | (2,005,491 | )  |
| NETLOSS PER COMMON SHARE –BASIC ANDDILUTED                             |  |                        |       |                      |  |                     |       |    |  |   |       |    |  |   |       |    |
| Lossfrom continuingoperations                                                |  | $                           | (0.03      | )                    |  | $                        | (0.01      | )  |  | $      | (0.04      | )  |  | $      | (0.02      | )  |
| Lossfrom discontinuedoperations                                              |  |                        | —    |                      |  |                     | (0.02      | )  |  |   | —    |    |  |   | (0.03      | )  |
| NETLOSS PER COMMON SHARE –BASIC ANDDILUTED                             |  | $                           | (0.03      | )                    |  | $                        | (0.03      | )  |  | $      | (0.04      | )  |  | $      | (0.05      | )  |
| WEIGHTEDAVERAGE NUMBER OF COMMON SHARES OUTSTANDING – BASIC ANDDILUTED |  |                        | 39,242,251 |                      |  |                     | 39,242,251 |    |  |   | 39,242,251 |    |  |   | 39,242,251 |    |
|                                                                              |

Seeaccompanying notes to condensed consolidated financialstatements.

3

----

YOUTHSTREAM MEDIANETWORKS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENT OFSTOCKHOLDERS’ DEFICIENCY (UNAUDITED)SIX MONTHS ENDED MARCH31, 2005(Restated — Note10)

|                                                                                                            |  |             |            |                          |  |                    |         |               |  |        |             |         |  |        |              |         |  |        |          |         |  |        |             |         |  |  |
|------------------------------------------------------------------------------------------------------------|--|-------------|------------|--------------------------|--|--------------------|---------|---------------|--|--------|-------------|---------|--|--------|--------------|---------|--|--------|----------|---------|--|--------|-------------|---------|--|--|
|                                                                                                       |  | CommonStock |            | AdditionalPaid-inCapital |  | AccumulatedDeficit |         | TreasuryStock |  | Total  |
| Shares                                                                                                     |  | Amount      |
| Balancesat October  1,2004                                                                                 |  |        | 39,849,751 |                     |  | $                  | 398,486 |          |  | $      | 331,200,561 |    |  | $      | (343,834,836 | )  |  | $      | (829,576 | )  |  | $      | (13,065,365 | )  |
| Deemeddistribution to sellers of KES Acquisition Company, LLC in excess ofpredecessor company’sbasis |  |        | —    |                     |  |               | — |          |  |   | (63,104,423 | )  |  |   | —      |    |  |   | —  |    |  |   | (63,104,423 | )  |
| Netloss                                                                                                    |  |        | —    |                     |  |               | — |          |  |   | —     |    |  |   | (1,416,746   | )  |  |   | —  |    |  |   | (1,416,746  | )  |
| Balancesat March  31,2005                                                                                  |  |        | 39,849,751 |                     |  | $                  | 398,486 |          |  | $      | 268,096,138 |    |  | $      | (345,251,582 | )  |  | $      | (829,576 | )  |  | $      | (77,586,534 | )  |
|                                                                                                            |

Seeaccompanying notes to condensed consolidated financialstatements.

4

----

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

|                                                                                                    |  |                          |            |         |  |        |                                                                                 |         |  |  |
|----------------------------------------------------------------------------------------------------|--|--------------------------|------------|---------|--|--------|---------------------------------------------------------------------------------|---------|--|--|
|                                                                                               |  | SixMonths Ended March31, |
|                                                                                               |  | 2005                     |            | 2004    |
|                                                                                               |  | (Restated—Note10)  |            |    |
| CASH FLOWS FROM OPERATINGACTIVITIES                                                                |  |                     |       |    |  |   |                                                                            |    |
| Netloss                                                                                            |  | $                        | (1,416,746 | )  |  | $      | (2,005,491                                                                      | )  |
| Adjustmentsto reconcile net loss to net cash used in operatingactivities:                          |  |                     |       |    |  |   |                                                                            |    |
| Loss fromdiscontinuedoperations                                                                    |  |                     | —    |    |  |   | 476,776                                                                         |    |
| Losson disposal of discontinuedoperations                                                          |  |                     | —    |    |  |   | 821,721                                                                         |    |
| Netchange in assets and liabilities of discontinuedoperations                                      |  |                     | (21,727    | )  |  |   | (196,620                                                                        | )  |
| Depreciationandamortization                                                                        |  |                     | 66,035     |    |  |   | 9,960                                                                           |    |
| Amortizationof original issue discount on subordinatednotes                                        |  |                     | 1,223      |    |  |   | 599                                                                             |    |
| Amortizationof loancosts                                                                           |  |                     | 51,395     |    |  |   | —                                                                         |    |
| Write-offof fixedassets                                                                            |  |                     | 20,430     |    |  |   | —                                                                         |    |
| Write-offof KES acquisition costs                                                                  |  |                     | 792,954    |    |  |   | —                                                                         |    |
| Minorityinterest – relatedparties                                                            |  |                     | (268,111   | )  |  |   | —                                                                         |    |
| Changesin operating assets and liabilities, net of effect of KESacquisition:                       |  |                     |       |    |  |   |                                                                            |    |
| (Increase)decrease in–                                                                       |  |                     |       |    |  |   |                                                                            |    |
| Accountsreceivable,net                                                                             |  |                     | (41,514    | )  |  |   | —                                                                         |    |
| Inventories                                                                                        |  |                     | 327,686    |    |  |   | —                                                                         |    |
| Accruedinterestreceivable                                                                          |  |                     | (21,399    | )  |  |   | —                                                                         |    |
| Prepaidexpenses                                                                                    |  |                     | (12,833    | )  |  |   | 146,194                                                                         |    |
| Increase(decrease) in–                                                                       |  |                     |       |    |  |   |                                                                            |    |
| Accountspayable                                                                                    |  |                     | (1,118,584 | )  |  |   | 22,703                                                                          |    |
| Accruedemployeecompensation                                                                        |  |                     | —    |    |  |   | (8,778                                                                          | )  |
| Accruedinterestpayable                                                                             |  |                     | 614,867    |    |  |   | —                                                                         |    |
| Accruedexpenses                                                                                    |  |                     | (344,784   | )  |  |   | 78,501                                                                          |    |
| Deferredrent                                                                                       |  |                     | (3,008     | )  |  |   | —                                                                         |    |
| NETCASH USED IN OPERATINGACTIVITIES                                                                |  |                     | (1,374,116 | )  |  |   | (654,435                                                                        | )  |
| CASHFLOWS FROM INVESTINGACTIVITIES                                                                 |  |                     |       |    |  |   |                                                                            |    |
| Proceeds from sale ofBTWassets                                                                     |  |                     | —    |    |  |   | 820,000                                                                         |    |
| Principaland interest payments on notereceivable                                                   |  |                     | 247,227    |    |  |   | —                                                                         |    |
| Deferredcosts related to KEStransaction                                                            |  |                     | (430,108   | )  |  |   | —                                                                         |    |
| NETCASH PROVIDED BY (USED IN) INVESTINGACTIVITIES                                                  |  |                     | (182,881   | )  |  |   | 820,000                                                                         |    |
| CASHFLOWS FROM FINANCINGACTIVITIES                                                                 |  |                     |       |    |  |   |                                                                            |    |
| Net increase in line ofcredit                                                                      |  |                     | 1,005,374  |    |  |   | —                                                                         |    |
| Principalpayments on equipment contract payable and capital leaseobligation                        |  |                     | (34,634    | )  |  |   | —                                                                         |    |
| NETCASH PROVIDED BY FINANCINGACTIVITIES                                                            |  |                     | 970,740    |    |  |   | —                                                                         |    |
| NETCASH PROVIDED BY (USED IN) OPERATING, INVESTING AND FINANCINGACTIVITIES                         |  |                     | (586,257   | )  |  |   | 165,565                                                                         |    |
| CASHACQUIRED IN CONNECTION WITH KESACQUISITION                                                     |  |                     | 913,194    |    |  |   | —                                                                         |    |
| CASHAND CASH EQUIVALENTS                                                                           |  |                     |       |    |  |   |                                                                            |    |
| Netincrease                                                                                        |  |                     | 326,937    |    |  |   | 165,565                                                                         |    |
| Balance atbeginning ofperiod                                                                       |  |                     | 674,880    |    |  |   | 531,466                                                                         |    |
| Balanceat end ofperiod                                                                             |  | $                        | 1,001,817  |    |  | $      | 697,031                                                                         |    |
| SUPPLEMENTALCASH FLOWINFORMATION                                                                   |  |                     |       |    |  |   |                                                                            |    |
| Cash paidfor–                                                                                |  |                     |       |    |  |   |                                                                            |    |
| Interest                                                                                           |  | $                        | 191,034    |    |  | $      |             — |    |
| Incometaxes                                                                                        |  | $                        | —    |    |  | $      | —                                                                         |    |
| NON-CASHINVESTING AND FINANCINGACTIVITIES                                                          |  |                     |       |    |  |   |                                                                            |    |
| Preferred stock issuedin connection with acquisition of KES Acquisition Company,LLC                |  | $                        | 24,733,000 |    |  | $      | —                                                                         |    |
| Notespayable issued in connection with acquisition of KES AcquisitionCompany,LLC                   |  | $                        | 39,493,000 |    |  | $      | —                                                                         |    |
| Non-cashassets acquired in connection with acquisition of KES AcquisitionCompany,LLC               |  | $                        | 37,019,827 |    |  | $      | —                                                                         |    |
| Liabilitiesassumed in connection with acquisition of KES Acquisition Company,LLC                   |  | $                        | 36,255,513 |    |  | $      | —                                                                         |    |
| Deemeddistribution to sellers of KES Acquisition Company, LLC in excess ofpredecessor’sbasis |  | $                        | 63,104,423 |    |  | $      | —                                                                         |    |
| Loanfees capitalized and added to noteprincipal                                                    |  | $                        | 125,000    |    |  | $      | —                                                                         |    |
|                                                                                                    |

Seeaccompanying notes to condensed consolidated financialstatements.

5

----

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

1.    Organization and Basis ofPresentation

Basis ofPresentation

The accompanying condensed consolidatedfinancial statements include the accounts of YouthStream MediaNetworks, Inc. (‘‘YouthStream’’),and its direct and indirect wholly and majority-owned subsidiaries:Network Event Theater, Inc.(‘‘NET’’), American PassageMedia, Inc. (‘‘American Passage’’),Beyond the Wall, Inc. (‘‘Beyond theWall’’ or ‘‘BTW’’), andW3T.com, Inc. (‘‘Teen.com’’) (allinactive); and YouthStream Acquisition Corp.(‘‘Acquisition Corp.’’), Atacama KESHolding Corporation (‘‘Atacama KES’’) andKES Acquisition Company, LLC (‘‘KESAcquisition’’) (see Note 2) (collectively, the‘‘Company’’).

The condensedconsolidated financial statements have been prepared in accordance withgenerally accepted accounting principles in the United States ofAmerica. All intercompany items and transactions have been eliminatedin consolidation.

During fiscal 2001, the Companyreorganized into two market segments: media and retail.

InAugust  2002, the Company sold substantially all of its remainingmedia assets and assigned certain liabilities of its NET and AmericanPassage subsidiaries to Alloy, Inc. and ceased operating the mediasegment.

In February  2004, the Company sold theassets and operations of its Beyond the Wall subsidiary and ceasedoperating the retail segment. Beyond the Wall had been engaged in thesale of decorative wall posters through on-campus sales events, retailstores and internet sales, primarily to teenagers and young adults.During the three months and six months ended March  31,2004, Beyond the Wall operated 17 stores in 12 states, plus Washington,D.C., throughout the East and mid-West, as well as a warehouse anddistribution center in Stroudsburg, Pennsylvania, and was theCompany’s only revenue-generating business operation. Thecondensed consolidated financial statements for the three months andsix months ended March  31,  2004 present Beyond theWall’s operations as a discontinued operation as a result of thedisposal of its assets and operations on February  25,2004 (see Note 3).

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

The accompanying condensedconsolidated financial statements are unaudited, but in the opinion ofmanagement of the Company, contain all adjustments, which includenormal recurring accruals, necessary to present fairly the financialposition at March  31,  2005, the results of operations forthe three months and six months ended March  31,  2005 and2004, and the cash flows for the six months ended March31,  2005 and 2004. The balance sheet as of September30,  2004 is derived from the Company’s audited financialstatements included in the Company’s Annual Report on Form 10-Kfor the fiscal year ended September  30,  2004.

