**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-KSB**




x
            **ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES****EXCHANGE
                ACT OF 1934****For
                the fiscal year ended September 30, 2005**o
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934****For
                the transition period from ________ to ________**





**Commission
      file number: 0-27556**





**YOUTHSTREAM
      MEDIA NETWORKS, INC.**


(Exact
      name of registrant as specified in its charter)





**Delaware**
              (State
                or other jurisdiction of
              incorporation
                or organization)
            
            **13-4082185**
              (I.R.S.
                Employer
              Identification
                Number)**244
                Madison Avenue, PMB #358**
              **New
                York, New York**
              (Address
                of Principal Executive Offices)
            
            **10016**
              (Zip
                Code)




**(212)
                883-0083**
              (Registrant’s
                telephone number, including Area Code)





**Securities
      registered pursuant to Section 12(b) of the Act:**


None





**Securities
      registered pursuant to Section 12(g) of the Act:**


Common
      Stock, par value $0.01 per share





Check
      whether the issuer in not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act YES o NO
x





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 for such shorter period
      that the registrant as required to file such reports) and (2) has been subject
      to such filing requirements for the past 90 days.


YES o NO
x





Check
      if
      there is no disclosure of delinquent filers pursuant to Item 405 of Regulation
      S-B contained herein, and no disclosure will be contained, to the best of
      registrant's knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-KSB or any amendment
      to
      this Form 10-KSB. o





Indicate
      by checkmark whether the registrant is a shell company (as defined in Rule
      12b-2
      of the Act). YES oNO
x





The
      issuer’s revenues for the fiscal year ended September 30, 2005 were
      $69,182,475.





As
      of May
      31, 2006, the aggregate market value of voting and non-voting stock held by
      non-affiliates of the registrant was $3,754,325 (based on the closing price
      of
      the registrant's common stock on such date of $0.12 per share).





As
      of May
      31, 2006, there were 39,242,251 **** shares
      of
      the registrant's common stock issued and outstanding.





Transitional
      Small Business Disclosure Format (check one): YES oNO
x





Documents
      incorporated by reference: None.





**YOUTHSTREAM
      MEDIA NETWORKS, INC.**


**ANNUAL
      REPORT ON FORM 10-KSB**





**TABLE
      OF CONTENTS**





**Item
                No.**
            
            **Page**




Part
                I1.
            Description
                of Business
            11A.
            Risk
                Factors
            132.
            Description
                of Property
            243.
            Legal
                Proceedings
            244.
            Submission
                of Matters to a Vote of Security Holders
            24




Part
                II5.
            Market
                for Common Equity, Related Stockholder Matters and Small Business
                Issuer
                Purchases of Equity Securities
            256.
            Management's
                Discussion and Analysis or Plan of Operation
            267.
            Financial
                Statements
            428.
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            428A.
            Controls
                and Procedures
            428B.
            Other
                Information
            43




Part
                III9.
            Directors,
                Executive Officers, Promoters and Control Persons; Compliance with
                Section
                16(a) of the Exchange Act
            4410.
            Executive
                Compensation
            4711.
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters
            5012.
            Certain
                Relationships and Related Transactions
            5113.
            Exhibits
            5214.
            Principal
                Accountant Fees and Services
            58




Index
                to Consolidated Financial Statements
            F-1Signatures
            S-1








INTRODUCTION





The
      statements included in this Annual Report on Form 10-KSB for the fiscal year
      ended September 30, 2005 (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, YouthStream Media Networks, Inc.
      ("YouthStream" or 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, includingmanagement's
      success in continuing to settle the Company's outstanding
      obligationsfrom 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.




ii


**PART
      I**





**ITEM
      1. DESCRIPTION OF BUSINESS**





**OVERVIEW**





In
      January 2003, the Company completed a restructuring pursuant to which it
      canceled an aggregate of $18,000,000 principal amount of outstanding notes
      and
      underwent a change in officers and directors (see “Debt Restructuring”
below).





On
      February 25, 2004, the Company sold the assets and operations of its Beyond
      the
      Wall subsidiary. Beyond the Wall had been engaged in the sale of decorative
      wall
      posters through on-campus sales events, retail stores and internet sales,
      primarily to teenagers and young adults. During the period from October 1,
      2003
      through February 25, 2004, Beyond the Wall operated 17 stores in 12 states,
      plus
      Washington, D.C., throughout the East and mid-West, as well as a warehouse
      and
      distribution center in Stroudsburg, Pennsylvania, and was the Company’s only
      revenue-generating business operation. The Company’s consolidated financial
      statements for the year ended September 30, 2004 present Beyond the Wall’s
      operations as a discontinued operation as a result of the disposal of its assets
      and operations on February 25, 2004.





In
      July
      2004, the Company entered into a letter of intent to acquire a steel mini-mill
      located in Ashland, Kentucky (the “Mill”) (see “Acquisition of Steel Mini-Mill”
below). The Company consummated the acquisition of the Mill effective March
      1,
      2005, and since that date the Company has included the operations of the Mill,
      which represents the only business segment in which the Company currently
      operates, in its consolidated financial statements.





**DEBT
      RESTRUCTURING**





In
      January 2003, the Company reached an agreement with the holders of all of
      its and its Network Event Theater subsidiary's outstanding notes in the
      aggregate principal amount of $18,000,000, to cancel those notes. In exchange
      for cancellation of all of the principal due on these old notes, including
      accrued interest of $2,062,000, the note holders received in aggregate
      $4,500,000 in cash, redeemable preferred stock with a face value of $4,000,000,
      and 3,985,000 shares of common stock, valued at $255,000, and $4,000,000
      aggregate principal amount of promissory notes due December 31, 2010 issued
      by
      the Company's retail subsidiary, Beyond the Wall, Inc., secured by the
      Company's pledge of all of its stock in Beyond the Wall.





At
      the
      closing of the January 2003 debt restructuring, all of the Company's
      previous directors and officers resigned, and three new directors were
      appointed. Jonathan V. Diamond, who previously had been a director and interim
      Chief Executive Officer of the Company, was appointed as Chairman of the Board
      of Directors, and Hal G. Byer and Robert Scott Fritz were appointed as directors
      of the Company. Mr. Diamond was appointed as Chief Executive Officer and
      Robert N. Weingarten was appointed as Chief Financial Officer.





In
      May 2003, the Company issued options to the three new directors to purchase
      an aggregate of 700,000 shares of common stock exercisable at the fair market
      value of $0.04 per share for a period of seven years. In addition, each of
      the
      three new directors paid $2,500 ($0.04 per share) in cash to acquire options
      from the holder of the shares of preferred stock that were issued in the
      January 2003 restructuring to purchase 62,500 shares of such holder's
      preferred stock, exercisable at $0.36 per share. In July 2004, Mr. Diamond
      irrevocably waived any and all rights related to this option.





The
      terms
      and conditions of the January 2003 debt restructuring agreement qualified
      as a troubled debt restructuring for accounting purposes in accordance with
      SFAS
      No. 15 "Accounting by Debtors and Creditors for Troubled Debt
      Restructurings". The Company recognized a gain from the troubled debt
      restructuring of approximately $2,800,000. The gain was classified as part
      of
      continuing operations in accordance with SFAS No. 145, "Rescission of SFAS
      Nos. 4, 44 and 64, Amendment of SFAS No. 13, and Technical Corrections as
      of April 2000".








During
      June 2003, the Company amended the original provisions of the $4,000,000 of
      promissory notes issued in conjunction with the January 2003 restructuring
      to provide for the following:




a.
            Beyond the Wall was replaced by the Company as the
              issuer
              of the notes, and was released from any liability with respect to the
              notes.





b.
            The note holders agreed to convert the notes from
              secured
              to unsecured, and to release their security interest in all of the
              outstanding common stock of Beyond the
              Wall.





c.
            The note holders agreed to delete all provisions
              in the
              notes requiring the issuer of the notes to make mandatory prepayments
              based on the occurrence of certain
              events.





d.
            The
                note holders agreed to delete provisions in the notes prohibiting
                the
                issuer from: (i) incurring any indebtedness for borrowed money;
                (ii) selling, or entering into any agreement to sell, all or
                substantially all of the assets or all or substantially all of the
                capital
                stock of the issuer; or (iii) entering into any transaction with an
                affiliate, other than transactions with the Company, Network Event
                Theater, Inc. and/or their successors, that have fair and reasonable
                terms which are no less favorable to the issuer than would be obtained
                in
                a comparable arms-length transaction with a person or entity that
                is not
                an affiliate.




**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
      hours worked, is approximately 200,000 short-tons per year, and the Mill is
      currently operating at approximately 94% of such annualized capacity **.** Management is focusing on developing the business and improving operating
      efficiencies.





2


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”) and 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 million in promissory notes (the “Notes”), (ii)
      25,000 shares of Series A Non-Convertible Preferred Stock with an aggregate
      liquidation value of $25 million (the “13% Series A Preferred Stock”) and (iii)
      100% of its authorized shares of Series B Non-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. In December 2005, KES Holdings transferred all
      10,000 shares of its 13% Series A Preferred Stock to two charities.





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 interest in the Notes and $267,000 interest in the 13% Series A
      Preferred Stock in the condensed consolidated balance sheet at September 30,
      2005. 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.





3


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, (or earlier if consented to by GECC or any other senior
      lender) 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.





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.





For
      the
      nine months ending September 30, 2005, Acquisition Corp., KES Acquisition and
      Atacama KES are 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 EBITDA
      requirement for the nine months ending September 30, 2005.





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 are being issued or (iii) the first
      anniversary of Acquisition Corp.’s full and complete repayment of the
      Notes.





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 and as described in “Current Business Activities”
below.





4


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”).
      Cash proceeds from the Subordinated Promissory Notes were used to accelerate
      and
      expand the operations of the Mill. 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, almost all **** of
      which
      was paid subsequent
      to fiscal year end.




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. 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 No. 88-16 that must 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 No. 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 will be includible in the consolidated federal income tax return to be
      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 $250,000,000 of federal net operating loss
      carryovers currently available to offset the consolidated federal taxable income
      of the affiliated group in the future.





5


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 table summarizes the assets acquired and liabilities assumed at
      predecessor basis at February 28, 2005.





Assets
                Acquired:Cash
            
            $
            913,194Accounts
                receivable, net
            
            
            10,453,485Inventories
            
            
            18,762,218Prepaid
                expenses and other current assets
            
            
            904,271Property,
                plant and equipment, net
            
            
            5,990,758Due
                from YouthStream Acquisition Corp.
            
            
            187,702Other
                non-current assets
            
            
            721,393Total
                assets acquired
            
            
            37,933,021Liabilities
                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:Subordinated
                secured promissory notes payable,net
                of elimination
            
            $
            39,493,00013%
                Series A preferred stock, net of elimination
            
            
            24,733,00064,226,000Minority
                interests in equity
            
            
            223,950Adjustment
                to record deemed distribution to Sellers
            
            
            (63,104,423
            )$
            1,345,527








6


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





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




The
      following pro forma operating data presents the results of operations for the
      years ended September 30, 2005 and 2004, as if the Acquisition had occurred
      on
      the last day of the immediately preceding fiscal year. Accordingly, transaction
      costs of $1,171,406 related to the Acquisition for the year ended September
      30,
      2005 are not included in the net loss from continuing operations shown below.
      In
      addition, discontinued operations for the year ended September 30, 2004 are
      not
      included. The Mill commenced generating revenues in late January 2004. 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. The
      Company’s unaudited pro forma information for the years ended September 30 2005
      and 2004 is summarized as follows:




2005
            
            2004Net
                sales
            
            $
            113,786,971
            
            $
            48,944,338Cost
                of sales
            
            
            105,265,441
            
            
            51,158,622Gross
                margin (deficit)
            
            
            8,521,530
            
            
            (2,214,284
            )Operating
                income (loss)
            
            
            3,169,836
            
            
            (7,469,548
            )Interest
                expense
            
            
            (9,469,875
            )
            
            (7,243,971
            )Minority
                interest
            
            
            199,109
            
            
            199,109Net
                loss from continuing operations
            
            $
            (5,786,987
            )
            $
            (14,134,628
            )Basic
                and diluted net loss per common share
            
            $
            (0.15
            )
            $
            (0.36
            )Weighted
                average common shares outstanding
            
            
            39,242,251
            
            
            39,242,251





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 from the sale of the assets
      and operations of Beyond the Wall in February 2004 and any tax sharing payments
      under the Tax Sharing Agreement, as described above. The Notes were repaid
      in
      October 2005 from the proceeds from the settlement of the Beyond the Wall note
      receivable, which were received on September 30, 2005, as described below.





On
      September 30, 2005, the Company received a cash payment of $258,922 as
      settlement in full of the outstanding note receivable that had a balance,
      including accrued interest, of $271,686 at June 30, 2005 that the Company had
      previously received from the sale of the assets and operations of Beyond the
      Wall in February 2004.





7


**Current
      Business Activities**





The
      Company’s business is conducted through its majority-owned subsidiary, KES
      Acquisition, which owns and operates a steel mini-mill near Ashland, Kentucky
      (the “Mill”). See “Recent Events - Acquisition of Steel Mini-Mill.” As a
      mini-mill producer of bar flats, the Company recycles steel from scrap, a
      process designed to result in lower production costs than those of integrated
      steel mills, which produce steel by processing iron ore and other raw materials
      in blast furnaces. Bar flats 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 various 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 a variety
      of
      relatively small 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 demanded by its customers, including OEMs. Although the
      Mill
      specializes in SBQ Bar Flats, it also, to a lesser extent, competes in the
      MBQ
      Bar Flat market, particularly with respect to thicker and wider bar
      flats.





The
      Company’s business strategy is to increase its share of the SBQ Bar Flat market
      and to expand into related niche market applications where it can supply
      products for special customer needs. The Company plans to expand its business
      primarily by increasing the number of products it sells to existing customers
      and the development of new customers.





The
      Mill
      operates pursuant to a Management Services Agreement (the "Management Services
      Agreement") with Pinnacle Steel, LLC (“Pinnacle”) pursuant
      to which Pinnacle provides, 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. Pursuant to the Management Services
      Agreement Pinnacle 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 $4,500,000 for the nine
      months ending September 30, 2005 and $6,000,000 for the fiscal years ending
      September 30, 2006 and thereafter. **** The
      Management Services Agreement is effective through October 31, 2009, subject
      to
      earlier termination or extension based on the financial performance of the
      Mill.
      The principals of Pinnacle that manage the Mill have significant experience
      and
      expertise in the steel industry.





**Industry
      Conditions**





The
      U.S.
      steel industry has historically been and continues to be highly cyclical in
      nature, influenced by many factors, including periods of economic growth or
      recession, strength or weakness of the U.S. dollar, worldwide production
      capacity, worldwide steel demand, and levels of steel imports. The steel
      industry has also been affected by various company-specific factors, such as
      a
      company’s ability or inability to adapt to and deal with technological change,
      plant inefficiency and high labor costs. The U.S. has traditionally been a
      net
      importer of steel.





During
      the second half of 2000 and throughout 2001, the U.S. steel industry experienced
      a severe downward cycle, largely as a result of increased imports of steel
      at
      depressed prices, the effect of a strong dollar, weak economic conditions and
      excess global steel production capacity. During the first half of 2002,
      domestic flat-rolled steel prices increased dramatically from historical
      cyclical lows in 2001. This increase resulted from a number of factors,
      including (1) a temporary reduction in domestic steel production capacity as
      a
      result of certain bankruptcies and shutdowns of other U.S. steel producers,
      (2)
      a reduction in imports, driven in part by certain favorable rulings and
      executive actions with respect to tariffs and quotas on foreign steel, and
      (3) a
      brief strengthening of the overall U.S. economy and the need for end-users
      of
      steel products to replenish their depleted inventories. The cycle began to
      turn
      downward again toward the end of 2002 and into early 2003, however, largely
      as a
      result of softening product demand brought about by a still weak economy and
      war
      concerns. The shortness of the previous up cycle, poor cost controls and high
      fixed costs and legacy costs for many steel producers, an absence of any supply
      or pricing discipline by individual producers, and the strength of the U.S.
      dollar that brought exports streaming into the country created the conditions
      for more than 40 bankruptcies among U.S. steel producers, mainly integrated
      producers, between 2001 and 2003.





