**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
      10-QSB**





**ý**
            **QUARTERLY
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934****For
                the Quarterly Period Ended March 31, 2006****o**
            **TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934****For
                the transition period from _____  to _____****Commission
                file number: 0-27556**





**YOUTHSTREAM
      MEDIA NETWORKS, INC.**


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





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





**Not
      applicable**


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





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





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





As
      of
      August 30, 2006, the issuer had 39,242,251 shares of common stock, $0.01 par
      value, issued and outstanding.





Transitional
      Small Business Disclosure Format. Yes [
      ]   No  [x]





Documents
      incorporated by reference: None.










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




**EXPLANATORY
      NOTES**








The
      statements included in this Quarterly Report on Form 10-QSB for the quarterly
      period ended March 31, 2006 (the “Report”) regarding future financial
      performance and results and other statements that are not historical facts
      constitute forward-looking statements. The words "believes," "intends,"
      "expects," "anticipates," "projects," "estimates," "predicts," and similar
      expressions are also intended to identify forward-looking statements. These
      forward-looking statements are based on current expectations and are subject
      to
      risks and uncertainties. In connection with the "safe harbor" provisions of
      the
      Private Securities Litigation Reform Act of 1995, the Company cautions the
      reader that actual results or events could differ materially from those set
      forth or implied by such forward-looking statements and related assumptions
      due
      to certain important factors, including, without limitation, the following:
      (i)
      cyclical changes in market supply and demand for steel, (ii) general economic
      conditions affecting steel consumption, (iii) U.S. or foreign trade policy
      affecting the price of imported steel, (iv) governmental monetary or fiscal
      policy in the U.S. and other major international economies, (v) increased price
      competition brought about by excess domestic and global steelmaking capacity
      and
      imports of low priced steel, (vi) continued consolidation in the domestic and
      global steel industry, resulting in larger producers with much greater market
      power to affect price and/or supply, (vii) changes in the availability or cost
      of steel scrap, which has risen dramatically over the past few years, (viii)
      periodic fluctuations in the availability and cost of electricity, natural
      gas
      or other utilities, (ix) the occurrence of unanticipated equipment failures
      and
      plant outages or the occurrences of extraordinary operating expenses, (x)
      competitive actions by the Company’s domestic and foreign competitors, (xi)
      margin squeeze or compression resulting from the Company’s inability to pass
      through to its customers, through price increases or surcharges, the increased
      cost of raw materials and supplies, (xii) loss of business from one or more
      major customers or end-users, (xiii) labor unrest, work stoppages and/or strikes
      involving the Company’s workforce, those of its important suppliers or
      customers, or those affecting the steel industry in general, (xiv) the effect
      of
      the elements upon the Company’s production or upon the production or needs of
      its important suppliers or customers, (xv) the impact of, or changes in,
      environmental laws or in the application of other legal or regulatory
      requirements upon the Company’s production processes or costs of production or
      upon those of its suppliers or customers, including actions by government
      agencies, such as the U.S. Environmental Protection Agency or the Kentucky
      Department for Environmental Protection, (xvi) private or governmental liability
      claims or litigation, or the impact of any adverse outcome of any litigation
      on
      the adequacy of the Company’s reserves, the availability or adequacy of its
      insurance coverage, its financial well-being or its business and assets, (xvii)
      changes in interest rates or other borrowing costs, or the effect of existing
      loan covenants or restrictions upon the cost or availability of credit to fund
      operations or take advantage of other business opportunities, (xviii) changes
      in
      the Company’s business strategies or development plans which it may adopt or
      which may be brought about in response to actions by its suppliers or customers,
      and any difficulty or inability to successfully consummate or implement as
      planned any planned or potential projects, acquisitions, joint ventures or
      strategic alliances; and (xix) the impact of regulatory or other governmental
      permits or approvals, litigation, construction delays, cost overruns, technology
      risk or operational complications upon the Company’s ability to complete,
      start-up or continue to profitably operate a project or a new business, or
      to
      complete, integrate and operate any potential acquisitions as anticipated.
      The
      Company is also subject to general business risks, including management's
      success in continuing to settle the Company's outstanding obligations from
      its
      prior business activities, results of tax audits, adverse state, federal or
      foreign legislation and regulation, changes in general economic factors, the
      Company's ability to retain and attract key employees, acts of war or global
      terrorism, and unexpected natural disasters. Any forward-looking statements
      included in this Report are made as of the date hereof, based on information
      available to the Company as of the date hereof, and, subject to applicable
      law,
      the Company assumes no obligation to update any forward-looking
      statements.




2





**INDEX**





Page
              Number**PART
                I. FINANCIAL INFORMATION**ITEM
                1.
            FINANCIAL
                STATEMENTSCondensed
                Consolidated Balance Sheets —
              March
                31, 2006 (Unaudited) and September 30, 2005
            4Condensed
                Consolidated Statements of Operations (Unaudited) —
              Three
                Months and Six Months Ended March 31, 2006 and 2005
            6Condensed
                Consolidated Statement of Stockholders’ Deficiency (Unaudited) —
              Six
                Months Ended March 31, 2006
            7Condensed
                Consolidated Statements of Cash Flows (Unaudited) —
              Six
                Months Ended March 31, 2006 and 2005
            8Notes
                to Condensed Consolidated Financial Statements (Unaudited) —
              Three
                Months and Six Months Ended March 31, 2006 and 2005
            9ITEM
                2.
            MANAGEMENT’S
                DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
            23ITEM
                3.
            CONTROLS
                AND PROCEDURES
            38**PART
                II. OTHER INFORMATION**ITEM
                1.
            LEGAL
                PROCEEDINGS
            39ITEM
                2.
            UNREGISTERED
                SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
            39ITEM
                3.
            DEFAULTS
                UPON SENIOR SECURITIES
            39ITEM
                4.
            SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY HOLDERS
            39ITEM
                5.
            OTHER
                INFORMATION
            39ITEM
                6.
            EXHIBITS
            3939SIGNATURES
            40





3





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


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**








**March
                31,****2006**
            
            **September
                30,****2005****(Unaudited)**ASSETSCurrent
                assets:Cash
                and cash equivalents
            
            $
            948,003
            
            $
            998,835Accounts
                receivable, less allowance for doubtful accounts of $870,165 atMarch
                31, 2006 and $747,399 at September 30, 2005
            
            
            14,005,631
            
            
            14,668,539Inventories
            
            
            18,296,946
            
            
            17,880,805Prepaid
                expenses and other current assets
            
            
            1,214,543
            
            
            2,167,382Total
                current assets
            
            
            34,465,123
            
            
            35,715,561Property,
                plant and equipment
            
            
            6,630,012
            
            
            6,630,012Less
                accumulated depreciation and amortization
            
            
            (1,427,350
            )
            
            (1,062,267
            )Property,
                plant and equipment, net
            
            
            5,202,662
            
            
            5,567,745Other
                assets:Deferred
                loan costs, net of amortization of $606,391 atMarch
                31, 2006 and $438,913 at September 30, 2005
            
            
            255,435
            
            
            422,913Deposits
            
            
            215,435
            
            
            216,035Total
                other assets
            
            
            470,870
            
            
            638,948Total
                assets
            
            $
            40,138,655
            
            $
            41,922,254





(continued)




4








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


**CONDENSED
      CONSOLIDATED BALANCE SHEETS (continued)**








**March
                31, 2006**
            
            **September
                30, 2005****(Unaudited)**LIABILITIES
                AND STOCKHOLDERS’ DEFICIENCYCurrent
                liabilities:Accounts
                payable
            
            $
            8,725,626
            
            $
            9,008,612Accrued
                expenses
            
            
            2,704,752
            
            
            2,048,481Accrued
                interest payable:12%
                subordinated promissory notes payable to related parties
            
            
            440,843
            
            
            1,085,7538%
                subordinated promissory notes payable to related parties
            
            
            299,151
            
            
            ---Notes
                payable to directors
            
            
            ---
            
            
            50,000Secured
                line of credit
            
            
            13,600,142
            
            
            19,009,37912%
                subordinated promissory notes payable to related parties
            
            
            7,000,000
            
            
            ---8%
                subordinated promissory notes payable to related parties
            
            
            3,159,416
            
            
            ---Current
                portion of 8% subordinated promissory notes payable to related
                parties
            
            
            1,849,300
            
            
            ---Current
                portion of equipment contract payable
            
            
            80,735
            
            
            77,091Current
                portion of capital lease obligation
            
            
            401,062
            
            
            372,256Liabilities
                related to discontinued operations
            
            
            2,984,660
            
            
            2,984,660Total
                current liabilities
            
            
            41,245,687
            
            
            34,636,232Non-current
                liabilities:Accrued
                interest payable:4%
                note payable to investor
            
            
            127,419
            
            
            107,4198%
                subordinated promissory notes payable to related parties
            
            
            ---
            
            
            1,852,3844%
                note payable to related party, plus cumulative interest of
                $952,775
            
            
            3,952,775
            
            
            3,952,7754%
                note payable to investor, net of unamortized discount
            
            
            966,041
            
            
            964,1948%
                subordinated secured promissory notes payable to related parties,
                less
                current portion
            
            
            37,643,700
            
            
            39,493,00012%
                subordinated promissory notes payable to related parties
            
            
            ---
            
            
            7,000,000Equipment
                contract payable, less current portion
            
            
            131,345
            
            
            172,714Capital
                lease obligation, less current portion
            
            
            1,104,063
            
            
            1,312,064Deferred
                rent
            
            
            126,215
            
            
            144,360Preferred
                stock of subsidiary subject to mandatory redemption; issued and
                outstanding at March 31, 2006 - 25,000 shares, and at September 30,
                2005 -
                24,733 shares of Series A 13% cumulative, non-convertible, redeemable
                preferred stock, mandatory redemption and liquidation value of $1,000.00
                per share, plus cumulative dividends of $3,526,027 at March 31, 2006
                and
                $1,885,129 at September 30, 2005
            
            
            28,526,027
            
            
            26,618,129Preferred
                stock subject to mandatory redemption; issued and outstanding at
                March 31,
                2006 and September 30, 2005 - 1,000,000 shares of Series A 4% cumulative,
                non-convertible, redeemable preferred stock, mandatory redemption
                and
                liquidation value of $4.00 per share, plus cumulative dividends of
                $1,269,333
            
            
            5,269,333
            
            
            5,269,333Minority
                interest - related parties
            
            
            ---
            
            
            ---Total
                liabilities
            
            
            119,092,605
            
            
            121,522,604Commitments
                and contingenciesStockholders’
                deficiency:Preferred
                stock, $0.01 par value; authorized - 5,000,000 shares; issued and
                outstanding at March 31, 2006 and September 30, 2005 - 1,000,000
                shares of
                Series A preferred stock (classified in long-term liabilities as
                preferred
                stock subject to mandatory redemption)
            
            
            ---
            
            
            ---Common
                stock, $0.01 par value; authorized - 100,000,000 shares; issued -
                39,849,751 shares; outstanding -39,242,251 shares at March 31, 2006
                and
                September 30, 2005
            
            
            398,486
            
            
            398,486Additional
                paid-in capital
            
            
            267,835,888
            
            
            268,096,138Accumulated
                deficit
            
            
            (346,358,748
            )
            
            (347,265,398
            )Treasury
                stock - 607,500 shares, at cost
            
            
            (829,576
            )
            
            (829,576
            )Total
                stockholders’ deficiency
            
            
            (78,953,950
            )
            
            (79,600,350
            )Total
                liabilities and stockholders’ deficiency
            
            $
            40,138,655
            
            $
            41,922,254






See
      accompanying notes to condensed consolidated financial statements.






5







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


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








**Three
                Months Ended**
              **March
                31,**
            
            **Six
                Months Ended**
              **March
                31,****2006**
            
            **2005**
            
            **2006**
            
            **2005**NET
                SALES
            
            $
            36,520,950
            
            $
            9,133,777
            
            $
            70,003,792
            
            $
            9,133,777COSTS
                AND EXPENSESCost
                of sales
            
            
            31,603,974
            
            
            8,472,228
            
            
            60,479,506
            
            
            8,472,228Selling
            
            
            410,185
            
            
            112,058
            
            
            795,756
            
            
            112,058General
                and administrative
            
            
            1,656,100
            
            
            404,486
            
            
            2,997,529
            
            
            599,15733,670,259
            
            
            8,988,772
            
            
            64,272,791
            
            
            9,183,443Income
                (loss) from operations
            
            
            2,850,691
            
            
            145,005
            
            
            5,731,001
            
            
            (49,666
            )OTHER
                INCOME (EXPENSE)Interest
                income
            
            
            103
            
            
            11,169
            
            
            202
            
            
            25,534Interest
                expense:
              13%
                Series A Preferred Stock
            
            
            (801,370
            )
            
            (273,079
            )
            
            (1,640,898
            )
            
            (273,079
            )Notes
                payable to related parties
            
            
            (1,016,955
            )
            
            (339,599
            )
            
            (2,025,033
            )
            
            (339,678
            )Other
            
            
            (530,463
            )
            
            (213,816
            )
            
            (1,116,421
            )
            
            (224,309
            )Transaction
                costs related to KES acquisition
            
            
            ---
            
            
            (792,954
            )
            
            ---
            
            
            (792,954
            )Other
                income (expense), net
            
            
            79,110
            
            
            (12,967
            )
            
            85,799
            
            
            (30,705
            )Other
                income (expense), net
            
            
            (2,269,575
            )
            
            (1,621,246
            )
            
            (4,696,351
            )
            
            (1,635,191
            )INCOME
                (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST
            
            
            581,116
            
            
            (1,476,241
            )
            
            1,034,650
            
            
            (1,684,857
            )Income
                taxes
            
            
            65,000
            
            
            ---
            
            
            128,000
            
            
            ---INCOME
                (LOSS) BEFORE MINORITY INTEREST
            
            
            516,116
            
            
            (1,476,241
            )
            
            906,650
            
            
            (1,684,857
            )MINORITY
                INTEREST - related parties
            
            
            ---
            
            
            268,111
            
            
            ---
            
            
            268,111NET
                INCOME (LOSS)
            
            $
            516,116
            
            $
            (1,208,130
            )
            $
            906,650
            
            $
            (1,416,746
            )NET
                INCOME (LOSS) PER COMMON SHARE -Basic
            
            $
            0.01
            
            $
            (0.03
            )
            $
            0.02
            
            $
            (0.04
            )Diluted
            
            $
            0.01
            
            $
            (0.03
            )
            $
            0.02
            
            $
            (0.04
            )WEIGHTED
                AVERAGE NUMBER OF COMMON
              SHARES
                OUTSTANDING -Basic
            
            
            39,242,251
            
            
            39,242,251
            
            
            39,242,251
            
            
            39,242,251Diluted
            
            
            40,038,680
            
            
            39,242,251
            
            
            40,038,680
            
            
            39,242,251





See
      accompanying notes to condensed consolidated financial statements.




6




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


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


**SIX
      MONTHS ENDED MARCH 31, 2006**


**Common
                  Stock****Shares**
              
              **Amount**
              
              **Additional**
                **Paid-in**
                **Capital**
              
              **Accumulated**
                **Deficit**
              
              **Treasury**
                **Stock**
              
              **Total**Balances
                  at October 1, 2005
              
              
              39,849,751
              
              $
              398,486
              
              $
              268,096,138
              
              $
              (347,265,398
              )
              $
              (829,576
              )
              $
              (79,600,350
              )Fair
                  value of stock options
              
              
              --
              
              
              --
              
              
              6,750
              
              
              --
              
              
              --
              
              
              6,750Deemed
                  distribution to sellers of KES Acquisition Company, LLC
              
              
              --
              
              
              --
              
              
              (267,000
              )
              
              --
              
              
              --
              
              
              (267,000
              )Net
                  income
              
              
              --
              
              
              --
              
              
              --
              
              
              906,650
              
              
              --
              
              
              906,650Balances
                  at March 31, 2006
              
              
              39,849,751
              
              $
              398,486
              
              $
              267,835,888
              
              $
              (346,358,748
              )
              $
              (829,576
              )
              $
              (78,953,950
              )





See
      accompanying notes to condensed consolidated financial statements.