Certain information and footnote disclosures normallyincluded in financial statements that have been prepared in accordancewith generally accepted accounting principles have been condensed oromitted pursuant to the rules and regulations of the Securities andExchange Commission, although management of the Company believes thatthe disclosures contained in these financial statements are adequate tomake the information presented therein not misleading. For furtherinformation, refer to the financial statements and the notes theretoincluded in the Company’s Annual Report on Form 10-K for thefiscal year ended September  30,  2004, as filed with theSecurities and Exchange Commission.

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assetsand liabilities, disclosure of contingent assets and liabilities at thedate of 

6

----

the financial statements, and the reportedamounts of revenues and expenses during the reporting period. Actualresults could differ from those estimates.

The results ofoperations for the three months and six months ended March31,  2005 are not necessarily indicative of the results ofoperations to be expected for the full fiscal year endingSeptember  30,  2005.

GoingConcern

The Company has incurred recurring operatinglosses since its inception. As of September  30,  2004, theCompany had an accumulated deficit of $343,834,836, astockholders' deficiency of $13,065,365, a working capitaldeficiency of $3,452,840, and had incurred a net loss and negative cashflows from operating activities for the year ended September30,  2004 of $2,365,620 and $901,443, respectively. As ofMarch 31, 2005, the Company had an accumulated deficit of$345,251,582, a stockholders’ deficiency of $77,586,534 and hadincurred a net loss and negative cash flows from operating activitiesfor the six months ended March 31, 2005 of $1,416,746 and$1,374,116, respectively. As of September  30,  2004 andMarch  31,  2005, the Company had insufficient capital tofund all of its obligations. These conditions raise substantial doubtabout the Company’s ability to continue as a going concern. Thecondensed consolidated financial statements do not include anyadjustments to reflect the possible future effect of the recoverabilityand classification of assets or the amounts and classifications ofliabilities that may result from the outcome of this uncertainty. TheCompany’s independent registered public accounting firm, in itsreport dated December  17,  2004, included an explanatoryparagraph stating that the Company’s recurring losses andaccumulated deficit, working capital deficiency and negative cash flow,among other things, raise substantial doubt about the Company’sability to continue as a going concern.

On March9,  2005, the Company completed the acquisition of a steelmini-mill located in Ashland, Kentucky (see Note 2). The Companyutilized substantially all of its available cash resources to fund suchacquisition, and will therefore need to obtain additional operatingcapital to fund corporate general and administrative expenses eitherthrough internal or external resources. In addition, the steelmini-mill restarted operations in late January  2004 after beingacquired by the previous owners, and has incurred losses to date. Thesteel mini-mill relies on cash flows from operations and a line ofcredit with General Electric Capital Corporation to fund its separateoperations. The Company has borrowed the maximum amount available underits line of credit with General Electric Capital Corporation and isattempting to restructure the terms of the line of credit to be able toincrease its borrowings thereunder.

The Company believesthat its current internal and external cash resources will be adequateto fund its operations through September  30,  2005.However, to the extent the Company’s estimates and assumptionsare inaccurate, the Company may not have sufficient cash resources tofund its operations. In such event, the Company may be required toconsider a formal or informal restructuring orreorganization.

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

Stock-BasedCompensation

The Company generally grants stockoptions to management and employees for a fixed number of shares withan exercise price equal to or greater than the fair value of the sharesat the date of grant. The Company accounts for stock option grants inaccordance with Accounting Principles Board(‘‘APB’’) Opinion No. 25,‘‘Accounting for Stock Issued toEmployees’’, and, accordingly, recognizes compensationexpense only if the fair value of the underlying common stock exceedsthe exercise price of the stock option on the date of grant. Aspermitted by Statement of Financial Accounting Standards(‘‘SFAS’’) No. 123, the Company continuesto account for stock-based compensation in accordance with APB OpinionNo. 25 and has elected the pro forma disclosure alternative of SFAS No.123, as amended by SFAS No. 148 (see Note 5).

7

----

Net Loss PerShare

The Company calculates net loss per share asrequired by SFAS No. 128, ‘‘Earnings perShare’’. Basic earnings per share excludes any dilutionfor common stock equivalents and is computed by dividing net loss bythe weighted average number of common shares outstanding during therelevant period. Diluted earnings per share reflects the potentialdilution that could occur if options or other securities or contractsentitling the holder to acquire shares of common stock were exercisedor converted, resulting in the issuance of additional shares of commonstock that would then share in earnings. However, diluted earnings pershare does not consider such dilution if its effect would beanti-dilutive. Accordingly, basic and diluted loss per share is thesame for all periods presented.

Recent AccountingPronouncements

In December  2004, the FASBissued SFAS No. 123(Revised 2004), ‘‘Share-BasedPayment’’. SFAS No. 123(R) revises SFAS No. 123,‘‘Accounting for Stock-Based Compensation’’and supersedes APB Opinion No. 25, ‘‘Accounting for StockIssued to Employees’’ and amends SFAS No. 95,‘‘Statement of Cash Flows’’. SFAS No.123(R) focuses primarily on the accounting for transactions in which anentity obtains employee services in share-based payment transactions.SFAS No. 123(R) requires companies to recognize in the statement ofoperations the cost of employee services received in exchange forawards of equity instruments based on the grant-date fair value ofthose awards (with limited exceptions). SFAS No. 123(R) is effective asof the Company’s first interim or annual reporting period thatbegins after December  15,  2005. Accordingly, the Companywill adopt SFAS No. 123(R) in its quarter ending March31,  2006. The Company is currently evaluating the provisions ofSFAS No. 123(R) and has not yet determined the impact, if any, thatSFAS No. 123(R) will have on its financial statement presentation ordisclosures.

In November  2004, the FASB issuedSFAS No. 151, ‘‘InventoryCosts – An Amendment of ARB No. 43,Chapter 4’’ (SFAS No. 151). SFAS No.151 clarifies that abnormal amounts of idle facility expense, freight,handling costs and spoilage should be expensed as incurred and notincluded in overhead. Further, SFAS No. 151 requires thatallocation of fixed and production facilities overhead to conversioncosts should be based on normal capacity of the production facilities.The provisions in SFAS No. 151 are effective for inventory costsincurred during fiscal years beginning after June 15, 2005. TheCompany is currently evaluating the provisions of SFAS No. 151 and hasnot yet determined the impact, if any, that SFAS No. 151 will have onits financial statement presentation or disclosures.

InDecember  2004, the FASB issued SFAS No. 153,‘‘Exchanges of Nonmonetary Assets, an amendment to APBOpinion No. 29’’ (‘‘SFAS No.153’’). SFAS No. 153 amends Accounting PrinciplesBoard Opinion No. 29, ‘‘Accounting for NonmonetaryTransactions’’, to require that exchanges of nonmonetaryassets be measured and accounted for at fair value, rather than atcarryover basis, of the assets exchanged. Nonmonetary exchanges thatlack commercial substance are exempt from this requirement.SFAS No. 153 is effective for nonmonetary exchanges entered intoin fiscal periods beginning after June 15, 2005. The Company iscurrently evaluating the provisions of SFAS No. 153, and has notyet determined the impact, if any, that it will have on theCompany’s financial statement presentation or disclosures.

2.    Acquisition of Steel Mini-Mill

InSeptember 2003, YouthStream invested $125,000 to acquire a1.00% membership interest in KES Holdings, LLC, a Delawarelimited liability company (‘‘KESHoldings’’), which was formed to acquire certain assetsof Kentucky Electric Steel, Inc., a Delaware company(‘‘KES’’), consisting of a steel mini-milllocated in Ashland, Kentucky (the‘‘Mill’’). On September 2, 2003, KESHoldings, through its subsidiary, KES Acquisition Company, LLC, aDelaware limited liability company (‘‘KESAcquisition’’), completed the acquisition of the Millpursuant to Section 363 of the United States Bankruptcy Code forcash consideration of $2,650,000, which was funded through thecontributions of the members of KES Holdings. Members’contributions were also used for start-up costs, working capitalpurposes and payment of deferred maintenance of the Mill. KES hadceased production on or about December 16, 2002 and filed avoluntary petition for relief under Chapter 11 of the United StatesBankruptcy Code on February 5, 2003.

8

----

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

The Millproduces bar flats that are produced to a variety of specifications andfall primarily into two general quality levels — merchant barquality steel bar flats (‘‘MBQ Bar Flats’’)for generic types of applications, and special bar quality steel barflats (‘‘SBQ Bar Flats’’), where moreprecise customer specifications require the use of alloys, customizedequipment and special production procedures to insure that the finishedproduct meets critical end-use performance characteristics. The Mill isa leading manufacturer of SBQ Bar Flats for the cold draw bar converterand truck trailer support beam markets.

The Millmanufactures over 2,600 different Bar Flat items which are sold to theleaf-spring suspension market for light- and heavy-duty trucks,mini-vans and utility vehicles, cold drawn bar converters, certainspecialty applications for steel service centers, truck trailermanufacturers and other miscellaneous markets. The Mill wasspecifically designed to manufacture wider and thicker bar flats up tothree inches in thickness and twelve inches in width that are requiredby these markets. In addition, the Mill employs a variety of speciallydesigned equipment which is required in order to manufacture SBQ BarFlats to the specifications of the Mill’scustomers.

On March  9,  2005, YouthStreamcompleted the acquisition of KES Acquisition (the‘‘Acquisition’’), which was deemedeffective March  1,  2005. Pursuant to definitiveagreements executed with KES Holdings and Atacama Capital Holdings,Ltd., a British Virgin Islands company(‘‘Atacama’’, and together with KESHoldings, collectively, the ‘‘Sellers’’),YouthStream, through its newly-formed subsidiary, YouthStreamAcquisition Corp., a Delaware corporation (‘‘AcquisitionCorp.’’), acquired 100% of the membershipinterests of KES Acquisition by acquiring (i) a 37.45%membership interest from KES Holdings and (ii) all of the capital stockof Atacama KES Holding Corporation, a wholly-owned subsidiary ofAtacama (‘‘Atacama KES’’), the owner of theremaining 62.55% membership interest in KES Acquisition. Asconsideration for the Acquisition, Acquisition Corp. issued to theSellers (i) $40  million in promissory notes (the‘‘Notes’’), (ii) 25,000 shares of13% Series A Non-Convertible Preferred Stock with an aggregateliquidation value of $25  million (the ‘‘13%Series A Preferred Stock’’) and (iii) 100% of itsauthorized shares of Series B Non-Voting Common Stock. With respect tothe $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 toKES Holdings and $21,000,000 of the Notes and $15,000,000 of the13% Series A Preferred Stock were issued to Atacama. YouthStreamalso 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 willperiodically be required to purchase shares of Series B Preferred Stockof Acquisition Corp.

As a result of these transactions,YouthStream owns 80.01% of the common stock, and 100% ofthe voting stock, of Acquisition Corp. The remaining 19.99%common stock interest in Acquisition Corp. is owned 62.55% byAtacama and 37.45% by KES Holdings. YouthStream has a2.67% equity interest in KES Holdings, as a result of which theCompany has eliminated its $507,000 interest in the Notes and $267,000interest in the 13% Series A Preferred Stock in the condensedconsolidated balance sheet at March  31,  2005. YouthStreamhas consolidated the operations of the Mill through its ownership ofKES Acquisition commencing March  1,  2005. As a result ofthe Acquisition, the financial statements for periods ending afterMarch  1,  2005 are materially different from and are notcomparable to the financial statements prior to that date.

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

9

----

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

The Notes are structurally subordinate inright and payment of up to $40,000,000 of senior debt, includingexisting debt obligations in favor of General Electric CapitalCorporation (‘‘GECC’’). Scheduled principalpayments commence in (i) February  2007 with respect to the$19,000,000 principal amount of Notes issued in favor of KES Holdingsand (ii) February  2011 with respect to the $21,000,000 principalamount of Notes issued in favor of Atacama. In addition, the Notesrequire additional quarterly principal payments out of‘‘free cash’’ as that term is defined inthe Note Purchase Agreement. The Notes bear interest at the rate of8% per annum, payable annually during the first two years of theNote (or earlier if consented to by GECC or any other senior lender)and quarterly thereafter. The obligations of Acquisition Corp. underthe Notes are secured by a limited guaranty by YouthStream, whichguaranty is secured by and limited in recourse solely to a pledge byYouthStream of all of its interest in Acquisition Corp. As ofMarch  31,  2005, the balance outstanding on the Notes was$39,493,000, and related accrued interest payable was $268,336.