8


Economic
      dislocations, rationalization of production capacity and supply due to steel
      industry consolidation, a weakened U.S. dollar, Section 201 tariffs, high ocean
      freight rates and strong foreign, mainly Chinese and Asian, steel demand and
      scrap demand, combined during 2003 to substantially reduce steel imports into
      the U.S., thus constraining
      the supply of new steel for domestic consumption. Moreover, by rendering exports
      of steel abroad more attractive, these factors also acted to constrain
      the U.S. supply of scrap for domestic consumption. The result has not only
      been
      a dramatic increase in U.S. steel pricing in late 2003 and throughout 2005,
      but also unprecedented increases in the cost of steel scrap.





The
      U.S.
      steel industry experienced many changes during 2003 through 2005 as a result
      of
      consolidation. Consolidations and similar developments caused formerly idled
      or
      inefficient production facilities to come back into the market with
      substantially lower capital costs, with renegotiated labor agreements containing
      fewer work rules and reduced labor costs, and shorn of many previously
      burdensome health care and retirement legacy costs and other liabilities. The
      result of this restructuring and consolidation, which we expect to continue,
      is
      a less competitive U.S. steel market, with a narrowing of production cost
      differentials between mini-mills and some of the integrated producers. Moreover,
      with the integrated mills’ lesser dependence on scrap as a percentage of their
      metallics melt mix than the mini-mills, the traditional mini-mill cost advantage
      over integrated mill steel making may be reduced or eliminated when scrap prices
      are at high levels.





**Manufacturing
      Operations**





The
      Mill
      recycles steel by melting steel scrap in one 50-ton electric arc furnace. The
      molten steel is then taken to the ladle metallurgy facility where a variety
      of
      alloys are added to make different grades of steel in accordance with customer
      specifications. The refined molten steel is then poured into a continuous caster
      to produce continuous strands of steel with cross-sectional dimensions ranging
      from approximately 16 to 72 square inches. The Mill can utilize up to four
      continuous strands in producing certain sizes. The strands are cut to produce
      billets of specified length which are reheated to approximately 2,300 degrees
      Fahrenheit and fed through a series of roll stands to reduce their size and
      form
      them into steel bar sections. These sections emerge from the rolling mill,
      are
      uniformly cooled on a cooling bed, and are cut to lengths specified by the
      customer. The cut bar flats are stacked into bundles ready for shipment.





The
      current production capacity of the Mill for finished products, based on the
      current configuration of the mini-mill and hours worked, is approximately
      200,000 short-tons per year. From March 1, 2005 (the effective date of the
      Acquisition) through December 31, 2005, the Mill had production capacity of
      168,000 tons and sold 158,619 tons of finished goods, or 94% of its rolling
      capacity.





The
      Company transports its products by common carrier, generally shipping by truck
      and by rail. The Mill has railroad sidings at its facilities.





9


**Capital
      Improvements and Expansion**





The
      Company has made no capital expenditures since March 1, 2005 and does not
      anticipate making any in fiscal 2006.





**Primary
      Markets and Products**





*OEM
      Markets* .
      The
      Company supplies bar flats to OEMs in the following markets: metal building,
      grader blades, agricultural equipment, construction/fabricating, railroad cars,
      industrial chain manufacturers and trailer support beam flange manufacturers.
      The products furnished to these markets are primarily SBQ Bar Flats along with
      a
      mixture of MBQ Bar Flats **.** One
      of
      the key characteristics of the OEM Markets relate to lot order size, which
      tend
      to be larger than the orders received from other markets, such as steel service
      centers. These larger orders typically result in improved operating efficiencies
      and longer term relationships with customers.





*Cold
      Drawn Bar Converters Market* .
      The
      Company sells its expanded range of SBQ hot rolled bar products to cold drawn
      bar manufacturers. The Company’s product range, 1/4" through 3" in thickness and
      2" through 12" in width, enables it to supply practically all the sizes needed
      by the converters. The converters remove the scale from the hot rolled bar
      and
      draw it through a die. The drawing reduces the cross section, improves surface,
      and produces a more exacting tolerance bar. The end product is sold either
      through distributors or directly to OEMs.





*Steel
      Service Center Market* .
      A
      significant percentage of all steel shipments to the end-user are distributed
      through steel service centers, making this the largest single market for steel
      manufacturers. The steel service center market encompasses all warehouses and
      distributors who buy steel to stock for their end use customers who buy in
      smaller volume than that of OEMs. The Company sells both MBQ and SBQ Bar Flats
      into this market.





*Leaf-Spring
      Suspension Market* .
      High
      tensile SBQ spring steel is produced to customer and industry specifications
      for
      use in leaf- spring assemblies. These assemblies are utilized in light, medium
      and heavy duty trucks, trailers, mini-vans and four-wheel drive vehicles with
      off-road capability. The trend toward tapered leaf-spring products and air-ride
      suspension continues. These products use somewhat less steel but they are
      manufactured from larger cross section bar flats that match the Company’s
      manufacturing strengths.





**Customers**





The
      Company sells to over 200 customers, none of whom accounted for more than 10%
      of
      sales for fiscal 2005. During
      2005, the Company’s ten largest customers accounted for approximately 48% of it
      net sales, of which $9,294,175 was included in accounts receivable at September
      30, 2005. The Company's largest customer accounted for 8.5% of its consolidated
      net sales during fiscal 2005.





The
      Company’s foreign sales as a percentage of total sales were 5% for the period
      March 1, 2005 through December 31, 2005. These sales consisted primarily of
      shipments to Canada and Mexico.





**Marketing**





Company
      employees are directly involved in sales to new and existing customers. Sales
      are nationwide and in certain foreign markets. Sales efforts are primarily
      performed by in-house sales personnel and augmented with manufacturers’
representative companies.





10


**Competition
      and Other Market Factors**





The
      domestic and foreign steel industries are characterized by intense competition.
      The Company competes with steel-producing mills of similar size operative within
      its market region and also larger mills producing similar products, such as
      Nucor Corporation, Gerdau Americsteel, Gautier Steel, Steel Dynamics and Bayou
      Steel. The Company believes that the principal competitive factors affecting
      its
      business are quality, service, price and geographic location.





**Raw
      Materials**





Scrap





The
      principal raw material used in the Mill is ferrous scrap. Ferrous scrap is
      derived from, among other sources, discarded automobiles, appliances, structural
      steel, railroad cars and machinery. The purchase price of scrap is subject
      to
      market conditions largely beyond the control of the Company. Starting during
      the
      latter part of 2002, however, and continuing through 2005, the price of scrap
      has risen sharply upward to historic highs, largely as a result of foreign
      scrap
      demand, particularly from China, a weak U.S. dollar that makes U.S. scrap
      exports more attractive, and relatively static if not limited scrap availability
      in the U.S. These factors have driven scrap prices to their highest levels
      in
      decades.





The
      Mill
      is located in an area where scrap is generally available and therefore the
      Mill
      typically maintains less than one month of scrap supply. While the Mill has
      generally been successful in passing on scrap cost increases through price
      increases, the effect of steel imports, market price competition and
      under-utilized industry capacity could in the future limit the Company’s ability
      to increase prices.





For
      the
      twelve months ended September 30, 2005, KES Acquisition obtained all of its
      scrap through a broker that purchases scrap from a multitude of scrap suppliers.
      In the event the Company’s relationship with this broker ended, the Company
      believes it could readily arrange for scrap purchases through other brokers
      or
      directly from scrap suppliers. During 2005, the Company had two suppliers that
      accounted for approximately 65% of raw materials purchases, one providing
      approximately 37% and the other providing approximately 28%, of which $2,634,161
      was included in accounts payable at September 30, 2005.





Energy
      Resources





*Electricity*





With
      respect to the Mill, the Company has an electric service contract with Kentucky
      Power Company d/b/a American Electric Power, or AEP, which is terminable upon
      12
      months prior written notice. ****





*Gas*





The
      Mill
      uses approximately 1.5 decatherms of natural gas per day. A decatherm is
      equivalent to 1 million BTUs or 1,000 cubic feet of natural gas. The Company
      has
      a pipeline delivery contract with Columbia Gas of Kentucky which delivers
      natural gas to the Mill from providers located on the Gulf Coast.





*Other*





11


The
      Mill
      uses oxygen, nitrogen and argon for production purposes, which the Company
      purchases from Air Products & Chemicals, Inc.





**Employees**





As
      of
      September 30, 2005, the Company had three persons, including its Chief Executive
      Officer and its Chief Financial Officer, performing services dedicated primarily
      to general corporate matters, including management of the Company , maintenance of the corporate entity, review of strategic options and settlement
      of debts and obligations from its prior business activities. **** As
      of
      September 30, 2005, the Mill employed 140 individuals approximately 76% of
      whom
      are members of the United Steelworkers of America. The Mill’s current five-year
      collective bargaining agreement expires in December 2008. We believe that the
      wage rates and benefits at the Mill are competitive with other
      mini-mills.





**Environmental
      and Regulatory Matters**





The
      operations of the Mill are subject to substantial and evolving local, state
      and
      federal environmental, health and safety laws and regulations concerning, among
      other things, emissions to the air, discharges to surface and ground water
      and
      to sewer systems, and the generation, handling, storage, transportation,
      treatment and disposal of toxic and hazardous substances. In particular, the
      Mill is dependent upon both state and federal permits regulating discharges
      into
      the air or into the water in order to be permitted to operate its facilities.
      The Company believes that in all current respects the Mill facilities are in
      material compliance with all provisions of federal and state laws concerning
      the
      environment and the Company does not currently believe that future compliance
      with such provisions will have a material adverse effect on its results of
      operations, cash flows or financial condition.





Since
      the
      level of enforcement of environmental laws and regulations, or the nature of
      those laws that may be enacted from time to time are sometimes subject to
      changing social or political pressures, our environmental capital expenditures
      and costs for environmental compliance may increase in the future. In addition,
      due to the possibility of unanticipated regulatory or other developments, the
      amount and timing of future environmental expenditures may vary substantially
      from those currently anticipated. The cost of current and future environmental
      compliance may also place U.S. steel producers at a competitive disadvantage
      with respect to foreign steel producers, which may not be required to undertake
      equivalent costs in their operations.





Pursuant
      to the Resource Conservation and Recovery Act, or RCRA, which governs the
      treatment, handling and disposal of solid and hazardous wastes, the United
      States Environmental Protection Agency, or U.S. EPA, and authorized state
      environmental agencies conduct inspections of RCRA regulated facilities to
      identify areas where there may have been releases of solid or hazardous
      constituents into the environment and require the facilities
      to take corrective action to remediate any such releases. RCRA also allows
      citizens to bring certain suits against regulated facilities for potential
      damages and clean up. The Mill’s steelmaking facilities are subject to RCRA. The
      manufacturing operations produce various by-products, some of which, for
      example, electric arc furnace or EAF dust, are categorized as industrial or
      hazardous waste, requiring special handling for disposal or for the recovery
      of
      metallics. The Mill collects such co-products in an approved baghouse facility.
      While the Company cannot predict the future actions of the regulators or other
      interested parties, the potential exists for required corrective action at
      these
      facilities, the costs of which could be substantial.





Under
      the
      Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA,
      the U.S. EPA and, in some instances, private parties have the authority to
      impose joint and several liability for the remediation of contaminated
      properties upon generators of waste, current and former site owners and
      operators, transporters and other potentially responsible parties, regardless
      of
      fault or the legality of the original disposal activity. Many states, including
      Kentucky, have statutes and regulatory authorities similar to CERCLA and to
      the
      U.S. EPA. The Company has a waste handling agreement with a contractor to
      properly dispose of our electric arc furnace dust and certain other waste
      products of steelmaking. However, no assurances can be given that, even if
      there
      has been no fault by the Company, the Company may not still be cited as a waste
      generator by reason of an environmental clean up at a site to which its waste
      products were transported.





12


In
      addition to RCRA and CERCLA, there are a number of other environmental, health
      and safety laws and regulations that apply to the Mill facilities and may affect
      its operations. By way of example and not of limitation, certain portions of
      the
      federal Clean Air Act, Clean Water Act, Oil Pollution Act, Safe Drinking Water
      Act and Emergency Planning and Community Right-to-Know Act, as well as state
      and
      local laws and regulations implemented by the regulatory agencies, apply to
      the
      Mill’s operations. Many of these laws allow both the governments and citizens to
      bring certain suits against regulated facilities for alleged environmental
      violations. Finally, any steelmaking company could be subject to certain toxic
      tort suits brought by citizens or other third parties alleging causes of action
      such as nuisance, negligence, trespass, infliction of emotional distress, or
      other claims alleging personal injury or property damage.





Except
      as
      otherwise indicated, the Company believes that the Mill is in substantial
      compliance with applicable environmental laws and regulations. Notwithstanding
      such compliance, if damage to persons or property or contamination of the
      environment has been or is caused by the conduct of the Company’s business or by
      hazardous substances or wastes used, generated or disposed of by the Company
      (or
      possibly by prior operators of the Mill or by third parties), the Company may
      be
      held liable for such damages and be required to pay the cost of investigation
      and remediation of such contamination. The amount of such liability to the
      Company could be material. Changes in federal or state laws, regulations or
      requirements or discovery of unknown conditions could require additional
      expenditures by the Company.





**ITEM
      1A. RISK FACTORS**





The
      following risk factors and other information included in this Report should
      be
      carefully considered. The risks and uncertainties described below are not the
      only ones we face. Additional risks and uncertainties not presently known to
      us
      or that we currently deem immaterial also may impair our business operations.
      If
      any of the following risks actually occur, our business, financial condition
      and
      operating results could be significantly harmed.





**Risks
      Related to Our Business**




***We
      have a*** ***history********* ***of********* ***losses******which may continue.***




We
      have
      incurred recurring operating losses since inception. We 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. We cannot assure you that we can achieve or sustain profitability on
      a
      quarterly or annual basis in the future. We may not achieve our business
      objectives and the failure to achieve such goals would have an adverse impact
      on
      us.




***Our
      independent auditors have expressed substantial doubt about our ability to
      continue as a going concern*** .




In
      their
      report dated May 18, 2006, our independent registered public accounting firm
      stated that our financial statements for the year ended September 30, 2005
      were
      prepared assuming that we would continue as a going concern. Our ability to
      continue as a going concern is an issue raised as a result of our history of
      recurring losses from operations and a working capital deficiency. Depending
      on
      various factors, we may continue to experience operating losses. Our ability
      to
      continue as a going concern on a consolidated basis is dependent on the
      continued improved operating performance of the Mill. Furthermore, our ability
      to fund corporate overhead is subject to our receipt of periodic tax sharing
      payments from Acquisition Corp. and Atacama KES, which in turn is dependent
      on
      the continued improved operating performance of the Mill. There can be no
      assurances that such improved operating performance will continue.





13


***Payments
      under our Tax Sharing Agreement are uncertain.***





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. P eriodic
      tax sharing payments from Acquisition Corp. and Atacama KES are currently the
      sole source of funds distributed to YouthStream from the operations of the
      Mill.
      The tax sharing payments are necessary to fund corporate overhead at the
      YouthStream level and the receipt of such payments is dependent upon the
      availability of sufficient cash resources from Mill operations. There can be
      no
      assurance that there will be sufficient levels of cash resources generated
      from
      Mill operations to support tax sharing payments.





***Because
      of our recent divestiture of our prior businesses and our recent acquisition
      of
      the Mill, we believe that historical information regarding our prior business
      results is of limited relevance in understanding our business as currently
      conducted and our prospects for the future.***





We
      have a
      limited operating history in our current line of business. We had no operating
      business for the period February 2004 through February 2005 until we consummated
      our acquisition of the Mill effective March 1, 2005. As a result, we believe
      the
      historical financial results of the Company prior to the acquisition of the
      Mill
      are of limited relevance in understanding our business as currently conducted.