7








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


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





**Six
                Months Ended**
              **March
                31,****2006**
            
            **2005**CASH
                FLOWS FROM OPERATING ACTIVITIESNet
                income (loss)
            
            $
            906,650
            
            $
            (1,416,746
            )Adjustments
                to reconcile net income (loss) to net cash provided by (used in)
                operating
                activities:Net
                change in liabilities related to discontinued operations
            
            
            ---
            
            
            (21,727
            )Depreciation
                and amortization
            
            
            365,083
            
            
            66,035Stock-based
                compensation
            
            
            6,750
            
            
            ---Amortization
                of original issue discount on subordinated notes payable
            
            
            1,847
            
            
            1,223Amortization
                of deferred loan costs
            
            
            167,478
            
            
            51,395Write-off
                of fixed assets
            
            
            ---
            
            
            20,430Write-off
                of KES acquisition costs
            
            
            ---
            
            
            792,954Minority
                interest - related parties
            
            
            ---
            
            
            (268,111
            )Changes
                in operating assets and liabilities:(Increase)
                decrease in -Accounts
                receivable, net
            
            
            662,908
            
            
            (41,514
            )Inventories
            
            
            (416,141
            )
            
            327,686Accrued
                interest receivable
            
            
            ---
            
            
            (21,399
            )Prepaid
                expenses
            
            
            952,839
            
            
            (12,833
            )Deposits
            
            
            600
            
            
            ---Increase
                (decrease) in -Accounts
                payable
            
            
            (282,986
            )
            
            (1,118,584
            )Accrued
                interest and dividends payable
            
            
            2,622,171
            
            
            614,867Accrued
                expenses
            
            
            656,271
            
            
            (344,784
            )Deferred
                rent
            
            
            (18,145
            )
            
            (3,008
            )NET
                CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
            
            
            5,625,325
            
            
            (1,374,116
            )CASH
                FLOWS FROM INVESTING ACTIVITIESPrincipal
                and interest payments on BTW note receivable
            
            
            ---
            
            
            247,227Deferred
                costs related to KES transaction
            
            
            ---
            
            
            (430,108
            )NET
                CASH USED IN INVESTING ACTIVITIES
            
            
            ---
            
            
            (182,881
            )CASH
                FLOWS FROM FINANCING ACTIVITIESNet
                borrowings (repayments) under secured line of credit
            
            
            (5,409,237
            )
            
            1,005,374Repayment
                of notes payable to directors
            
            
            (50,000
            )
            
            ---Principal
                payments on equipment contract payable and capital lease
                obligation
            
            
            (216,920
            )
            
            (34,634
            )NET
                CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
            
            
            (5,676,157
            )
            
            970,740NET
                CASH USED IN OPERATING, INVESTING AND FINANCING ACTIVITIES
            
            
            (50,832
            )
            
            (586,257
            )CASH
                ACQUIRED IN CONNECTION WITH KES ACQUISITION
            
            
            ---
            
            
            913,194CASH
                AND CASH EQUIVALENTSNet
                increase (decrease)
            
            
            (50,832
            )
            
            326,937Balance
                at beginning of period
            
            
            998,835
            
            
            674,880


Balance
                at end of period
            
            $
            948,003
            
            $
            1,001,817SUPPLEMENTAL
                CASH FLOW INFORMATIONCash
                paid for -Interest
            
            $
            2,160,181
            
            $
            191,034Income
                taxes
            
            $
            ---
            
            $
            ---NON-CASH
                INVESTING AND FINANCING ACTIVITIESDeemed
                distribution to sellers of KES Acquisition Company, LLC
            
            $
            267,000
            
            $
            ---8%
                promissory notes payable to related parties issued in payment of
                accrued
                interest
            
            $
            3,159,416
            
            $
            ---Preferred
                stock issued in connection with acquisition of KES Acquisition Company,
                LLC
            
            $
            ---
            
            $
            24,733,000Notes
                payable issued in connection with acquisition of KES Acquisition
                Company,
                LLC
            
            $
            ---
            
            $
            39,493,000Non-cash
                assets acquired in connection with acquisition of KES Acquisition
                Company,
                LLC
            
            $
            ---
            
            $
            37,019,827Liabilities
                assumed in connection with acquisition of KES Acquisition Company,
                LLC
            
            $
            ---
            
            $
            36,255,513Deemed
                distribution to sellers of KES Acquisition Company, LLC in excess
                of
                predecessor’s basis
            
            $
            ---
            
            $
            63,104,423Loan
                fees capitalized and added to note principal
            
            $
            ---
            
            $
            125,000




See
      accompanying notes to condensed consolidated financial statements.




8





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


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


**THREE
      MONTHS AND SIX MONTHS ENDED MARCH 31, 2006 AND 2005**








**1.
      Organization and Basis of Presentation**





Basis
      of
      Presentation





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





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





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





The
      accompanying condensed consolidated financial statements are unaudited, but
      in
      the opinion of management of the Company, contain all adjustments, which include
      normal recurring accruals, necessary to present fairly the financial position
      at
      March 31, 2006, the results of operations for the three months and six months
      ended March 31, 2006 and 2005, and the cash flows for the six months ended
      March
      31, 2006 and 2005. The balance sheet as of September 30, 2005 is derived from
      the Company’s audited financial statements included in the Company’s Annual
      Report on Form 10-KSB for the fiscal year ended September 30, 2005.





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





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





The
      results of operations for the three months and six months ended March 31, 2006
      are not necessarily indicative of the results of operations to be expected
      for
      the full fiscal year ending September 30, 2006.





Going
      Concern





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




9





On
      March
      9, 2005, the Company completed the acquisition of a steel mini-mill located
      in
      Ashland, Kentucky (see Note 2). The Company utilized substantially all of its
      available cash resources to fund such acquisition and will require additional
      operating capital to fund corporate general and administrative expenses, which
      the Company expects to obtain primarily through periodic tax sharing payments
      from Acquisition Corp. and Atacama KES (see Note 2). In addition, the steel
      mini-mill restarted operations in late January 2004 after being acquired by
      the
      previous owners, and until recently has incurred losses. For the year ended
      September 30, 2005, operating income was $2,691,955 (which included the
      operations of the steel mini-mill for the seven month period March through
      September 2005), exclusive of interest expense. For the three months and six
      months ended March 31, 2006, operating income was $2,850,691 and $5,731,001,
      respectively, exclusive of interest expense. The steel mini-mill relies on
      cash
      flows from operations to support a secured line of credit with General Electric
      Capital Corporation to fund its separate operations. As a result of improved
      operating performance of the steel mini-mill beginning in late 2005, the Company
      has been able to increase borrowing availability under this line of credit.





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





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





Stock-Based
      Compensation





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




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




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





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




10




Accordingly,
        the Company recognizes compensation cost for equity-based compensation for
        all
        new or modified grants issued after December 31, 2005. The Company did not
        have
        any new or modified grants during the three months ended March 31, 2006.
 
 In
        addition, commencing January 1, 2006, the Company is required to recognize
        the
        unvested portion of the grant date fair value of awards issued prior to the
        adoption of SFAS No. 123R based on the fair values previously calculated
        for
        disclosure purposes over the remaining vesting period of the outstanding
        stock
        options and warrants. The Company had one partially vested stock option
        outstanding at December 31, 2005 (see Note 6). This option fully vested during
        the three months ended March 31, 2006 and compensation cost of $6,750 was
        recognized during the period. As of March 31, 2006, there were no unvested
        stock
        options outstanding.
 
 Although
        the expense for stock options that may be vested or granted in future
        periods cannot be determined at this time due to the uncertainty of the vesting
        or timing of future grants, the Company’s future stock price, and the related
        fair value calculation, the adoption of SFAS No. 123R could have a material
        effect on the Company’s future financial statements.
 
 Pro
        forma
        information regarding net loss per share is required by SFAS No. 123 as if
        the
        Company had accounted for its employee stock options under the fair value
        method
        of such statement. The fair value of these options was estimated on the grant
        date using the Black-Scholes option-pricing model.
 
 For
        purposes of pro forma disclosures, the estimated fair value of the options
        is
        amortized to operations over the vesting period of the options or the expected
        period of benefit. The Company’s unaudited pro forma information is summarized
        as follows:
 
 Six
                  Months
                Ended
                March
                  31, 2006
              
              Three
                  Months
                Ended
                March
                  31,2005
              
              Six
                  Months
                Ended
                March
                  31,2005Net
                  income (loss) - as reported
              
              $
              906,650
              
              $
              (1,208,130
              )
              $
              (1,416,746
              )Less:
                  Total stock-based compensationexpense
                  determined under the fairvalue
                  method for all awards
              
              
              (13,500
              )
              
              (6,750
              )
              
              (6,750
              )Net
                  income (loss) - pro forma
              
              $
              893,150
              
              $
              (1,214,880
              )
              $
              (1,423,496
              )Net
                  income (loss) per share - basic:As
                  reported
              
              $
              0.02
              
              $
              (0.03
              )
              $
              (0.04
              )Pro
                  forma
              
              $
              0.02
              
              $
              (0.03
              )
              $
              (0.04
              )Net
                  income (loss) per share - diluted:As
                  reported
              
              $
              0.02
              
              $
              (0.03
              )
              $
              (0.04
              )Pro
                  forma
              
              $
              0.02
              
              $
              (0.03
              )
              $
              (0.04
              )
 
 Earnings
        Per Share
 
 The
        Company calculates net income (loss) per share as required by SFAS No. 128,
        "Earnings per Share". Basic earnings (loss) per share excludes any dilution
        for common stock equivalents and is computed by dividing net income (loss)
        by
        the weighted average number of common shares outstanding during the relevant
        period. Diluted earnings per share reflects the potential dilution that could
        occur if options or other securities or contracts entitling the holder to
        acquire shares of common stock were exercised or converted, resulting in
        the
        issuance of additional shares of common stock that would then share in earnings.
        However, diluted loss per share does not consider such dilution as its
        effect would be anti- dilutive.
  11
 
 At
        March
        31, 2006 and 2005, potentially dilutive securities entitling the holder thereof
        to acquire shares of common stock are summarized as follows:
 
 **2006**
              
              **2005**Stock
                  options
              
              
              1,405,404
              
              
              1,405,404Common
                  stock purchase warrants
              
              
              1,000,000
              
              
              1,000,000
 
 Concentrations
 
 The
        Company’s cash balances exceeded federally-insured levels at March 31, 2006 and
        September 30, 2005. The Company minimizes its credit risk by investing its
        cash
        and cash equivalents with major banks and financial institutions located
        in the
        United States, as a result of which the Company believes that it had nominal
        risk with respect to its concentration of balances in cash and cash equivalents
        at such date.
 
 During
        the three months ended March 31, 2006, the Company had two suppliers that
        accounted for approximately 59% of raw materials purchases, one supplier
        providing approximately 39% and the other supplier providing approximately
        20%,
        of which $2,630,345 was included in accounts payable at March 31, 2006. During
        the three months ended March 31, 2006, the Company had two customers that
        accounted for approximately 20% of net sales, one customer providing
        approximately 11% and the other customer providing approximately 9%, of which
        $3,347,173 was included in accounts receivable at March 31, 2006.
 
 During
        the six months ended March 31, 2006, the Company had two suppliers that
        accounted for approximately 54% of raw materials purchases, one supplier
        providing approximately 37% and the other supplier providing approximately
        17%,
        of which $2,630,345 was included in accounts payable at March 31, 2006. During
        the six months ended March 31, 2006, the Company had two customers that
        accounted for approximately 19% of net sales, one customer providing
        approximately 11% and the other customer providing approximately 8%, of which
        $3,347,173 was included in accounts receivable at March 31, 2006.
 
 Discontinued
        Operations
 
 As
        of
        March 31, 2006 and September 30, 2005, the Company has accrued liabilities
        $2,984,660 remaining from its discontinued businesses. The accrued liabilities
        consist primarily of severance, lease payments and other costs related to
        the
        operations of the discontinued businesses.
 
 Recent
        Accounting Pronouncements and Developments
 
 In
        May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error
        Corrections” (“SFAS No. 154”). SFAS No. 154 is a replacement of APB
        Opinion No. 20, “Accounting Changes” and SFAS No. 3, “Reporting
        Accounting Changes in Interim Financial Statements - (an Amendment of APB
        Opinion No. 28)” and provides guidance on the accounting for and reporting
        of accounting changes and error corrections. SFAS No. 154 establishes
        retrospective application as the required method for reporting a change in
        accounting principle, and provides guidance for determining whether
        retrospective application of a change in accounting principle is impracticable
        and for reporting a change when retrospective application is impracticable.
        Retrospective application is the application of a different accounting principle
        to a prior accounting period as if that principle had always been used or
        as the
        adjustment of previously issued financial statements to reflect a change
        in the
        reporting entity. SFAS No. 154 also addresses the reporting of the
        correction of an error by restating previously issued financial statements.
        SFAS
        No. 154 is effective for accounting changes and error corrections occurring
        in fiscal years beginning after December 15, 2005. The adoption of SFAS No.
        154 is not expected to have any impact on the Company’s financial statement
        presentation or disclosures.
  12
 
 In
        June
        2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
        Income Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48
        provides criteria for the recognition, measurement, presentation and disclosure
        of uncertain tax positions that has an effect on a company’s financial
        statements accounted for in accordance with SFAS No. 109, “Accounting for Income
        Taxes”, as a result of positions taken or expected to be taken in a company’s
        tax return. A tax benefit from an uncertain position may be recognized only
        if
        it is “more likely than not” that the position is sustainable based on its
        technical merits. The provisions of FIN 48 are effective for fiscal years
        beginning after December 15, 2006. The Company is currently evaluating the
        potential effect that the adoption of FIN 48 will have on the Company's
        financial statement presentation and disclosures.
 
 On
        September 22, 2005, the Securities and Exchange Commission ("SEC") issued
        rules
        to delay by one year the required reporting by management on internal controls
        over financial reporting for non-accelerated filers. The new SEC rule extends
        the compliance date for such registrants to fiscal years ending on or after
        July
        15, 2007. Accordingly, the Company qualifies for the deferral until its fiscal
        year ending September 30, 2007 to comply with the internal control reporting
        requirements. On August 9, 2006, the SEC issued two releases that when adopted
        are designed to grant smaller public companies further relief from compliance
        with Section 404 of the Sarbanes-Oxley Act of 2002.
 
 
 **2.
        Acquisition of Steel Mini-Mill**
 
 In
        September 2003, YouthStream invested $125,000 to acquire a 1.00% membership
        interest in KES Holdings, LLC, a Delaware limited liability company ("KES
        Holdings"), which was formed to acquire certain assets of Kentucky Electric
        Steel, Inc., a Delaware corporation ("KES"), consisting of a steel
        mini-mill located in Ashland, Kentucky (the “Mill”). On September 2, 2003,
        KES Holdings, through its subsidiary, KES Acquisition Company, LLC, a Delaware
        limited liability company ("KES Acquisition"), completed the acquisition
        of the
        Mill pursuant to Section 363 of the United States Bankruptcy Code for cash
        consideration of $2,650,000, which was funded through the capital contributions
        of the members of KES Holdings. Members’ capital contributions were also used
        for start-up costs, working capital purposes and payment of deferred maintenance
        of the Mill. KES had ceased production on or about December 16, 2002 and
        filed a voluntary petition for relief under Chapter 11 of the United States
        Bankruptcy Code on February 5, 2003.
 
 The
        Mill
        had been in operation for approximately forty years and was refurbished by
        KES
        Acquisition subsequent to its acquisition.  The refurbished Mill has been
        generating revenues since late January 2004. The current production capacity
        of
        the Mill for finished products, based on the current operating structure
        and
        man-hours worked, is approximately 200,000 short-tons per year, and the Mill
        is
        currently operating at approximately 99% of such annualized
        capacity.  Management
        is focusing on developing the business and improving operating
        efficiencies.
 
 The
        Mill
        produces bar flats that are produced to a variety of specifications and fall
        primarily into two general quality levels - merchant bar quality steel bar
        flats
        (“MBQ Bar Flats”) for generic types of applications, and special bar quality
        steel bar flats (“SBQ Bar Flats”), where more precise customer specifications
        require the use of alloys, customized equipment and special production
        procedures to insure that the finished product meets critical end-use
        performance characteristics.
 
 The
        Mill
        manufactures over 2,600 different Bar Flat items which are sold to volume
        niche
        markets, including original equipment manufacturers (“OEMs”), cold drawn bar
        converters, steel service centers and the leaf-spring suspension market for
        light- and heavy-duty trucks, mini-vans and utility vehicles. The Mill was
        specifically designed to manufacture wider and thicker bar flats up to three
        inches in thickness and twelve inches in width that are required by these
        markets. In addition, the Mill employs a variety of specially designed equipment
        which is necessary to manufacture SBQ Bar Flats to the specifications of
        the
        Mill’s customers.
 