For the nine months ending September  30,  2005,Acquisition Corp., KES Acquisition and Atacama KES are collectivelyrequired to have, on a consolidated basis, in excess of $4,000,000 ofearnings before interest, taxes, depreciation and amortization,calculated in accordance with generally accepted accounting principles(‘‘EBITDA’’). For each of the fiscalyears ending on and after September  30,  2006,Acquisition Corp., KES Acquisition and Atacama KES are collectivelyrequired to have, on a consolidated basis, in excess of $7,200,000 ofEBITDA. At March  31 of each fiscal year followingthe fiscal year ending September  30,  2005 in which theobligations under the Notes remain outstanding, Acquisition Corp., KESAcquisition and Atacama KES are collectively required to have, on aconsolidated basis, in excess of $3,000,000 of EBITDA for the sixmonths then ended. Effective September  23,  2005, theholders of the Notes executed an agreement to amend the Notes toeliminate the requirement that Acquisition Corp., KES Acquisition andAtacama KES collectively have, on a consolidated basis, in excess of$4,000,000 of EBITDA for the nine months ending September30,  2005.

The holders of each share of 13%Series A Preferred Stock are entitled to receive a cumulative dividendat an annual rate of 13% of the sum of $1,000 and all accruedbut unpaid dividends. The 13% Series A Preferred Stock containsa liquidation preference equal to $1,000 per share, plus accrued butunpaid 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. or (ii) the occurrence of anevent of default under the Note Purchase Agreement pursuant to whichthe Notes are being issued. In addition, beginning with the secondanniversary of the initial issuance of the 13% Series APreferred Stock, Acquisition Corp. will be required to use‘‘free cash’’ (as that term is defined inthe Securities Purchase Agreement) to commence redeeming shares of13% Series A Preferred Stock in increments of at least$4,000,000, with limited exceptions.

Since the acquisitionof the Mill by the Sellers, the Mill has been operating under aManagement Services Agreement with Pinnacle Steel, LLC (the‘‘Pinnacle Agreement’’), which agreementremained in effect following the closing. The principals of PinnacleSteel LLC that manage the Mill have significant experience andexpertise in the steel industry. The Pinnacle Agreement will remain ineffect through January  31,  2009, subject to earliertermination or extension based on the financial performance of theMill. Pinnacle is entitled to a monthly management fee and a managementincentive fee as provided in the PinnacleAgreement.

Subsequent to the acquisition of the Mill bythe Sellers, KES Acquisition issued an aggregate of $7,000,000 ofsubordinated promissory notes to the Sellers and certain of theirrespective affiliates (the 

10

----

‘‘Subordinated PromissoryNotes’’). Cash proceeds from the Subordinated PromissoryNotes were used to accelerate and expand the operations of the Mill.The Subordinated Promissory Notes bear interest at the rate of12% per annum, with interest payable monthly, subject tocompliance with various agreements and covenants, with principal andinterest due and payable upon the earlier to occur of (i) an event ofdefault under the Loan and Security Agreement with GECC or (ii)December  31,  2006.

Related parties aresummarized as follows: Robert Scott Fritz, a director of YouthStream,is an investor in KES Holdings. Hal G. Byer, another director ofYouthStream, is an employee of affiliates of Libra/KES Investment I,LLC (collectively, ‘‘Libra’’), the Managerof KES Holdings and has an economic interest in KES Holdings throughhis relationship with Libra. Certain other affiliates of Libra are alsoinvestors in KES Holdings, including trusts for the benefit of JessM.  Ravich (the ‘‘Ravich Trusts’’)and certain of his family members. Mr.  Ravich is a principal ofLibra and holds 1,860,000 shares of YouthStream's common stockand warrants to purchase 500,000 shares of YouthStream's commonstock exercisable through August  31,  2008, as well as1,000,000 shares of YouthStream's redeemable preferred stock.Through his positions at Libra, Mr.  Ravich has managed thebusiness 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 Trusts and Libra, respectively.Mr.  Fritz and Mr.  Byer have each previously acquired anoption from the Ravich Trusts for $2,500 ($0.04 per share) to purchase62,500 shares of YouthStream's redeemable preferred stock issuedto the Ravich Trusts in January  2003, exercisable at $0.36 pershare until December  31,  2006 or earlier upon theoccurrence of certain events.

The Acquisition wasaccounted for as a purchase in accordance with SFAS No. 141,‘‘Business Combinations’’, and inaccordance with Emerging Issues Task Force (EITF) No. 88-16,‘‘Basis in Leveraged Buyout Transactions’’.As a result of the substantial and continuing relationships betweenYouthStream and the Sellers, including the significant influenceretained by the Sellers over the operations of the Mill, and theprovisions of EITF No. 88-16 that must be considered when determiningthe extent of fair value/predecessor basis to be used in recording thetransaction, the Acquisition has been recorded at predecessor basis.Since the debt and equity held by the Sellers represented almost theentire amount of capital at risk both before and after the Acquisition,the application of the ‘‘monetary test’’specified in Section 3 of EITF No. 88-16, which limits the portion ofthe purchase consideration that can be valued at fair value to thepercentage of the total consideration that is monetary, was utilized bythe Company in determining to record the transaction at predecessorbasis. The excess of the purchase price over predecessor basis of thenet assets acquired has been reflected as a deemed distribution of$63,104,423 to the Sellers at the date of acquisition in theconsolidated financial statements.

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

11

----

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

|                                                                                                     |  |        |             |         |  |  |
|-----------------------------------------------------------------------------------------------------|--|--------|-------------|---------|--|--|
| AssetsAcquired:                                                                                     |  |   |        |    |
| Cash                                                                                                |  | $      | 913,194     |    |
| Accountsreceivable,net                                                                              |  |   | 10,453,485  |    |
| Inventories                                                                                         |  |   | 18,762,218  |    |
| Prepaidexpenses and other currentassets                                                             |  |   | 904,271     |    |
| Property, plant andequipment, net                                                                   |  |   | 5,990,758   |    |
| Due fromYouthStream Acquisition Corp.                                                               |  |   | 187,702     |    |
| Othernon-currentassets                                                                              |  |   | 721,393     |    |
| Totalassetsacquired                                                                                 |  |   | 37,933,021  |    |
| LiabilitiesAssumed:                                                                                 |  |   |        |    |
| Accountspayable                                                                                     |  |   | 9,566,327   |    |
| Accruedexpenses                                                                                     |  |   | 1,267,016   |    |
| Accrued interestpayable                                                                             |  |   | 593,260     |    |
| Deferredrent                                                                                        |  |   | 165,413     |    |
| Subordinated promissory notespayable                                                                |  |   | 7,000,000   |    |
| Line ofcredit                                                                                       |  |   | 15,495,095  |    |
| Equipment contractpayable                                                                           |  |   | 291,223     |    |
| Capital leaseobligation                                                                             |  |   | 1,877,179   |    |
| Totalliabilitiesassumed                                                                             |  |   | 36,255,513  |    |
| Netassets acquired                                                                                  |  |   | 1,677,508   |    |
| Adjustment torecognize minorityinterest                                                             |  |   | (331,981    | )  |
|                                                                                                |  | $      | 1,345,527   |    |
| Totalpurchase consideration, net of intercompany eliminations of2.67% interest held by KESHoldings: |  |   |        |    |
| 8% Subordinatedsecured promissory notespayable                                                      |  | $      | 39,493,000  |    |
| 13% SeriesA preferredstock                                                                          |  |   | 24,733,000  |    |
| Netpurchase consideration                                                                           |  |   | 64,226,000  |    |
| Minorityinterests in equity                                                                         |  |   | 223,950     |    |
| Adjustment torecord deemed distribution toSellers                                                   |  |   | (63,104,423 | )  |
|                                                                                                |  | $      | 1,345,527   |    |
|                                                                                                     |

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

As ofDecember  31,  2004 and September  30,  2004,the Company had incurred $335,146 and $175,144, respectively, of costswith respect to the Acquisition, which were presented as deferred costsin the Company’s condensed consolidated balance sheets at suchdates. These costs were included in the $792,954 of transaction costsrelated to the KES Acquisition charged to operations during the threemonths and six months ended March  31,  2005.

The following pro forma operating data presents the resultsof operations for the three months ended March  31,  2004and 2005 as if the Acquisition had occurred on December31,  2003 and 2004, respectively, and for the six months endedMarch  31,  2004 and 2005, as if the Acquisition hadoccurred on September  30,  2003 and 2004, respectively.Accordingly, transaction costs of $792,954 related to the KESAcquisition are not included in the net loss from continuing operationsshown 

12

----

below. In addition, discontinued operationsfor the three months and six months ended March  31,  2004and 2005 are not included. The Mill commenced generating revenues inlate January  2004. The pro forma results are not necessarilyindicative of the financial results that might have occurred had theAcquisition actually taken place on the respective dates, or of futureresults of operations.The Company’s unaudited pro formainformation is summarized asfollows:

|                                           |  |                            |            |                          |  |        |            |         |  |        |            |         |  |        |            |         |  |  |
|-------------------------------------------|--|----------------------------|------------|--------------------------|--|--------|------------|---------|--|--------|------------|---------|--|--------|------------|---------|--|--|
|                                      |  | ThreeMonths EndedMarch 31, |            | Six Months EndedMarch31, |
|                                      |  | 2005                       |            | 2004                     |  | 2005   |            | 2004    |
| Netrevenues                               |  | $                          | 26,250,401 |                     |  | $      | 3,559,708  |    |  | $      | 53,738,048 |    |  | $      | 3,559,708  |    |
| Operatingincome(loss)                     |  |                       | 10,796     |                     |  |   | (2,734,237 | )  |  |   | 348,102    |    |  |   | (3,997,991 | )  |
| Interestexpense                           |  |                       | (2,307,088 | )                   |  |   | (1,605,033 | )  |  |   | (4,624,056 | )  |  |   | (3,226,815 | )  |
| Minorityinterest                          |  |                       | 274,005    |                     |  |   | 274,005    |    |  |   | 274,005    |    |  |   | 274,005    |    |
| Netloss from continuingoperations         |  | $                          | (2,022,553 | )                   |  | $      | (4,000,775 | )  |  | $      | (3,918,589 | )  |  | $      | (6,813,067 | )  |
| Basicand diluted net loss per commonshare |  | $                          | (0.05      | )                   |  | $      | (0.10      | )  |  | $      | (0.10      | )  |  | $      | (0.17      | )  |
| Weightedaverage common sharesoutstanding  |  |                       | 39,242,251 |                     |  |   | 39,242,251 |    |  |   | 39,242,251 |    |  |   | 39,242,251 |    |
|                                           |

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

Cash and CashEquivalents

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

Accounts Receivable

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

Inventories

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

Property, Plantand Equipment

Property, plant and equipment are recordedat cost. Expenditures for routine maintenance and repairs are chargedto expense as incurred. Expenditures for equipment renewals andimprovements, which extend the useful life of an asset, arecapitalized. Certain equipment held under capital lease is classifiedas property, plant and equipment and the related obligation is recordedas a liability. Lease amortization is included in depreciationexpense.

Depreciation is provided on the straight-linemethod over the estimated useful lives of the assets, generally 3 to 20years for machinery and equipment, and 20 to 40 years for buildings andimprovements. Equipment under capital lease is amortized using thestraight-line method over the lease term.

Impairment ofLong-Lived Assets

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

13

----

if its carrying amount exceeds the future netcash flow the asset is expected to generate. If an asset is consideredto be impaired, the impairment to be recognized is measured by theamount by which the carrying amount of the asset exceeds its fairmarket value. The recoverability of long-lived assets is assessed bydetermining whether the unamortized balances can be recovered throughundiscounted future net cash flows of the related assets. The amount ofimpairment, if any, is measured based on projected discounted futurenet cash flows using a discount rate reflecting the Company'saverage cost of capital.

Loan Costs

Direct costsand fees associated with the establishment of debt financing arecapitalized and amortized on a straight-line basis over the term of theunderlying debt.

Revenue Recognition

The Companyrecognizes revenues when title passes, the earnings process issubstantially complete, and the Company is reasonably assured of thecollection of the proceeds from the exchange, all of which generallyoccur either upon shipment of the Company’s products or deliveryof the product at the destination specified by thecustomer.