Furthermore,
      under its previous ownership, after several years of financial difficulties,
      the
      Mill ceased production in December 2002 and the Mill’s owners at such time filed
      a voluntary petition for relief under Chapter 11 of the United States Bankruptcy
      Code in February 2003. Under new management that acquired the assets of KES
      Acquisition in a bankruptcy proceeding in September 2003, the Mill restarted
      operations in late January 2004 and completed its ramp-up phase and reached
      full
      operating status in August 2004.





***Our
      level of production and our sales and earnings are subject to significant
      fluctuations.***





The
      price
      of steel and steel products may fluctuate significantly due to many factors
      beyond our control. This fluctuation would directly affect our levels of
      production and sales and earnings. The domestic steel industry has been highly
      cyclical in nature, influenced by a combination of factors, including periods
      of
      economic growth or recession, strength or weakness of the U.S. dollar, worldwide
      production capacity, levels of steel imports and applicable tariffs. The demand
      for steel products is generally affected by macroeconomic fluctuations in the
      United States and the global economies in which steel companies sell their
      products. For example, future economic downturns, stagnant economies or currency
      fluctuations in the United States or globally could decrease the demand for
      products or increase the amount of imports of steel into the United States,
      which could negatively impact our sales, margins and profitability. In addition,
      prolonged weakness in any industries in which we sell our products could
      materially adversely affect our results of operations and cash flows.





***Our
      business requires maintenance expenditures and may require capital investment
      which we may be unable to provide.***





We
      require capital for, among other purposes, maintaining the condition of our
      existing equipment and maintaining compliance with environmental laws and
      regulations. From time to time, we may also require capital to acquire new
      equipment. To the extent that cash generated internally and cash available
      under
      our senior credit facilities is not sufficient to fund capital requirements,
      we
      will require additional debt and/or equity financing. However, this type of
      financing may not be available or, if available, may not be on satisfactory
      terms. Future debt financings, if available, will require the approval of our
      existing lenders and may result in increased interest and amortization expense,
      increased leverage. In addition, future debt financings may limit our ability
      to
      withstand competitive pressures and render us more vulnerable to economic
      downturns. If we fail to generate or obtain sufficient additional capital in
      the
      future, we could be forced to reduce or delay capital expenditures, sell assets
      or restructure or refinance our indebtedness.





14


***Unexpected
      equipment failures or unanticipated events may lead to production curtailments
      or shutdowns and we do not maintain any business interruption insurance to
      offset resulting lost revenues.***





Interruptions
      in production capabilities will inevitably increase production costs and reduce
      our sales and earnings. Our manufacturing processes depend on critical pieces
      of
      steelmaking equipment, such as furnaces, continuous casters and rolling
      equipment, as well as electrical equipment, such as transformers, and this
      equipment may, on occasion, be out of service as a result of unanticipated
      failures. In the future, we may experience material plant shutdowns or periods
      of reduced production as a result of any equipment failures. Furthermore, any
      interruption in production capability may require us to make large capital
      expenditures to remedy the situation, which could have a negative effect on
      our
      profitability and cash flows. In addition to equipment failures, our facilities
      are also subject to the risk of catastrophic loss due to unanticipated events
      such as fires, explosions, adverse weather conditions or transportation
      interruptions. We do not maintain any business interruption insurance and thus
      there will be no recovery under such a policy to offset the lost revenues or
      increased costs that we experience during the disruption of our operations.
      In
      addition to the revenue losses, longer-term business disruption could result
      in
      a loss of customers. If this were to occur, our future sales levels, and
      therefore our profitability and cash flows, could be adversely affected.





***Competition
      from other materials may materially adversely affect our business.***





In
      many
      applications, steel competes with other materials, such as aluminum, cement,
      composites, glass, plastic and wood. Increased use of these materials in
      substitution for steel products could materially adversely affect prices and
      demand for our steel products.





***Environmental
      regulations impose substantial costs and limitations on operations.***





We
      have
      environmental liability risks and limitations on operations brought about by
      the
      requirements of environmental laws and regulations. We are subject to various
      federal, state and local environmental, health and safety laws and regulations,
      and are required to maintain numerous permits and governmental approvals
      required for operation, concerning issues such as air emissions, wastewater
      discharges, solid and hazardous waste management and disposal and the
      investigation and remediation of contamination. These laws and regulations
      are
      becoming increasingly stringent. While we believe that our facilities are in
      material compliance with all permits, governmental approvals, applicable
      environmental laws and regulations, the risks of substantial unanticipated
      costs
      and liabilities related to compliance with these permits, governmental
      approvals, laws and regulations are an inherent part of our business. It is
      possible that future conditions may develop, arise or be discovered that create
      new environmental compliance or remediation liabilities and costs. While we
      believe that we can comply with environmental legislation and regulatory
      requirements and that the costs of compliance have been included within budgeted
      cost estimates, compliance may prove to be more limiting and costly than
      anticipated. There can also be no assurance that the facilities will continue
      to
      operate in accordance with the conditions and restrictions established by the
      permits or approvals. Similarly, we cannot assure you that the requirements
      contained in such permits will not change or that the facilities will be able
      to
      renew or to maintain all permits and approvals required for continued operation
      of the facilities.





15


If
      any
      substances are found at the facilities that are classified by applicable
      environmental laws, ordinances or regulations as hazardous materials, we could
      become liable for the investigation and removal of those substances, regardless
      of their source. Failure to comply with these laws, ordinances or regulations,
      or any change in the requirements of these laws, ordinances or regulations
      could
      result in liabilities, imposition of cleanup liens and fines and large
      expenditures to bring the facilities into compliance. We may also be subject
      from time to time to legal proceedings brought by private parties or
      governmental agencies with respect to environmental matters, including matters
      involving alleged property damage or personal injury. We may also be subject
      to
      future claims with respect to historic asbestos exposure relating to our
      acquired assets.





***The
      potential presence of radioactive materials in the scrap that we melt in our
      electric arc furnaces presents a significant economic exposure.***





The
      potential presence of radioactive materials in our scrap supply presents a
      significant economic exposure. The cost to clean up the contaminated material
      and the loss of revenue resulting from the loss in production time can be
      material to our business, results of operations and financial condition. While
      we have three detection devices at the Mill, radioactive scrap could go
      undetected. If we fail to detect radioactive material in the scrap we receive,
      we may incur significant costs to clean up the contamination of our facilities
      and to dispose of the contaminated material that could have a material adverse
      effect on our results of operation and financial condition. In addition,
      there can be no assurance that we will have sufficient financial resources
      to
      fund the clean up costs in such event resulting in a potential suspension or
      curtailment of operations at the Mill.




***The
      results of our operations are sensitive to volatility in steel prices and
      changes in the cost of raw materials, particularly scrap steel.***




We
      rely
      to a substantial extent on outside vendors to supply us with raw materials
      that
      are critical to the manufacture of our products. We acquire our primary raw
      material, steel scrap, from numerous sources. Although we believe that the
      supply of scrap is adequate to operate our facilities, purchase prices of these
      critical raw materials are subject to volatility. At any given time, we may
      be
      unable to obtain an adequate supply of these critical raw materials with price
      and other terms acceptable to us.




If
      our
      suppliers increase the price of our critical raw materials, we may not be able
      to locate alternative sources of supply. If we are unable to obtain adequate
      and
      timely deliveries of our required raw materials, we may be unable to timely
      manufacture sufficient quantities of our products. This could cause us to lose
      sales, incur additional costs and suffer harm to our reputation.





***Changes
      in the availability and cost of electricity and natural gas are subject to
      volatile market conditions that could adversely affect our business.***





Our
      Mill
      is a large consumer of electricity and natural gas. We rely upon third parties
      for our supply of energy resources consumed in the manufacture of our products.
      The prices for and availability of electricity, natural gas, oil and other
      energy resources are subject to volatile market conditions. These market
      conditions often are affected by weather, political and economic factors beyond
      our control. Disruptions in the supply of our energy resources could temporarily
      impair our ability to manufacture our products for our customers. Increases
      in
      our energy costs could materially adversely affect our business, results of
      operations, financial condition and cash flows.





***Mill
      management may be difficult to replace if they leave.***





Management
      of the Mill is currently conducted by employees of Pinnacle Steel, LLC pursuant
      to a Management Services Agreement which expires October 31, 2009. The loss
      of
      the services of one or more members of our Mill management team or the inability
      to attract, retain and maintain additional Mill management personnel could
      harm
      our business, financial condition, results of operations and future prospects.
      Our operations and prospects depend in large part on the performance of our
      Mill
      management team. We may not be able to find qualified replacements for any
      members of the Mill management team if their services are no longer available.





16


***Our
      Chief Executive Officer and Chief Financial Officer have recently tendered
      their
      resignations and there can be no assurance that suitable replacements will
      be
      timely retained to fill these positions.***


Messrs.
        Diamond and Weingarten have each tendered their resignations as officers
        of the
        Company and each of its subsidiaries, effective as of August 31, 2006 or
        earlier if requested by the Company’s Board of Directors. Mr. Diamond will
        continue to serve as the Company’s Chairman of the Board of Directors. The Board
        of
        Directors anticipates filling these executive positions concurrent with
        their vacancy and in any event on or before August 31, 2006.  There can be
        no assurance that qualified replacements for Messrs. Diamond and Weingarten
        will
        be timely retained to fill these executive positions.





***Our
      level of indebtedness and other demands on our cash resources could materially
      adversely affect our ability to execute our business strategy.***





As
      of
      September 30, 2005, we had a substantial amount of total
      consolidated debt, including current maturities and capital lease obligations.
      Subject to the limits contained in our senior credit facility, we may also
      incur
      additional debt in the future. In addition to interest and principal payments
      on
      our outstanding debt and dividends and repurchase obligations with respect
      to
      our preferred stock, we have other demands on our cash resources, including,
      among others, capital expenditures that may arise from time to time and
      operating expenses.





Indebtedness
      levels could have a material effect on our operations and our ability to execute
      our business strategy. Currently, our level of indebtedness requires us to
      dedicate a substantial portion of our cash flow from operations to payments
      on
      our debt, thereby reducing the amount of our cash flow available for working
      capital, capital expenditures, payment of dividends and other general corporate
      purposes. Acquisition Corp. was unable to make a cash interest payment of
      $3,200,000 due on February 27, 2006 to the holders of its $40,000,000 of 8%
      subordinated secured promissory notes and issued 8% promissory notes due
      February 27, 2007 in the principal amount of $3,200,000 to pay such interest.
      There can be no assurance that these note holders will continue to accept this
      form of interest payment in the future. In addition, Acquisition Corp. has
      substantial scheduled principal obligations beginning in fiscal 2007 with
      respect to the promissory notes issued in connection with its operation of
      the
      Mill. See “ITEM
      6.
      MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - Principal
      Commitments”.





Our
      levels of indebtedness could:




•
            require
                us to raise additional capital through the issuance of equity, which
                may
                have a dilutive impact to existing
                stockholders;


•
            limit
                our flexibility in planning for, or reacting to, changes in the industries
                in which we compete;


•
            place
                us at a competitive disadvantage compared to our competitors, some
                of
                which have less debt service obligations and greater financial resources
                than we do;





17





•
            limit
                our ability to borrow additional
                funds;


•
            increase
                our vulnerability to general adverse economic and industry conditions;
                and


•
            result
                in our failure to satisfy the financial covenants contained in our
                senior
                credit facilities or in other agreements governing our indebtedness,
                which
                could result in an event of default that, if not cured or waived,
                could
                result in the lenders calling a default under the terms of the
                indebtedness or otherwise restrict or eliminate our ability to finance
                the
                cash requirements of our business.





Based
      on
      our current level operations, we believe that our current internal and external
      cash resources will be adequate to fund our operations through September 30,
      2006. However, to the extent our estimates and assumptions are inaccurate,
      we
      may not have sufficient cash resources to fund our operations. In such event,
      we
      may have to consider a formal or informal restructuring or reorganization,
      including a sale or other disposition of its assets.





***We
      are required to meet certain minimum operating
      thresholds.***





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 EBITDA requirement for the nine months ending September
      30, 2005. There can be no assurances that we will be able to comply with future
      EBITDA requirements in the future. To the extent that we are not able to comply
      with such requirements, we intend to seek a further amendment of the Notes,
      although no assurance can be given that we will be able to obtain amendments
      or
      waivers if necessary.





***To
      service our indebtedness, we will require a significant amount of cash, and
      our
      ability to generate cash depends on many factors beyond our control.***





Our
      ability to make payments on our indebtedness and to fund any future capital
      expenditures will depend on our ability to generate cash in the future. This,
      to
      a certain extent, is subject to general economic, financial, competitive,
      legislative, regulatory and other factors that are beyond our control.





We
      cannot
      assure you that our business will generate sufficient cash flow from operations
      or that future borrowings will be available to us under our credit facilities
      in
      an amount sufficient to enable us to pay our indebtedness, or to fund our other
      liquidity needs. We may need to refinance all or a portion of our indebtedness,
      on or before maturity. We cannot assure you that we will be able to refinance
      any of our indebtedness, including our senior credit facilities, on commercially
      reasonable terms or at all.





***We
      may incur variable rate indebtedness that subjects us to interest rate risk,
      which could cause our annual debt service obligations to increase significantly.***





A
      portion
      of our current borrowings, namely KES Acquisition’s senior credit facility
      (approximately $19,000,000 at September 30, 2005), and possibly future
      borrowings, are and may continue to be at variable rates of interest, thus
      exposing us to interest rate risk. If interest rates increase, our debt service
      obligations on our variable rate indebtedness would increase even if the amount
      borrowed remained the same, resulting in a decrease in our net income. ****





18


***Our
      ability and the ability of some of our subsidiaries to engage in some business
      transactions may be limited by the terms of our debt.***





The
      Notes
      issued by Acquisition Corp. in connection with the acquisition of the Mill
      and
      KES Acquisition’s senior credit facility contain a number of financial covenants
      requiring them to meet financial ratios and financial condition tests, as well
      as covenants restricting their ability to:





•  
      incur additional debt;


•  
      make certain capital expenditures;


•  
      incur or permit to exist liens;


•  
      enter into transactions with affiliates;


•  
      guarantee the debt of other entities, including joint ventures;


•  
      merge or consolidate or otherwise combine with another company; and


•  
      transfer or sell our assets.





KES
      Acquisition’s ability to borrow under its senior credit facility will depend
      upon its ability to comply with certain covenants and our borrowing base
      requirements. Its ability to meet these covenants and requirements may be
      affected by events beyond its control and it may not meet these obligations.
      The
      failure of KES Acquisition to comply with these covenants and requirements
      could
      result in an event of default under its senior credit facility that, if not
      cured or waived, could terminate its ability to borrow further, permit
      acceleration of the relevant debt (and other indebtedness based on cross default
      provisions) and permit foreclosure on any collateral granted as security under
      its credit facility. There have been certain past covenant violations pursuant
      to the senior credit facility which have been waived by the senior lender and
      there can be no assurance that future covenant violations will not occur. There
      can be no assurance that KES Acquisition’s senior lender will continue to grant
      waivers on any future covenant violations.





***We
      have a significant amount of debt, which, in the event of a default, could
      have
      material adverse consequences upon us.***





Our
      total
      debt obligations (including preferred stock considered as debt obligations
      in
      the Company’s consolidated financial statements) is approximately $107,000,000
      on a consolidated basis as of September 30, 2005. The degree to which we are
      leveraged could have important consequences to us, including the following:





•
            Except
                for periodic tax sharing payments, all****of
                our cash flows must be used to fund our operations and service our
                debt
                obligations, including interest, dividends, required principal payments,
                and required preferred stock repurchase obligations, and therefore
                is not
                available for use in our business;


•
            Our
                ability to obtain additional financing for working capital, capital
                expenditures, general corporate purposes or other purposes could
                be
                impaired;


•
            Our
                failure to comply with restrictions contained in the terms of our
                borrowings, in particular KES Acquisition’s senior credit facility, could
                lead to a default which could cause all or a significant portion
                of our
                debt to become immediately payable;
                and


•
            If
                we default, the loans will become due and we may not have the funds
                to
                repay the loans, and we could discontinue our business and investors
                could
                lose all their money.