 On
        March
        9, 2005, YouthStream completed the acquisition of KES Acquisition (the
        "Acquisition"), which was deemed effective March 1, 2005. Pursuant to definitive
        agreements executed with KES Holdings and Atacama Capital Holdings, Ltd.,
        a
        British Virgin Islands company ("Atacama", and together with KES Holdings,
        collectively, the "Sellers"), YouthStream, through its newly-formed subsidiary,
        YouthStream Acquisition Corp., a Delaware corporation ("Acquisition Corp."),
        acquired 100% of the membership interests of KES Acquisition by acquiring
        (i) a
        37.45% membership interest from KES Holdings and (ii) all of the capital
        stock
        of Atacama KES Holding Corporation, a wholly-owned subsidiary of Atacama
        (“Atacama KES”), the owner of the remaining 62.55% membership interest in KES
        Acquisition. As consideration for the Acquisition, Acquisition Corp. issued
        to
        the Sellers (i) $40,000,000 in promissory notes (the “Notes”), (ii) 25,000
        shares of 13% Series A Non-Convertible Preferred Stock with an aggregate
        liquidation value of $25,000,000 (the “13% Series A Preferred Stock”) and (iii)
        100% of its authorized shares of Series B Non-Voting Common Stock. With respect
        to the $65,000,000 of purchase consideration, $19,000,000 of the Notes and
        $10,000,000 of the 13% Series A Preferred Stock were issued to KES Holdings,
        and
        $21,000,000 of the Notes and $15,000,000 of the 13% Series A Preferred Stock
        were issued to Atacama. YouthStream also contributed an aggregate of $500,000
        of
        cash to Acquisition Corp. as consideration for the issuance by Acquisition
        Corp.
        of 100% of its Series A Voting Common Stock. In addition, YouthStream will
        periodically be required to purchase shares of Series B Preferred Stock of
        Acquisition Corp. in amounts equal to distributions it receives on its KES
        Holdings membership interest.
  13
 
 As
        a
        result of these transactions, YouthStream owns 80.01% of the common stock,
        and
        100% of the voting stock, of Acquisition Corp. The remaining 19.99% common
        stock
        interest in Acquisition Corp. is owned 62.55% by Atacama and 37.45% by KES
        Holdings. YouthStream currently has a 2.67% equity interest in KES Holdings
        (this percentage has increased from 1.00% as a result of the redemption of
        another member’s interest), as a result of which the Company has eliminated its
        $507,000 equity interest in the Notes and $267,000 equity interest in the
        13%
        Series A Preferred Stock in the consolidated balance sheet at September 30,
        2005, and its $507,000 equity interest in the Notes and $0 equity interest
        in
        the 13% Series A Preferred Stock in the consolidated balance sheet at March
        31,
        2006 (see Note 6). YouthStream has consolidated the operations of the Mill
        through its ownership of KES Acquisition commencing March 1, 2005. As a result
        of the Acquisition, the Company’s financial statements for periods ending after
        March 1, 2005 are materially different from and are not comparable to its
        financial statements prior to that date.
 
 Subsequent
        to this transaction, the management of the Mill continued unchanged. This
        transaction did not result in any change in the Mill’s business operations or
        financial condition, and, other than as set forth herein, the working capital,
        operating cash flow, debt service obligations and credit profile of the Mill
        were not affected in any way by this transaction.
 
 As
        described herein, the Notes and 13% Series A Preferred Stock were issued
        by
        Acquisition Corp., the parent company of KES Acquisition. KES Acquisition
        is a
        separate legal entity that owns and operates the Mill. The Notes are legal
        obligations solely of Acquisition Corp., and are not obligations of KES
        Acquisition, nor are they secured by the assets or cash flows of the Mill.
        In
        the future, Acquisition Corp. may grant liens to secure repayment of the
        Notes,
        upon the consent of any senior lender to KES Acquisition at that time. In
        addition, the Notes are non-recourse to the assets of YouthStream, except
        for
        the shares of capital stock of Acquisition Corp. that have been pledged by
        YouthStream to the holders of the Notes. Pursuant to the terms of the
        transaction documentation in connection with the Acquisition and the loan
        facility with General Electric Capital Corporation (“GECC”), YouthStream and
        Acquisition Corp. are currently limited in their ability to receive cash
        distributions from KES Acquisition, but are permitted to receive tax sharing
        payments as described below. Any change in control of Acquisition Corp. in
        the
        future as a result of the holders of the Notes exercising their legal rights
        would not reasonably be expected to have a material impact on the operations
        or
        financial position of the Mill.
  The
        Notes
        are structurally subordinate in right and payment of up to $40,000,000 of
        senior
        debt, including existing debt obligations in favor of GECC. Scheduled principal
        payments commence in (i) February 2007 with respect to the $19,000,000 principal
        amount of Notes issued in favor of KES Holdings and (ii) February 2011 with
        respect to the $21,000,000 principal amount of Notes issued in favor of Atacama.
        In addition, the Notes require additional quarterly principal payments out
        of
        "free cash", as that term is defined in the Note Purchase Agreement. The
        Notes
        bear interest at the rate of 8% per annum, payable annually during the first
        two
        years of the Note, as provided for in a letter agreement dated as of July
        14,
        2005 and effective as of February 28, 2005 by and among Acquisition Corp.
        and
        the Note holders, and quarterly thereafter. The obligations of Acquisition
        Corp.
        under the Notes are secured by a limited guaranty by YouthStream, which guaranty
        is secured by and limited in recourse solely to a pledge by YouthStream of
        all
        of its interest in Acquisition Corp. As of September 30, 2005, the balance
        outstanding on the Notes was $39,493,000, and related accrued interest payable
        was $1,852,384. As of March 31, 2006, the balance outstanding on the notes
        was
        $39,493,000 (of which $1,849,300 was classified as a current liability) and
        the
        related accrued interest payable was $276,992 (which was classified as a
        current
        liability).
  14
 
 Future
        scheduled principal payments on the Notes are summarized as
        follows:
 
 **KES
                  Holdings -**
                **$19,000,000
                  Note**
              
              **Atacama
                  -**
                **$21,000,000
                  Note**Years
                  Ending September 30,2006
              
              $
              ---
              
              $
              ---2007
              
              
              1,900,000
              
              
              ---2008
              
              
              950,000
              
              
              ---2009
              
              
              950,000
              
              
              ---2010
              
              
              950,000
              
              
              ---2011
              
              
              2,850,000
              
              
              4,200,0002012
              
              
              2,850,000
              
              
              4,200,0002013
              
              
              2,850,000
              
              
              4,200,0002014
              
              
              ---
              
              
              1,264,0002015
              
              
              5,700,000
              
              
              7,136,000Total
              
              $
              19,000,000
              
              $
              21,000,000
 
 Pursuant
        to a further letter agreement dated April 11, 2006 and effective as of February
        27, 2006 by and among Acquisition Corp. and the Note holders, the interest
        payment of $3,200,000 due on February 27, 2006 was paid by the delivery of
        short-term notes due February 27, 2007 in the principal amount of $3,200,000,
        with interest at 8% per annum. The balance outstanding on the notes, net
        of
        eliminations, was $3,159,416 at March 31, 2006. Accrued interest payable
        was
        $22,159 at March 31, 2006.
 
 For
        the
        nine months ending September 30, 2005, Acquisition Corp., KES Acquisition
        and
        Atacama KES were collectively required to have, on a consolidated basis,
        in
        excess of $4,000,000 of earnings before interest, taxes, depreciation and
        amortization, calculated in accordance with generally accepted accounting
        principles ("EBITDA").  For each of the fiscal years ending on and
        after September 30, 2006, Acquisition Corp., KES Acquisition and Atacama
        KES are
        collectively required to have, on a consolidated basis, in excess of $7,200,000
        of EBITDA.  At March 31 of each fiscal year following the fiscal year
        ending September 30, 2005 in which the obligations under the Notes remain
        outstanding, Acquisition Corp., KES Acquisition and Atacama KES are collectively
        required to have, on a consolidated basis, in excess of $3,000,000 of EBITDA
        for
        the six months then ended. Effective September 23, 2005, the holders of the
        Notes executed an agreement to amend the Notes to eliminate the requirement
        that
        Acquisition Corp., KES Acquisition and Atacama KES collectively have, on
        a
        consolidated basis, in excess of $4,000,000 of EBITDA for the nine months
        ending
        September 30, 2005. The Company was in compliance with this minimum EBITDA
        requirement for the six months ended March 31, 2006.
  The
        holders of each share of 13% Series A Preferred Stock are entitled to receive
        a
        cumulative dividend at an annual rate of 13% of the sum of $1,000 and all
        accrued but unpaid dividends. The 13% Series A Preferred Stock contains a
        liquidation preference equal to $1,000 per share, plus accrued but unpaid
        dividends, and is redeemable out of, and to the extent of, legally available
        funds, at a redemption price equal to the sum of $1,000 and all accrued but
        unpaid dividends on the earlier to occur of (i) any liquidation of Acquisition
        Corp., (ii) the occurrence of an event of default under the Note Purchase
        Agreement pursuant to which the Notes were issued or (iii) the first anniversary
        of Acquisition Corp.’s full and complete repayment of the Notes. In addition,
        beginning with the second anniversary of the initial issuance of the 13%
        Series
        A Preferred Stock, Acquisition Corp. will be required to use "free cash",
        as
        that term is defined in the Securities Purchase Agreement, to commence redeeming
        shares of 13% Series A Preferred Stock in increments of at least $4,000,000,
        with limited exceptions. As of September 30, 2005, the balance outstanding
        on
        the 13% Series A Preferred Stock was $24,733,000, and related accrued dividends
        payable were $1,885,129. As of March 31, 2006, the balance outstanding on
        the
        13% Series A Preferred Stock was $25,000,000 and related accrued dividends
        payable were $3,526,027.
  15
 
 Since
        the
        acquisition of the Mill by the Sellers, the Mill has been operating under
        a
        Management Services Agreement with Pinnacle Steel, LLC (the "Pinnacle
        Agreement"), which agreement remained in effect following the closing. The
        principals of Pinnacle Steel LLC that manage the Mill have significant
        experience and expertise in the steel industry. The Pinnacle Agreement will
        remain in effect through October 31, 2009, subject to earlier termination
        or
        extension based on the financial performance of the Mill. Pinnacle is entitled
        to a monthly management fee and a management incentive fee as provided in
        the
        Pinnacle Agreement.
 
 Subsequent
        to the acquisition of the Mill by the Sellers, KES Acquisition issued an
        aggregate of $7,000,000 of subordinated promissory notes to the Sellers and
        certain of their respective affiliates (the “Subordinated Promissory Notes”).
        The proceeds from the Subordinated Promissory Notes were used to accelerate
        the
        development and expansion of the Mill’s operations. The Subordinated Promissory
        Notes bear interest at the rate of 12% per annum, with interest payable monthly,
        subject to compliance with various agreements and covenants, are secured
        by a
        subordinated security interest in all of the assets of KES Acquisition, and
        are
        subject to an Intercreditor and Subordination Agreement dated March 24, 2004
        with GECC. When originally issued, principal and interest were due and payable
        upon the earlier to occur of (i) an event of default under the Loan and Security
        Agreement with GECC or (ii) each note’s respective due date, which ranged from
        March 31, 2005 to December 31, 2005. As of September 30, 2005, the due dates
        of
        the notes had all been extended to December 31, 2006, if not repaid earlier.
        At
        September 30, 2005, accrued interest payable with respect to the Subordinated
        Promissory Notes was $1,085,753. At March 31, 2006, accrued interest payable
        with respect to the Subordinated Promissory Notes was $440,843.
  Related
        parties with respect to this transaction are summarized as follows: Robert
        Scott
        Fritz, a director of YouthStream, is an investor in KES Holdings. Hal G.
        Byer,
        another director of YouthStream, is an employee of affiliates of Libra/KES
        Investment I, LLC ("Libra/KES"), the Manager of KES Holdings, and has an
        economic interest in KES Holdings through his relationship with Libra
        Securities, LLC ("Libra Securities"). Jess M. Ravich, a director of YouthStream
        effective June 26, 2006, is a principal of Libra/KES. In addition, affiliates
        of
        Mr. Ravich, including a trust for the benefit of Mr. Ravich and certain of
        his
        family members (the “Ravich Trust”) are investors in KES Holdings. Mr. Ravich,
        either directly or through the Ravich Trust, holds 1,860,000 shares of
        YouthStream's common stock, warrants to purchase 500,000 shares of YouthStream's
        common stock exercisable through August 31, 2008, 1,000,000 shares of
        YouthStream's redeemable preferred stock and an option to purchase 200,000
        shares of YouthStream’s common stock exercisable through June 26, 2013, which
        was issued to Mr. Ravich under YouthStream’s 2000 Stock Option Incentive Plan in
        connection with his election to the Board of Directors. Through his positions
        at
        Libra/KES, Mr. Ravich managed the business of KES Acquisition through February
        28, 2005. Subordinated Promissory Notes with a principal amount of $1,650,000
        and $450,000 are payable to the Ravich Trust and Libra Securities Holdings,
        LLC, the parent of Libra Securities, respectively. Mr. Fritz and Mr. Byer
        have
        each previously acquired an option from the Ravich Trust for $2,500 ($0.04
        per
        share) to purchase 62,500 shares of YouthStream's redeemable preferred stock
        issued to the Ravich Trust in January 2003, exercisable at $0.36 per share
        until
        December 31, 2006 or earlier upon the occurrence of certain events.
 
 The
        Acquisition was accounted for as a purchase in accordance with SFAS No. 141,
        “Business Combinations”, and in accordance with Emerging Issues Task Force
        (“EITF”) No. 88-16, “Basis in Leveraged Buyout Transactions”. As a result of the
        substantial and continuing relationships between YouthStream and the Sellers,
        and the provisions of EITF 88-16 that are required to be considered when
        determining the extent of fair value/predecessor basis to be used in recording
        the transaction, the Acquisition has been recorded at predecessor basis.
        Since
        the debt and equity held by the Sellers represented almost the entire amount
        of
        capital at risk both before and after the Acquisition, the application of
        the
“monetary test” specified in Section 3 of EITF 88-16, which limits the portion
        of the purchase consideration that can be valued at fair value to the percentage
        of the total consideration that is monetary, was utilized by the Company
        in
        determining to record the transaction at predecessor basis. The excess of
        the
        purchase price over predecessor basis of the net assets acquired has been
        reflected as a deemed distribution of $63,104,423 to the Sellers at the date
        of
        acquisition in the consolidated financial statements.
 
 For
        taxable periods beginning after February 28, 2005, Acquisition Corp. and
        Atacama
        KES are included in the consolidated federal income tax return filed by
        YouthStream as the common parent.  Acquisition Corp. and Atacama KES have
        entered into a Tax Sharing Agreement with YouthStream, pursuant to which
        they
        have agreed to pay YouthStream an amount equal to 50% of their respective
        "separate company tax liability", subject to compliance with the GECC secured
        line of credit.  The term "separate company tax liability" is defined as
        the amount, if any, of the federal income tax liability (including, without
        limitation, liability for any penalty, fine, additions to tax, interest,
        minimum
        tax and other items applicable to such subsidiary in connection with the
        determination of the subsidiary's tax liability), which such subsidiary
        would have incurred if its federal income tax liability for the periods during
        which it is includible in a consolidated federal income tax return with
        YouthStream were determined generally in the same manner in which its
        separate return liability would have been calculated under Section 1552(a)(2)
        of
        the Internal Revenue Code of 1986, as amended.  YouthStream has
        approximately $255,000,000 of federal net operating loss carryovers currently
        available to offset the consolidated federal taxable income of the affiliated
        group in the future.
  16
 
 The
        total
        purchase price of $65,000,000, as well as the terms and conditions of the
        Notes
        and 13% Series A Preferred Stock issued to the Sellers, was determined to
        be at
        fair value based on reports prepared by an independent valuation firm.
 
 The
        following is a summary of the assets acquired and liabilities assumed at
        predecessor basis at February 28, 2005.
   Assets
                  Acquired:Cash
              
              $
              $
                  913,194Accounts
                  receivable
              
              
              10,781,836Allowance
                  for doubtful accounts
              
              
              (328,351
              )Inventories
              
              
              18,762,218Prepaid
                  expenses and other current assets
              
              
              904,271Property,
                  plant and equipment
              
              
              6,630,012Accumulated
                  depreciation and amortization
              
              
              (639,254
              )Due
                  from YouthStream Acquisition Corp.
              