Shipping and Handling Fees and Costs

Inaccordance with EITF No. 00-10, ‘‘Accounting for Shippingand Handling Fees and Costs’’, shipping and handling feesand costs billed to customers are included in net sales and the actualcosts incurred by the Company are included in cost of sales.

Operating Leases

Leases where substantially all therewards and risks of ownership of the assets remain with the leasingcompany are accounted for as operating leases. Rent payable underoperating leases is recorded in the statement of operations on astraight-line basis over the lease terms.

IncomeTaxes

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

Asset RetirementObligations

The Company accounts for its assetretirement obligations in accordance with SFAS No. 143,‘‘Accounting for Asset RetirementObligations’’, which addresses financial accounting andreporting for obligations associated with the retirement of tangiblelong-lived assets and associated costs. SFAS 143 requires that thediscounted fair value of a liability for an asset retirement obligationbe recognized in the period in which it is incurred if a reasonableestimate of the fair value can be made. The associated asset retirementcosts are capitalized as part of the carrying amount of the long-livedasset.

All material environmental remediation liabilitiesfor non-capital expenditures, which are probable and estimable, arerecorded in the financial statements based on current technologies andcurrent environmental standards at the time of evaluation. Adjustmentsare made when additional information is available that suggestsdifferent remediation methods or periods may be required and affect thetotal cost.

14

----

Self-Insurance

The Companyis self-insured for health care costs up to $25,000 per subscriberannually. Insurance coverage is carried for risks in excess of thisamount. The Company recognized self-insured health care expense ofapproximately $122,000 for the three months and six months endedMarch  31,  2005. Estimated claims incurred but notreported were approximately $112,000 as of March  31,2005, which are included in accrued liabilities in the condensedconsolidated balance sheet at March  31,  2005.

FairValue of Financial Instruments

The Company believes thatthe carrying value of its cash, accounts receivable, accounts payable,accrued liabilities, and line of credit as of March  31,2005 approximates their respective fair values due to the demand orshort-term nature of those instruments. The carrying value of long-termobligations approximates the fair value based on the effective interestrates compared to current market rates.

Concentrations andCommitments

The Company’s cash balances exceededfederally-insured levels at March  31,  2005. The Companyminimizes its credit risk by investing its cash and cash equivalentswith major banks and financial institutions located in the UnitedStates, as a result of which the Company believes that it had nominalrisk with respect to its concentration of balances in cash and cashequivalents at such date.

For the three months and sixmonths ended March  31,  2005, the Company has twosuppliers that account for approximately 90% of raw materialspurchases, one providing approximately 40% and the otherproviding approximately 50%, of which approximately $5,100,000was included in accounts payable at March  31,  2005. Forthe three months and six months ended March  31,  2005, theCompany has two customers that each accounted for 10% or more ofnet sales (aggregate 22%), of which approximately $2,000,000 wasincluded in accounts receivable at March  31,2005.

The Mill has been operating under a ManagementServices Agreement with Pinnacle Steel, LLC(‘‘Pinnacle’’) effective throughOctober  31,  2009 that provides for Pinnacle to provide,at its expense, employees to serve as the General Manager of the Milland provide oversight and general management of the operations of theMill, for which Pinnacle receives an annual fee of $700,000, payablemonthly, and bonus payments based on 16.6% of defined earningsbefore interest, taxes, depreciation and amortization(‘‘EBITDA’’) in excess of $4,500,000 forthe nine months ending September  30,  2005 and $6,000,000for the fiscal years ending September  30,  2006 andthereafter.

The Company has various short-termcommitments for the purchase of materials, supplies and energy arisingin the ordinary course of business which aggregated approximately$8,300,000 at March  31,  2005.

The Companyleases a ladle metallurgy furnace facility under a capital leasearrangement and certain other machinery and equipment under anoperating lease. At March  31,  2005, future minimum annuallease payments under scheduled capital and operating leases that haveinitial or remaining non-cancelable terms in excess of one year are asfollows:

|                                         |  |              |           |                |  |        |           |        |  |  |
|-----------------------------------------|--|--------------|-----------|----------------|--|--------|-----------|--------|--|--|
| TwelveMonths Ending March31,            |  | CapitalLease |           | OperatingLease |
| 2006                                    |  | $            | 600,000   |           |  | $      | 425,868   |   |
| 2007                                    |  |         | 600,000   |           |  |   | 421,764   |   |
| 2008                                    |  |         | 600,000   |           |  |   | 392,638   |   |
| 2009                                    |  |         | 600,000   |           |  |   | 390,363   |   |
| 2010                                    |  |         | 50,000    |           |  |   | 175,610   |   |
| Totalminimumpayments                    |  |         | 2,450,000 |           |  | $      | 1,806,243 |   |
| Amountrepresentinginterest              |  |         | (599,356  | )         |  |   |      |   |
| Obligationsunder capital lease          |  |         | 1,850,644 |           |  |   |      |   |
| Obligationsdue within oneyear           |  |         | (345,519  | )         |  |   |      |   |
| Long-termobligations under capitallease |  | $            | 1,505,125 |           |  |   |      |   |
|                                         |

15

----

Equipment rental expensefor the operating lease for the three months and six months endedMarch  31,  2005 was $44,132.

3.    DiscontinuedOperations

On August 5, 2002, the Company soldsubstantially all of its media assets and assigned certain liabilitiesto Cass Communications, Inc., a subsidiary of Alloy, Inc.and, as a result of the sale, the media segment of the Company’soperations was discontinued during the three months endedSeptember 30, 2002.

In early fiscal 2003 theCompany followed through on its previously announced plans to close anumber of under performing retail stores within its Beyond the Wallchain and incurred approximately $989,000 of store-closing costs duringthe three months ended December  31, 2002. The loss fromdiscontinued operations for the six months ended March31,  2004 of $476,776 consists of an operating loss of $976,776,offset by a gain of $500,000 resulting from the reduction of a prioraccrual with respect to the closing of retail stores. The reduction inthe accrual was a result of the Company completing settlements withlandlords below what had been originallyaccrued.

Effective February  25,  2004, theCompany’s wholly-owned subsidiary, Beyond the Wall, Inc.(‘‘BTW’’), sold substantially all ofits assets and operations to a group unaffiliated with the Company(which included certain former management of BTW), for $1,920,000,consisting of a cash payment of $820,000 and a subordinated securedpromissory note (the ‘‘Note’’) for$1,100,000, with interest at 10% per annum, due October31, 2006. The buyer had the right to make certain optionalprincipal pre-payments on the Note by June  30,  2004,which would result in the principal balance of the Note being adjusteddownward, in excess of such principal pre-payments, based on anagreed-upon sliding scale as set forth in the Note.

OnApril  30,  2004, the buyer made an optional principalpre-payment on the Note of $400,000. Accordingly, under theprovisions of the sale agreement, the buyer received a credit of$107,000 against the $1,100,000 note (in excess of the $400,000payment), as well as an additional $150,000 back-end credit on theNote. On October  31,  2004, the buyer made its scheduledprincipal payment on the Note of $197,734, plus accrued interest of$49,493. Remaining scheduled principal payments at March31,  2005 with respect to the Note totaling $245,466 are asfollows: October  31,  2005 – $197,734;October  31,  2006 – $47,732.

TheCompany initially recognized a loss of $565,000 with respect to thissale before taking into consideration the effect of the $400,000principal pre-payment made on April  30, 2004. Inclusiveof such payment, the effect of the accelerated payment credit and theback-end credit resulted in an additional loss of $257,000, whichdecreased the carrying value of the note receivable from $1,100,000 to$843,000 and increased the loss on the BTW sale from $565,000 to$822,000. The loss on the BTW sale was reported as a loss on thedisposal of discontinued operations for the three months and six monthsended March  31, 2004. As a result of the sale, the retailsegment operations have been presented as a discontinued operation forthe three months and six months ended March  31,  2004.

The Company’s unaudited net revenues and loss fromdiscontinued operations are summarized as follows:

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

16

----

As of March31,  2005 and September 30, 2004, the Company has accruedliabilities of $2,476,741 and $2,498,468, respectively, remaining fromits discontinued businesses. The accrued liabilities consist primarilyof severance, lease payments and other costs related to the operationsof the discontinuedbusinesses

4.    Inventories

Inventories arecomprised of the following at March  31,2005:

|                    |  |        |            |        |  |  |
|--------------------|--|--------|------------|--------|--|--|
| Rawmaterials       |  | $      | 2,390,350  |   |
| Semi-finishedgoods |  |   | 5,347,329  |   |
| Finishedgoods      |  |   | 10,696,853 |   |
| Total              |  | $      | 18,434,532 |   |
|                    |

5.    Stock-BasedCompensation

On October  15,  2003, theCompany issued an option to purchase 50,000 shares of common stock toits Chief Executive Officer, exercisable through October15,  2010 at $0.26 per share, which was the fair market value onthe date of issuance. The option was fully vested uponissuance.

On June  3,  2004, the Companyissued an option to purchase 200,000 shares of common stock to a newdirector, exercisable through June  3,  2011 at $0.14 pershare, which was the fair market value on the date of issuance. Theoption was fully vested upon issuance.

On February15,  2005, the Company issued an option to purchase 200,000shares of common stock to new director, exercisable throughFebruary  15,  2012 at $0.30 per share, which was the fairmarket value on the date of issuance. The option vests over a 12-monthperiod in equal monthly installments beginning March  1,2005.

The Company accounts for stock-based employeecompensation in accordance with the provisions of Accounting PrinciplesBoard (‘‘APB’’) Opinion No. 25 andFASB Interpretation No. 44 (‘‘FIN44’’), ‘‘Accounting for CertainTransactions Involving Stock Compensation’’, and complieswith the disclosure requirements of SFAS No. 123,‘‘Accounting for Stock-BasedCompensation’’. Under APB No. 25, compensationexpense is recorded based on the difference, if any, between the fairvalue of the Company’s stock and the exercise price on themeasurement date. The Company accounts for stock issued tonon-employees in accordance with SFAS No. 123, which requiresentities to recognize as expense over the service period the fair valueof all stock-based awards on the date of grant and EITF No. 96-18,‘‘Accounting for Equity Investments that are Issued toOther Than Employees for Acquiring, or in Conjunction with Selling,Goods or Services’’, which addresses the measurement dateand recognition approach for such transactions.

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

17

----

For purpose of pro formadisclosures, the estimated fair value of the options is amortized tooperations over the vesting period of the options or the expectedperiod of benefit. The Company’s unaudited pro forma informationis summarized as follows:

|                                                                                                |  |                             |            |                          |  |        |            |         |  |        |            |         |  |        |            |         |  |  |
|------------------------------------------------------------------------------------------------|--|-----------------------------|------------|--------------------------|--|--------|------------|---------|--|--------|------------|---------|--|--------|------------|---------|--|--|
|                                                                                           |  | ThreeMonths Ended March 31, |            | Six Months EndedMarch31, |
|                                                                                           |  | 2005                        |            | 2004                     |  | 2005   |            | 2004    |
| Netloss attributable to common shares — asreported                                       |  | $                           | (1,208,130 | )                   |  | $      | (1,340,819 | )  |  | $      | (1,416,746 | )  |  | $      | (2,005,491 | )  |
| Add:Total stock-based compensation expense included in reported netloss                        |  |                        | —    |                     |  |   | —    |    |  |   | —    |    |  |   | —    |    |
| Deduct:Total stock-based compensation expense determined under fair valuemethod for all awards |  |                        | (6,750     | )                   |  |   | —    |    |  |   | (6,750     | )  |  |   | (13,000    | )  |
| Netloss – proforma                                                                       |  | $                           | (1,214,880 | )                   |  | $      | (1,340,819 | )  |  | $      | (1,423,496 | )  |  | $      | (2,018,491 | )  |
| Basicand diluted net loss per common share –  asreported                                 |  | $                           | (0.03      | )                   |  | $      | (0.03      | )  |  | $      | (0.04      | )  |  | $      | (0.05      | )  |
| Basicand diluted net loss per common share –  proforma                                   |  | $                           | (0.03      | )                   |  | $      | (0.03      | )  |  | $      | (0.04      | )  |  | $      | (0.05      | )  |
|                                                                                                |