19


***We
      rely upon a small number of major customers for a substantial percentage of
      our
      sales.***





A
      loss of
      any large customer or group of customers could materially reduce our sales
      and
      earnings. We have substantial business relationships with a few large customers.
      In fiscal 2005, our top ten customers accounted for approximately 48% of our
      consolidated net sales. During this period, our largest customer accounted
      for
      approximately 8.5% of our consolidated net sales. We expect to continue to
      depend upon a small number of customers for a significant percentage of our
      net
      sales, and cannot assure you that any of them will continue to purchase steel
      from us.





***We
      could face adverse consequences as a result of our*** ***late
      SEC filing*** **s** ***.*** ******





We
      failed
      to timely file this Form 10-KSB Annual Report, as well as other reports with
      the
      SEC. As a result, we will not be eligible to use a "short form" registration
      statement on Form S-3 for a period of 12 months after becoming current in our
      filings. Our inability to use a short form registration statement for a period
      of 12 months after becoming current in our SEC reporting obligations may impair
      our ability or increase the costs and complexity of our efforts, to raise funds
      in the public markets or use our stock as consideration in acquisitions should
      we desire to do so. In addition, we may face additional adverse consequences,
      including an inability to have a registration statement under the Securities
      Act
      of 1933 covering a public offering of securities declared effective by the
      SEC,
      an inability to make offerings pursuant to existing registration statements
      (including registration statements on Form S-8 covering employee stock plans)
      and limitations on the ability of our affiliates to sell our securities pursuant
      to Rule 144 under the Securities Act. These restrictions and adverse
      consequences may negatively affect our ability to attract and retain key
      employees and may further impair our ability to raise funds in the public
      markets should we desire to do so or use our stock as consideration in
      acquisitions.





In
      addition, our future success depends largely upon the support of our customers,
      suppliers and investors. The late
      SEC
      filings have
      resulted in negative publicity and may have a negative impact on the market
      price of our common stock. The effects of the late
      SEC
      filings could
      cause some of our customers or potential customers to refrain from purchasing
      or
      defer decisions to purchase our products. Additionally, current or potential
      suppliers and other parties may re-examine their willingness to do business
      with
      us. Any of these developments could have a material adverse effect on our
      financial and business prospects.





***Recently
      enacted and proposed changes in securities laws and regulations may increase
      our
      costs.***


**


The
      Sarbanes-Oxley Act of 2002 that became law in July 2002, as well as rules
      subsequently implemented by the Securities and Exchange Commission and the
      Nasdaq Stock Market, have required (or will require) changes to some of our
      accounting and corporate governance practices, including a report on our
      internal controls as required by Section 404 of the Sarbanes-Oxley Act of
      2002, which we will be
      required to file with our Annual Report on Form 10-KSB for the year ending
      September 30, 2007 . In
      order
      to comply, the Company is required to increase the amount of documentation
      surrounding its internal control system and provide evidence that the system
      has
      been properly tested to support management’s conclusions. The Company has
      reported previous issues relating to the adequacy of its internal control system
      and there can be no assurance that these deficiencies are rectified or that
      other material weaknesses requiring disclosure do not exist. See “ITEM
      8A. CONTROLS
      AND PROCEDURES” and below.





We
      expect
      these rules and regulations to continue to create additional costs and overhead
      absent the requirement. These rules and regulations have made, and we expect
      will continue to make, it more difficult and more expensive for us to obtain
      director and officer liability insurance, and we may be required to accept
      reduced coverage or incur substantially higher costs to obtain coverage. These
      additional expenses have and may continue to reduce our profits or increase
      our
      losses. These rules and regulations could also make it more difficult for us
      to
      attract and retain qualified executive officers and qualified members of our
      board of directors, particularly to serve on our audit committee.





20


***Our
      internal controls and procedures have been materially deficient, and we are
      in
      the process of correcting internal control deficiencies.***





In
      the
      second quarter of fiscal 2005 following our acquisition of the Mill, the Company
      and its independent registered public accounting firm recognized that internal
      controls at the Mill had material weaknesses. We are still in the process of
      examining and remedying the weaknesses. If we cannot rectify these material
      weaknesses through remedial measures and improvements to our systems and
      procedures, management may encounter difficulties in timely assessing business
      performance and identifying incipient strategic and oversight issues. Management
      is currently focused on remedying internal control deficiencies, and this focus
      will require management from time to time to devote its attention away from
      other planning, oversight and performance functions.





We
      cannot
      provide assurances as to the timing of the completion of these efforts. We
      cannot be certain that the measures we take will ensure that we implement and
      maintain adequate internal controls in the future. Any failure to implement
      required new or improved controls, or difficulties encountered in their
      implementation, could harm our operating results or cause us to fail to meet
      our
      reporting obligations.




***We
      may encounter difficulties in effectuating future
      acquisitions.***





We
      acquired the Mill effective March 1, 2005 and may in the future effectuate
      further acquisitions. If we identify suitable candidates, we may not be able
      to
      make investments or acquisitions on commercially acceptable terms. Acquisitions
      may cause a disruption in our ongoing business, distract management, require
      other resources and make it difficult to maintain our standards, controls and
      procedures. We may not be able to retain key employees of the acquired companies
      or maintain good relations with their clients or suppliers. It may be required
      to incur additional debt and to issue equity securities, which may be dilutive
      to existing stockholders, to effect and/or fund acquisitions.





***We
      cannot assure you that any acquisitions we make will enhance our
      business.***





We
      cannot
      assure you that any completed acquisition will enhance our business. Since
      we
      anticipate that acquisitions could be made with both cash and our common stock,
      if we consummate one or more significant acquisitions, the potential impacts
      are:





•
                  a
                      substantial portion of our available cash could be used to
                      consummate the
                      acquisitions and/or we could incur or assume significant amounts
                      of
                      indebtedness; and


•
                      our
                          stockholders could suffer significant dilution of their
                          interest in our
                          common
                          stock.





Also,
      we
      are required to account for acquisitions under the purchase method, which would
      likely result in our recording significant amounts of goodwill or other tangible
      and intangible assets. The inability of a subsidiary to sustain profitability
      may result in an impairment loss in the value of long-lived assets, principally
      goodwill and other tangible and intangible assets, which would adversely affect
      our financial statements.





21


**Risks
      Related to the Steel Industry**





***We
      may face significant price and other forms of competition from other steel
      producers, which could have a material adverse effect on our business, financial
      condition, results of operation or prospects.***




The
      global markets in which steel companies conduct business are highly competitive.
      Increased competition could cause us to lose market share or reduce pricing,
      either one of which could have a material adverse effect on our business,
      financial condition, results of operations or prospects. We compete primarily
      on
      the basis of price, quality and the ability to meet our customers’ product needs
      and delivery schedules. Some of our competitors may have advantages due to
      greater capital resources, different technologies, lower raw material costs,
      lower energy costs or favorable exchange rates.





***In
      recent years, imports of steel into the United States have adversely affected,
      and may yet again adversely affect, U.S. steel prices, which would impact our
      sales, margins and profitability.***




Excessive
      imports of steel into the United States as a result of excess world supply,
      have
      in recent years exerted, and may again in the future exert downward pressure
      on
      U.S. steel prices and significantly reduce our sales, margins and profitability.
      U.S. steel producers compete with many foreign producers. Competition from
      foreign producers is typically strong, is periodically exacerbated by weakening
      of the economies of certain foreign steelmaking countries, and is further
      intensified during periods when the U.S. dollar is strong relative to foreign
      currencies. Greater steel exports to the United States tend to occur at
      depressed prices when steel producing countries experience periods of economic
      difficulty, decreased demand for steel products or excess capacity.




***Increases
      in prices and limited availability of raw materials and energy may constrain
      operation levels and reduce profit margins.***




Steel
      producers require large amounts of raw materials such as scrap. Steel producers
      also consume large amounts of energy. Over the last several years, prices for
      raw materials and energy have increased significantly. Depending upon applicable
      raw material and energy prices, over which we may have little control, we and
      other steel producers may be faced in the future with difficulty in obtaining
      sufficient raw materials and energy in a timely manner or for reasonable costs,
      resulting in potential production curtailments.




**Risks
      Related to our Common Stock**





***Regulation
      of penny stocks.***





The
      Company's securities are subject to a Securities and Exchange Commission rule
      that imposes special sales practice requirements upon broker-dealers who sell
      such securities to persons other than established customers or accredited
      investors. For purposes of the rule, the phrase "accredited investors" means,
      in
      general terms, institutions with assets in excess of $5,000,000, or individuals
      having a net worth in excess of $1,000,000 or having an annual income that
      exceeds $200,000 (or that, when combined with a spouse's income, exceeds
      $300,000). For transactions covered by the rule, the broker-dealer must make
      a
      special suitability determination for the purchaser and receive the purchaser's
      written agreement to the transaction prior to the sale. Consequently, the rule
      may affect the ability of broker-dealers to sell the Company's securities.





In
      addition, the Securities and Exchange Commission has adopted a number of rules
      to regulate "penny stocks." Such rules include Rules 3a51-1, 15g-1, 15g-2,
      15g-3, 15g-4, 15g-5, 15g-6, 15g-7, and 15g-9 under the Securities Exchange
      Act
      of 1934, as amended. Because the securities of the Company may constitute "penny
      stocks" within the meaning of the rules, the rules would apply to the Company
      and to its securities. The rules may further affect the ability of owners of
      shares to sell the securities of the Company in any market that might develop
      for them.





22


Shareholders
      should be aware that, according to Securities and Exchange Commission, the
      market for penny stocks has suffered in recent years from patterns of fraud
      and
      abuse. Such patterns include (i) control of the market for the security by
      one
      or a few broker-dealers that are often related to the promoter or issuer; (ii)
      manipulation of prices through prearranged matching of purchases and sales
      and
      false and misleading press releases; (iii) "boiler room" practices involving
      high-pressure sales tactics and unrealistic price projections by inexperienced
      sales persons; (iv) excessive and undisclosed bid-ask differentials and markups
      by selling broker-dealers; and (v) the wholesale dumping of the same securities
      by promoters and broker-dealers after prices have been manipulated to a desired
      level, along with the resulting inevitable collapse of those prices and with
      consequent investor losses. The Company's management is aware of the abuses
      that
      have occurred historically in the penny stock market. Although the Company
      does
      not expect to be in a position to dictate the behavior of the market or of
      broker-dealers who participate in the market, management will strive within
      the
      confines of practical limitations to prevent the described patterns from being
      established with respect to the Company's securities.





***Holders
      may find it difficult to effect transactions in our common stock.***




Our
      common stock is currently trading on the ‘‘pink sheets’’ under the symbol
‘‘YSTM.PK.’’ Since our common stock is not listed on Nasdaq, Amex or the New
      York Stock Exchange, holders of our common stock may find that the liquidity
      of
      our common stock is impaired—not only in the number of securities that can be
      bought and sold, but also through delays in the timing of transactions, lack
      of
      security analysts’ and the news media’s coverage of us, and lower prices for our
      securities than might otherwise be attained.




Securities
      that are not listed on a stock exchange, the Nasdaq National Market or the
      Nasdaq SmallCap Market are subject to an SEC rule that imposes special
      requirements on broker-dealers who sell those securities to persons other than
      their established customers and accredited investors. The broker-dealer must
      determine that the security is suitable for the purchaser and must obtain the
      purchaser’s written consent prior to the sale. These requirements may make it
      more difficult for stockholders to sell our stock than the stock of some other
      companies. It may also affect our ability to raise more capital if and when
      necessary.




***Volatility
      in the market price of our common stock.***





The
      market price of our common stock could fluctuate substantially in the future
      in
      response to a number of factors, including the following:





•
              our
                  quarterly operating results or the operating results of other companies
                  in
                  the steel industry;


•
              changes
                  in general conditions in the economy, the financial markets or
                  the steel
                  industry;


•
              announcements
                  by us or our competitors of significant acquisitions;
                  and


•
              increases
                  in raw materials and other
                  costs.





In
      addition, in recent years the stock market has experienced extreme price and
      volume fluctuations. This volatility has had a significant effect on the market
      prices of securities issued by many companies for reasons unrelated to their
      operating performance. These broad market fluctuations may materially adversely
      affect our stock price, regardless of our operating results.





23


***The
      Company does not currently plan to pay dividends to holders of its common
      stock.***




The
      Company does not currently anticipate paying cash dividends to the holders
      of its common stock. Accordingly, holders of the Company’s common stock
      must rely upon subsequent price appreciation as the sole method to realize
      a
      gain on their investment. There can be no assurances that the price of the
      Company’s common stock will ever appreciate in value.





**ITEM
      2. DESCRIPTION OF PROPERTY**




The
      Company maintains corporate offices at 244 Madison Avenue, PMB #358, New
      York, New York 10016.





The
      Mill’s operations are located on approximately 126 acres of land near Ashland,
      Kentucky, next to an interstate highway and a rail line. All of the Mill’s
      facilities are secured by a mortgage in favor of GECC under KES Acquisition’s
      existing senior credit facility.





The
      Company believes that its facilities are well maintained, in good condition
      and
      adequate and suitable for its operating needs.





**ITEM
      3. 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 September 30, 2005 and 2004.




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





The
      Company did not submit any matters to a vote of its security holders during
      the
      fourth quarter of the fiscal year ended September 30, 2005.


24


**PART
      II**





**ITEM
      5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
      ISSUER PURCHASES OF EQUITY SECURITIES**





Since
      June 24, 2005, the Company's common stock has traded on the “Pink Sheets” under
      the symbol "YSTM.PK". Prior to such date, the Company’s common stock traded on
      the OTC Bulletin Board under the symbol “YSTM”. The following table sets forth
      the high and low closing bid prices for the common stock as provided by
      Scotrade.com. The quotations reflect inter-dealer prices, without retail
      mark-up, mark-down or commission, and may not represent actual transactions.





**High**
            
            **Low**Fiscal
                2005First
                Quarter 12/31/04
            
            0.48
            
            0.15Second
                Quarter 3/31/05
            
            0.54
            
            0.18Third
                Quarter 6/30/05
            
            0.30
            
            0.11Fourth
                Quarter 9/30/05
            
            0.16
            
            0.06Fiscal
                2004First
                Quarter 12/31/03
            
            0.32
            
            0.12Second
                Quarter 3/31/04
            
            0.27
            
            0.16Third
                Quarter 6/30/04
            
            0.17
            
            0.11Fourth
                Quarter 9/30/04
            
            0.27
            
            0.14





As
      of
      June 27, 2006, there were 224 holders of record of the Company's common
      stock. To date, the Company has not declared or paid any dividends on its common
      stock. The payment by the Company of dividends, if any, is within the discretion
      of the board of directors and will depend on the Company's earnings, if any,
      its
      capital requirements and financial condition, as well as other relevant factors.
      The Board of Directors does not intend to declare any dividends in the
      foreseeable future but instead intends to retain earnings for use in the
      Company's business operations.





**Equity
      Compensation Plan Information**




**PLAN
                CATEGORY**
            
            **NUMBER
                OF SECURITIES TO BE ISSUED UPON EXERCISE OF OUTSTANDING OPTIONS,
                WARRANTS
                AND RIGHTS**
            **WEIGHTED-AVERAGE
                EXERCISE PRICE OF OUTSTANDING OPTIONS, WARRANTS AND RIGHTS**
            
            **NUMBER
                OF SECURITIES REMAINING AVAILABLE FOR FUTURE ISSUANCE UNDER EQUITY
                COMPENSATION PLANS**
              **(excluding
                securities reflected in column(a) )****(a)**
            **(b)**
            
            **(c)**Equity
                compensation plans approved by security holders
            
            1,405,404
            $0.18
            
            3,594,596Equity
                compensation plans not approved by security holders
            
            -
            -
            
            -Total
            
            1,405,404
            $0.18
            
            3,594,596




As
      of
      June 27, 2006, 5,000,000 options were authorized for issuance under the 2000
      Plan, of which options to purchase 1 ,605,404 shares
      were outstanding and options to purchase 3,394,596 shares were available
      for future grants.