              
              187,702Other
                  non-current assets
              
              
              721,393Total
                  assets acquired
              
              
              37,933,021
 Liabilities
                  Assumed:Accounts
                  payable
              
              
              9,566,327Accrued
                  expenses
              
              
              1,267,016Accrued
                  interest payable
              
              
              593,260Deferred
                  rent
              
              
              165,413Subordinated
                  promissory notes payable
              
              
              7,000,000Line
                  of credit
              
              
              15,495,095Equipment
                  contract payable
              
              
              291,223Capital
                  lease obligation
              
              
              1,877,179Total
                  liabilities assumed
              
              
              36,255,513Net
                  assets acquired
              
              
              1,677,508Adjustment
                  to recognize minority interest
              
              
              (331,981
              )$
              $
                  1,345,527Total
                  purchase consideration, net of intercompany eliminations of 2.67%
                  interest
                  held by KES Holdings:8%
                  Subordinated secured promissory notes payable
              
              $
              $
                  39,493,00013%
                  Series A preferred stock
              
              
              24,733,000Net
                  purchase consideration
              
              
              64,226,000Minority
                  interests in equity
              
              
              223,950Adjustment
                  to record deemed distribution to Sellers
              
              
              (63,104,423
              )$
              1,345,527
  17
 
 The
        amount due from YouthStream Acquisition Corp. of $187,702 represents costs
        incurred by KES Acquisition with respect to the Acquisition, which were included
        in the $1,171,406 of transaction costs related to the Acquisition charged
        to
        operations during the year ended September 30, 2005.
 
 As
        of
        September 30, 2004, the Company had incurred $175,144 of costs with respect
        to
        the Acquisition, which were presented as deferred costs in the Company’s
        consolidated balance sheet at such date. These costs were included in the
        $1,171,406 of transaction costs related to the Acquisition charged to operations
        during the year ended September 30, 2005.
 
 Minority
        interest - related parties was $430,931 on February 28, 2005. For the year
        ended
        September 30, 2005, the net loss of Acquisition Corp. (an 80.01% consolidated
        subsidiary) allocable to the 19.99% minority shareholders was $681,698, but
        the
        reduction to minority interest - related parties was limited to the balance
        at
        February 28, 2005 of $430,931. Accordingly, the remainder of the net loss
        of
        Acquisition Corp. allocable to the 19.99% minority shareholders for the year
        ended September 30, 2005 of $250,767 was included in the Company’s consolidated
        statement of operations for the year ended September 30, 2005, and will be
        recovered to the extent that Acquisition Corp. generates net income in future
        periods. For the three months and six months ended March 31, 2006, net income
        allocable to the 19.99% minority shareholders was $58,966 and $30,229,
        respectively.
 
 The
        following pro forma operating data shown below presents the results of
        operations for the three months and six months ended March 31, 2005, as if
        the
        Acquisition had occurred on the last day of the immediately preceding fiscal
        period. Accordingly, transaction costs related to the Acquisition are not
        included in the net loss from continuing operations shown below. The pro
        forma
        results are not necessarily indicative of the financial results that might
        have
        occurred had the Acquisition actually taken place on the respective dates,
        or of
        future results of operations. P ro
        forma
        information for the three months and six months ended March 31, 2005 is
        summarized as follows:
 
 **Three
                  Months**
                **Ended**
                **March****31,
                  2005**
              
              **Six
                  Months**
                **Ended**
                **March****31,
                  2005**Net
                  sales
              
              $
              26,250,401
              
              $
              53,738,048Cost
                  of sales
              
              
              25,038,468
              
              
              50,798,656Gross
                  margin
              
              
              1,211,933
              
              
              2,939,392Operating
                  income
              
              
              10,796
              
              
              348,102Interest
                  expense
              
              
              (2,307,088
              )
              
              (4,624,056
              )Minority
                  interest
              
              
              274,005
              
              
              274,005Net
                  loss from continuing operations
              
              $
              (2,022,553
              )
              $
              (3,918,589
              )Basic
                  and diluted net loss per common share
              
              $
              (0.05
              )
              $
              (0.10
              )Weighted
                  average common shares outstanding
              
              
              39,242,251
              
              
              39,242,251
 
 
 Almost
        all of the Company's net assets are owned by KES Acquisition, a consolidated
        subsidiary.  As a result of various contractual restrictions contained in
        various financing agreements (as previously described) and documents relating
        to
        the Acquisition, there are limits on the Company’s ability to transfer assets
        from KES Acquisition to Youthstream, whether in the form of loans and advances,
        cash dividends, tax-sharing payments, or otherwise, without notice to and/or
        consent of one or more third parties.
  18
 
 A
        summary
        of the Company's restricted and unrestricted assets, liabilities and equity
        at
        March 31, 2006 and at September 30, 2005 is presented below.
 
 March
                  31, 2006
              
              Unrestricted
              
              Restricted
              
              As
                  ReportedCurrent
                  assets
              
              $
              603,862
              
              $
              33,861,261
              
              $
              34,465,123Property,
                  plant and equipment, net
              
              
              -
              
              
              5,202,662
              
              
              5,202,662Other
                  assets
              
              
              -
              
              
              470,870
              
              
              470,870Total
                  assets
              
              $
              603,862
              
              $
              39,534,793
              
              $
              40,138,655Current
                  liabilities
              
              $
              9,165,221
              
              $
              32,080,466
              
              $
              41,245,687Non-current
                  liabilities
              
              
              76,485,295
              
              
              1,361,623
              
              
              77,846,918Equity:Retained
                  earnings (accumulated deficit)
              
              
              (351,342,764
              )
              
              4,984,016
              
              
              (346,358,748
              )Other
              
              
              266,296,110
              
              
              1,108,688
              
              
              267,404,798Total
                  liabilities and equity
              
              $
              603,862
              
              $
              39,534,793
              
              $
              40,138,655
 
 September
                  30, 2005
              
              Unrestricted
              
              Restricted
              
              As
                  ReportedCurrent
                  assets
              
              $
              261,740
              
              $
              35,453,821
              
              $
              35,715,561Property,
                  plant and equipment, net
              
              
              -
              
              
              5,567,745
              
              
              5,567,745Other
                  assets
              
              
              -
              
              
              638,948
              
              
              638,948Total
                  assets
              
              $
              261,740
              
              $
              41,660,514
              
              $
              41,922,254Current
                  liabilities
              
              $
              4,224,995
              
              $
              30,411,237
              
              $
              34,636,232Non-current
                  liabilities
              
              
              78,257,234
              
              
              8,629,138
              
              
              86,886,372Equity:Retained
                  earnings (accumulated deficit)
              
              
              (348,435,183
              )
              
              1,169,785
              
              
              (347,265,398
              )Other
              
              
              266,214,694
              
              
              1,450,354
              
              
              267,665,048Total
                  liabilities and equity
              
              $
              261,740
              
              $
              41,660,514
              
              $
              41,922,254
 
 
 **3.
        Inventories**
 
 Inventories
        are comprised of the following at March 31, 2006 and September 30,
        2005:
  March
                    31,2006
                
                September
                    30,2005(Unaudited)Raw
                    materials and scrap
                
                $
                4,106,546
                
                $
                2,954,405Semi-finished
                    goods
                
                
                8,671,115
                
                
                6,556,006Finished
                    goods
                
                
                5,519,285
                
                
                8,370,394Total
                
                $
                18,296,946
                
                $
                17,880,805
 
 
 19
  Inventories
        are comprised of raw materials (consisting of billets and scrap metal),
        semi-finished goods and finished goods. Inventory costs include material,
        labor
        and manufacturing overhead. Inventories are valued at the lower of average
        cost
        or market. The average cost of the billets and scrap metal is adjusted
        periodically to reflect current changes in cost inputs.
 
 
 **4.
        Notes Payable and Long-Term Debt**
 
 **Notes
        Payable to Related Parties**
 
 During
        September 2005, the Company borrowed $50,000 from certain directors under
        short-term unsecured notes due December 31, 2005, with interest at 4% per
        annum,
        to fund corporate general and administrative expenses. The notes were subject
        to
        mandatory prepayment based on any proceeds received by the Company from,
        among
        other sources, the note that the Company received in February 2004 from the
        sale
        of the assets and operations of its subsidiary, Beyond the Wall, Inc., and
        any
        tax sharing payments received under the Tax Sharing Agreement with Acquisition
        Corp. and Atacama KES (see Note 2). On
        September 30, 2005, the Company received a cash payment of $258,922 as
        settlement in full of the outstanding note receivable from the sale of the
        assets and operations of Beyond the Wall, Inc., and repaid the notes payable
        to
        directors in October 2005.
 
 **Subordinated
        Secured Promissory Notes Payable to Related Parties**
 
 Subordinated
        secured promissory notes payable consist of seven notes payable aggregating
        $7,000,000 issued by KES Acquisition to three related parties. The proceeds
        from
        these notes were used to accelerate the development and expansion of the
        steel
        mini-mill’s operations prior to its acquisition by the Company. The notes bear
        interest at 12% per annum, with interest payable monthly, subject to compliance
        with various agreements and covenants, are secured by a subordinated security
        interest in all of the assets of KES Acquisition, and are subject to an
        Intercreditor and Subordination Agreement dated March 24, 2004 with GECC.
        When
        originally issued, principal and interest were due and payable upon the earlier
        to occur of (i) an event of default under the Loan and Security Agreement
        with
        GECC or (ii) each note’s respective due date, which ranged from March 31, 2005
        to December 31, 2005. As of September 30, 2005, the due dates of the notes
        had
        all been extended to December 31, 2006, if not repaid earlier. At March 31,
        2006
        and September 30, 2005, accrued interest payable with respect to the
        subordinated secured promissory notes payable was $440,843 and $1,085,753,
        respectively.
  At March
          31, 2006, the Company was not in compliance with certain covenants under
          its
          loan and security agreement with General Electric Capital Corporation (see
          below), which was an event of default under the terms of its subordinated
          secured promissory notes payable.  On June 26, 2006, the Company received a
          waiver of default from General Electric Capital Corporation, which cured
          the
          default under the subordinated secured promissory notes payable.
  **Secured
          Line of Credit**
 
 Effective
        March 24, 2004, KES Acquisition entered into a loan and security agreement,
        as
        amended, with GECC. Under the terms of the agreement, KES Acquisition has
        the
        ability to borrow up to $23,000,000, subject to limitations under the lender’s
        borrowing base formula and compliance with a minimum fixed charge coverage
        ratio. Interest is payable monthly in arrears on the outstanding principal
        balance at the index rate (defined as the thirty-day dealer commercial paper
        rate) plus 5.5% per annum. The line of credit matures on March 24, 2007,
        and is
        secured by all of the assets of KES Acquisition and a pledge of (i) the
        membership interests of KES Acquisition owned by Acquisition Corp. and (ii)
        the
        capital stock of Atacama KES owned by Acquisition Corp. As of March 31, 2006 and
        September 30, 2005, the balance outstanding on the line of credit was
        $13,600,142 and $19,009,379, respectively, which has been presented as a
        current
        liability in the consolidated balance sheet at such date due to the collateral
        securing such line of credit consisting primarily of current assets and the
        continuing uncertainty with respect to the Company’s ability to maintain
        compliance under the terms and conditions of the line of credit.
 
 At
        March
        31, 2005, KES Acquisition was not in compliance with the fixed charge coverage
        ratio based on its consolidated financial statements as originally filed,
        in
        part relating to changes to its accounting procedures as a result of the
        review
        of its financial statements conducted in conjunction with its acquisition
        by
        YouthStream (see Note 2), and subsequently received a waiver of default from
        the
        lender. At June 30, 2005, KES Acquisition was in compliance with the fixed
        charge coverage ratio based on its consolidated financial statements as
        originally filed. However, KES Acquisition was not in compliance with the
        fixed
        charge coverage ratio at June 30, 2005 based on its revised consolidated
        financial statements, as a result of a determination by management to
        re-characterize a lease for certain equipment used by KES Acquisition as
        a
        capital lease rather than an operating lease. In addition, KES Acquisition
        was
        not in compliance with its obligation to deliver audited financial statements
        in
        the form and time period as set forth in the loan agreement. On June 26,
        2006, the Company received a waiver of default from the lender with respect
        to
        the fixed charge coverage ratio for the restated March 31, 2005 and June
        30,
        2005 interim financial statements, as well as with respect to the form and
        timeliness of the September 30, 2005 annual audited financial statements
        being
        provided to GECC.
  20
 
 At
        March
        31, 2006, December 31, 2005 and September 30, 2005, KES Acquisition was in
        compliance with the fixed charge coverage ratio based on its consolidated
        financial statements.
 
 In
        the
        event that KES Acquisition is not in compliance with the fixed charge coverage
        ratio in any future period, the Company intends to seek a further waiver
        of any
        default from the lender, and if no such waiver is received, the lender would
        have the right to accelerate the maturity of the line of credit at that time.
 
 
 **5.
        Commitment and Contingencies**
 
 Legal
        Proceedings
 
 The
        Company and/or its subsidiary that owned its former operating business, Beyond
        the Wall, Inc., have periodically been defendants in various lawsuits and
        claims
        from various trade creditors and former landlords. Based on the Company’s
        contract relating to the sale of the Beyond the Wall, Inc. assets, certain
        of
        these claims are the responsibility of the buyer of the Beyond the Wall,
        Inc.
        business. The Company evaluates its response in each situation based on the
        particular facts and circumstances of a claim. Accordingly, the ultimate
        outcome
        of these matters cannot be determined at this time and may ultimately result
        in
        judgments and liens against the Company or its assets. The Company has made
        sufficient accruals for the exposure related to such matters that have been
        deemed probable and reasonably estimable at March 31, 2006 and
        September 30, 2005.
 
 KES
        Acquisition has been named in a wrongful death lawsuit pending before the
        Circuit Court of Cabell County, West Virginia, which was filed in December
        2004.
        The action was brought by Stephanie Harshbarger, individually and as
        Administratrix of the Estate of Chad Harshbarger against Aero-Fab, Inc. and
        KES
        Acquisition. Mr. Harshbarger was an employee of Aero-Fab, Inc., an unaffiliated
        contractor, who died while working at the Mill in April 2004. KES Acquisition
        is
        being defended by its insurance carrier. The Company does not believe that
        the
        resolution of this litigation will have a material adverse effect on its
        financial condition or results of operations.
 
 Operating
        Commitments
 
 The
        Mill
        has been operating under a Management Services Agreement with a management
        company effective through October 31, 2009 that provides for the management
        company to provide, at its expense, employees to serve as the General Manager
        of
        the Mill and provide oversight and general management of the operations of
        the
        Mill, for which the management company receives an annual fee of $700,000,
        payable monthly, and bonus payments based on 16.6% of defined earnings before
        interest, taxes, depreciation and amortization (“EBITDA”) in excess of
        $6,000,000 for the fiscal years ending September 30, 2006 and thereafter.
 
 The
        Company has various short-term commitments for the purchase of materials,
        supplies and energy arising in the ordinary course of business which aggregated
        approximately $7,940,000 and $7,962,000 at March 31, 2006 and September 30,
        2005, respectively.
 
 
 **6.
        Common and Preferred Stock**
 
 On
        December 22, 2005, 10,000 shares of 13% Series A Preferred Stock with a face
        amount of $10,000,000 that were originally issued by Acquisition Corp. to
        KES
        Holdings in February 2005 (see Note 2) were transferred to two independent
        charities. Since the Company owned a 2.67% interest in KES Holdings, the
        pro
        rata portion of the face amount of such 13% Series A Preferred Stock and
        the
        related accrued dividends had previously been eliminated in consolidation.
        However, as a result of the transfer of such preferred shares to the two
        charities in December 2005, the Company recorded the previously eliminated
        portion of the face amount of the 13% Series A Preferred Stock ($267,000)
        as a
        deemed distribution to the Sellers of KES Acquisition, consistent with the
        accounting for the Acquisition as described at Note 2, and the previously
        eliminated portion of the preferred stock dividends ($28,243) through December
        22, 2005, as interest expense.
  21
 
 On
        February 15, 2005, the Company issued an option to purchase 200,000 shares
        of
        common stock to a new director, exercisable through February 15, 2012 at
        $0.30
        per share, which was the fair market value on the date of issuance. The fair
        value of the option, calculated pursuant to the Black-Scholes option-pricing
        model, was $54,000 ($0.27 per share). The option vests over a 12-month period
        in
        equal monthly installments beginning March 1, 2005.
 