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

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

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

6.    Property,Plant and Equipment

Property, plant and equipmentconsisted of the following at March  31,  2005 andSeptember  30,  2004:

|                                         |  |               |           |                    |  |        |          |         |  |  |
|-----------------------------------------|--|---------------|-----------|--------------------|--|--------|----------|---------|--|--|
|                                    |  | March31, 2005 |           | September  30,2004 |
|                                    |  | (Unaudited)   |           |               |
| Land                                    |  | $             | 142,487   |               |  | $      | —  |    |
| Buildingsandimprovements                |  |          | 672,529   |               |  |   | —  |    |
| Machineryandequipment                   |  |          | 5,814,996 |               |  |   | —  |    |
| Officeequipment                         |  |          | —   |               |  |   | 140,068  |    |
| Total                                   |  |          | 6,630,012 |               |  |   | 140,068  |    |
| Accumulateddepreciation andamortization |  |          | (700,309  | )             |  |   | (114,658 | )  |
| Property,plant and equipment,net        |  | $             | 5,929,703 |               |  | $      | 25,410   |    |
|                                         |

Assetsrecorded under capitalized lease arrangements included in property,plant and equipment consist of the following:

|                                         |  |               |           |                   |  |        |                                                   |        |  |  |
|-----------------------------------------|--|---------------|-----------|-------------------|--|--------|---------------------------------------------------|--------|--|--|
|                                    |  | March31, 2005 |           | September 30,2004 |
|                                    |  | (Unaudited)   |           |              |
| Machineryandequipment                   |  | $             | 2,101,730 |              |  | $      |        — |   |
| Accumulateddepreciation andamortization |  |          | (350,288  | )            |  |   | —                                           |   |
| Property,plant and equipment,net        |  | $             | 1,751,442 |              |  | $      | —                                           |   |
|                                         |

Depreciationexpense for the three months ended March  31,  2005 and2004 was $66,035 and $4,980, respectively, and for the six months endedMarch  31,  2005 and 2004 was $66,035 and $9,960,respectively.

18

----

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

7.    Non-CurrentLiabilities

Non-current liabilities assumed byYouthStream in conjunction with the acquisition of KES Acquisition (seeNote 2) are summarized below.

Subordinated Secured PromissoryNotes Payable to Related Parties

Subordinated securedpromissory notes payable consist of seven notes payable aggregating$7,000,000 issued by KES Acquisition to three related parties. Thenotes bear interest at 12% per annum, with interest payablemonthly, subject to compliance with various agreements and covenants,are secured by a subordinated security interest in all of the assets ofKES Acquisition, and are subject to an Intercreditor and SubordinationAgreement dated March  24,  2004 with General ElectricCapital Corporation. When originally issued, the notes were due, withinterest, upon the earlier to occur of (i) an event of default underthe Loan and Security Agreement with General Electric CapitalCorporation or (ii) each note’s respective due date, whichranged from March  31,  2005 to December  31,2005. As of June  30,  2005, all seven of the notes havebeen extended to December  31,  2006. Proceeds from thesenotes were used to accelerate and expand the operations of the steelmini-mill. At March  31,  2005, accrued interest payablewith respect to the subordinated secured promissory notes payable was$664,603.

Line of Credit

Effective March24,  2004, KES Acquisition entered into a loan and securityagreement, as amended, with General Electric Capital Corporation. Underthe terms of the agreement, KES Acquisition has the ability to borrowup to $23,000,000, subject to limitations under the lender’sborrowing base formula and compliance with a minimum fixed chargecoverage ratio. Interest is payable monthly in arrears on theoutstanding principal balance at the index rate (defined as thethirty-day dealer commercial paper rate) plus 5.5% per annum.The line of credit matures on March  24,  2007, and issecured by all of the assets of KES Acquisition and a pledge of (i) themembership interests of KES Acquisition owned by Acquisition Corp. and(ii) the capital stock of Atacama KES owned by Acquisition Corp. As ofMarch  31,  2005, the balance outstanding on the line ofcredit was $16,625,470, which has been presented as a current liabilityin the condensed consolidated balance sheet at such date due tocontinuing uncertainty with respect to the Company’s ability tomaintain compliance with the minimum fixed charge coverage ratio.

At March  31,  2005, KES Acquisition was not incompliance with the fixed charge coverage ratio based on itsconsolidated financial statements as originally filed, in part relatingto changes to its accounting procedures as a result of the review ofits financial statements conducted in conjunction with its acquisitionby YouthStream (see Note 2), and subsequently received a waiver ofdefault from the lender. The Company intends to seek an amended waiverof default from the lender with respect to the restated March31,  2005 consolidated financial statements. If no such waiver isreceived, the lender would have the right to accelerate the maturity ofthe line of credit.

In the event that KES Acquisition isnot in compliance with the fixed charge coverage ratio in futureperiods, the Company intends to seek a further waiver of any defaultfrom the lender, and if no such waiver is received, the lender wouldhave the right to accelerate the maturity of the line of credit at thattime.

19

----

Equipment ContractPayable

The equipment contract payable is due in 47 equalmonthly installments of $8,099, including interest at 9.35% perannum, with a balloon payment of $35,252 due on May  8,2008. The equipment contract payable is secured by the relatedequipment. As of March  31,  2005, the balance outstandingon the equipment contract payable was $285,232. Future scheduledprincipal payments on the equipment contract payable are summarized asfollows:

|                                |  |        |         |        |  |  |
|--------------------------------|--|--------|---------|--------|--|--|
| Twelve Months Ending March 31, |  |   |
| 2006                           |  | $      | 73,152  |   |
| 2007                           |  |   | 80,735  |   |
| 2008                           |  |   | 88,602  |   |
| 2009                           |  |   | 42,743  |   |
| Totalprincipalpayments         |  | $      | 285,232 |   |
|                                |

CapitalLease Obligation

The Company leases a ladle metallurgyfurnace facility under a capital lease arrangement requiring monthlypayments of $50,000 per month for a term of 5 years commencingJune  1,  2004, reflecting a total obligation of$3,000,000. The Company has the option to renew the lease for anadditional 5 years. The Company determined that the fair value of thisasset at the date of acquisition, calculated utilizing an effectiveinterest rate of 15% per annum, was $2,101,730. At March31,  2005, future minimum annual lease payments under thiscapital lease arrangement are as follows:

|                                         |  |        |           |         |  |  |
|-----------------------------------------|--|--------|-----------|---------|--|--|
| Twelve Months Ending March31,           |  |   |
| 2006                                    |  | $      | 600,000   |    |
| 2007                                    |  |   | 600,000   |    |
| 2008                                    |  |   | 600,000   |    |
| 2009                                    |  |   | 600,000   |    |
| 2010                                    |  |   | 50,000    |    |
| Totalminimum payments                   |  |   | 2,450,000 |    |
| Amountrepresentinginterest              |  |   | (599,356  | )  |
| Obligationsunder capital lease          |  |   | 1,850,644 |    |
| Obligationsdue within oneyear           |  |   | (345,519  | )  |
| Long-termobligations under capitallease |  | $      | 1,505,125 |    |
|                                         |

8.    LegalProceedings

The Company and/or its former subsidiary,Beyond the Wall, are defendants in various lawsuits and claims fromvarious trade creditors and former landlords seeking damagesaggregating approximately $300,000. Certain of these claims are theresponsibility of the buyer of the Beyond the Wall business. TheCompany evaluates its response in each situation based on theparticular facts and circumstances of a claim. Accordingly, theultimate outcome of these matters cannot be determined at this time andmay ultimately result in judgments and liens against the Company or itsassets. The Company has made sufficient accruals for the exposurerelated to such matters that have been deemed probable and reasonablyestimable at March  31,  2005 and September 30,2004.

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

9.    Income Taxes

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

20

----

At March  31,  2005,the Company had net operating loss carryovers for federal income taxpurposes of approximately $286,000,000 that expire from 2012 through2024. The use of approximately $36,000,000 of this net operating lossin future years may be restricted under Section 382 of the InternalRevenue Code. For financial reporting purposes, a 100% valuationallowance has been recognized to offset the net deferred tax assetprincipally related to the net operating loss carryovers for allperiods presented.

The Company is subject to periodicaudits by federal, state and local tax authorities for various taxliabilities incurred in prior periods from the parent entity and itssubsidiaries, including any discontinued businesses. The amount of anytax assessments and penalties may be material and may negatively impactthe Company's operations. Given the uncertainty in the amount andthe difficulty in estimating the probability of the assessments arisingfrom future tax audits, the Company has not made accruals for such taxcontingencies.

10.    Restatement

The Companyhas restated its March  31,  2005 consolidated financialstatements as a result of a determination by management tore-characterize a lease for certain equipment utilized by KESAcquisition Company, LLC (which was acquired by the Company effectiveMarch  1,  2005) as a capital lease rather than anoperating lease (see Note 7). The Company also recorded additionalinterest expense with respect to notes payable of $10,000 for the threemonths ended March  31,  2005. These adjustments did nothave a significant effect on the Company’s results of operationsor cash flows.

The Company also reclassified an allowancefor accounts receivable of $321,721, which was erroneously included asan accrued liability at March  31,  2005, as a reduction toaccounts receivable at March  31,  2005. This adjustmenthad no effect on the Company’s results of operations, networking capital or net cash flows.

These adjustments hadthe following aggregate effect on the Company’s condensedconsolidated balance sheet at March  31,  2005:

|                                                                                    |  |                       |              |            |  |        |              |         |  |  |
|------------------------------------------------------------------------------------|--|-----------------------|--------------|------------|--|--------|--------------|---------|--|--|
|                                                                               |  | March31, 2005         |
|                                                                               |  | AsOriginally Reported |              | AsAdjusted |
| Assets:                                                                            |  |                  |         |       |  |   |         |    |
| Currentassets                                                                      |  | $                     | 31,400,882   |       |  | $      | 31,079,170   |    |
| Property,plant and equipment,net                                                   |  |                  | 4,178,262    |       |  |   | 5,929,703    |    |
| Otherassets                                                                        |  |                  | 842,730      |       |  |   | 842,730      |    |
| Totalassets                                                                        |  | $                     | 36,421,874   |       |  | $      | 37,851,603   |    |
| Liabilitiesand Stockholders’ Deficiency:                                     |  |                  |         |       |  |   |         |    |
| Currentliabilities                                                                 |  | $                     | 30,745,115   |       |  | $      | 30,778,922   |    |
| Non-currentliabilities                                                             |  |                  | 52,715,858   |       |  |   | 54,220,983   |    |
| Preferredstock of subsidiary subject tomandatory    redemption |  |                  | 25,006,079   |       |  |   | 25,006,079   |    |
| Preferredstock subject to mandatoryredemption                                      |  |                  | 5,269,333    |       |  |   | 5,269,333    |    |
| Minorityinterest – relatedparties                                            |  |                  | 182,452      |       |  |   | 162,820      |    |
| Commonstock                                                                        |  |                  | 398,486      |       |  |   | 398,486      |    |
| Additionalpaid-incapital                                                           |  |                  | 268,168,896  |       |  |   | 268,096,138  |    |
| Accumulateddeficit                                                                 |  |                  | (345,234,769 | )     |  |   | (345,251,582 | )  |
| Treasurystock                                                                      |  |                  | (829,576     | )     |  |   | (829,576     | )  |
| Totalliabilities and stockholders’deficiency                                 |  | $                     | 36,421,874   |       |  | $      | 37,851,603   |    |
|                                                                                    |

21

----

ITEM2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OFOPERATION

General Overview:

During fiscal 2001,the Company reorganized into two market segments: media and retail. InAugust  2002, the Company sold substantially all of its remainingmedia assets and assigned certain liabilities of its NET and AmericanPassage subsidiaries to Alloy, Inc. and ceased operating the mediasegment.

In February  2004, the Company sold theassets and operations of its Beyond the Wall subsidiary and ceasedoperating the retail segment. Beyond the Wall had been engaged in thesale of decorative wall posters through on-campus sales events, retailstores and internet sales, primarily to teenagers and young adults.During the three months and six months ended March  31, 2004,Beyond the Wall operated 17 stores in 12 states, plus Washington, D.C.,throughout the East and mid-West, as well as a warehouse anddistribution center in Stroudsburg, Pennsylvania, and was theCompany’s only revenue-generating business operation. Thecondensed consolidated financial statements for the three months andsix months ended March  31, 2004 present Beyond the Wall’soperations as a discontinued operation as a result of the disposal ofits assets and operations on February  25, 2004.