**RECENT
      SALES OF UNREGISTERED SECURITIES**





None.





**ISSUER
      PURCHASE OF EQUITY SECURITIES**





None.





25


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





**General
      Overview:**





On
      February 25, 2004, the Company sold the assets and operations of its Beyond
      the
      Wall subsidiary (see “Sale of Assets and Operations of Beyond the Wall, Inc.”
below). Beyond the Wall had been engaged in the sale of decorative wall posters
      through on-campus sales events, retail stores and internet sales, primarily
      to
      teenagers and young adults. During the period from October 1, 2003 through
      February 25, 2004, Beyond the Wall operated 17 stores in 12 states, plus
      Washington, D.C., throughout the East and mid-West, as well as a warehouse
      and
      distribution center in Stroudsburg, Pennsylvania, and was the Company’s only
      revenue-generating business operation. The consolidated financial statements
      for
      the year ended September 30, 2004 present Beyond the Wall’s operations as a
      discontinued operation as a result of the disposal of its assets and operations
      on February 25, 2004.





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).





**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. The Company’s independent registered public accounting firm, in its
      report dated May 18, 2006, included an explanatory paragraph stating that the
      Company’s recurring losses and negative cash flow, accumulated deficit,
      stockholders’ deficiency and working capital deficiency, among other factors,
      raise substantial doubt about the Company’s ability to continue as a going
      concern.





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.
      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.





26


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.





**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 Company repaid the
      notes payable to directors subsequent to September 30, 2005 from the proceeds
      from the settlement of the Beyond the Wall note receivable, which proceeds
      were
      received on September 30, 2005, as described below.




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





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),
      for $1,920,000, consisting of a cash payment of $820,000 and a subordinated
      secured promissory note (the “Note”) for $1,100,000, with interest at 10% per
      annum, due October 31, 2006.  The buyer had the right to make certain
      optional principal pre-payments on the Note by June 30, 2004, which would result
      in the principal balance of the Note being adjusted downward, in excess of
      such
      principal pre-payments, based on an agreed-upon sliding scale as set forth
      in
      the Note.




On
      April
      30, 2004, the buyer made an optional principal pre-payment on the Note of
      $400,000.  Accordingly, under the provisions of the sale agreement, the
      buyer received a credit of $106,800 against the $1,100,000 note (in excess
      of
      the $400,000 payment), as well as an additional $150,000 back-end credit on
      the
      Note. On October 31, 2004, the buyer made its scheduled principal payment on
      the
      Note of $197,734, plus accrued interest of $49,493.





On
      September 30, 2005, the Company received a cash payment of $258,922 as
      settlement in full of the outstanding note receivable with a balance, including
      accrued interest, of $281,654, and recognized a loss in connection therewith
      of
      $22,732.





The
      Company initially recognized a loss of $564,921 with respect to the BTW sale
      before taking into consideration the effect of the $400,000 principal
      pre-payment made on April 30, 2004.  Inclusive of such payment, the effect
      of the accelerated payment credit and the back-end credit resulted in an
      additional loss of $256,800, which decreased the carrying value of the note
      receivable from $1,100,000 to $843,200 and increased the loss on the BTW sale
      from $564,921 to $821,721.  The loss on the BTW sale was reported as a loss
      on the disposal of discontinued operations for the year ended September 30,
      2004.  As a result of the sale, the retail segment operations have been
      presented as a discontinued operation for the year ended September 30, 2004.





27


**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
      hours worked, is approximately 200,000 short-tons per year, and the Mill is
      currently operating at approximately 94% 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 the 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”) and 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.





28


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 interest in the Notes and $267,000 interest in the 13% Series A
      Preferred Stock in the consolidated balance sheet at September 30, 2005.
      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.





29


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


Years
                Ending September 30,
            
            **KES
                Holdings -**
              **$19,000,000
                Note**
            
            **Atacama
                -**
              **$21,000,000
                Note**


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.





For
      the
      nine months ending September 30, 2005, Acquisition Corp., KES Acquisition and
      Atacama KES are 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
      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.





30


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 January 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, almost all of which was paid subsequent to
      fiscal year end.


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. 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.





31


For
      taxable periods beginning after February 28, 2005, Acquisition Corp. and Atacama
      KES are included in the consolidated federal income tax return filed by
      YouthStream as the common parent.  Acquisition Corp. and Atacama KES have
      entered into a Tax Sharing Agreement with YouthStream, pursuant to which they
      have agreed to pay YouthStream an amount equal to 50% of their respective
“separate company tax liability”, subject to compliance with the GECC secured
      line of credit.  The term “separate company tax liability” is defined as
      the amount, if any, of the federal income tax liability (including, without
      limitation, liability for any penalty, fine, additions to tax, interest, minimum
      tax and other items applicable to such subsidiary in connection with the
      determination of the subsidiary’s tax liability), which such subsidiary
      would have incurred if its federal income tax liability for the periods during
      which it is includible in a consolidated federal income tax return with
      YouthStream were determined generally in the same manner in which its
      separate return liability would have been calculated under Section 1552(a)(2)
      of
      the Internal Revenue Code of 1986, as amended.  YouthStream has
      approximately $255,000,000 of federal net operating loss carryovers currently
      available to offset the consolidated federal taxable income of the affiliated
      group in the future.





The
      total
      purchase price of $65,000,000, as well as the terms and conditions of the Notes
      and 13% Series A Preferred Stock issued to the Sellers, were determined to
      be at fair value based on reports prepared by an independent valuation firm.
      The
      following table summarizes 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
            
            
            37,933,021Liabilities
                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





32





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





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





Minority
      interest - related parties was $430,931 on February 28, 2005. For the year
      ended
      September 30, 2005, the net loss of Acquisition Corp. 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.





**Pro
      Forma Information**





The
      following pro forma operating data presents the results of operations for the
      years ended September 30, 2005 and 2004, as if the Acquisition had occurred
      on
      the last day of the immediately preceding fiscal year. Accordingly, transaction
      costs of $1,171,406 related to the Acquisition for the year ended September
      30,
      2005 are not included in the net loss from continuing operations shown below.
      In
      addition, discontinued operations for the year ended September 30, 2004 are
      not
      included. The Mill commenced generating revenues in late January 2004. 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 years ended September 30, 2005 and 2004 is summarized as
      follows:


33


**2005**
            
            **2004**Net
                sales
            
            $
            113,786,971
            
            $
            48,944,338Cost
                of sales
            
            
            105,265,441
            
            
            51,158,622Gross
                margin (deficit)
            
            
            8,521,530
            
            
            (2,214,284
            )Operating
                income (loss)
            
            
            3,169,836
            
            
            (7,469,548
            )Interest
                expense
            
            
            (9,469,875
            )
            
            (7,243,971
            )Minority
                interest
            
            
            199,109
            
            
            199,109Net
                loss from continuing operations
            
            $
            (5,786,987
            )
            $
            (14,134,628
            )Basic
                and diluted net loss per common share
            
            $
            (0.15
            )
            $
            (0.36
            )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.





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.





34


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.





**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 begin 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
      will no longer be 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.




35


Public
      companies are permitted to adopt the requirements of SFAS No. 123R using
      one of two methods:




(1) A
      “modified prospective” method in which compensation cost is recognized beginning
      with the effective date (a) based on the requirements of SFAS No. 123R
      for all share-based payments granted after the effective date and (b) based
      on the requirements of SFAS No. 123R for all awards granted to employees
      prior to the effective date of SFAS No. 123R that remain unvested on the
      effective date.




(2) A
      “modified retrospective” method which includes the requirements of the modified
      prospective method described above, but also permits entities to restate based
      on the amounts previously recognized under SFAS No. 123 for purposes of pro
      forma disclosures for either (a) all prior periods presented or
      (b) prior interim periods of the year of adoption.




The
      Company will adopt SFAS No. 123R effective January 1, 2006 and will
      use the modified prospective method in which compensation cost is recognized
      beginning with the effective date (a) based on the requirements of SFAS
      No. 123R for all share-based payments granted after the effective date and
      (b) based on the requirements of SFAS No. 123R for all awards granted
      to employees prior to the effective date of SFAS No. 123R that remain
      unvested on the effective date. 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
      November 2004, the Financial Accounting Standards Board (“FASB”) issued
      SFAS No. 151, “Inventory Costs — An Amendment of ARB No. 43,
      Chapter 4” (SFAS No. 151). SFAS No. 151 clarifies that abnormal
      amounts of idle facility expense, freight, handling costs and spoilage should
      be
      expensed as incurred and not included in overhead. Further, SFAS No. 151
      requires that allocation of fixed and production facilities overhead to
      conversion costs should be based on normal capacity of the production
      facilities. The provisions in SFAS No. 151 are effective for inventory
      costs incurred during fiscal years beginning after June 15, 2005.
      Accordingly, the Company adopted SFAS No. 151 effective October 1, 2005. The
      adoption of SFAS No. 151 did not have any impact on the Company’s financial
      statement presentation or disclosures.





In
      December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary
      Assets, an amendment to APB Opinion No. 29” (“SFAS No. 153”). SFAS No.
      153 amends Accounting Principles Board Opinion No. 29, “Accounting for
      Nonmonetary Transactions”, to require that exchanges of nonmonetary assets be
      measured and accounted for at fair value, rather than at carryover basis, of
      the
      assets exchanged. Nonmonetary exchanges that lack commercial substance are
      exempt from this requirement. SFAS No. 153 is effective for nonmonetary
      exchanges entered into in fiscal periods beginning after June 15, 2005.
      Accordingly, the Company adopted SFAS No. 153 effective July 1, 2005. The
      adoption of SFAS No. 153 did not have any impact on the Company’s financial
      statement presentation or disclosures.





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. Accordingly, the Company
      will adopt the provisions of SFAS No. 154 effective October 1, 2006. The
      adoption of SFAS No. 154 is not expected to have any impact on the Company’s
      financial statement presentation or disclosures.





36


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 year ending September 30, 2007 to comply with the
      internal control reporting requirements.




**Results
      of Operations:**





The
      operations of Beyond the Wall have been presented as a discontinued operation
      in
      2004. Accordingly, for the year ended September 30, 2004, the Company did not
      have any revenues or cost of revenues from continuing operations.





The
      refurbished Mill restarted operations in late January 2004 and completed its
      ramp-up phase and reached full operating status in August 2004. The Company
      acquired the Mill effective February 28, 2005, and the operations of the Mill
      have been consolidated commencing March 1, 2005. Sales and cost of sales were
      generated by the operations of the Mill during 2005. The Company’s results of
      operations for the year ended September 30, 2005 include the Mill’s operations
      for seven months (March through September 2005). As a result of the acquisition
      of the Mill, the Company’s financial statements for periods ending after March
      1, 2005 are materially different from and are not comparable to its financial
      statements prior to that date.




**Years
      Ended September 30, 2005 and 2004:**





Net
      Sales. Net sales were $69,182,475 for the year ended September 30, 2005, an
      average of $9,883,211 per month for the seven months that the Company owned
      the
      Mill. If the Company had owned the Mill for the full years ended September
      30,
      2005 and 2004, pro forma net sales would have been $113,786,971 for 2005 (an
      average of $9,482,248 per month), as compared to pro forma net sales of
      $48,944,338 for 2004 (an average of $4,078,695 per month), since the Mill
      restarted operations in late January 2004 and did not reach full operating
      status until August 2004.





Cost
      of
      Sales. Cost of sales was $62,939,014 for the year ended September 30, 2005,
      resulting in gross profit of $6,243,461 and a gross profit margin of 9.0%.
      If
      the Company had owned the Mill for the full year ended September 30, 2005,
      pro
      forma gross profit margin would have been 7.5%. Due to the restart of Mill
      operations in late January 2004, a comparison of 2004 cost of sales amounts
      (assuming that the Company had owned the Mill for the full year ended September
      30, 2004) to 2005 cost of sales amounts would not be meaningful, since pro
      forma
      gross profit and gross margin were negative in 2004.





Selling
      Expenses. For the year ended September 30, 2005, selling expenses were $735,381
      or 1.1% of sales. The Company did not have any selling expenses for the year
      ended September 30, 2004. Selling expenses consist primarily of sales
      commissions and personnel-related costs.





Selling, General
      and Administrative Expenses. For the year ended September 30, 2005, general
      and
      administrative expenses were $2,816,125 or 4.1% of sales . The
      Company incurred corporate general and administrative expenses during the entire
      year ended September 30, 2005, but only had operating revenues for the last
      seven months of the year ended September 30, 2005. For the year ended September
      30, 2004, general and administrative expenses were $1,090,256, which reflected
      corporate general and administrative expenses, including management
      compensation, legal and accounting fees and insurance costs.





37


Operating
      Income. Operating income was $2,691,955 for the year ended September 30, 2005,
      as compared to an operating loss of $1,090,256 for the year ended September
      30,
      2004.





Interest
      Income. Interest income was $45,542 for the year ended September 30, 2005,
      as
      compared to $49,566 for the year ended September 30, 2004.





Interest
      Expense. For the year ended September 30, 2005, interest expense was $5,607,454,
      which included interest expense related to the 8% notes payable of $1,852,384
      and the 13% Series A Preferred Stock of $1,885,129 issued in conjunction with
      the acquisition of the Mill, the 12% notes payable of $492,493 and the 4% notes
      payable of $42,758. For the year ended September 30, 2004, interest expense
      was
      $41,509.





Transaction
      Costs Related to KES Acquisition. The
      Company incurred $1,171,406 of costs with respect to the acquisition of the
      Mill
      (primarily legal and accounting fees), which were charged to operations during
      the year ended September 30, 2005. Included in such costs was $187,702 of
      transaction costs incurred by KES Acquisition prior to February 28, 2005.





Gain
      on
      Settlement of Compensation Obligations. During the year ended September 30,
      2005, the Company recognized a gain on settlement of compensation obligations
      of
      $225,948 as a result of the settlement of various contractual compensation
      obligations at less than amounts that had been previously accrued.





Other
      Income (Expense). For the year ended September 30, 2005, other expense was
      $46,078. There was no other income (expense) for the year ended September 30,
      2004.





Loss
      before Income Taxes and Minority Interest. The loss before income taxes and
      minority interest was $3,861,493 for the year ended September 30, 2005, as
      compared to $1,082,199 for the year ended September 30, 2004.





Income
      Taxes. For the year ended September 30, 2004, the Company recorded a benefit
      from income taxes of $88,372. The Company did not record any provision for
      or
      benefit from income taxes for the year ended September 30, 2005.





Loss
      before Minority Interest. The loss before minority interest was $3,861,493
      for
      the year ended September 30, 2005, as compared to $993,827 for the year ended
      September 30, 2004.





Minority
      Interest - Related Parties. For the year ended September 30, 2005, minority
      interest was $430,931, reflecting the minority interest’s share in the loss of
      YouthStream Acquisition Corp., an 80.01%-owned consolidated
      subsidiary.





Loss
      from
      Continuing Operations. The loss from continuing operations was $3,430,562 for
      the year ended September 30, 2005, as compared to $993,827 for the year ended
      September 30, 2004.





Loss
      from
      Discontinued Operations. For the year ended September 30, 2004, the Company
      had
      a loss from discontinued operations of $1,371,793, which related to the former
      operations of Beyond the Wall. The loss from discontinued operations of $550,072
      for the year ended September 30, 2004 consisted of an operating loss of
      $1,050,072, offset by a gain of $500,000 resulting from the reduction of a
      prior
      accrual with respect to the closing of retail stores as a result of the Company
      completing settlements with landlords below what had been originally accrued.
      The Company also had a loss on the disposal of discontinued operations of
      $821,721 for the year ended September 30, 2004, as a result of the sale of
      the
      assets and operations of Beyond the Wall in February 2004.