 
 **7.
        Income Taxes**
 
 Income
        tax expense was $65,000 and $128,000 for the three months and six months
        ended
        March 31, 2006, respectively, consisting of a provision for state income
        taxes.
        No federal income tax provision was provided for the three months and six
        months
        ended March 31, 2006 as a result of the utilization of the Company’s net
        operating loss carryforwards as described below. No federal or state income
        tax
        provision was provided for the three months and six months ended March 31,
        2005
        due to the Company reporting a pre-tax operating loss for such
        periods.
 
 At
        September 30, 2005, the Company had net operating loss carryforwards for
        federal income tax purposes of approximately $291,060,000 that expires from
        2012
        through 2025. The use of approximately $36,000,000 of this net operating
        loss in
        future years may be restricted under Section 382 of the Internal Revenue
        Code.
 
 In
        assessing the potential realization of deferred tax assets, management considers
        whether it is more likely than not that some portion or all of the deferred
        tax
        assets will be realized. The ultimate realization of deferred tax assets
        is
        dependent upon the Company attaining future taxable income during the periods
        in
        which those temporary differences become deductible. As of September 30,
        2005,
        management was unable to determine if it was more likely than not that the
        deferred tax assets would be realized. Accordingly, due to the uncertainty
        surrounding the realization of the benefits of the Company’s tax attributes
        (primarily net operating loss carryforwards), as of September 30, 2005, the
        Company recorded a 100% valuation allowance against its net deferred tax
        assets
        for financial reporting purposes.
 
 The
        Company is subject to periodic audits by federal, state and local tax
        authorities for various tax liabilities incurred in prior periods from the
        parent entity and its subsidiaries, including previously discontinued
        businesses. The amount of any tax assessments and penalties may be material
        and
        may negatively impact the Company’s operations. Given the uncertainty in the
        amount and the difficulty in estimating the probability of the assessments
        arising from future tax audits, the Company has not made any accruals for
        such
        tax contingencies.
 
 For
        taxable periods beginning after February 28, 2005, Acquisition Corp. and
        Atacama
        KES (see Note 2) are included in the consolidated federal income tax return
        filed by YouthStream as the common parent.  Acquisition Corp. and Atacama
        KES have entered into a Tax Sharing Agreement with YouthStream, pursuant
        to
        which they have agreed to pay YouthStream an amount equal to 50% of their
        respective "separate company tax liability", subject to compliance with the
        GECC
        secured line of credit.  The term "separate company tax liability" is
        defined as the amount, if any, of the federal income tax liability (including,
        without limitation, liability for any penalty, fine, additions to tax, interest,
        minimum tax and other items applicable to such subsidiary in connection
        with the determination of the subsidiary's tax liability), which such
        subsidiary would have incurred if its federal income tax liability for the
        periods during which it is includible in a consolidated federal income tax
        return with YouthStream were determined generally in the same manner in
        which its separate return liability would have been calculated under Section
        1552(a)(2) of the Internal Revenue Code of 1986, as amended.  YouthStream
        has approximately $255,000,000 of federal net operating loss carryovers
        currently available to offset the consolidated federal taxable income of
        the
        affiliated group in the future.
  22
 
 **ITEM
        2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**
 
 **General
        Overview:**
 
 Commencing
        March 1, 2005, the Company has included the operations of a steel mini-mill
        located in Ashland, Kentucky, which represents the only business segment
        in
        which the Company currently operates, in its consolidated financial statements.
        The Company completed the acquisition of this steel mini-mill on March 9,
        2005
        (see “Acquisition of Steel Mini-Mill” below).
 
 **Recent
        Developments:**
 
 During
        September 2005, the Company borrowed $50,000 from certain directors under
        short-term unsecured notes due December 31, 2005, with interest at 4% per
        annum,
        to fund corporate general and administrative expenses. The notes were subject
        to
        mandatory prepayment based on any proceeds received by the Company from,
        among
        other sources, the note that the Company received in February 2004 from the
        sale
        of the assets and operations of its subsidiary, Beyond the Wall, Inc., and
        any
        tax sharing payments received under the Tax Sharing Agreement with Acquisition
        Corp. and Atacama KES (see “Acquisition of Steel Mini-Mill” below). On
        September 30, 2005, the Company received a cash payment of $258,922 as
        settlement in full of the outstanding note receivable from the sale of the
        assets and operations of Beyond the Wall, Inc., and repaid the notes payable
        to
        directors in October 2005.
 
 **Acquisition
        of Steel Mini-Mill:**
 
 In
        September 2003, YouthStream invested $125,000 to acquire a 1.00% membership
        interest in KES Holdings, LLC, a Delaware limited liability company ("KES
        Holdings"), which was formed to acquire certain assets of Kentucky Electric
        Steel, Inc., a Delaware corporation ("KES"), consisting of a steel
        mini-mill located in Ashland, Kentucky (the “Mill”). On September 2, 2003,
        KES Holdings, through its subsidiary, KES Acquisition Company, LLC, a Delaware
        limited liability company ("KES Acquisition"), completed the acquisition
        of the
        Mill pursuant to Section 363 of the United States Bankruptcy Code for cash
        consideration of $2,650,000, which was funded through the capital contributions
        of the members of KES Holdings. Members’ capital contributions were also used
        for start-up costs, working capital purposes and payment of deferred maintenance
        of the Mill. KES had ceased production on or about December 16, 2002 and
        filed a voluntary petition for relief under Chapter 11 of the United States
        Bankruptcy Code on February 5, 2003.
 
 The
        Mill
        had been in operation for approximately forty years and was refurbished by
        KES
        Acquisition subsequent to its acquisition.  The refurbished Mill has been
        generating revenues since late January 2004. The current production capacity
        of
        the Mill for finished products, based on the current operating structure
        and
        man-hours worked, is approximately 200,000 short-tons per year, and the Mill
        is
        currently operating at approximately 99% of such annualized
        capacity.  Management
        is focusing on developing the business and improving operating
        efficiencies.
 
 The
        Mill
        produces bar flats that are produced to a variety of specifications and fall
        primarily into two general quality levels - merchant bar quality steel bar
        flats
        (“MBQ Bar Flats”) for generic types of applications, and special bar quality
        steel bar flats (“SBQ Bar Flats”), where more precise customer specifications
        require the use of alloys, customized equipment and special production
        procedures to insure that the finished product meets critical end-use
        performance characteristics.
 
 The
        Mill
        manufactures over 2,600 different Bar Flat items which are sold to volume
        niche
        markets, including original equipment manufacturers (“OEMs”), cold drawn bar
        converters, steel service centers and the leaf-spring suspension market for
        light- and heavy-duty trucks, mini-vans and utility vehicles. The Mill was
        specifically designed to manufacture wider and thicker bar flats up to three
        inches in thickness and twelve inches in width that are required by these
        markets. In addition, the Mill employs a variety of specially designed equipment
        which is necessary to manufacture SBQ Bar Flats to the specifications of
        the
        Mill’s customers.
 
 On
        March
        9, 2005, YouthStream completed the acquisition of KES Acquisition (the
        "Acquisition"), which was deemed effective March 1, 2005. Pursuant to definitive
        agreements executed with KES Holdings and Atacama Capital Holdings, Ltd.,
        a
        British Virgin Islands company ("Atacama", and together with KES Holdings,
        collectively, the "Sellers"), YouthStream, through its newly-formed subsidiary,
        YouthStream Acquisition Corp., a Delaware corporation ("Acquisition Corp."),
        acquired 100% of the membership interests of KES Acquisition by acquiring
        (i) a
        37.45% membership interest from KES Holdings and (ii) all of the capital
        stock
        of Atacama KES Holding Corporation, a wholly-owned subsidiary of Atacama
        (“Atacama KES”), the owner of the remaining 62.55% membership interest in KES
        Acquisition. As consideration for the Acquisition, Acquisition Corp. issued
        to
        the Sellers (i) $40,000,000 in promissory notes (the “Notes”), (ii) 25,000
        shares of 13% Series A Non-Convertible Preferred Stock with an aggregate
        liquidation value of $25,000,000 (the “13% Series A Preferred Stock”) and (iii)
        100% of its authorized shares of Series B Non-Voting Common Stock. With respect
        to the $65,000,000 of purchase consideration, $19,000,000 of the Notes and
        $10,000,000 of the 13% Series A Preferred Stock were issued to KES Holdings,
        and
        $21,000,000 of the Notes and $15,000,000 of the 13% Series A Preferred Stock
        were issued to Atacama. YouthStream also contributed an aggregate of $500,000
        of
        cash to Acquisition Corp. as consideration for the issuance by Acquisition
        Corp.
        of 100% of its Series A Voting Common Stock. In addition, YouthStream will
        periodically be required to purchase shares of Series B Preferred Stock of
        Acquisition Corp. in amounts equal to distributions it receives on its KES
        Holdings membership interest.
  23
 
 As
        a
        result of these transactions, YouthStream owns 80.01% of the common stock,
        and
        100% of the voting stock, of Acquisition Corp. The remaining 19.99% common
        stock
        interest in Acquisition Corp. is owned 62.55% by Atacama and 37.45% by KES
        Holdings. YouthStream currently has a 2.67% equity interest in KES Holdings
        (this percentage has increased from 1.00% as a result of the redemption of
        another member’s interest), as a result of which the Company has eliminated its
        $507,000 equity interest in the Notes and $267,000 equity interest in the
        13%
        Series A Preferred Stock in the consolidated balance sheet at September 30,
        2005, and its $507,000 equity interest in the Notes and $0 equity interest
        in
        the 13% Series A Preferred Stock in the consolidated balance sheet at March
        31,
        2006. YouthStream has consolidated the operations of the Mill through its
        ownership of KES Acquisition commencing March 1, 2005. As a result of the
        Acquisition, the Company’s financial statements for periods ending after March
        1, 2005 are materially different from and are not comparable to its financial
        statements prior to that date.
 
 Subsequent
        to this transaction, the management of the Mill continued unchanged. This
        transaction did not result in any change in the Mill’s business operations or
        financial condition, and, other than as set forth herein, the working capital,
        operating cash flow, debt service obligations and credit profile of the Mill
        were not affected in any way by this transaction.
 
 As
        described herein, the Notes and 13% Series A Preferred Stock were issued
        by
        Acquisition Corp., the parent company of KES Acquisition. KES Acquisition
        is a
        separate legal entity that owns and operates the Mill. The Notes are legal
        obligations solely of Acquisition Corp., and are not obligations of KES
        Acquisition, nor are they secured by the assets or cash flows of the Mill.
        In
        the future, Acquisition Corp. may grant liens to secure repayment of the
        Notes,
        upon the consent of any senior lender to KES Acquisition at that time. In
        addition, the Notes are non-recourse to the assets of YouthStream, except
        for
        the shares of capital stock of Acquisition Corp. that have been pledged by
        YouthStream to the holders of the Notes. Pursuant to the terms of the
        transaction documentation in connection with the Acquisition and the loan
        facility with General Electric Capital Corporation (“GECC”), YouthStream and
        Acquisition Corp. are currently limited in their ability to receive cash
        distributions from KES Acquisition, but are permitted to receive tax sharing
        payments as described below. Any change in control of Acquisition Corp. in
        the
        future as a result of the holders of the Notes exercising their legal rights
        would not reasonably be expected to have a material impact on the operations
        or
        financial position of the Mill.
  The
        Notes
        are structurally subordinate in right and payment of up to $40,000,000 of
        senior
        debt, including existing debt obligations in favor of GECC. Scheduled principal
        payments commence in (i) February 2007 with respect to the $19,000,000 principal
        amount of Notes issued in favor of KES Holdings and (ii) February 2011 with
        respect to the $21,000,000 principal amount of Notes issued in favor of Atacama.
        In addition, the Notes require additional quarterly principal payments out
        of
        "free cash", as that term is defined in the Note Purchase Agreement. The
        Notes
        bear interest at the rate of 8% per annum, payable annually during the first
        two
        years of the Note, as provided for in a letter agreement dated as of July
        14,
        2005 and effective as of February 28, 2005 by and among Acquisition Corp.
        and
        the Note holders, and quarterly thereafter. The obligations of Acquisition
        Corp.
        under the Notes are secured by a limited guaranty by YouthStream, which guaranty
        is secured by and limited in recourse solely to a pledge by YouthStream of
        all
        of its interest in Acquisition Corp. As of September 30, 2005, the balance
        outstanding on the Notes was $39,493,000, and related accrued interest payable
        was $1,852,384. As of March 31, 2006, the balance outstanding on the notes
        was
        $39,493,000 (of which $1,849,300 was classified as a current liability) and
        the
        related accrued interest payable was $276,992 (which was classified as a
        current
        liability).
  24
 
 Future
        scheduled principal payments on the Notes are summarized as
        follows:
 
 **KES
                  Holdings -**
                **$19,000,000
                  Note**
              
              **Atacama
                  -**
                **$21,000,000
                  Note**Years
                  Ending September 30,2006
              
              $
              ---
              
              $
              ---2007
              
              
              1,900,000
              
              
              ---2008
              
              
              950,000
              
              
              ---2009
              
              
              950,000
              
              
              ---2010
              
              
              950,000
              
              
              ---2011
              
              
              2,850,000
              
              
              4,200,0002012
              
              
              2,850,000
              
              
              4,200,0002013
              
              
              2,850,000
              
              
              4,200,0002014
              
              
              ---
              
              
              1,264,0002015
              
              
              5,700,000
              
              
              7,136,000Total
              
              $
              19,000,000
              
              $
              21,000,000
 
 Pursuant
        to a further letter agreement dated April 11, 2006 and effective as of February
        27, 2006 by and among Acquisition Corp. and the Note holders, the interest
        payment of $3,200,000 due on February 27, 2006 was paid by the delivery of
        short-term notes due February 27, 2007 in the principal amount of $3,200,000,
        with interest at 8% per annum. The balance outstanding on the notes, net
        of
        eliminations, was $3,159,416, at March 31, 2006. Accrued interest payable
        was
        $22,159 at March 31, 2006.
 
 For
        the
        nine months ending September 30, 2005, Acquisition Corp., KES Acquisition
        and
        Atacama KES were collectively required to have, on a consolidated basis,
        in
        excess of $4,000,000 of earnings before interest, taxes, depreciation and
        amortization, calculated in accordance with generally accepted accounting
        principles ("EBITDA").  For each of the fiscal years ending on and
        after September 30, 2006, Acquisition Corp., KES Acquisition and Atacama
        KES are
        collectively required to have, on a consolidated basis, in excess of $7,200,000
        of EBITDA.  At March 31 of each fiscal year following the fiscal year
        ending September 30, 2005 in which the obligations under the Notes remain
        outstanding, Acquisition Corp., KES Acquisition and Atacama KES are collectively
        required to have, on a consolidated basis, in excess of $3,000,000 of EBITDA
        for
        the six months then ended. Effective September 23, 2005, the holders of the
        Notes executed an agreement to amend the Notes to eliminate the requirement
        that
        Acquisition Corp., KES Acquisition and Atacama KES collectively have, on
        a
        consolidated basis, in excess of $4,000,000 of EBITDA for the nine months
        ending
        September 30, 2005. The Company was in compliance with this minimum EBITDA
        requirement for the six months ended March 31, 2006.
  The
        holders of each share of 13% Series A Preferred Stock are entitled to receive
        a
        cumulative dividend at an annual rate of 13% of the sum of $1,000 and all
        accrued but unpaid dividends. The 13% Series A Preferred Stock contains a
        liquidation preference equal to $1,000 per share, plus accrued but unpaid
        dividends, and is redeemable out of, and to the extent of, legally available
        funds, at a redemption price equal to the sum of $1,000 and all accrued but
        unpaid dividends on the earlier to occur of (i) any liquidation of Acquisition
        Corp., (ii) the occurrence of an event of default under the Note Purchase
        Agreement pursuant to which the Notes were issued or (iii) the first anniversary
        of Acquisition Corp.’s full and complete repayment of the Notes. In addition,
        beginning with the second anniversary of the initial issuance of the 13%
        Series
        A Preferred Stock, Acquisition Corp. will be required to use "free cash",
        as
        that term is defined in the Securities Purchase Agreement, to commence redeeming
        shares of 13% Series A Preferred Stock in increments of at least $4,000,000,
        with limited exceptions. As of September 30, 2005, the balance outstanding
        on
        the 13% Series A Preferred Stock was $24,733,000, and related accrued dividends
        payable were $1,885,129. As of March 31, 2006, the balance outstanding on
        the
        13% Series A Preferred Stock was $25,000,000 and related accrued dividends
        payable were $3,526,027.
  25
 
 Since
        the
        acquisition of the Mill by the Sellers, the Mill has been operating under
        a
        Management Services Agreement with Pinnacle Steel, LLC (the "Pinnacle
        Agreement"), which agreement remained in effect following the closing. The
        principals of Pinnacle Steel LLC that manage the Mill have significant
        experience and expertise in the steel industry. The Pinnacle Agreement will
        remain in effect through October 31, 2009, subject to earlier termination
        or
        extension based on the financial performance of the Mill. Pinnacle is entitled
        to a monthly management fee and a management incentive fee as provided in
        the
        Pinnacle Agreement.
 