Commencing March  1, 2005, the Company has included theoperations of a steel mini-mill located in Ashland, Kentucky in itsconsolidated financial statements, which represents the only businesssegment in which the Company currently operates.

GoingConcern:

The Company has incurred recurring operatinglosses since its inception. As of September  30, 2004, theCompany had an accumulated deficit of $343,834,836, astockholders' deficiency of $13,065,365, a working capitaldeficiency of $3,452,840, and had incurred a net loss and negative cashflows from operating activities for the year ended September  30,2004 of $2,365,620 and $901,443, respectively. As of March 31,2005, the Company had an accumulated deficit of $345,251,582, astockholders’ deficiency of $77,586,534 and had incurred a netloss and negative cash flows from operating activities for the sixmonths ended March 31, 2005 of $1,416,746 and $1,374,116,respectively. As of September  30, 2004 and March  31,2005, the Company had insufficient capital to fund all of itsobligations. These conditions raise substantial doubt about theCompany’s ability to continue as a going concern. The condensedconsolidated financial statements do not include any adjustments toreflect the possible future effect of the recoverability andclassification of assets or the amounts and classifications ofliabilities that may result from the outcome of this uncertainty. TheCompany’s independent registered public accounting firm, in itsreport dated December  17, 2004, included an explanatoryparagraph stating that the Company’s recurring losses andaccumulated deficit, working capital deficiency and negative cash flow,among other things, raise substantial doubt about the Company’sability to continue as a going concern.

On March  9,2005, the Company completed the acquisition of a steel mini-milllocated in Ashland, Kentucky. The Company utilized substantially all ofits available cash resources to fund such acquisition, and willtherefore need to obtain additional operating capital to fund corporategeneral and administrative expenses either through internal or externalresources. In addition, the steel mini-mill restarted operations inlate January  2004 after being acquired by the previous owners,and has incurred losses to date. The steel mini-mill relies on cashflows from operations and a line of credit with General ElectricCapital Corporation to fund its separate operations. The Company hasborrowed the maximum amount available under its line of credit withGeneral Electric Capital Corporation and is attempting to restructurethe terms of the line of credit to be able to increase its borrowingsthereunder.

The Company believes that its currentinternal and external cash resources will be adequate to fund itsoperations through September  30, 2005. However, to the extentthe Company’s estimates and assumptions are inaccurate, theCompany may not have sufficient cash resources to fund its operations.In such event, the Company may be required to consider a formal orinformal restructuring or reorganization.

22

----

The Company’s management mayalso consider various strategic alternatives in the future, includingthe acquisition of new business opportunities, which may be fromrelated or unrelated parties. However, there can be noassurances that such efforts will ultimately be successful. TheCompany may finance any acquisitions through a combination of debtand/or equity securities.

**Sale of Assets and Operationsof Beyond the Wall, Inc.:**

Effective February25,  2004, the Company’s wholly-owned subsidiary, Beyondthe Wall, Inc. (‘‘BTW’’), soldsubstantially all of its assets and operations to a group unaffiliatedwith the Company (which included certain former management of BTW), for$1,920,000, consisting of a cash payment of $820,000 and a subordinatedsecured promissory note (the ‘‘Note’’) for$1,100,000, with interest at 10% per annum, due October31, 2006. The buyer had the right to make certain optionalprincipal pre-payments on the Note by June  30, 2004, which wouldresult in the principal balance of the Note being adjusted downward, inexcess of such principal pre-payments, based on an agreed-upon slidingscale as set forth in the Note.

On April  30, 2004,the buyer made an optional principal pre-payment on the Note of$400,000. Accordingly, under the provisions of the saleagreement, the buyer received a credit of $107,000 against the$1,100,000 note (in excess of the $400,000 payment), as well as anadditional $150,000 back-end credit on the Note. On October  31,2004, the buyer made its scheduled principal payment on the Note of$197,734, plus accrued interest of $49,493. Remaining scheduledprincipal payments at March  31, 2005 with respect to the Notetotaling $245,466 are as follows: October  31, 2005 –$197,734; October  31, 2006 – $47,732.

TheCompany initially recognized a loss of $565,000 with respect to thissale before taking into consideration the effect of the $400,000principal pre-payment made on April  30, 2004. Inclusiveof such payment, the effect of the accelerated payment credit and theback-end credit resulted in an additional loss of $257,000, whichdecreased the carrying value of the note receivable from $1,100,000 to$843,000 and increased the loss on the BTW sale from $565,000 to$822,000. The loss on the BTW sale was reported as a loss on thedisposal of discontinued operations for the three months endedMarch  31, 2004. As a result of the sale, the retailsegment operations have been presented as a discontinued operation forthe three months and six months ended March  31,2004.

Acquisition of Steel Mini-Mill:

InSeptember 2003, YouthStream invested $125,000 to acquire a1.00% membership interest in KES Holdings, LLC, a Delawarelimited liability company (‘‘KESHoldings’’), which was formed to acquire certain assetsof Kentucky Electric Steel, Inc., a Delaware company(‘‘KES’’), consisting of a steel mini-milllocated in Ashland, Kentucky (the‘‘Mill’’). On September 2, 2003, KESHoldings, through its subsidiary, KES Acquisition Company, LLC, aDelaware limited liability company (‘‘KESAcquisition’’), completed the acquisition of the Millpursuant to Section 363 of the United States Bankruptcy Code forcash consideration of $2,650,000, which was funded through thecontributions of the members of KES Holdings. Members’contributions were also used for start-up costs, working capitalpurposes and payment of deferred maintenance of the Mill. KES hadceased production on or about December 16, 2002 and filed avoluntary petition for relief under Chapter 11 of the United StatesBankruptcy Code on February 5, 2003.

The Mill hadbeen in operation for approximately forty years and was refurbished byKES Acquisition subsequent to its acquisition. The refurbishedMill has been generating revenues since late January  2004. Ascurrently configured, the Mill has an annual production capacity of240,000 tons of steel, and is currently operating at approximately80% of such annualized capacity. Management is focusing ondeveloping the business and improving operatingefficiencies.

The Mill produces bar flats that areproduced to a variety of specifications and fall primarily into twogeneral quality levels — merchant bar quality steel bar flats(‘‘MBQ Bar Flats’’) for generic types ofapplications, and special bar quality steel bar flats(‘‘SBQ Bar Flats’’), where more precisecustomer specifications require the use of alloys, customized equipmentand special production procedures to insure that the finished productmeets critical end-use performance characteristics. The Mill is aleading manufacturer of SBQ Bar Flats for the cold draw bar converterand truck trailer support beam markets.

23

----

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

OnMarch  9, 2005, YouthStream completed the acquisition of KESAcquisition (the ‘‘Acquisition’’), whichwas deemed effective March  1, 2005. Pursuant to definitiveagreements executed with KES Holdings and Atacama Capital Holdings,Ltd., a British Virgin Islands company(‘‘Atacama’’, and together with KESHoldings, collectively, the ‘‘Sellers’’),YouthStream, through its newly-formed subsidiary, YouthStreamAcquisition Corp., a Delaware corporation (‘‘AcquisitionCorp.’’), acquired 100% of the membershipinterests of KES Acquisition by acquiring (i) a 37.45%membership interest from KES Holdings and (ii) all of the capital stockof Atacama KES Holding Corporation, a wholly-owned subsidiary ofAtacama, the owner of the remaining 62.55% membership interestin KES Acquisition. As consideration for the Acquisition, AcquisitionCorp. issued to the Sellers (i) $40  million in promissory notes(the ‘‘Notes’’), (ii) 25,000 shares ofSeries A Non-Convertible Preferred Stock with an aggregate liquidationvalue of $25  million (the ‘‘13% Series APreferred Stock’’) and (iii) 100% of itsauthorized shares of Series B Non-Voting Common Stock. With respect tothe $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 toKES Holdings and $21,000,000 of the Notes and $15,000,000 of the13% Series A Preferred Stock were issued to Atacama. YouthStreamalso 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 willperiodically be required to purchase shares of Series B Preferred Stockof Acquisition Corp.

As a result of these transactions,YouthStream owns 80.01% of the common stock, and 100% ofthe voting stock, of Acquisition Corp. The remaining 19.99%common stock interest in Acquisition Corp. is owned 62.55% byAtacama and 37.45% by KES Holdings. YouthStream has a2.67% equity interest in KES Holdings, as a result of which theCompany has eliminated its $507,000 interest in the Notes and $267,000interest in the 13% Series A Preferred Stock in the condensedconsolidated balance sheet at March  31, 2005. YouthStream hasconsolidated the operations of the Mill through its ownership of KESAcquisition commencing March  1, 2005. As a result of theAcquisition, the financial statements for periods ending afterMarch  1, 2005 are materially different from and are notcomparable to the financial statements prior to thatdate.

Subsequent to this transaction, the management ofthe Mill remained intact. This transaction did not result in any changein the Mill’s business operations or financial condition, and,other than as set forth herein, the working capital, operating cashflow, debt service obligations and credit profile of the Mill were notaffected in any way by this transaction.

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

The following proforma operating data presents the results of operations for the threemonths ended March  31, 2004 and 2005 as if the Acquisition hadoccurred on December  31, 2003 and 2004, respectively, and forthe six months ended March  31, 2004 and 2005, as if theAcquisition had occurred on September  30, 2003 and 2004,respectively. Accordingly, transaction costs of $792,954 related to theKES Acquisition are not included in the net loss from continuingoperations shown below. In addition, discontinued operations for thethree months and six months ended March  31, 

24

----

2004 and 2005 are not included. The Millcommenced generating revenues in late January  2004. The proforma results are not necessarily indicative of the financial resultsthat might have occurred had the Acquisition actually taken place onthe respective dates, or of future results of operations. TheCompany’s unaudited pro forma information is summarized asfollows:

|                                           |  |                             |            |                           |  |        |            |         |  |        |            |         |  |        |            |         |  |  |
|-------------------------------------------|--|-----------------------------|------------|---------------------------|--|--------|------------|---------|--|--------|------------|---------|--|--------|------------|---------|--|--|
|                                      |  | ThreeMonths Ended March 31, |            | Six Months Ended March31, |
|                                      |  | 2005                        |            | 2004                      |  | 2005   |            | 2004    |
| Netrevenues                               |  | $                           | 26,250,401 |                      |  | $      | 3,559,708  |    |  | $      | 53,738,048 |    |  | $      | 3,559,708  |    |
| Operatingincome(loss)                     |  |                        | 10,796     |                      |  |   | (2,734,237 | )  |  |   | 348,102    |    |  |   | (3,997,991 | )  |
| Interestexpense                           |  |                        | (2,077,088 | )                    |  |   | (1,605,033 | )  |  |   | (4,624,056 | )  |  |   | (3,226,815 | )  |
| Minorityinterest                          |  |                        | 274,005    |                      |  |   | 274,005    |    |  |   | 274,005    |    |  |   | 274,005    |    |
| Netloss from continuingoperations         |  | $                           | (2,022,553 | )                    |  | $      | (4,000,775 | )  |  | $      | (3,918,589 | )  |  | $      | (6,813,067 | )  |
| Basicand diluted net loss per commonshare |  | $                           | (0.05      | )                    |  | $      | (0.10      | )  |  | $      | (0.10      | )  |  | $      | (0.17      | )  |
| Weightedaverage common sharesoutstanding  |  |                        | 39,242,251 |                      |  |   | 39,242,251 |    |  |   | 39,242,251 |    |  |   | 39,242,251 |    |
|                                           |

CriticalAccounting Policies:

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

Thefollowing critical accounting policies affect the more significantjudgments and estimates used in the preparation of the Company’sfinancial statements. In addition, as a result of the acquisition ofthe Mill during the three months ended March  31, 2005, theCompany adopted additional accounting policies as described at Note 2to the condensed consolidated financial statements.

Revenue Recognition:

The Company recognizesrevenues when title passes, the earnings process is substantiallycomplete, and the Company is reasonably assured of the collection ofthe proceeds from the exchange, all of which generally occur eitherupon shipment of the Company’s products or delivery of theproduct at the destination specified by thecustomer.

Accounts Receivable:

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

Inventories:

Inventoriesconsist of raw materials, 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.

Impairment of Assets:

The Company periodicallyevaluates its non-current assets for potential impairment indicators.The Company's judgments regarding the potential impairment arebased on legal factors, market 

25

----

conditions and operational performanceindicators, among others. Future events could cause us to conclude thatimpairment indicators exist and that such assets (primarilyinvestments, notes receivable and fixed assets) areimpaired.