38


Net
      Loss.
      Net loss was $3,430,562 for the year ended September 30, 2005, as compared
      $2,365,620 for the year ended September 30, 2004.





**Liquidity
      and Capital Resources - September 30, 2005:**





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





As
      of
      September 30, 2005, the balance outstanding on the line of credit was
      $19,009,379, 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 GECC. 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 GECC 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
      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 GECC, and if no such waiver is received, GECC 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 estimated tax sharing payment due to YouthStream was approximately
      $342,000, which was received in early 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.





39


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.





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 September 30,
      2005
      is presented below.




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





Operating
      Activities. During the year ended September 30, 2005, the Company used
      $4,300,395 of cash in operating activities, both to fund the corporate overhead
      of YouthStream for the year ended September 30, 2005 and to fund the operations
      of the Mill for a period of seven months from the date of acquisition through
      September 30, 2005. During the year ended September 30, 2004, the Company used
      $901,442 of cash in operating activities, primarily to fund its loss from
      continuing operations of $993,827 for the year ended September 30, 2004, which
      consisted of corporate general and administrative expenses.





Investing
      Activities. During the year ended September 30, 2005, net cash provided by
      investing activities of $506,149 consisted of principal and interest payments
      on
      the Beyond the Wall note receivable that the Company received in the February
      2004 sale of the assets and operations of Beyond the Wall. During the year
      ended
      September 30, 2004, net cash provided by investing activities of $1,044,856
      consisted of the proceeds received from the sale of the Beyond the Wall assets
      and operations in February 2004 of $820,000 and principal payments on the Beyond
      the Wall note receivable of $400,000, reduced by deferred costs related to
      the
      KES transaction of $175,144.





40


Financing
      Activities. During the year ended September 30, 2005, net cash provided by
      financing activities was $3,205,007, consisting of $3,389,284 from increased
      borrowings under the secured line of credit with GECC and $50,000 from the
      proceeds from short-term notes payable issued to certain directors, reduced
      by
      payments on an equipment contract payable and capital lease obligation of
      $234,277. During the year ended September 30, 2004, the Company did not generate
      or use any cash in financing transactions.





**Principal
      Commitments:**





At
      September 30, 2005, the Company’s principal commitments consisted of the
      following obligations:


Payments
                Due by Years Ending September
                30,Contractual
                cash obligations (in thousands)
            
            Total
            
            2006
            
            2007
            
            2008
            
            2009
            
            2010
            
            There-after4%
                notes payable
            
            $
            4,917
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            4,917Notes
                payable to directors
            
            
            50
            
            
            50
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -12%
                subordinated promissory notes payable
            
            
            7,000
            
            
            -
            
            
            7,000
            
            
            -
            
            
            -
            
            
            -
            
            
            -8%
                subordinated secured promissory notes payable
            
            
            39,493
            
            
            -
            
            
            1,849
            
            
            925
            
            
            925
            
            
            925
            
            
            34,869Secured
                line of credit
            
            
            19,009
            
            
            -
            
            
            19,009
            
            
            -
            
            
            -
            
            
            -
            
            
            -Operating
                leases
            
            
            1,593
            
            
            426
            
            
            406
            
            
            390
            
            
            371
            
            
            -
            
            
            -Capital
                lease obligation
            
            
            1,684
            
            
            372
            
            
            432
            
            
            502
            
            
            378
            
            
            -
            
            
            -Equipment
                contact payable
            
            
            250
            
            
            77
            
            
            85
            
            
            88
            
            
            -
            
            
            -
            
            
            -Management
                services agreement
            
            
            2,858
            
            
            700
            
            
            700
            
            
            700
            
            
            700
            
            
            58
            
            
            -4%
                Series A Preferred Stock subject to mandatory redemption
            
            
            5,269
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            5,26913%
                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
            
            
            10,786Total
                contractual cash obligations
            
            $
            108,741
            
            $
            1,625
            
            $
            33,439
            
            $
            6,563
            
            $
            6,332
            
            $
            4,941
            
            $
            55,841





At
      September 30, 2005, the Company does not have any material commitments for
      capital expenditures.





At
      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 $7,962,000.





**Off-Balance
      Sheet Arrangements:**





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





**Recent
      Accounting Pronouncements**





In
      December 2004, the FASB issued SFAS No. 123(Revised 2004), "Share-Based
      Payment". SFAS No. 123(R) revises SFAS No. 123, "Accounting for Stock-Based
      Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued
      to
      Employees" and amends SFAS No. 95, "Statement of Cash Flows". SFAS No. 123(R)
      focuses primarily on the accounting for transactions in which an entity obtains
      employee services in share-based payment transactions. SFAS No. 123(R) requires
      companies to recognize in the statement of operations the cost of employee
      services received in exchange for awards of equity instruments based on the
      grant-date fair value of those awards (with limited exceptions). SFAS No. 123(R)
      is effective as of the Company's first interim or annual reporting period that
      begins after December 15, 2005. Accordingly, the Company will adopt SFAS No.
      123(R) effective January 1, 2006. The Company is currently evaluating the
      provisions of SFAS No. 123(R) and has not yet determined the impact, if any,
      that SFAS No. 123(R) will have on its financial statement presentation or
      disclosures.





41


In
      November 2004, the FASB issued SFAS No. 151, "Inventory Costs — An Amendment of
      ARB No. 43, Chapter 4" (SFAS No. 151). SFAS No. 151 clarifies that abnormal
      amounts of idle facility expense, freight, handling costs and spoilage should
      be
      expensed as incurred and not included in overhead. Further, SFAS No. 151
      requires that allocation of fixed and production facilities overhead to
      conversion costs should be based on normal capacity of the production
      facilities. The provisions in SFAS No. 151 are effective for inventory costs
      incurred during fiscal years beginning after June 15, 2005. Accordingly, the
      Company will adopt SFAS No. 151 effective October 1, 2005. The Company is
      currently evaluating the provisions of SFAS No. 151 and has not yet determined
      the impact, if any, that SFAS No. 151 will have on its financial statement
      presentation or disclosures.





In
      December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets,
      an amendment to APB Opinion No. 29" ("SFAS 153"). SFAS No. 153 amends Accounting
      Principles Board Opinion No. 29, "Accounting for Nonmonetary Transactions",
      to
      require that exchanges of nonmonetary assets be measured and accounted for
      at
      fair value, rather than at carryover basis, of the assets exchanged. Nonmonetary
      exchanges that lack commercial substance are exempt from this requirement.
      SFAS
      No. 153 is effective for nonmonetary exchanges entered into in fiscal periods
      beginning after June 15, 2005. Accordingly, the Company will adopt SFAS No.
      153
      effective July 1, 2005. The Company is currently evaluating the provisions
      of
      SFAS No. 153, and has not yet determined the impact, if any, that it will have
      on the Company's financial statement presentation or disclosures.





**ITEM
      7. FINANCIAL STATEMENTS**





Information
      with respect to this item appears as a separate section of this document
      following “ITEM
      13. EXHIBITS” . Such
      information is incorporated herein by reference.





**ITEM
      8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND****FINANCIAL
      DISCLOSURE**





None.





**ITEM
      8A. 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.





42


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 accounting and financial systems at the Company's Mill, which
      resulted in deficient disclosure controls and procedures. The Mill was acquired
      effective March 1, 2005, and its operations have been 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 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 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 has begun to address these issues by reviewing
      and
      revising its internal accounting policies and procedures, as necessary. The
      Company also intends to increase the resources and personnel allocated to the
      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.





**ITEM
      8B. OTHER INFORMATION**





The
      Company did not have any reportable events during the fourth quarter of the
      fiscal year ended September 30, 2005 that were required to be filed on
      Form 8-K, but were not so reported.


43


**PART
      III**





**ITEM
      9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;**


**COMPLIANCE
      WITH SECTION 16(a) OF THE EXCHANGE ACT**





The
      following table sets forth certain information regarding the Company's directors
      and executive officers.








**Name**
            
            **Age**
            
            **Position**Jonathan
                V. Diamond
            
            47
            
            Chairman
                of the Board of Directors (Class III Director) and Chief Executive
                OfficerRobert
                N. Weingarten
            
            52
            
            Chief
                Financial Officer and SecretaryHal
                G. Byer
            
            48
            
            Class
                II DirectorRobert
                Scott Fritz
            
            49
            
            Class
                I DirectorPatrick
                J. Panzarella
            
            40
            
            Class
                II DirectorJames
                N. Lane
            
            55
            
            Class
                I DirectorJess M.
              Ravich
            
            48
            
            Class
                III Director





The
      Company's Board of Directors is divided into three classes, with one class
      being
      elected each year and members of each class holding office for a three-year
      term. All of the directors serve until their terms expire and until their
      successors are elected and qualified, or until their earlier death, retirement,
      resignation or removal.





In
      connection with the January 2003 debt restructuring transactions, all of the
      Company's previous directors and officers resigned, and three directors were
      appointed. Jonathan V. Diamond, who had previously served as a director and
      interim Chief Executive Officer of the Company, was appointed as Chairman of
      the
      Board of Directors, and Hal G. Byer and Robert Scott Fritz were appointed as
      directors. Mr. Fritz has been designated as a Class I director and Mr. Byer
      has
      been designated as a Class II director. Mr. Diamond had been previously
      designated as a Class III director. Mr. Panzarella was appointed to the Board
      of
      Directors in June 2004 as a Class II director, Mr. Lane was appointed to the
      Board of Director in February 2005 as a Class I director and Mr. Ravich was
      appointed to the Board of Directors in June 2006 as a Class III
      director.





The
      Class
      I directors’ terms will expire at the annual meeting to be held subsequent to
      the fiscal year ended September 30, 2006. The Class II directors’ terms were set
      to expire at the annual meeting to be held subsequent to the fiscal year ended
      September 30, 2004. However, no annual meeting was held subsequent to the fiscal
      year ended September 30, 2004. The Class III director's term will expire at
      the
      annual meeting to be held subsequent to the fiscal year ended September 30,
      2005.


Messrs.
        Diamond and Weingarten have each tendered their resignations as officers
        of the
        Company and each of its subsidiaries, effective as of August 31, 2006 or
        earlier if requested by the Company’s Board of Directors. Mr. Diamond will
        continue to serve as the Company’s Chairman of the Board of Directors. The Board
        of
        Directors anticipates filling these executive positions concurrent with
        their vacancy and in any event on or before August 31, 2006.




The
      Board
      of Directors has established Audit, Compensation and Stock Option Committees.
      Messrs. Byer and Fritz currently serve on the Audit, Compensation and Stock
      Option Committees. The Board of Directors is currently contemplating
      reconfiguring its committee membership to more fully comply with various
      regulatory requirements.





44


Due
      to
      the delay in finalizing the Company's audited financial statements for
      the fiscal year ended September 30, 2005, the Company has not been
      able to acquire an audit committee financial expert to serve on its Audit
      Committee. The Company intends to attempt to add a qualified board member to
      serve as an audit committee financial expert in the future.





The
      following is a brief summary of the background of the Company's directors and
      executive officers.





**Directors**





Jonathan
      V. Diamond. Mr. Diamond has served as Chairman of the Board and Chief Executive
      Officer of the Company since January 30, 2003. Mr. Diamond previously served
      as
      a director from April 4, 2001 to December 2, 2002, and as interim Chief
      Executive Officer from August 17, 2002 to December 2, 2002. From September
      2003
      to the present, he has served as the Chief Executive Officer and a director
      of
      ARTISTdirect, Inc., a publicly traded digital media entertainment company.
      He
      was the co-founder of N2K, Inc. and served as its Vice Chairman and Chief
      Executive Officer through its 1999 merger with CDnow, Inc., an e-commerce
      company. He continued to serve as Chairman of the combined company until its
      sale to Bertelsmann Music Group in August 2000. Mr. Diamond was a founder of
      GRP
      Records, an independent music label acquired by MCA in 1990. Mr.
      Diamond holds an
      M.B.A. from the Columbia University Graduate School of Business and a B.A.
      in
      Economics and Music from the University of Michigan Honors College. Mr. Diamond
      has resigned from all executive positions that he holds in the Company and
      its
      subsidiaries, effective as of August 31, 2006, or earlier if requested by the
      Board of Directors. Mr. Diamond will continue to serve as the Company's
      Chairman of the Board.





Hal
      G.
      Byer. Mr. Byer has served as a director of the Company since January 30, 2003.
      Mr. Byer joined Libra Securities, LLC ("Libra Securities"), a broker-dealer
      registered with the Securities and Exchange Commission and an NASD member,
      in
      May 2001, and has been a Senior Vice President since January 2002. From 1995
      to
      2003, Mr. Byer was Chief Executive Officer of Byer Distributing Co., a snack
      food distribution company. From 2000 to 2003, Mr. Byer was also the Chief
      Operating Officer of eGreatcause.com, an internet start-up involved in
      fundraising for charitable and non-profit organizations that is no longer
      active.





Robert
      Scott Fritz. Mr. Fritz has served as a director of the Company since January
      30,
      2003. Mr. Fritz is the president and owner of Robert Fritz and Sons Sales
      Company, a food broker and paper distributor located in New Jersey, and has
      operated in that capacity since 1976.





Patrick
      J. Panzarella. Mr. Panzarella has served as a director of the Company since
      June
      3, 2004. Mr. Panzarella has served as the Chief Executive Officer of Pacific
      Entertainment Group, a global entertainment corporation with interests in artist
      management, marketing, promotion, publishing, and production, since May 2001.
      Prior to joining Pacific Entertainment Group, Mr. Panzarella served as Partner
      and Co-Chairman of the Board of Sheridan Square Entertainment, a global music
      company, from April 1999 to May 2002. Mr. Panzarella also served as Partner,
      President and Chief Executive Officer of C&P Investment Properties, a
      private investment fund focused on the entertainment industry, from November
      1991 to December 2002. This fund participated in numerous acquisitions and
      start
      ups over an eleven year period. Mr. Panzarella received a B.A. in Business
      from
      University of Southern California in 1988.





James
      N.
      Lane.  Mr. Lane has served as a director of the Company since February 15,
      2005.  He has also been a director of ARTISTdirect, Inc., a publicly traded
      digital media entertainment company, since May 2005.  Mr. Lane has been
      Managing Partner of Devonwood Capital Partners LLC, a private equity firm,
      since
      2002, a Senior Advisor to Ripplewood Holdings LLC, a private equity firm, since
      September 2005 and also Chairman of NanoHoldings, LLC, a nanotechnology venture
      fund, since July 2005.  From 1997 to 2002, Mr. Lane served as Chairman and
      CEO of SG Capital Partners, a private equity firm affiliated with Societe
      General and SG Cowen Securities.  Prior to establishing SG Capital
      Partners, Mr. Lane’s career spanned approximately twenty years at Goldman Sachs
& Co. where he was a General Partner and a founding member of the firm’s
      private equity business. Mr. Lane received a B.A. degree from Wheaton
      College and a M.B.A. from Columbia University.




Jess
        M.
        Ravich.  Mr. Ravich has served as a director of the Company since June 26,
        2006. Mr. Ravich
        is the Chairman and Chief Executive Officer of Libra Securities, a Los Angeles
        based investment banking firm that focuses on capital raising and financial
        advisory services for middle market corporate clients and the sales and trading
        of debt and equity securities for institutional investors. Prior to founding
        Libra Securities in 1991, Mr. Ravich was an Executive Vice President at
        Jefferies & Co., Inc. and a Senior Vice President at Drexel
        Burnham Lambert. Mr. Ravich serves on the board of directors of Cherokee
        Inc. and Continental AFA Dispensing Company and on the board of managers of
        OpBiz, LLC. In addition to his professional responsibilities, Mr. Ravich is
        also on the Undergraduate Executive Board of the Wharton School and the Board
        of
        Trustees of the Archer School for Girls.