 Subsequent
        to the acquisition of the Mill by the Sellers, KES Acquisition issued an
        aggregate of $7,000,000 of subordinated promissory notes to the Sellers and
        certain of their respective affiliates (the “Subordinated Promissory Notes”).
        The proceeds from the Subordinated Promissory Notes were used to accelerate
        the
        development and expansion of the Mill’s operations. The Subordinated Promissory
        Notes bear interest at the rate of 12% per annum, with interest payable monthly,
        subject to compliance with various agreements and covenants, are secured
        by a
        subordinated security interest in all of the assets of KES Acquisition, and
        are
        subject to an Intercreditor and Subordination Agreement dated March 24, 2004
        with GECC. When originally issued, principal and interest were due and payable
        upon the earlier to occur of (i) an event of default under the Loan and Security
        Agreement with GECC or (ii) each note’s respective due date, which ranged from
        March 31, 2005 to December 31, 2005. As of September 30, 2005, the due dates
        of
        the notes had all been extended to December 31, 2006, if not repaid earlier.
        At
        September 30, 2005, accrued interest payable with respect to the Subordinated
        Promissory Notes was $1,085,753. At March 31, 2006, accrued interest payable
        with respect to the Subordinated Promissory Notes was $440,843.
  Related
        parties with respect to this transaction are summarized as follows: Robert
        Scott
        Fritz, a director of YouthStream, is an investor in KES Holdings. Hal G.
        Byer,
        another director of YouthStream, is an employee of affiliates of Libra/KES
        Investment I, LLC ("Libra/KES"), the Manager of KES Holdings, and has an
        economic interest in KES Holdings through his relationship with Libra
        Securities, LLC ("Libra Securities"). Jess M. Ravich, a director of YouthStream
        effective June 26, 2006, is a principal of Libra/KES. In addition, affiliates
        of
        Mr. Ravich, including a trust for the benefit of Mr. Ravich and certain of
        his
        family members (the “Ravich Trust”) are investors in KES Holdings. Mr. Ravich,
        either directly or through the Ravich Trust, holds 1,860,000 shares of
        YouthStream's common stock, warrants to purchase 500,000 shares of YouthStream's
        common stock exercisable through August 31, 2008, 1,000,000 shares of
        YouthStream's redeemable preferred stock and an option to purchase 200,000
        shares of YouthStream’s common stock exercisable through June 26, 2013, which
        was issued to Mr. Ravich under YouthStream’s 2000 Stock Option Incentive Plan in
        connection with his election to the Board of Directors. Through his positions
        at
        Libra/KES, Mr. Ravich managed the business of KES Acquisition through February
        28, 2005. Subordinated Promissory Notes with a principal amount of $1,650,000
        and $450,000 are payable to the Ravich Trust and Libra Securities Holdings,
        LLC, the parent of Libra Securities, respectively. Mr. Fritz and Mr. Byer
        have
        each previously acquired an option from the Ravich Trust for $2,500 ($0.04
        per
        share) to purchase 62,500 shares of YouthStream's redeemable preferred stock
        issued to the Ravich Trust in January 2003, exercisable at $0.36 per share
        until
        December 31, 2006 or earlier upon the occurrence of certain events.
 
 The
        Acquisition was accounted for as a purchase in accordance with SFAS No. 141,
        “Business Combinations”, and in accordance with Emerging Issues Task Force
        (EITF) No. 88-16, “Basis in Leveraged Buyout Transactions”. As a result of the
        substantial and continuing relationships between YouthStream and the Sellers,
        and the provisions of EITF 88-16 that are required to be considered when
        determining the extent of fair value/predecessor basis to be used in recording
        the transaction, the Acquisition has been recorded at predecessor basis.
        Since
        the debt and equity held by the Sellers represented almost the entire amount
        of
        capital at risk both before and after the Acquisition, the application of
        the
“monetary test” specified in Section 3 of EITF 88-16, which limits the portion
        of the purchase consideration that can be valued at fair value to the percentage
        of the total consideration that is monetary, was utilized by the Company
        in
        determining to record the transaction at predecessor basis. The excess of
        the
        purchase price over predecessor basis of the net assets acquired has been
        reflected as a deemed distribution of $63,104,423 to the Sellers at the date
        of
        acquisition in the consolidated financial statements.
 
 For
        taxable periods beginning after February 28, 2005, Acquisition Corp. and
        Atacama
        KES are included in the consolidated federal income tax return filed by
        YouthStream as the common parent.  Acquisition Corp. and Atacama KES have
        entered into a Tax Sharing Agreement with YouthStream, pursuant to which
        they
        have agreed to pay YouthStream an amount equal to 50% of their respective
        "separate company tax liability", subject to compliance with the GECC secured
        line of credit.  The term "separate company tax liability" is defined as
        the amount, if any, of the federal income tax liability (including, without
        limitation, liability for any penalty, fine, additions to tax, interest,
        minimum
        tax and other items applicable to such subsidiary in connection with the
        determination of the subsidiary's tax liability), which such subsidiary
        would have incurred if its federal income tax liability for the periods during
        which it is includible in a consolidated federal income tax return with
        YouthStream were determined generally in the same manner in which its
        separate return liability would have been calculated under Section 1552(a)(2)
        of
        the Internal Revenue Code of 1986, as amended.  YouthStream has
        approximately $255,000,000 of federal net operating loss carryovers currently
        available to offset the consolidated federal taxable income of the affiliated
        group in the future.
  26
 
 The
        total
        purchase price of $65,000,000, as well as the terms and conditions of the
        Notes
        and 13% Series A Preferred Stock issued to the Sellers, was determined to
        be at
        fair value based on reports prepared by an independent valuation firm.
 
 The
        following is a summary of the assets acquired and liabilities assumed at
        predecessor basis at February 28, 2005.
 
 Assets
                  Acquired:Cash
              
              $
              913,194Accounts
                  receivable
              
              
              10,781,836Allowance
                  for doubtful accounts
              
              
              (328,351
              )Inventories
              
              
              18,762,218Prepaid
                  expenses and other current assets
              
              
              904,271Property,
                  plant and equipment
              
              
              6,630,012Accumulated
                  depreciation and amortization
              
              
              (639,254
              )Due
                  from YouthStream Acquisition Corp.
              
              
              187,702Other
                  non-current assets
              
              
              721,393Total
                  assets acquired
              
              
              37,933,021
 
 Liabilities
                  Assumed:Accounts
                  payable
              
              
              9,566,327Accrued
                  expenses
              
              
              1,267,016Accrued
                  interest payable
              
              
              593,260Deferred
                  rent
              
              
              165,413Subordinated
                  promissory notes payable
              
              
              7,000,000Line
                  of credit
              
              
              15,495,095Equipment
                  contract payable
              
              
              291,223Capital
                  lease obligation
              
              
              1,877,179Total
                  liabilities assumed
              
              
              36,255,513Net
                  assets acquired
              
              
              1,677,508Adjustment
                  to recognize minority interest
              
              
              (331,981
              )$
              1,345,527Total
                  purchase consideration, net of intercompany eliminations of 2.67%
                  interest
                  held by KES Holdings:8%
                  Subordinated secured promissory notes payable
              
              $
              39,493,00013%
                  Series A preferred stock
              
              
              24,733,000Net
                  purchase consideration
              
              
              64,226,000Minority
                  interests in equity
              
              
              223,950Adjustment
                  to record deemed distribution to Sellers
              
              
              (63,104,423
              )$
              1,345,527
   27
 
 The
        amount due from YouthStream Acquisition Corp. of $187,702 represents costs
        incurred by KES Acquisition with respect to the Acquisition, which were included
        in the $1,171,406 of transaction costs related to the Acquisition charged
        to
        operations during the year ended September 30, 2005.
 
 As
        of
        September 30, 2004, the Company had incurred $175,144 of costs with respect
        to
        the Acquisition, which were presented as deferred costs in the Company’s
        consolidated balance sheet at such date. These costs were included in the
        $1,171,406 of transaction costs related to the Acquisition charged to operations
        during the year ended September 30, 2005.
 
 Minority
        interest - related parties was $430,931 on February 28, 2005. For the year
        ended
        September 30, 2005, the net loss of Acquisition Corp. (an 80.01% consolidated
        subsidiary) allocable to the 19.99% minority shareholders was $681,698, but
        the
        reduction to minority interest - related parties was limited to the balance
        at
        February 28, 2005 of $430,931. Accordingly, the remainder of the net loss
        of
        Acquisition Corp. allocable to the 19.99% minority shareholders for the year
        ended September 30, 2005 of $250,767 was included in the Company’s consolidated
        statement of operations for the year ended September 30, 2005, and will be
        recovered to the extent that Acquisition Corp. generates net income in future
        periods. For the three months and six months ended March 31, 2006, net income
        allocable to the 19.99% minority shareholders was $58,966 and $30,229,
        respectively.
 
 **Pro
        Forma Information**
 
 The
        following pro forma operating data shown below presents the results of
        operations for the three months and six months ended March 31, 2005, as if
        the
        Acquisition had occurred on the last day of the immediately preceding fiscal
        period. Accordingly, transaction costs related to the Acquisition are not
        included in the net loss from continuing operations shown below. The pro
        forma
        results are not necessarily indicative of the financial results that might
        have
        occurred had the Acquisition actually taken place on the respective dates,
        or of
        future results of operations. P ro
        forma
        information for the three months and six months ended March 31, 2005 is
        summarized as follows:
 
 **Three
                  Months**
                **Ended**
                **March****31,
                  2005**
              
              **Six
                  Months**
                **Ended**
                **March****31,
                  2005**Net
                  sales
              
              $
              26,250,401
              
              $
              53,738,048Cost
                  of sales
              
              
              25,038,468
              
              
              50,798,656Gross
                  margin
              
              
              1,211,933
              
              
              2,939,392Operating
                  income
              
              
              10,796
              
              
              348,102Interest
                  expense
              
              
              (2,307,088
              )
              
              (4,624,056
              )Minority
                  interest
              
              
              274,005
              
              
              274,005Net
                  loss from continuing operations
              
              $
              (2,022,553
              )
              $
              (3,918,589
              )Basic
                  and diluted net loss per common share
              
              $
              (0.05
              )
              $
              (0.10
              )Weighted
                  average common shares outstanding
              
              
              39,242,251
              
              
              39,242,251
 
 
 **Critical
        Accounting Policies and Estimates:**
 
 The
        Company prepared its financial statements in accordance with accounting
        principles generally accepted in the United States. The preparation of these
        financial statements requires the use of estimates and assumptions that affect
        the reported amounts of assets and liabilities and the disclosure of contingent
        assets and liabilities at the date of the financial statements and the reported
        amount of revenues and expenses during the reporting period. Management
        periodically evaluates the estimates and judgments made. Management bases
        its
        estimates and judgments on historical experience and on various factors that
        are
        believed to be reasonable under the circumstances. Actual results may differ
        from these estimates as a result of different assumptions or
        conditions.
  28
 
 The
        following critical accounting policies affect the more significant judgments
        and
        estimates used in the preparation of the Company’s financial statements.
  Revenue
        Recognition:
  The
        Company recognizes revenue when there is persuasive evidence that an arrangement
        exists, delivery of the product has occurred and title has passed, the selling
        price is both fixed and determinable, and collectibility is reasonably assured,
        all of which generally occur either upon shipment of the Company’s product or
        delivery of the product to the destination specified by the
        customer.
 
 Accounts
        Receivable:
 
 The
        Company grants credit to its customers generally in the form of short-term
        trade
        accounts receivable. Management evaluates the credit risk of its customers
        utilizing historical data and estimates of future performance. Accounts
        receivable are stated at the amount management expects to collect from
        outstanding balances. When appropriate, management provides for probable
        uncollectible amounts through a provision for doubtful accounts and an
        adjustment to a valuation allowance. Management reviews and adjusts this
        allowance periodically based on the aging of accounts receivable balances,
        historical write-off experience, customer concentrations, customer
        creditworthiness, and current industry and economic trends. Balances that
        are
        still outstanding after management has used reasonable collection efforts
        are
        written off through a charge to the valuation allowance and a credit to accounts
        receivable.
 
 Inventories:
 
 Inventories
        are comprised of raw materials (consisting of billets and scrap metal),
        semi-finished goods and finished goods. Inventory costs include material,
        labor
        and manufacturing overhead. Inventories are valued at the lower of average
        cost
        or market. The average cost of the billets and scrap metal is adjusted
        quarterly.
 
 Impairment
        of Assets:
 
 Long-lived
        assets are evaluated for impairment whenever events or changes in circumstances
        indicate that the carrying amount of an asset may not be recoverable in
        accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
        Long-Lived Assets”. An asset is considered impaired if its carrying amount
        exceeds the future net cash flow the asset is expected to generate. If an
        asset
        is considered to be impaired, the impairment to be recognized is measured
        by the
        amount by which the carrying amount of the asset exceeds its fair market
        value.
        The recoverability of long-lived assets is assessed by determining whether
        the
        unamortized balances can be recovered through undiscounted future net cash
        flows
        of the related assets. The amount of impairment, if any, is measured based
        on
        projected discounted future net cash flows using a discount rate reflecting
        the
        Company’s average cost of capital.
 
 Income
        Taxes:
 
 The
        Company accounts for income taxes in accordance with SFAS No. 109,
“Accounting for Income Taxes”. Under this method, deferred income taxes are
        provided for differences between the carrying amounts of the Company’s assets
        and liabilities for financial reporting purposes and the amounts used for
        income
        tax purposes using expected tax rates in effect for the year in which those
        temporary differences are expected to be recovered or settled. KES Acquisition
        Company is a limited liability company and as such does not provide for federal
        and state income taxes. Rather, its income is taxed to its members.
 
 The
        Company records a valuation allowance to reduce its deferred tax assets to
        the
        amount that is more likely than not to be realized. In the event the Company
        was
        to determine that it would be able to realize its deferred tax assets in
        the
        future in excess of its recorded amount, an adjustment to the deferred tax
        assets would be credited to operations in the period such determination was
        made. Likewise, should the Company determine that it would not be able to
        realize all or part of its deferred tax assets in the future, an adjustment
        to
        the deferred tax assets would be charged to operations in the period such
        determination was made.
  29
 
 **Recent
        Accounting Pronouncements and Developments:**
 
 In
        December 2004, the Financial Accounting Standards Board
        (“FASB”) issued SFAS No. 123 (revised 2004), “Share-Based Payment”
(“SFAS No. 123R”), a revision to SFAS No. 123, “Accounting for
        Stock-Based Compensation”. SFAS No. 123R supersedes Accounting Principles
        Board Opinion No. 25, “Accounting for Stock Issued to Employees”, and
        amends SFAS No. 95, “Statement of Cash Flows”. SFAS No. 123R requires
        that the Company measure the cost of employee services received in exchange
        for
        equity awards based on the grant date fair value of the awards. The cost
        will be
        recognized as compensation expense over the vesting period of the awards.
        The
        Company was required to adopt SFAS No. 123R effective January 1,
        2006. Under this method, the Company will recognize compensation cost for
        equity-based compensation for all new or modified grants after the date of
        adoption. The pro forma disclosures previously permitted under SFAS No. 123
        are no longer an alternative to financial statement recognition. In addition,
        the Company will recognize the unvested portion of the grant date fair value
        of
        awards issued prior to adoption based on the fair values previously calculated
        for disclosure purposes over the remaining vesting period of the outstanding
        options and warrants. Although the expense for stock options that may be
        vested or granted in future periods cannot be determined at this time due
        to the
        uncertainty of the vesting or timing of future grants, the Company’s future
        stock price, and the related fair value calculation, the adoption of SFAS
        No. 123R could have a material effect on the Company’s future financial
        statements.
 