Income Taxes:

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

Results of Operations:

The retail segmentoperations of Beyond the Wall have been presented as a discontinuedoperation for the three months and six months ended March  31,2004. Accordingly, for the three months and six months endedMarch  31,  2004, the Company did not have any revenues orcost of revenues from continuing operations.

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

Three Months Ended March  31, 2005 and2004:

Net Sales.    Net sales were $9,133,777for three months ended March  31, 2005, which reflects Milloperations for the month of March  2005.

Cost ofSales.    Cost of sales was $8,472,228 for the three months endedMarch  31, 2005, which reflects Mill operations for the month ofMarch  2005.

Selling, General and AdministrativeExpenses.    For the three months ended March  31, 2005,selling, general and administrative expenses were $516,544, whichincludes the operations of the Mill for the month of March  2005.For the three months ended March  31, 2004, selling, general andadministrative expenses were $376,414, which reflected corporategeneral and administrative expenses, including management compensation,legal and accounting fees and insurancecosts.

Operating Income (Loss).    Operatingincome was $145,005 for the three months ended March  31, 2005,as compared to an operating loss of $376,414 for the three months endedMarch  31, 2004.

Interest Income.    Forthe three months ended March  31, 2005, interest income was$11,169, as compared to $11,149 for the three months ended March31, 2004.

Interest Expense.    For the threemonths ended March  31, 2005, interest expense was $826,494,which included interest expense for the month of March  2005related to the 8% notes payable ($268,336) and the 13%Series A Preferred Stock ($273,079) issued in conjunction with theacquisition of the Mill, and the 12% notes payable ($71,342).For the three months ended March  31, 2004, interest expense was$10,338.

Transaction Costs Related to KESAcquisition.    The Company incurred $792,954 of costs withrespect to the acquisition of the Mill, which were charged tooperations during the three months ended March  31,  2005.Included in such costs was $187,702 of transaction costs incurred byKES Acquisition.

Other Expense.    For the threemonths ended March  31, 2005, other expense was $12,967. Therewas no other expense for the three months ended March  31,2004.

Loss before Income Taxes and MinorityInterest.    The loss before income taxes and minority interestwas $1,476,241 for the three months ended March  31, 2005, ascompared to $375,603 for the three months ended March  31,2004.

26

----

Income Taxes.    For thethree months ended March  31, 2004, the Company recorded abenefit from income taxes of $12,173. The Company did not record anyprovision for or benefit from income taxes for the three months endedMarch  31, 2005.

Loss before MinorityInterest.    The loss before minority interest was $1,476,241 forthe three months ended March  31, 2005, as compared to $363,430for the three months ended March  31,2004.

Minority Interest.    For the three monthsended March  31, 2005, minority interest was $268,111, reflectingthe minority interest’s share in the loss of YouthStreamAcquisition Corp., an 80.01%-owned consolidatedsubsidiary.

Loss from ContinuingOperations.    The loss from continuing operations was $1,208,130for the three months ended March  31, 2005, as compared to$363,430 for the three months ended March  31,2004.

Loss from Discontinued Operations.    Forthe three months ended March  31, 2004, the Company had a lossfrom discontinued operations of $155,668, reflecting the operations ofBeyond the Wall. The Company also had a loss on the disposal ofdiscontinued operations of $821,721 for the three months endedMarch  31, 2004, as a result of the sale of the assets andoperations of Beyond the Wall in February2004.

Net Loss.    Net loss was $1,208,130 forthe three months ended March  31, 2005, as compared $1,340,819for the three months ended March  31, 2004.

Six MonthsEnded March  31, 2005 and 2004:

NetSales.    Net sales were $9,133,777 for six months endedMarch  31, 2005, which reflects Mill operations for the month ofMarch  2005.

Cost of Sales.    Cost ofsales was $8,472,228 for the six months ended March  31, 2005,which reflects Mill operations for the month of March  2005.

Selling, General and Administrative Expenses.    Forthe six months ended March  31, 2005, selling, general andadministrative expenses were $711,215, which includes the operations ofthe Mill for the month of March  2005. For the six months endedMarch  31, 2004, selling, general and administrative expenseswere $709,957, which reflected corporate general and administrativeexpenses, including management compensation, legal and accounting feesand insurance costs.

Operating Loss.    Operatingloss was $49,666 for the six months ended March  31,  2005,as compared to an operating loss of $709,957 for the six months endedMarch  31, 2004.

Interest Income.    Forthe six months ended March  31, 2005, interest income was$25,534, as compared to $11,448 for the six months ended March31, 2004.

Interest Expense.    For the six monthsended March  31, 2005, interest expense was $837,066, whichincluded interest expense for the month of March  2005 related tothe 8% notes payable ($268,336) and the 13% Series APreferred Stock ($273,079) issued in conjunction with the acquisitionof the Mill, and the 12% notes payable ($71,342). For the sixmonths ended March  31, 2004, interest expense was $20,598.

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

OtherExpense.    For the six months ended March  31, 2005, otherexpense was $30,705. There was no other expense for the six monthsended March  31, 2004.

Loss before Income Taxesand Minority Interest.    The loss before income taxes andminority interest was $1,684,857 for the six months ended March31, 2005, as compared to $719,107 for the six months ended March31, 2004.

27

----

Income Taxes.    For thesix months ended March  31, 2004, the Company recorded a benefitfrom income taxes of $12,113. The Company did not record any provisionfor or benefit from income taxes for the six months ended March31, 2005.

Loss before Minority Interest.    Theloss before minority interest was $1,684,857 for the six months endedMarch  31, 2005, as compared to $706,994 for the six months endedMarch  31, 2004.

Minority Interest.    Forthe six months ended March  31, 2005, minority interest was$268,111, reflecting the minority interest’s share in the lossof YouthStream Acquisition Corp., an 80.01%-owned consolidatedsubsidiary.

Loss from ContinuingOperations.    The loss from continuing operations was $1,416,746for the six months ended March  31, 2005, as compared to $706,994for the six months ended March  31, 2004.

Lossfrom Discontinued Operations.    For the six months endedMarch  31, 2004, the Company had a loss from discontinuedoperations of $476,776, reflecting the operations of Beyond the Wall.The loss from discontinued operations for the six months endedMarch  31, 2004 consisted of an operating loss of $976,776,offset by a gain of $500,000 resulting from the reduction of a prioraccrual with respect to the closing of retail stores. The reduction inthe accrual was a result of the Company completing settlements withlandlords below what had been originally accrued. The Company also hada loss on the disposal of discontinued operations of $821,721 for thesix months ended March  31, 2004, as a result of the sale of theassets and operations of Beyond the Wall in February2004.

Net Loss.    Net loss was $1,416,746 forthe six months ended March  31, 2005, as compared $2,005,491 forthe six months ended March  31, 2004.

Liquidity andCapital Resources – March  31, 2005:

OnMarch  9, 2005, YouthStream completed the acquisition of theMill. YouthStream owns 80.01% of the common stock, and100% of the voting stock, of Acquisition Corp, which owns,directly and indirectly, 100% of KES Acquisition, the legalentity that owns and operates the Mill. Accordingly, YouthStream hasconsolidated the operations of the Mill commencing March  1,2005. As a result of this transaction, the financial statements forperiods ending after March  1, 2005 are materially different fromand are not comparable to the financial statements prior to thatdate.

The Company utilized substantially all of itsavailable cash resources to complete the acquisition of the Mill,including its contribution of an aggregate of $500,000 of cash toAcquisition Corp. and the payment of the costs related to thetransaction. Accordingly, the Company will therefore need to obtainadditional operating capital to fund corporate general andadministrative expenses either through internal or external resources.The Mill relies on cash flows from operations and a line of credit withGeneral Electric Capital Corporation to fund its separate operations.The Company has borrowed the maximum amount available under its line ofcredit with General Electric Capital Corporation and is attempting torestructure the terms of line of credit to be able to increase itsborrowings thereunder.

As of March  31, 2005, thebalance outstanding on the line of credit was $16,625,470, which hasbeen presented as a current liability in the condensed consolidatedbalance sheet at such date due to continuing uncertainty with respectto the Company’s ability to maintain compliance with the minimumfixed charge coverage ratio. At March  31, 2005, KES Acquisitionwas not in compliance with the fixed charge coverage ratio based on itsconsolidated financial statements as originally filed, in part relatingto changes to its accounting procedures as a result of the review ofits financial statements conducted in conjunction with its acquisitionby YouthStream, and subsequently received a waiver of default from thelender. The Company intends to seek an amended waiver of default fromthe lender with respect to the restated March  31, 2005consolidated financial statements. If no such waiver is received, thelender would have the right to accelerate the maturity of the line ofcredit.

28

----

In the event that KES Acquisitionis not in compliance with the fixed charge coverage ratio in futureperiods, the Company intends to seek a further waiver of any defaultfrom the lender, and if no such waiver is received, the lender wouldhave the right to accelerate the maturity of the line of credit at thattime.

To the extent that the Mill generates taxableincome in the future, the Tax Sharing Agreement with Acquisition Corp.and Atacama KES will generate cash payments to YouthStream equal to50% of their respective ‘‘separate company taxliability’’. YouthStream has approximately $250,000,000of federal net operating loss carryovers currently available to offsetany federal income tax liability of Acquisition Corp and Atacama KESsubsequent to February  28, 2005. YouthStream expects that itsfederal net operating loss carryovers will be sufficient to absorb mostof any future federal income tax liability of Acquisition Corp. andAtacama KES.

The Mill restarted operations inJanuary  2004 after being acquired by the previous owners, andhas incurred losses to date. The long-term economic viability of theMill and its ability to fund its operations, as well as to service theinterest and principal obligations on the Notes and the dividends andredemption features on the 13% Series A Preferred Stock issuedin connection with the acquisition of the Mill, is dependent on variousinternal and external factors, including the Mill’s ability tooperate on a sustained basis at 80% or more of its annualcapacity of 240,000 tons per year, as currently configured. To theextent that the Mill is not able to maintain this operating threshold,the ability of the Mill to generate sufficient cash flows to fund itsoperations may be impaired, and the Company may have to consider aformal or information restructuring or reorganization, including a saleof its assets.

Operating Activities.    Duringthe six months ended March  31, 2005, the Company used $1,374,116of cash in operating activities, both to fund the corporate overhead ofYouthStream for the six months ended March  31, 2005 and to fundthe operations of the Mill for the month of March  2005. Duringthe six months ended March  31, 2004, the Company used $654,435of cash in operating activities, primarily to fund its loss fromcontinuing operations in 2004 of $706,994, which consisted of corporategeneral and administrative expenses.

InvestingActivities.    During the six months ended March  31, 2005,net cash used in investing activities was $182,881, consisting of theOctober  31, 2004 scheduled principal payment of $197,734, plusaccrued interest of $49,493, on the note that the Company received inthe February  2004 sale of the assets and operations of Beyondthe Wall, offset by an increase of $430,108 of deferred costs withrespect to the KES transaction. During the six months endedMarch  31, 2004, net cash provided by investing activities of$820,000 consisted of the proceeds received from the sale of the Beyondthe Wall assets and operations in February  2004.

Financing Activities.    During the six months endedMarch  31, 2005, net cash provided by financing activities was$970,740, consisting of $1,005,374 from an increase in the line ofcredit with General Electric Capital Corporation, reduced by principalpayments on long-term debt and capital lease obligations of $34,634.During the six months ended March  31, 2004, the Company did notgenerate or use any cash in financing transactions.

TheCompany acquired $913,194 of cash in connection with the acquisition ofKES Acquisition, LLC.