45


**Other
      Executive Officer**





Robert
      N.
      Weingarten. Mr. Weingarten was appointed Chief Financial Officer of the Company
      on February 6, 2003. From July 1992 to present, Mr. Weingarten has been the
      sole
      shareholder of Resource One Group, Inc., a financial consulting and advisory
      company. From January 2004 to present, he has served as the Chief Financial
      Officer and Secretary of ARTISTdirect, Inc., a publicly traded digital media
      entertainment company. Since 1979, Mr. Weingarten has served as a consultant
      to
      numerous public companies in various stages of development, operation or
      reorganization. Mr. Weingarten received an M.B.A. Degree in Finance from the
      University of Southern California in 1975 and a B.A. Degree in Accounting from
      the University of Washington in 1974. Mr. Weingarten currently serves as a
      director of Resource Ventures, Inc., a non-trading public
      company. ****Mr.
      Weingarten has resigned as Chief Financial Officer and Secretary of the Company
      and its subsidiaries, effective as of August 31, 2006, or earlier if requested
      by the Board of Directors.




**Compliance
      with Section 16(a) of the Exchange Act**





Section
      16(a) of the Securities Exchange Act of 1934, as amended, requires a company's
      directors and executive officers, and beneficial owners of more than 10% of
      the
      common stock of such company to file with the Securities and Exchange Commission
      initial reports of ownership and periodic reports of changes in ownership of
      the
      company's securities. Based upon a review of the copies of such forms furnished
      to the Company and written representations from the Company's executive officers
      and directors, the Company believes that during the fiscal year ended September
      30, 2005, all Forms 3, 4 and 5 were filed on a timely basis for the Company's
      executive officers and directors. To the knowledge of the Company, Joseph Corso,
      Jr., a beneficial owner of more than 10% of the Company’s common stock who
      reports his stock ownership on Schedule 13g, has never filed a Form 3, 4 or
      5 in
      connection with his stock holdings in the Company.





**Family
      Relationships among Directors and Executive Officers**





There
      were no family relationships among directors and executive officers during
      the
      fiscal year ended September 30, 2005.





**Code
      of Ethics**





The
      Company has adopted a written Code of Ethics that applies to its senior
      management, including its Chief Executive Officer and Chief Financial Officer.
      A
      copy of the Company's Code of Ethics
      is
      available to any shareholder that requests a copy, and has been filed as an
      exhibit to the Company's Annual Report on Form 10-K/A for the fiscal year ended
      September 30, 2003. Such request should be addressed to the attention of the
      Secretary of the Company and mailed to the Company's corporate offices. Any
      amendment to the Code of Ethics or any waiver of the Code of Ethics will be
      disclosed promptly following the date of such amendment or waiver pursuant
      to a
      Form 8-K filing with the Securities and Exchange Commission.





46


**Changes
      in Procedures to Nominate Directors**





Since
      the
      date of the Company’s last disclosures pursuant to Item 7(d)(2)(ii)(G) of
      Schedule 14A of the Securities Exchange Act of 1934, as amended, there have
      been
      no material changes to the procedures by which security holders may recommend
      nominees to the Company’s Board of Directors.




**ITEM
      10. EXECUTIVE COMPENSATION**





The
      following table sets forth the total compensation paid or accrued by the Company
      to the named executive officers for services rendered during the last three
      fiscal years. No other executive officers received total annual compensation
      exceeding $100,000 during such fiscal years.








Annual
                Compensation
            
            Long-Term
                Compensation


**Securities**
              **Underlying**
              **Options/SARs**
            
            **All
                Other**
              **Compensation****Year**
            
            **Salary**
            
            **Bonus**Jonathan
                V. Diamond
              Chairman
                of the Board and
              Chief
                Executive Officer (1)
            
            2005
              2004
              2003
            
            $
              $
              $
            120,000
              120,000
              98,000
            
            0
              0
              0
            
            0
              50,000
              300,000
            
            $
            0
              0
              11,000
            (5)Robert
                N. Weingarten
              Chief
                Financial Officer and Secretary (3)
            
            2005
              2004
              2003
            
            $
              $
              $
            60,000
              85,000
              90,000
            (6)
              (6)
              (6)
            0
              0
              0
            
            0
              0
              175,000
            
            
            0
              0
              0Harlan
                Peltz
              Former
                Chief Corporate Strategist and Chairman (4)
            
            2003
            
            $
            135,417
            (2)
            0
            
            0
            
            
            0








(1)
      Mr.
      Diamond served as interim Chief Executive Officer from August 17, 2002 to
      December 2, 2002, and was named Chief Executive Officer on January 30, 2003.





(2)
      Mr.
      Peltz's compensation is calculated for the period July 1, 2002 through January
      24, 2003.





(3)
      Mr.
      Weingarten has served as Chief Financial Officer since February 6, 2003.





(4)
      Mr.
      Peltz's employment with the Company terminated on January 24, 2003.





(5)
      Pursuant to Mr. Diamond's agreement with the Company, the Company recorded
      a
      liability for $11,000 at September 30, 2003, to be used as a credit against
      the
      exercise price of any of Mr. Diamond's stock options in the future.





(6)
      Mr.
      Weingarten was compensated at an effective rate of $120,000 per annum during
      the
      fiscal year ended September 30, 2003. Mr. Weingarten's compensation decreased
      to
      an effective rate of $60,000 per annum effective March 1, 2004, as a result
      of
      the sale of the assets and operations of the Company's Beyond the Wall, Inc.
      subsidiary in February 2004. Mr. Weingarten’s annual salary was adjusted to
      $102,000 effective November 1, 2005.




**Aggregated
      Option Exercises in Last Fiscal Year
      and Fiscal Year-End Option Values**




The
      following table sets forth information concerning
      the exercise of stock options during the fiscal year ended September 30, 2005
      with respect to the Company's executive officers and the fiscal year-end value
      of unexercised options. No options were granted to, or exercised by any of
      the
      Company's executive officers during the fiscal year ended September 30,
      2005.




**Number
                  of**
                **Securities
                  Underlying**
                **Unexercised
                  Options**
                **at
                  September 30, 2005**
              
              **Value
                  of****Unexercised**
                **In-The-Money
                  Options**
                **at
                  September 30, 2005 (1)****Name**
              
              Exercisable
              
              Unexercisable
              
              Exercisable
              
              UnexercisableJonathan
                V. Diamond
              
              
              430,404
              
              
              —
              
              $
              18,000
              
              
              —Robert
                N. Weingarten
              
              
              175,000
              
              
              —
              
              $
              10,500
              
              
              —




(1)
      Based
      on September 30, 2005 closing stock price of $0.10 per share.




**STOCK
      OPTION PLAN**





In
      February 2000, the Company adopted the YouthStream 2000 Stock Option Plan (the
      "2000 Plan") in order to grant employees providing services to the Company
      incentive stock options. The 2000 Plan allows for the granting of options to
      purchase up to 5,000,000 shares of the Company's common stock. All option plans
      of the Company in existence at the formation of the 2000 Plan were merged into
      the 2000 Plan. The terms of the options were not changed upon merging the Plans.
      The exercise
      price of the options granted was at fair market value on the date of the grant.
      Options generally vest over three years.





47


As
      of June
      27, 2006, the
      Company was authorized to issue options to purchase 5,000,000 shares of
      common stock under the 2000 Plan, of which options to purchase 1,605,404 shares
      were outstanding and options to purchase 3,394,596
      shares of common stock were
      available for future grants.





**Director
      Compensation**





The
      Company has no standard arrangements for compensation of directors. Directors
      are reimbursed for reasonable out-of-pocket expenses incurred in attending
      board
      meetings.





In
      February 2005, the Company issued options to purchase an aggregate of 200,000
      shares of common stock to Mr. Lane, exercisable at the fair market value of
      $0.30 per share for a period of seven years. The option fully vested in February
      2006.




In
      June
      2006, the Company issued options to purchase an aggregate of 200,000 shares
      of
      common stock to Mr. Ravich, exercisable at the fair market value of $0.12 per
      share for a period of seven years. The option vests over twelve months in
      equal monthly installments.





**Employment
      Contracts, Termination of Employment and Change in Control Arrangements**





The
      Company does not have any employment contracts, termination of employment or
      change in control arrangements with its current officers.





**Long-Term
      Incentive Plans**





The
      Company does not have any long-term incentive plans.





**Meetings
      and Committees of the Board of Directors**





The
      Board
      of Directors held 6 meetings and took 7 **** actions
      by written consent during the fiscal year ended September 30, 2005. The Board
      has an Audit Committee, a Compensation Committee and a Stock Option Committee.
      Each Director attended or participated in 75% or more of the aggregate of (i)
      the total number of meetings of the Board and (ii) the total number of meetings
      held by all committees of the Board on which such Director served during the
      fiscal year ended September 30, 2005.





The
      Audit
      Committee was created to review, act on and report to the Board of Directors
      with respect to various auditing and accounting matters, including the selection
      of the Company's independent auditors, the scope of the annual audits, fees
      to
      be paid to the auditors, the performance of the independent auditors and the
      Company's accounting practices. The members of the Audit Committee are Messrs.
      Byer and Fritz, each non-employee directors of the Company. During the fiscal
      year ended September 30, 2005, the Audit Committee did not meet as a separate
      entity, rather all auditing and accounting matters were discussed and acted
      upon
      by the full Board of Directors.





The
      Company does not currently have an "audit committee financial expert" as defined
      in Item 401(e) of Regulation S-B under the Securities Exchange Act of 1934,
      as
      amended, serving on its Audit Committee. The Company intends to attempt to
      add a
      qualified board member to serve as an "audit committee financial expert" in
      the
      future.





The
      Compensation Committee reviews and approves the compensation and benefits of
      its
      key executive officers, administers its employee benefit plans and makes
      recommendations to the Board regarding such matters. The members of the
      Compensation Committee are Messrs. Byer and Fritz. The Compensation Committee
      did not hold any meetings during the fiscal year ended September 30,
      2005.





48


The
      Stock
      Option Committee reviews and approves the options that are issued pursuant
      to
      the 2000 Stock Option Plan, unless such stock options are approved by the Board
      of Directors. The members of the Compensation Committee are Messrs. Byer and
      Fritz. The Stock Option Committee did not hold any meetings during the fiscal
      year ended September 30, 2005.





Nominating
      Committee





The
      Company does not currently have a Nominating Committee. Board of Director
      nominations are recommended by a majority of directors. In making its
      nominations, the Board of Director identifies candidates who meet the current
      challenges and needs of the Board of Directors. In determining whether it is
      appropriate to add or remove individuals, the Board of Directors will consider
      issues of judgment, diversity, age, skills, background and experience. In making
      such decisions, the Board of Directors considers, among other things, an
      individual's business experience, industry experience, financial background
      and
      experiences.





49


**ITEM
      11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**




The
        following table sets forth, as of June 27, 2006, the beneficial ownership
        of common stock with respect to (i) each person who was known by the Company
        to
        own beneficially more than 5% of the outstanding shares of common stock,
        (ii)
        each director, (iii) each of the Company's current executive officers, and
        (iv)
        all directors and executive officers as a group. As of June 27, 2006, the
        Company had 39,242,251 shares of common stock issued and outstanding, which
        was
        the only class of voting securities authorized or outstanding. Unless otherwise
        indicated, the address of each beneficial owner
        is
        c/o YouthStream Media Networks, Inc., 244 Madison Avenue, PMB #358, New York,
        New York 10016.


**Name
                and Address**
              **of
                Beneficial Owner**
            **Amount
                and Nature of**
              **Beneficial
                Ownership (1)**
            
            **Percent
                of**
              **Class****Executive
                Officers and Directors:**Jonathan
                V. Diamond
            1,560,404(2
            )
            3.88
            %Robert
                N. Weingarten
            175,000(3
            )
            0.44
            %Robert
                Scott Fritz
              711
                Sycamore Avenue
              Red
                Bank, NJ 07701
            200,000(4
            )
            0.51
            %Hal
                G. Byer
              c/o
                Libra Securities, LLC
              11766
                Wilshire Boulevard, Suite 870
              Los
                Angeles, CA 90025
            200,000(5
            )
            0.51
            %Patrick
                J. Panzarella
              820
                Manhattan Avenue, Suite 104
              Manhattan
                Beach, CA 90266
            200,000(6)
            
            0.51
            %James
                N. Lane
              c/o
                Ripplewood Holdings LLC
              One
                Rockefeller Plaza, 32nd Floor****
              New
                York, NY 10020
            200,000(7)
            
            0.51
            %Jess M. Ravich
              c/o
                  Libra Securities, LLC
                11766
                  Wilshire Boulevard, Suite 870
                Los
                  Angeles, CA 90025
            2,393,332(8
            )
            6.02
            %All
                executive officers and directors as a group (6 persons)
            4,928,736(9)
            
            11.82
            %**5%
                Stockholders:**Joseph
                Corso Jr.
              167
                Zock Road
              Cuddlebackville,
                NY 12729
            5,466,213(10
            )
            13.93
            %




(1)
      Shares of common stock subject to options currently exercisable or exercisable
      within 60 days of June 27, 2006 are deemed outstanding for the purpose of
      computing the percentage ownership of the person holding such options but are
      not deemed outstanding for computing the percentage ownership of any other
      person. Unless otherwise indicated below, the persons and entities named in
      this
      table have sole voting and sole investment power with respect to all shares
      beneficially owned, subject to community property laws where applicable.





(2)
      Includes 930,404 shares issuable upon exercise of options and warrants.





50


(3)
      Consists of 175,000 shares issuable upon exercise of options.





(4)
      Consists of 200,000 shares issuable upon exercise of options.





(5)
      Consists of 200,000 shares issuable upon exercise of options.





(6)
      Consists of 200,000 shares issuable upon exercise of options.





(7)
      Consists of 200,000 shares issuable upon exercise of options.




(8)
        Includes 1,860,000 shares held by the Ravich Revocable Trust of 1989 (the
        “Ravich Trust"), 500,000 shares issuable upon exercise of warrants issued
        to the
        Ravich Trust and 33,332 shares issuable to Mr. Ravich within 60 days upon
        exercise of an option.





(9)
      Includes 2,438,736 shares issuable upon exercise of options and
      warrants.




(10)
      Reflects amount derived from this person's Schedule 13G as filed with the
      Securities and Exchange Commission on May 9, 2006 .





**Securities
      Authorized for Issuance under Equity Compensation Plans**





The
      information required herein is contained in “ITEM 5. MARKET FOR COMMON EQUITY
      AND RELATED STOCKHOLDER MATTERS”.




**Changes
      in Control**





The
      Company is unaware of any contract or other arrangement, the operation of which
      may at a subsequent date result in a change in control of the Company.





**ITEM
      12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**





**Affiliate
      Loans**




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 from the sale of the assets
      and operations of Beyond the Wall in February 2004 and any tax sharing payments
      under the Tax Sharing Agreement, as described below. The Company repaid the
      notes payable to directors for the proceeds of the settlement of the Beyond
      the
      Wall note receivable, which were received on September 30, 2005.





**Investment
      in KES Holdings and 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.





51


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”) and 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.




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. 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. 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.





This
      transaction is more fully described at “ITEM 1. DESCRIPTION OF BUSINESS - Acquisition
      of Steel Mini-Mill”.





**ITEM
      13. EXHIBITS**


Exhibit
                No.
              
              Description3.1
              
              Certificate
                  of Incorporation (incorporated by reference to Exhibit 3.1 to the
                  Company's Registration Statement on Form SB-2, Registration No.
                  33-80935,
                  filed on March 6, 1996).3.2
              
              Certificate
                  of Amendment of Certificate of Incorporation (incorporated by reference
                  to
                  Exhibit 3.2 to the Company's Registration Statement on Form SB-2,
                  Registration No. 33-80935, filed on March 6, 1996).3.3
              
              Certificate
                  of Amendment of Certificate of Incorporation (incorporated by reference
                  to
                  Exhibit 3.3 to the Company's Form 10-KSB for the fiscal year ended
                  June
                  30, 1998, filed May 27, 1998).3.4
              
              Certificate
                  of Designation for Preferred Stock of YouthStream Media Networks,
                  Inc.
                  (incorporated by reference to Exhibit 99.3 to the Company's Form
                  8K filed
                  February 7, 2003).
  52
 Exhibit
                No.
              