 In
        May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error
        Corrections” (“SFAS No. 154”). SFAS No. 154 is a replacement of APB
        Opinion No. 20, “Accounting Changes” and SFAS No. 3, “Reporting
        Accounting Changes in Interim Financial Statements - (an Amendment of APB
        Opinion No. 28)” and provides guidance on the accounting for and reporting
        of accounting changes and error corrections. SFAS No. 154 establishes
        retrospective application as the required method for reporting a change in
        accounting principle, and provides guidance for determining whether
        retrospective application of a change in accounting principle is impracticable
        and for reporting a change when retrospective application is impracticable.
        Retrospective application is the application of a different accounting principle
        to a prior accounting period as if that principle had always been used or
        as the
        adjustment of previously issued financial statements to reflect a change
        in the
        reporting entity. SFAS No. 154 also addresses the reporting of the
        correction of an error by restating previously issued financial statements.
        SFAS
        No. 154 is effective for accounting changes and error corrections occurring
        in fiscal years beginning after December 15, 2005. The adoption of SFAS No.
        154 is not expected to have any impact on the Company’s financial statement
        presentation or disclosures.
 
 In
        June
        2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
        Income Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48
        provides criteria for the recognition, measurement, presentation and disclosure
        of uncertain tax positions that has an effect on a company’s financial
        statements accounted for in accordance with SFAS No. 109, “Accounting for Income
        Taxes”, as a result of positions taken or expected to be taken in a company’s
        tax return. A tax benefit from an uncertain position may be recognized only
        if
        it is “more likely than not” that the position is sustainable based on its
        technical merits. The provisions of FIN 48 are effective for fiscal years
        beginning after December 15, 2006. The Company is currently evaluating the
        potential effect that the adoption of FIN 48 will have on the Company's
        financial statement presentation and disclosures.
 
 On
        September 22, 2005, the Securities and Exchange Commission ("SEC") issued
        rules
        to delay by one year the required reporting by management on internal controls
        over financial reporting for non-accelerated filers. The new SEC rule extends
        the compliance date for such registrants to fiscal years ending on or after
        July
        15, 2007. Accordingly, the Company qualifies for the deferral until its fiscal
        year ending September 30, 2007 to comply with the internal control reporting
        requirements. On August 9, 2006, the SEC issued two releases that when adopted
        are designed to grant smaller public companies further relief from compliance
        with Section 404 of the Sarbanes-Oxley Act of 2002.
  30
 
 **Results
        of Operations:**
 
 Effective
        February 25, 2004, the Company’s wholly-owned subsidiary, Beyond the Wall, Inc.
        (“BTW”), sold substantially all of its assets and operations to a group
        unaffiliated with the Company (which included certain former management of
        BTW).
        Effective February 28, 2005, the Company acquired the Mill, and the operations
        of the Mill have been consolidated commencing March 1, 2005. Accordingly,
        for
        the period from March 2004 through February 2005, the Company did not have
        any
        revenue-generating operations.
 
 For
        the
        three months and six months ended March 31, 2005, the Company’s results of
        operations include the operations of the Mill for the month of March 2005
        only.
 
 As
        a
        result of the acquisition of the Mill, the Company’s financial statements for
        periods ending after March 1, 2005 are materially different from and are
        not
        comparable to its financial statements prior to that date.
  **Three
        Months Ended March 31, 2006 and 2005:**
 
 Net
        Sales. Net sales were $36,520,950 for the three months ended March 31, 2006,
        an
        average of $12,173,650 per month, as compared to net sales of $9,133,777
        for the
        three months ended March 31, 2005. If the Company had owned the Mill for
        the
        three months ended March 31, 2005, pro forma net sales would have been
        $26,250,401, an average of $8,750,134 per month.
 
 Cost
        of
        Sales. Cost of sales was $31,603,974 for the three months ended March 31,
        2006,
        resulting in gross profit of $4,916,976 and a gross profit margin of 13.5%.
        Cost
        of sales was $8,472,228 for the three months ended March 31, 2005, resulting
        in
        a gross profit of $661,549 and a gross profit margin of 7.2%. If the Company
        had
        owned the Mill for the three months ended March 31, 2005, pro forma gross
        profit
        would have been $1,211,933 and the gross profit margin would have been 4.6%.
 
 Selling
        Expenses. For the three months ended March 31, 2006, selling expenses were
        $410,185 or 1.1% of sales, as compared to selling expenses of $112,058 or
        1.2%
        of sales for the three months ended March 31, 2005. Selling expenses consist
        primarily of sales commissions and personnel-related costs.
 
 General
        and Administrative Expenses. For the three months ended March 31, 2006, general
        and administrative expenses were $1,656,100 or 4.5% of sales, as compared
        to
        general and administrative expenses of $404,486 or 4.4% of sales. General
        and
        administrative expenses consist primarily of management and office compensation
        and related costs, legal and accounting fees, and insurance costs at both
        corporate and the Mill.
 
 Income
        (Loss) from Operations. Income from operations was $2,850,691 for the three
        months ended March 31, 2006, as compared to income from operations of $145,005
        for the three months ended March 31, 2005.
 
 Interest
        Income. Interest income was $103 for the three months ended March 31, 2006,
        as
        compared to $11,169 for the three months ended March 31, 2005.
 
 Interest
        Expense. For the three months ended March 31, 2006, interest expense was
        $2,348,788, which included interest expense related to the 8% notes payable
        of
        $799,259 and the 13% Series A Preferred Stock of $801,370 issued in conjunction
        with the acquisition of the Mill, the 12% notes payable of $207,122 and the
        4%
        notes payable of $10,963.
 
 For
        the
        three months ended March 31, 2005, interest expense was $826,494, which included
        interest expense related to the 8% notes payable of $268,336 and the 13%
        Series
        A Preferred Stock of $273,079 issued in conjunction with the acquisition
        of the
        Mill, the 12% notes payable of $71,342 and the 4% notes payable of $10,000.
 
 Transaction
        Costs Related to KES Acquisition. The
        Company incurred $792,954 of costs with respect to the acquisition of the
        Mill,
        which were charged to operations during the three months ended March 31,
        2005.
        Included in such costs was $187,702 of transaction costs incurred by KES
        Acquisition.
  31
 
 Other
        Income (Expense). For the three months ended March 31,2006, other income
        was
        $79,110, as compared to other expense of $12,967 for the three months ended
        March 31, 2005.
 
 Income
        (Loss) before Income Taxes and Minority Interest. Income before income taxes
        and
        minority interest was $581,116 for the three months ended March 31, 2006,
        as
        compared to a loss of $(1,476,241) for the three months ended March 31, 2005.
 
 Income
        Taxes. Income
        tax expense was $65,000 for the three months ended March 31, 2006, consisting
        of
        a provision for state income taxes. No federal income tax provision was provided
        for the three months ended March 31, 2006 as a result of the utilization
        of the
        Company’s net operating loss carryforwards. No federal or state income tax
        provision was provided for the three months ended March 31, 2005 due to the
        Company reporting a pre-tax operating loss for such period.
 
 Income
        (Loss) before Minority Interest. Income before minority interest was $516,116
        for the three months ended March 31, 2006, as compared to a loss before minority
        interest of $(1,476,241) for the three months ended March 31, 2005.
 
 Minority
        Interest - Related Parties. Minority interest - related parties was $0 for
        the
        three months ended March 31, 2006 and $268,111 for the three months ended
        March
        31, 2005. Minority
        interest - related parties was $430,931 on February 28, 2005. For the year
        ended
        September 30, 2005, the net loss of Acquisition Corp. (an 80.01% consolidated
        subsidiary) allocable to the 19.99% minority shareholders was $681,698, but
        the
        reduction to minority interest - related parties was limited to the balance
        at
        February 28, 2005 of $430,931. Accordingly, the remainder of the net loss
        of
        Acquisition Corp. allocable to the 19.99% minority shareholders for the year
        ended September 30, 2005 of $250,767 was included in the Company’s consolidated
        statement of operations for the year ended September 30, 2005, and will be
        recovered to the extent that Acquisition Corp. generates net income in future
        periods. For the three months ended March 31, 2006, net income allocable
        to the
        19.99% minority shareholders was $58,966.
 
 Net
        Income (Loss). Net income was $516,116 for the three months ended March 31,
        2006, as compared a loss of $(1,208,130) for the three months ended March
        31,
        2005.
 
 **Six
        Months Ended March 31, 2006 and 2005:**
 
 Net
        Sales. Net sales were $70,003,792 for the six months ended March 31, 2006,
        an
        average of $11,667,298 per month, as compared to net sales of $9,133,777
        for the
        six months ended March 31, 2005. If the Company had owned the Mill for the
        six
        months ended March 31, 2005, pro forma net sales would have been $53,738,048,
        an
        average of $8,956,341 per month.
 
 Cost
        of
        Sales. Cost of sales was $60,479,506 for the six months ended March 31, 2006,
        resulting in gross profit of $9,524,286 and a gross profit margin of 13.6%.
        Cost
        of sales was $8,472,228 for the six months ended March 31, 2005, resulting
        in a
        gross profit of $661,549 and a gross profit margin of 7.2%. If the Company
        had
        owned the Mill for the six months ended March 31, 2005, pro forma gross profit
        would have been $2,939,392 and the gross profit margin would have been 5.5%.
 
 Selling
        Expenses. For the six months ended March 31, 2006, selling expenses were
        $795,756 or 1.1% of sales, as compared to selling expenses of $112,058 or
        1.2%
        of sales for the six months ended March 31, 2005. Selling expenses consist
        primarily of sales commissions and personnel-related costs.
 
 General
        and Administrative Expenses. For the six months ended March 31, 2006, general
        and administrative expenses were $2,997,529 or 4.3% of sales, as compared
        to
        general and administrative expenses of $599,157 or 6.6% of sales. General
        and
        administrative expenses consist primarily of management and office compensation
        and related costs, legal and accounting fees, and insurance costs at both
        corporate and the Mill.
 
 Income
        (Loss) from Operations. Income from operations was $5,731,001 for the six
        months
        ended March 31, 2006, as compared to a loss from operations of $(49,666)
        for the
        six months ended March 31, 2005.
  32
 
 Interest
        Income. Interest income was $202 for the six months ended March 31, 2006,
        as
        compared to $25,534 for the six months ended March 31, 2005.
 
 Interest
        Expense. For the six months ended March 31, 2006, interest expense was
        $4,782,352, which included interest expense related to the 8% notes payable
        of
        $1,606,183 and the 13% Series A Preferred Stock of $1,640,898 issued in
        conjunction with the acquisition of the Mill, the 12% notes payable of $418,849
        and the 4% notes payable of $21,848.
 
 For
        the
        six months ended March 31, 2005, interest expense was $837,066, which included
        interest expense related to the 8% notes payable of $268,336 and the 13%
        Series
        A Preferred Stock of $273,079 issued in conjunction with the acquisition
        of the
        Mill, the 12% notes payable of $71,342 and the 4% notes payable of $21,223.
 
 Transaction
        Costs Related to KES Acquisition. The
        Company incurred $792,954 of costs with respect to the acquisition of the
        Mill,
        which were charged to operations during the six months ended March 31, 2005.
        Included in such costs was $187,702 of transaction costs incurred by KES
        Acquisition.
 
 Other
        Income (Expense). For the six months ended March 31, 2006, other income was
        $85,799, as compared to other expense of $30,705 for the six months ended
        March
        31, 2005.
 
 Income
        (Loss) before Income Taxes and Minority Interest. Income before income taxes
        and
        minority interest was $1,034,650 for the six months ended March 31, 2006,
        as
        compared to a loss of $(1,684,857) for the six months ended March 31, 2005.
 
 Income
        Taxes. Income
        tax expense was $128,000 for the six months ended March 31, 2006, consisting
        of
        a provision for state income taxes. No federal income tax provision was provided
        for the six months ended March 31, 2006 as a result of the utilization of
        the
        Company’s net operating loss carryforwards. No federal or state income tax
        provision was provided for the six months ended March 31, 2005 due to the
        Company reporting a pre-tax operating loss for such period.
 
 Income
        (Loss) before Minority Interest. Income before minority interest was $906,650
        for the six months ended March 31, 2006, as compared to a loss before minority
        interest of $(1,684,857) for the six months ended March 31, 2005.
 
 Minority
        Interest - Related Parties. Minority interest - related parties was $0 for
        the
        six months ended March 31, 2006 and $268,111 for the six months ended March
        31,
        2005. Minority
        interest - related parties was $430,931 on February 28, 2005. For the year
        ended
        September 30, 2005, the net loss of Acquisition Corp. (an 80.01% consolidated
        subsidiary) allocable to the 19.99% minority shareholders was $681,698, but
        the
        reduction to minority interest - related parties was limited to the balance
        at
        February 28, 2005 of $430,931. Accordingly, the remainder of the net loss
        of
        Acquisition Corp. allocable to the 19.99% minority shareholders for the year
        ended September 30, 2005 of $250,767 was included in the Company’s consolidated
        statement of operations for the year ended September 30, 2005, and will be
        recovered to the extent that Acquisition Corp. generates net income in future
        periods. For the six months ended March 31, 2006, net income allocable to
        the
        19.99% minority shareholders was $30,229.
 
 Net
        Income (Loss). Net income was $906,650 for the six months ended March 31,
        2006,
        as compared a loss of $(1,416,746) for the six months ended March 31,
        2005.
 
 **Liquidity
        and Capital Resources - March 31, 2006:**
 
 **Overview:**
 
 On
        March
        9, 2005, YouthStream completed the acquisition of the Mill. In connection
        with
        the Company’s acquisition and consolidation of the Mill, the Company also
        acquired $913,194 of cash. The Company used substantially all of its available
        cash resources to fund the acquisition of the Mill, including its contribution
        of an aggregate of $500,000 of cash to Acquisition Corp. and the payment
        of the
        costs related to the transaction. Accordingly, the Company will require
        additional operating capital to fund corporate general and administrative
        expenses, which the Company expects to obtain primarily through periodic
        tax
        sharing payments from Acquisition Corp. and Atacama KES. The Mill relies
        on cash
        flows from operations to support a secured line of credit with GECC to fund
        its
        separate operations. As a result of improved operating performance of the
        Mill
        beginning in late 2005, the Company has been able to increase borrowing
        availability under this line of credit.
  33
 
 As
        of
        March 31, 2006 and September 30, 2005, the balance outstanding on the line
        of
        credit was $13,600,142 and $19,009,379, respectively, which has been presented
        as a current liability in the consolidated balance sheet at such date due
        to the
        collateral securing such line of credit consisting primarily of current assets
        and the continuing uncertainty with respect to the Company’s ability to maintain
        compliance under the terms and conditions of the line of credit.
 
 At
        March
        31, 2005, KES Acquisition was not in compliance with the fixed charge coverage
        ratio based on its consolidated financial statements as originally filed,
        in
        part relating to changes to its accounting procedures as a result of the
        review
        of its financial statements conducted in conjunction with its acquisition
        by
        YouthStream, and subsequently received a waiver of default from the lender.
        At
        June 30, 2005, KES Acquisition was in compliance with the fixed charge coverage
        ratio based on its consolidated financial statements as originally filed.
        However, KES Acquisition was not in compliance with the fixed charge coverage
        ratio at June 30, 2005 based on its revised consolidated financial statements,
        as a result of a determination by management to re-characterize a lease for
        certain equipment used by KES Acquisition as a capital lease rather than
        an
        operating lease. In addition, KES Acquisition was not in compliance with
        its
        obligation to deliver audited financial statements in the form and time period
        as set forth in the loan agreement. On June 26, 2006, the Company received
        a waiver of default from the lender with respect to the fixed charge coverage
        ratio for the restated March 31, 2005 and June 30, 2005 interim financial
        statements, as well as with respect to the form and timeliness of the September
        30, 2005 annual audited financial statements being provided to GECC.
 
 At
        March
        31, 2006, December 31, 2005 and September 30, 2005, KES Acquisition was in
        compliance with the fixed charge coverage ratio based on its consolidated
        financial statements.
 
 In
        the
        event that KES Acquisition is not in compliance with the fixed charge coverage
        ratio in any future period, the Company intends to seek a further waiver
        of any
        default from the lender, and if no such waiver is received, the lender would
        have the right to accelerate the maturity of the line of credit at that time.
 
 To
        the
        extent that the Mill generates taxable income in the future, the Tax Sharing
        Agreement with Acquisition Corp. and Atacama KES will generate cash payments
        to
        YouthStream equal to 50% of their respective “separate company tax liability”,
        subject to compliance with the GECC secured line of credit. At September
        30,
        2005, the tax sharing payment due to YouthStream was $342,292, which was
        received in December 2005. At December 31, 2005, the tax sharing payment
        due to
        YouthStream was $374,824, which was received in February 2006. At March 31,
        2006, the tax sharing payment due to YouthStream was $318,066, which was
        received, net of certain intercompany offsets, in July 2006. YouthStream
        has
        approximately $255,000,000 of federal net operating loss carryovers currently
        available to offset any federal income tax liability of Acquisition Corp
        and
        Atacama KES in subsequent periods. YouthStream expects that its federal net
        operating loss carryovers will be sufficient to absorb most of any future
        federal income tax liability of Acquisition Corp. and Atacama KES.
 