29

----

Principal Commitments:

AtMarch  31, 2005, the Company's principal commitmentsconsisted of the followingobligations:

|                                                                                                      |  |                      |             |                 |  |                   |            |                  |  |               |            |        |  |        |            |        |  |        |            |        |  |  |
|------------------------------------------------------------------------------------------------------|--|----------------------|-------------|-----------------|--|-------------------|------------|------------------|--|---------------|------------|--------|--|--------|------------|--------|--|--------|------------|--------|--|--|
|                                                                                                 |  | PaymentsDue byPeriod |
| Contractualcash obligations                                                                          |  | Total                |             | Lessthan 1 year |  | Between 2-3 years |            | Between4-5 years |  | After 5 years |
| Notes payableto relatedparties                                                                       |  | $                    | 4,915,434   |            |  | $                 | —    |             |  | $             | —    |   |  | $      | —    |   |  | $      | 4,915,434  |   |
| 12%subordinated promissory notespayable                                                              |  |                 | 7,000,000   |            |  |              | —    |             |  |          | 7,000,000  |   |  |   | —    |   |  |   | —    |   |
| 8%subordinated secured promissory notespayable                                                       |  |                 | 39,493,000  |            |  |              | —    |             |  |          | 18,493,000 |   |  |   | —    |   |  |   | 21,000,000 |   |
| Lineofcredit                                                                                         |  |                 | 16,625,470  |            |  |              | 16,625,470 |             |  |          | —    |   |  |   | —    |   |  |   | —    |   |
| Operatingleases                                                                                      |  |                 | 1,806,243   |            |  |              | 425,868    |             |  |          | 814,402    |   |  |   | 565,973    |   |  |   | —    |   |
| Capitalleaseobligation                                                                               |  |                 | 1,850,644   |            |  |              | 345,519    |             |  |          | 866,597    |   |  |   | 638,528    |   |  |   | —    |   |
| Equipmentcontactpayable                                                                              |  |                 | 285,232     |            |  |              | 73,152     |             |  |          | 169,337    |   |  |   | 42,743     |   |  |   | —    |   |
| Managementservices agreement                                                                         |  |                 | 3,208,333   |            |  |              | 700,000    |             |  |          | 1,400,000  |   |  |   | 1,108,333  |   |  |   | —    |   |
| 4%Series A Preferred Stock subject to mandatoryredemption                                            |  |                 | 5,269,333   |            |  |              | —    |             |  |          | —    |   |  |   | —    |   |  |   | 5,269,333  |   |
| 13%Series A Preferred Stock of subsidiary subject to mandatory redemption,excluding accrueddividends |  |                 | 24,733,000  |            |  |              | —    |             |  |          | 7,916,000  |   |  |   | 7,916,000  |   |  |   | 8,901,000  |   |
| Total                                                                                                |  | $                    | 105,186,689 |            |  | $                 | 18,170,009 |             |  | $             | 36,659,336 |   |  | $      | 10,271,577 |   |  | $      | 40,085,767 |   |
|                                                                                                      |

AtMarch  31, 2005, the Company does not have any materialcommitments for capital expenditures.

At March  31,2005, the Company has various short-term commitments for the purchaseof materials, supplies and energy arising in the ordinary course ofbusiness which aggregated approximately $8,300,000.

Off-BalanceSheet Arrangements:

The Company does not have anytransactions, obligations or relationships that could be consideredoff-balance sheet arrangements at March  31, 2005.

RecentAccounting Pronouncements:

In December  2004, theFASB issued SFAS No. 123(Revised 2004), ‘‘Share-BasedPayment’’. SFAS No. 123(R) revises SFAS No. 123,‘‘Accounting for Stock-Based Compensation’’and supersedes APB Opinion No. 25, ‘‘Accounting for StockIssued to Employees’’ and amends SFAS No. 95,‘‘Statement of Cash Flows’’. SFAS No.123(R) focuses primarily on the accounting for transactions in which anentity obtains employee services in share-based payment transactions.SFAS No. 123(R) requires companies to recognize in the statement ofoperations the cost of employee services received in exchange forawards of equity instruments based on the grant-date fair value ofthose awards (with limited exceptions). SFAS No. 123(R) is effective asof the Company’s first interim or annual reporting period thatbegins after December  15, 2005. Accordingly, the Company willadopt SFAS No. 123(R) in its quarter ending March  31, 2006. TheCompany is currently evaluating the provisions of SFAS No. 123(R) andhas not yet determined the impact, if any, that SFAS No. 123(R) willhave on its financial statement presentation ordisclosures.

In November  2004, the FASB issuedSFAS No. 151, ‘‘InventoryCosts — An Amendment of ARB No. 43,Chapter 4’’ (SFAS No. 151). SFAS No.151 clarifies that abnormal amounts of idle facility expense, freight,handling costs and spoilage should be expensed as incurred and notincluded in overhead. Further, SFAS No. 151 requires thatallocation of fixed and production facilities overheads to conversioncosts should be based on normal capacity of the production facilities.The provisions in SFAS No. 151 are effective for inventory costsincurred during fiscal years beginning after June 15, 2005. TheCompany is currently evaluating the provisions of SFAS No. 151 and hasnot yet determined the impact, if any, that SFAS No. 151 will have onits financial statement presentation or disclosures.

InDecember  2004, the FASB issued SFAS No. 153,‘‘Exchanges of Nonmonetary Assets, an amendment to APBOpinion No. 29’’ (‘‘SFAS No.153’’). SFAS No. 153 amends Accounting Principles

30

----

Board Opinion No. 29,‘‘Accounting for NonmonetaryTransactions’’, to require that exchanges of nonmonetaryassets be measured and accounted for at fair value, rather than atcarryover basis, of the assets exchanged. Nonmonetary exchanges thatlack commercial substance are exempt from this requirement.SFAS No. 153 is effective for nonmonetary exchanges entered intoin fiscal periods beginning after June 15, 2005. The Company iscurrently evaluating the provisions of SFAS No. 153, and has notyet determined the impact, if any, that it will have on theCompany’s financial statement presentation ordisclosures.

31

----

ITEM 3.    CONTROLS ANDPROCEDURES

(a)   Evaluation of Disclosure Controls andProcedures

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

Disclosure controls and procedures are designed to ensurethat information required to be disclosed in the reports filed orsubmitted by the Company under the Securities Exchange Act of 1934 isrecorded, processed, summarized and reported, within the time periodsspecified in the rules and forms of the Securities and ExchangeCommission. Disclosure controls and procedures include, withoutlimitation, controls and procedures designed to ensure that informationrequired to be disclosed in the reports filed under the SecuritiesExchange Act of 1934 is accumulated and communicated to management,including its principal executive and financial officers, asappropriate, to allow timely decisions regarding requireddisclosure.

The Company carried out an evaluation, underthe supervision and with the participation of its management, includingits principal executive and financial officers, of the effectiveness ofthe design and operation of the Company’s disclosure controlsand procedures as of the end of the period covered by this report.Based upon and as of the date of that evaluation, the Company’sprincipal executive and financial officers concluded that there werematerial weaknesses in the internal controls at the Company’ssteel mini-mill acquired effective February  28, 2005, thefinancial statements of which are included in the consolidatedfinancial statements of the Company from that date forward. Inaddition, as a result of this evaluation, the Company’sconsolidated financial reporting and disclosure controls were alsodetermined to have material weaknesses.

Specifically, thesteel mini-mill lacks adequate accounting systems and controls andprocedures to process information for inclusion in the Company’sreports filed with the Securities and Exchange Commission. Furthermore,the steel mini-mill also lacks adequate accounting personnel in generaland adequately trained accounting personnel in particular in order tobe able to process and generate the required financial information tobe included in the Company’s consolidated financial statementson a timely basis. The Company is addressing these issues by reviewingand revising its internal accounting policies and procedures. TheCompany also intends to increase the resources and personnel allocatedto the steel mini-mill’s accounting department. The Companyexpects that the resolution of these issues will take severalmonths.

(b)   Changes in InternalControls

There were no changes in the Company’sinternal controls or in other factors that could have significantlyaffected those controls subsequent to the date of the Company’smost recent evaluation.

32

----

PART II. OTHER INFORMATION

ITEM1.    LEGAL PROCEEDINGS

Not applicable.

ITEM2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OFPROCEEDS

Not applicable.

ITEM 3.    DEFAULTSUPON SENIOR SECURITIES

Effective March  24,2004, KES Acquisition entered into a loan and security agreement, asamended, with General Electric Capital Corporation. Under the terms ofthe agreement, KES Acquisition has the ability to borrow up to$23,000,000, subject to limitations under the lender’s borrowingbase formula and compliance with a minimum fixed charge coverage ratio.Interest is payable monthly in arrears on the outstanding principalbalance at the index rate (defined as the thirty-day dealer commercialpaper rate) plus 5.5% per annum. The line of credit matures onMarch  24, 2007, and is secured by all of the assets of KESAcquisition and a pledge of (i) the membership interests of KESAcquisition owned by Acquisition Corp. and (ii) the capital stock ofAtacama KES owned by Acquisition Corp. As of March  31, 2005, thebalance outstanding on the line of credit was $16,625,470, which hasbeen presented as a current liability in the condensed consolidatedbalance sheet at such date due to continuing uncertainty with respectto the Company’s ability to maintain compliance with the minimumfixed charge coverage ratio.

At March  31, 2005,KES Acquisition was not in compliance with the fixed charge coverageratio based on its consolidated financial statements as originallyfiled, in part relating to changes to its accounting procedures as aresult of the review of its financial statements conducted inconjunction with its acquisition by YouthStream, and subsequentlyreceived a waiver of default from the lender. The Company intends toseek an amended waiver of default from the lender with respect to therestated March  31, 2005 consolidated financial statements. If nosuch waiver is received, the lender would have the right to acceleratethe maturity of the line of credit.

As of March 8, 2006,the Company's subsidiary, YouthStream Acquisition Corp., was indefault with respect to certain terms and provisions of its previouslyissued promissory notes as described below:

1.8.0% Subordinated Secured Promissory Note due February 28, 2015in favor of KES Holdings, LLC in the principal amount of $19,000,000,as amended July 14, 2005.   Accrued interest of approximately$1,520,000 was due and payable on February 28, 2006. 

2.   8.0% Subordinated Secured Promissory Notedue February 28, 2015 in favor of Atacama Capital Holdings, Ltd. in theprincipal amount of $21,000,000, as amended July 14, 2005.Accrued interest of approximately $1,680,000 was due and payable onFebruary 28, 2006. 

The Company is in discussionswith the holders of these Notes in an effort to waive the currentdefault and amend the Notes to revise the interest paymentterms.   No assurance can be given that such a waiver andamendment will be obtained and that the holders of such Notes will notexercise their rights to accelerate payment under such Notes, whichevent would have a material adverse affect on the financial conditionand operations of the Company.  

ITEM4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS

Not applicable.

ITEM 5.    OTHERINFORMATION

Not applicable.

ITEM6.    EXHIBITS

A list of exhibits required to be filedas part of this report is set forth in the Index to Exhibits, whichimmediately precedes such exhibits, and is incorporated herein byreference.

33

----

SIGNATURES

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

|                    |  |                                                  |  |  |  |  |
|--------------------|--|--------------------------------------------------|--|--|--|--|
|               |  | YOUTHSTREAMMEDIA NETWORKS, INC.                  |
|               |  | (Registrant)                                     |
| DATE: March 7,2006 |  | By:   /s/ JONATHANV. DIAMOND |
|               |  | JonathanV. DiamondChief Executive Officer        |
| DATE: March 7,2006 |  | /s/ ROBERT N.WEINGARTEN                     |
|               |  | RobertN. WeingartenChief FinancialOfficer        |
|                    |

34

----

INDEX TOEXHIBITS

|             |                                                                                                                                                                                                                                                                      |
|-------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.88  | Loan and SecurityAgreement dated as of March  24,  2004, as amended, betweenGeneral Electric Capital Corporation and KES Acquisition Company, LLC,previously filed as an exhibit to the Quarterly Report on Form 10-QSBfor the quarterly period ended March  31,2005 |

|             |                                                                                                                                                                                                               |
|-------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.89  | Letter Agreement, datedJuly  14,  2005, regarding 8% subordinated securedpromissory notes, previously filed as an exhibit to the QuarterlyReport on Form 10-QSB for the quarterly period ended March31,  2005 |

|            |                                                                                                     |
|------------|-----------------------------------------------------------------------------------------------------|
| 31.1  | Certification ofthe Chief Executive Officer pursuant to Section 302 of theSarbanes-Oxley Act of2002 |

|            |                                                                                                      |
|------------|------------------------------------------------------------------------------------------------------|
| 31.2  | Certification of the ChiefFinancial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of2002 |

|            |                                                                                                      |
|------------|------------------------------------------------------------------------------------------------------|
| 32.1  | Certification of the ChiefExecutive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of2002 |

|            |                                                                                                      |
|------------|------------------------------------------------------------------------------------------------------|
| 32.2  | Certification of the ChiefFinancial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of2002 |

35

----