 The
        Mill
        restarted operations in January 2004 after being acquired by the previous
        owners, and has incurred losses until recently. The long-term economic viability
        of the Mill and its ability to fund its operations and debt service
        requirements, including maintaining compliance with various debt covenants
        and
        servicing the interest and principal obligations on the Notes and the dividends
        and redemption features on the 13% Series A Preferred Stock issued in connection
        with the acquisition of the Mill, is dependent on various internal and external
        factors, including the Mill’s ability to operate on a sustained basis at 80% or
        more of its annual capacity of 200,000 tons per year, as currently configured.
        To the extent that the Mill is not able to maintain this operating threshold,
        the ability of the Mill to generate sufficient cash flows to fund its operations
        and debt service requirements and maintain compliance with various debt
        covenants may be impaired. In such event, the Company may have to consider
        a
        formal or informal restructuring or reorganization, including a sale or other
        disposition of its assets.
  34
 
 **Going
        Concern:**
 
 The
        Company has incurred recurring operating losses since its inception. The
        Company incurred
        a net loss of $3,430,562 and a negative cash flow from operating activities
        of
        $4,300,395 for the year ended September 30, 2005, and had an accumulated
        deficit
        of $347,265,398 and a stockholders' deficiency of $79,600,350 at September
        30,
        2005. As
        of
        September 30, 2005, the Company had insufficient capital to fund all of its
        obligations on a consolidated basis. These factors raise substantial doubt
        about
        the Company’s ability to continue as a going concern. The consolidated financial
        statements do not include any adjustments to reflect the possible future
        effect
        of the recoverability and classification of assets or the amounts and
        classifications of liabilities that may result from the outcome of this
        uncertainty.
 
 On
        March
        9, 2005, the Company completed the acquisition of a steel mini-mill located
        in
        Ashland, Kentucky. The Company utilized substantially all of its available
        cash
        resources to fund such acquisition and will require additional operating
        capital
        to fund corporate general and administrative expenses, which the Company
        expects
        to obtain primarily through periodic tax sharing payments from Acquisition
        Corp.
        and Atacama KES. In addition, the steel mini-mill restarted operations in
        late
        January 2004 after being acquired by the previous owners, and until recently
        has
        incurred losses. For the year ended September 30, 2005, operating income
        was
        $2,691,955 (which included the operations of the steel mini-mill for the
        seven
        month period March through September 2005), exclusive of interest expense.
        For
        the three months and six months ended March 31, 2006, operating income was
        $2,850,691 and $5,731,001, respectively, exclusive of interest expense. The
        steel mini-mill relies on cash flows from operations to support a secured
        line
        of credit with General Electric Capital Corporation to fund its separate
        operations. As a result of improved operating performance of the steel mini-mill
        beginning in late 2005, the Company has been able to increase borrowing
        availability under this line of credit.
 
 Based
        on
        its current level of operations, the Company believes that its current cash
        resources provided by operations and the secured line of credit will be adequate
        to fund its operations through September 30, 2006. However, to the extent
        the
        Company’s estimates are inaccurate or its assumptions are incorrect, the Company
        may not have sufficient cash resources to fund its operations. In such event,
        the Company may have to consider a formal or informal restructuring or
        reorganization, including a sale or other disposition of its
        assets.
 
 The
        Company’s management may also consider various strategic alternatives in the
        future, including the acquisition of new business opportunities, which may
        be
        from related or unrelated parties.  However, there can be no assurances
        that such efforts will ultimately be successful.  The Company may finance
        any acquisitions through a combination of debt and/or equity
        securities.
 
 Operating
        Activities. During the six months ended March 31, 2006, the Company generated
        $5,625,325 of cash in operating activities, both to fund the corporate overhead
        of YouthStream and to fund the operations of the Mill. During the six months
        ended March 31, 2006, the Company used $1,374,116 of cash in operating
        activities to fund its corporate general and administrative expenses.
 
 Investing
        Activities. During the six months ended March 31, 2005, net cash used in
        investing activities was $182,881, which consisted of principal and interest
        payments on the Beyond the Wall note receivable that the Company received
        in the
        February 2004 sale of the assets and operations of Beyond the Wall, reduced
        by
        deferred costs related to the KES transaction of $430,108. During the six
        months
        ended March 31, 2006, the Company did not have any investing activities.
 
 Financing
        Activities. During the six months ended March 31, 2006, net cash utilized
        in
        financing activities was $5,676,157, consisting of $5,409,237 to reduce
        borrowings under the secured line of credit with GECC, the repayment of $50,000
        of short-term notes payable to certain directors, and payments on an equipment
        contract payable and capital lease obligation of $216,920. During the six
        months
        ended March 31, 2005, net cash generated by financing activities was $970,740,
        consisting of $1,005,374 of borrowings under the secured line of credit with
        GECC, reduced by payments on an equipment contract payable and capital lease
        obligation of $34,634.
  35
 
 **Summary
        of Restricted and Unrestricted Assets, Liabilities and
        Equity:**
 
 Almost
        all of the Company’s net assets are owned by KES Acquisition, a consolidated
        subsidiary.  As a result of various contractual restrictions contained in
        various financing agreements (as previously described) and documents relating
        to
        the Acquisition, there are limits on the Company’s ability to transfer assets
        from KES Acquisition to Youthstream, whether in the form of loans and advances,
        cash dividends, tax-sharing payments, or otherwise, without notice to and/or
        consent of one or more third parties.
 
 A
        summary
        of the Company's restricted and unrestricted assets, liabilities and equity
        at
        March 31, 2006 and at September 30, 2005 is presented below.
 
 March
                  31, 2006
              
              Unrestricted
              
              Restricted
              
              As
                  ReportedCurrent
                  assets
              
              $
              603,862
              
              $
              33,861,261
              
              $
              34,465,123Property,
                  plant and equipment, net
              
              
              -
              
              
              5,202,662
              
              
              5,202,662Other
                  assets
              
              
              -
              
              
              470,870
              
              
              470,870Total
                  assets
              
              $
              603,862
              
              $
              39,534,793
              
              $
              40,138,655Current
                  liabilities
              
              $
              9,165,221
              
              $
              32,080,466
              
              $
              41,245,687Non-current
                  liabilities
              
              
              76,485,295
              
              
              1,361,623
              
              
              77,846,918Equity:Retained
                  earnings (accumulated deficit)
              
              
              (351,342,764
              )
              
              4,984,016
              
              
              (346,358,748
              )Other
              
              
              266,296,110
              
              
              1,108,688
              
              
              267,404,798Total
                  liabilities and equity
              
              $
              603,862
              
              $
              39,534,793
              
              $
              40,138,655
 
 
 September
                  30, 2005
              
              Unrestricted
              
              Restricted
              
              As
                  ReportedCurrent
                  assets
              
              $
              261,740
              
              $
              35,453,821
              
              $
              35,715,561Property,
                  plant and equipment, net
              
              
              -
              
              
              5,567,745
              
              
              5,567,745Other
                  assets
              
              
              -
              
              
              638,948
              
              
              638,948Total
                  assets
              
              $
              261,740
              
              $
              41,660,514
              
              $
              41,922,254Current
                  liabilities
              
              $
              4,224,995
              
              $
              30,411,237
              
              $
              34,636,232Non-current
                  liabilities
              
              
              78,257,234
              
              
              8,629,138
              
              
              86,886,372Equity:Retained
                  earnings (accumulated deficit)
              
              
              (348,435,183
              )
              
              1,169,785
              
              
              (347,265,398
              )Other
              
              
              266,214,694
              
              
              1,450,354
              
              
              267,665,048Total
                  liabilities and equity
              
              $
              261,740
              
              $
              41,660,514
              
              $
              41,922,254
  36
 
 **Principal
        Commitments:**
 
 At
        March
        31, 2006, the Company's principal commitments consisted of the following
        obligations:
 
 Payments
                  Due by 12 Month Periods Ending March
                  31,
                (in
                  thousands)Contractual
                  cash obligations
              
              Total
              
              2007
              
              2008
              
              2009
              
              2010
              
              2011
              
              There-after4%
                  notes payable
              
              $
              4,917
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              4,917
              
              $
              -12%
                  subordinated promissory notes payable
              
              
              7,000
              
              
              7,000
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -8%
                  subordinated secured promissory notes payable
              
              
              39,493
              
              
              1,849
              
              
              925
              
              
              925
              
              
              925
              
              
              6,974
              
              
              27,8958%
                  subordinated secured promissory notes payable - interest
              
              
              3,159
              
              
              3,159Secured
                  line of credit
              
              
              13,600
              
              
              13,600
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Operating
                  leases
              
              
              1,380
              
              
              422
              
              
              393
              
              
              390
              
              
              175
              
              
              -
              
              
              -Capital
                  lease obligation
              
              
              1,505
              
              
              401
              
              
              466
              
              
              540
              
              
              98
              
              
              -
              
              
              -Equipment
                  contact payable
              
              
              212
              
              
              81
              
              
              89
              
              
              42
              
              
              -
              
              
              -
              
              
              -Management
                  services agreement
              
              
              2,508
              
              
              700
              
              
              700
              
              
              700
              
              
              408
              
              
              -
              
              
              -4%
                  Series A Preferred Stock subject to mandatory redemption
              
              
              5,269
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              5,269
              
              
              -13%
                  Series A Preferred Stock of subsidiary subject to mandatory redemption,
                  excluding accrued dividends (assumes adequate defined “free cash flow” to
                  fund payments)
              
              
              26,618
              
              
              3,958
              
              
              3,958
              
              
              3,958
              
              
              3,958
              
              
              3,958
              
              
              6,828Total
                  contractual cash obligations
              
              $
              105,661
              
              $
              31,170
              
              $
              6,531
              
              $
              6,555
              
              $
              5,564
              
              $
              21,118
              
              $
              34,723
 At
        March
        31, 2006 and September 30, 2005, the Company did not have any material
        commitments for capital expenditures.
 
 At
        March
        31, 2006 and September 30, 2005, the Company has various short-term commitments
        for the purchase of materials, supplies and energy arising in the ordinary
        course of business which aggregated approximately $7,940,000 and $7,962,000,
        respectively.
 
 **Off-Balance
        Sheet Arrangements:**
 
 The
        Company does not have any transactions, obligations or relationships that
        could
        be considered off-balance sheet arrangements at March 31, 2006 or September
        30,
        2005.
  37
 
 
 **ITEM
        3. CONTROLS AND PROCEDURES**
 
 (a)
        Evaluation of Disclosure Controls and Procedures
 
 The
        certifications of the principal executive officer and the principal financial
        officer (or persons performing similar functions) required by Rules 13a-14
        and
        15d-14 of the Securities Exchange Act of 1934, as amended are filed as exhibits
        to this report. This section of the report contains the information concerning
        the evaluation of the Company's disclosure controls and procedures (as defined
        in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) and changes to
        internal controls over financial reporting (as defined in Securities Exchange
        Act Rules 13a-15(f) and 15d-15(f)) referred to in the certifications and
        this
        information should be read in conjunction with the certifications for a more
        complete understanding of the topics presented herein.
 
 Disclosure
        controls and procedures are designed to ensure that information required
        to be
        disclosed in the reports filed or submitted by the Company under the Securities
        Exchange Act of 1934 is recorded, processed, summarized and reported, within
        the
        time periods specified in the rules and forms of the Securities and Exchange
        Commission. Disclosure controls and procedures include, without limitation,
        controls and procedures designed to ensure that information required to be
        disclosed in the reports filed under the Securities Exchange Act of 1934
        is
        accumulated and communicated to management, including its principal executive
        and financial officers, as appropriate, to allow timely decisions regarding
        required disclosure.
 
 The
        Company carried out an evaluation, under the supervision and with the
        participation of its management, including its principal executive and financial
        officers, of the effectiveness of the design and operation of the Company’s
        disclosure controls and procedures as of the end of the period covered by
        this
        report. Based upon and as of the date of that evaluation, the Company’s
        principal executive and financial officers concluded that there were material
        weaknesses in the internal controls at the Company’s steel mini-mill acquired
        effective February 28, 2005, the financial statements of which are included
        in
        the consolidated financial statements of the Company from that date forward.
        In
        addition, as a result of this evaluation, the Company’s consolidated financial
        reporting and disclosure controls were also determined to have material
        weaknesses.
 
 Specifically,
        the steel mini-mill lacks adequate accounting systems and controls and
        procedures to process information for inclusion in the Company’s reports filed
        with the Securities and Exchange Commission. Furthermore, the steel mini-mill
        also lacks adequate accounting personnel in general and adequately trained
        accounting personnel in particular in order to be able to process and generate
        the required financial information to be included in the Company’s consolidated
        financial statements on a timely basis. The Company is addressing these issues
        by reviewing and revising its internal accounting policies and procedures.
        The
        Company also intends to increase the resources and personnel allocated to
        the
        steel mini-mill’s accounting department. The Company expects that the resolution
        of these issues will take several months.
 
 (b)
        Changes in Internal Controls
 
 There
        were no changes in the Company’s internal controls or in other factors that
        could have significantly affected those controls subsequent to the date of
        the
        Company’s most recent evaluation.
  38
 
 
 **PART
        II****.
        OTHER INFORMATION**
 
 
 **ITEM
        1. LEGAL PROCEEDINGS**
 
 The
        Company and/or its subsidiary that owned its former operating business, Beyond
        the Wall, have periodically been defendants in various lawsuits and claims
        from
        various trade creditors and former landlords. Based on the Company’s contract
        relating to the sale of the Beyond the Wall assets, certain of these claims
        are
        the responsibility of the buyer of the Beyond the Wall business. The Company
        evaluates its response in each situation based on the particular facts and
        circumstances of a claim. Accordingly, the ultimate outcome of these matters
        cannot be determined at this time and may ultimately result in judgments
        and
        liens against the Company or its assets. The Company has made sufficient
        accruals for the exposure related to such matters that have been deemed probable
        and reasonably estimable at December 31, 2005 and September 30,
        2005.
  KES
        Acquisition has been named in a wrongful death lawsuit pending before the
        Circuit Court of Cabell County, West Virginia, which was filed in December
        2004.
        The action was brought by Stephanie Harshbarger, individually and as
        Administratrix of the Estate of Chad Harshbarger against Aero-Fab, Inc. and
        KES
        Acquisition. Mr. Harshbarger was an employee of Aero-Fab, Inc., an
        unaffiliated contractor, who died while working at the Mill in April 2004.
        KES
        Acquisition is being defended by its insurance carrier. The Company does
        not
        believe that the resolution of this litigation will have a material adverse
        effect on its financial condition or results of operations.
 
 **ITEM
        2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
        PROCEEDS**
 
 Not
        applicable.
 
 **ITEM
        3. DEFAULTS UPON SENIOR SECURITIES**
 
 Not
        applicable.
 
 **ITEM
        4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**
 
 Not
        applicable.
 
 **ITEM
        5. OTHER INFORMATION**
 
 Not
        applicable.
 
 **ITEM
        6. EXHIBITS**
 
 A
        list of
        exhibits required to be filed as part of this report is set forth in the
        Index
        to Exhibits, which immediately precedes such exhibits, and is incorporated
        herein by reference.
  39
 
 **SIGNATURES**
 
 
 Pursuant
        to the requirements of Section 13 or 15(d) the Securities Exchange Act of
        1934,
        the registrant has caused this report to be signed on its behalf by the
        undersigned, thereunto duly authorized.
 
 
 YOUTHSTREAM
                  MEDIA NETWORKS, INC.(Registrant)DATE:
                  August 30, 2006
              By:
                   /s/ JONATHAN V. DIAMONDJonathan
                  V. DiamondChief
                  Executive OfficerDATE:
                  August 30, 2006
              By:
                  /s/ ROBERT N. WEINGARTENRobert
                  N. WeingartenChief
                  Financial Officer
 
 
 40
 
 
 **INDEX
        TO EXHIBITS**
 
 31.1
              
              Certification
                  of the Chief Executive Officer pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 200231.2
              
              Certification
                  of the Chief Financial Officer pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 200232.1
              
              Certification
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 41