              Description3.5
              
              Certificate
                  of Correction to the Certificate of Designation of Series A Preferred
                  Stock of YouthStream Media Networks, Inc. (incorporated by reference
                  to
                  Exhibit 3.5 to the Company’s Amended Form 10-K/A, filed March 5,
                  2004).3.6
              
              Bylaws
                  (incorporated by reference to Exhibit 3.3 to the Company's Registration
                  Statement on Form SB-2, Registration No. 33-80935, filed on March
                  6,
                  1996).3.7
              
              Bylaws
                  (incorporated by reference to Exhibit 4.2 to YouthStream's Registration
                  Statement on Form S-8, Registration No. 333-32022, filed on March
                  9,
                  2000).3.8
              
              Amendment
                  to Bylaws (incorporated by reference to Exhibit 3.8 to the Company’s Form
                  10-Q for the quarter ended June 30, 2004, filed August 13,
                  2004).4.1
              
              Warrant
                  Agreement (incorporated by reference to Exhibit 4.1 to the Company's
                  Registration Statement on Form SB-2, Registration No. 33-80935,
                  filed on
                  March 6, 1996).4.2
              
              Underwriter's
                  Warrant (incorporated by reference to Exhibit 4.2 to the Company's
                  Registration Statement on Form SB-2, Registration No. 33-80935,
                  filed on
                  March 6, 1996).10.1
              
              Employment
                  Stock Option Plan of the Company (incorporated by reference to
                  Exhibit
                  10.1 to the Company's Registration Statement on Form SB-2, Registration
                  No. 33-80935, filed on March 6, 1996).10.2
              
              Employment
                  Agreement between the Company and Harlan D. Peltz (incorporated
                  by
                  reference to Exhibit 10.2 to the Company's Registration Statement
                  on Form
                  SB-2, Registration No. 33-80935, filed on March 6,
                  1996).10.3
              
              Employment
                  Agreement between the Company and Don Leeds (incorporated by reference
                  to
                  Exhibit 1 to the Company's Form 10-QSB for the quarterly period
                  ended June
                  30, 1996).10.4
              
              Non-Incentive
                  Stock Option Agreement dated June 17, 1996 between the Company
                  and Don
                  Leeds incorporated by reference to Exhibit 10.3 to the Company's
                  Form
                  10-QSB for the quarterly period ended June 30, 1996).10.5
              
              Employment
                  Agreement between the Company and Bruce L. Resnik (incorporated
                  by
                  reference to Exhibit 2 to the Company's Form 10-QSB for the quarterly
                  period ended September 30, 1996).10.6
              
              NET
                  Portfolio Investors Agreement dated December 21, 1995 between the
                  Company
                  and NET Portfolio Investors, L.P. (incorporated by reference to
                  Exhibit
                  10.5 to the Company's Registration Statement on Form SB-2, Registration
                  No. 33-80935, filed on March 6, 1996).10.7
              
              Standard
                  Form of School Contract (incorporated by reference to Exhibit 10.8
                  to the
                  Company's Registration Statement on Form SB-2, Registration No.
                  33-80935,
                  filed on March 6, 1996).10.8
              
              Asset
                  Purchase Agreement dated September 13, 1996 among American Passage
                  Media
                  Corporation, Gilbert Scherer, the Company and American Passage
                  Media, Inc.
                  (incorporated by reference to Exhibit 2 to the Company's Form 8-K,
                  filed
                  on September 28, 1996).10.9
              
              Option
                  Agreement between the Company and American Passage Media corporation
                  (incorporated by reference to Exhibit 5 to the Company's Form 8-K,
                  filed
                  on September 28, 1996).10.10
              
              Bill
                  of Sale and Agreement dated January 31, 1997 among SCCGS, Inc.,
                  Sirrom
                  Capital Corporation, Campus Voice, L.L.C. and the Company (incorporated
                  by
                  reference to Exhibit 10.23 to the Company's Form 10-KSB for the
                  fiscal
                  year ended June 30, 1997).10.11
              
              Asset
                  Purchase Agreement dated April 11, 1997 among Posters Preferred,
                  Inc.,
                  Dennis Roche, Brian Gordon and the Company (incorporated by reference
                  to
                  Exhibit 10.30 to the Company's Form 10-KSB for the fiscal year
                  ended June
                  30, 1997).10.12
              
              Asset
                  Purchase Agreement dated April 30, 1997 among the Company, Pik:Nik
                  Media,
                  LLC, Pik:Nik, LLC and Garth Holsinger, Annett Schaefer-Sell and
                  Sunny
                  Smith (incorporated by reference to Exhibit 10.31 to the Company's
                  Form
                  10-KSB for the fiscal year ended June 30, 1997).10.13
              
              Stock
                  Purchase Agreement dated June 24, 1997 among Warburg, Pincus Emerging
                  Growth Fund, Inc., Small Company Growth Portfolio of Warburg, Pincus
                  Institutional Fund, Inc. and the Company (incorporated by reference
                  to
                  Exhibit 10.32 to the Company's Form 10-KSB for the fiscal year
                  ended June
                  30, 1997).10.14
              
              Registration
                  Rights Agreement dated June 24, 1997 among Warburg, Pincus Emerging
                  Growth
                  Fund, Inc., Small Company Growth Portfolio of Warburg, Pincus Institution
                  Fund, Inc., and the Company (incorporated by reference to Exhibit
                  10.33 to
                  the Company's Form 10-KSB for the fiscal year ended June 30, 1997).10.15
              
              Stock
                  Purchase Agreement dated December 23, 1997 between the Company
                  and Dirrom
                  Investments, Inc. (incorporated by reference to Exhibit 10.15 to
                  the
                  Company's Form 10-KSB for the fiscal year ended June 30, 1998).10.16
              
              Placement
                  Manager Agreement (incorporated by reference to Exhibit 10.17 to
                  the
                  Company's Form 10-KSB for the fiscal year ended June 30, 1998).10.17
              
              Form
                  of Stock Purchase Agreement (incorporated by reference to Exhibit
                  10.1 to
                  the Company's Form 10-KSB for the fiscal year ended June 30, 1998).




53





ExhibitNo.
            
            Description10.18
            
            Loan
                Agreement dated December 30, 1997 between First Union National Bank,
                American Passage Media, Inc., Beyond the Wall, Inc. and Campus Voice,
                Inc.
                (incorporated by reference to Exhibit 10.18 to the Company's Form
                10-KSB
                for the fiscal year ended June 30, 1998).10.19
            
            Unconditional
                Guaranty dated December 30, 1997 by the Company and National Campus
                Media,
                Inc. in favor of First Union National Bank (incorporated by reference
                to
                Exhibit 10.19 to the Company's Form 10-KSB for the fiscal year ended
                June
                30, 1998).10.20
            
            Merger
                Agreement dated June 9, 1999 among the Company, Trent Acquisition
                Co.,
                Inc., Trent Graphics, Inc. and Charles Sirolly, Thomas Sirolly, Daniel
                Sirolly and William Sirolly (incorporated by reference to Exhibit
                2 to the
                Company's Form 8-K filed June 24, 1999).10.21
            
            Asset
                Purchase Agreement dated June 10, 1999 among the Company, Pik:Nik
                Media,
                Inc., HelloXpress USA, Inc., and Dalia Smith and Ron Smith (incorporated
                by reference to Exhibit 2 to the Company's Form 8-K filed June 24,
                1999).10.22
            
            Option
                Agreement dated August 3, 1999 among the Company, New CW, Inc.,
                CollegeWeb.com, Inc. and J. Alexander Chriss and Todd M. Ragaza
                (incorporated by reference to Exhibit 10.22 to the Company's Form
                10-KSB
                for the fiscal year ended June 30, 1999).10.23
            
            Agreement
                and Plan of Merger dated August 3 1999 among the Company, New CW,
                Inc.,
                CollegeWeb.com, Inc. and J. Alexander Chriss and Todd M. Ragaza
                (incorporated by reference to Exhibit 10.23 to the Company's Form
                10-KSB
                for the fiscal year ended June 30, 1999).10.24
            
            Operating
                Agreement of Common Places, LLC (incorporated by reference to Exhibit
                10.1
                to the Company's quarterly report on Form 10-QSB for the quarter
                ended
                December 31, 1998).10.25
            
            Agreement
                and Plan of Merger dated June 28, 1999 among the Company, Common
                Places,
                LLC, YouthStream Media Networks, Inc., Nunet, Inc., Nucommon, Inc.,
                a
                wholly owned subsidiary of New Parent, Harlan Peltz, Benjamin Bassi,
                William Townsend and Mark Palmer (incorporated by reference to Exhibit
                10.25 to the Company's Form 10-KSB for the fiscal year ended June
                30,
                1999).10.26
            
            Restated
                Certificate of Incorporation of YouthStream Media Networks, Inc.
                (incorporated by reference to Exhibit 10.26 to the Company's Form
                10-KSB
                for the fiscal year ended June 30, 1999).10.27
            
            Rights
                Agreement between YouthStream Media Networks, Inc. and the Rights
                Agent
                (unsigned and undated) (incorporated by reference to Exhibit 10.27
                to the
                Company's Form 10-KSB for the fiscal year ended June 30, 1999).10.28
            
            YouthStream
                Media Networks, Inc. 2000 Stock Incentive Plan (incorporated by reference
                to Exhibit 10.28 to the Company's Form 10-KSB for the fiscal year
                ended
                June 30, 1999).10.29
            
            Voting
                Trust Agreement among YouthStream Media Networks, Inc., Benjamin
                Bassi,
                William Townsend, Mark Palmer, Harlan Peltz and the Voting Trustee
                (incorporated by reference to Exhibit 10.29 to the Company's Form
                10-KSB
                for the fiscal year ended June 30, 1999).10.30
            
            Stockholders
                Agreement among YouthStream Media Networks, Inc., Benjamin Bassi,
                William
                Townsend, Mark Palmer, Harlan Peltz individually, Harlan Peltz as
                voting
                trustee (incorporated by reference to Exhibit 10.30 to the Company's
                Form
                10-KSB for the fiscal year ended June 30, 1999).10.31
            
            Employment
                Agreement between YouthStream Media Networks, Inc. And Benjamin Bassi
                (incorporated by reference to Exhibit 10.31 to the Company's Form
                10-KSB
                for the fiscal year ended June 30, 1999).10.32
            
            Employment
                Agreement between YouthStream Media Networks, Inc. And Harlan Peltz
                (incorporated by reference to Exhibit 10.32 to the Company's Form
                10-KSB
                for the fiscal year ended June 30, 1999).10.33
            
            Merger
                Agreement dated December 14, 1999 among the Company, Sixdegrees
                Acquisition Corp. and sixdegrees, inc. (incorporated by reference
                to
                Exhibit 10.33 to the Company's Form 8-K filed January 20, 2000).10.34
            
            Certificate
                of Designation of Series A Convertible Preferred Stock of the Company
                (incorporated by reference to Exhibit 10.34 to the Company's Form
                8-K
                filed January 20, 2000).10.35
            
            1999
                Stock Option Plan of the Company (incorporated by reference to Exhibit
                10.35 to the Company's Form 8-K filed January 20, 2000).10.36
            
            1999
                Special Stock Option Plan of the Company (incorporated by reference
                to
                Exhibit 10.36 to the Company's Form 8-K filed January 20, 2000).10.37
            
            1999
                Special Incentive Stock Plan of the Company (incorporated by reference
                to
                Exhibit 10.37 to the Company's Form 8-K filed January 20, 2000).10.38
            
            Employment
                Agreement dated June 20, 2000 between YouthStream Media Networks,
                Inc. and
                James G. Lucchesi (incorporated by reference to Exhibit 10.38 to
                the
                Company's Form 10-KSB filed September 27, 2000).


54





Exhibit
              No.
            
            Description10.39
            
            Non-Qualified
                Stock Option Agreement of James G. Lucchesi dated June 20, 2000
                (incorporated by reference to Exhibit 10.39 to the Company's Form
                10-KSB
                filed September 27, 2000).10.40
            
            Amendment
                to Employment Agreement as of June 20, 2000 between YouthStream Media
                Networks, Inc. and Harlan D. Peltz (incorporated by reference to
                Exhibit
                10.40 to the Company's Form 10-KSB filed September 27, 2000).10.41
            
            Employment
                Agreement dated July 1, 2000 between YouthStream Media Networks,
                Inc. and
                Thea A. Winarsky (incorporated by reference to Exhibit 10.41 to the
                Company's Form 10-KSB filed September 27, 2000).10.42
            
            Merger
                Agreement dated July 13, 2000 among YouthStream Media Networks, Inc.,
                W3T
                Acquisition, Inc., a wholly-owned subsidiary of YouthStream, W3T.com,
                Inc., Gerald Croteau, Eugene Bellotti, Donald Dion, Richard King,
                James
                Westra, Mark Fusco, Suzanne W. Bookstein and John Genest (incorporated
                by
                reference to Exhibit 10.42 to the Company's Form 10-KSB filed September
                27, 2000).


10.43
            
            Consulting
                and Non-Competition Agreement dated July 25, 2000 between YouthStream
                Media Networks, Inc. and Andrew P. Weinreich (incorporated by reference
                to
                Exhibit 10.43 to the Company's Form 10-KSB filed September 27, 2000).10.44
            
            Amendment
                No. 1 dated July 28, 2000 to Stockholders Agreement dated February
                28,
                2000 among YouthStream Media Networks, Inc., Benjamin Bassi, William
                Townsend, Mark Palmer, Harlan D. Peltz, individually, and Harlan
                D. Peltz,
                as voting trustee (incorporated by reference to Exhibit 10.44 to
                the
                Company's Form 10-KSB filed September 27, 2000).10.45
            
            Non-Qualified
                Stock Option Agreement of Thea A. Winarsky dated August 16, 2000
                (incorporated by reference to Exhibit 10.45 to the Company's Form
                10-KSB
                filed September 27, 2000).10.46
            
            Non-Qualified
                Stock Option Agreement of James G. Lucchesi dated September 26, 2000
                (incorporated by reference to Exhibit 10.46 to the Company's Form
                10-KSB
                filed September 27, 2000).10.47
            
            Non-Qualified
                Stock Option Agreement of James G. Lucchesi dated July 2, 2001.10.48
            
            Non-Qualified
                Stock Option Agreement of James G. Lucchesi dated July 2, 2001.10.49
            
            Amendment
                to the Employment Agreement (dated June 20, 2000) dated June 29,
                2001 for
                James G. Lucchesi.10.50
            
            Amendment
                to Non-Qualified Stock Option Agreement (dated July 31, 2000) dated
                June
                29, 2001 for James G. Lucchesi.10.51
            
            Amendment
                to Non-Qualified Stock Option Agreement (dated June 20, 2000) dated
                June
                29, 2001 for James G. Lucchesi.10.52
            
            Asset
                Purchase Agreement by and between Alloy, Inc., Cass Communications,
                Inc.,
                YouthStream Media Networks, Inc., American Passage Media, Inc. and
                Network
                Event Theater, Inc., dated August 5, 2002 (incorporated by reference
                to
                Exhibit 10-1 to the Company's Form 8K filed August 20, 2002).10.53
            
            Restructuring
                Agreement dated as of January 20, 2003 by and among YouthStream Media
                Networks, Inc., and its subsidiary, Network Event Theater, Inc.,
                the
                United States Small Business Administration as Receiver for Interequity
                Capital Partners, LP, TCW Shared Opportunity Fund II, L.P., Shared
                Opportunity Fund IIB, LLC, The Charles and Adele Thurnher Living
                Trust
                Dated December 7, 1989, The Morrish Community Property Trust Dated
                April
                15, 1998, and Jean Smith, Stanley J. Schrager, Richard Coppersmith,
                Rand
                Ravich and Jess M. Ravich, individually (incorporated by reference
                to
                Exhibit 99.2 to the Company's Form 8K filed February 7, 2003).10.54
            
            Promissory
                Note Issued from Beyond the Wall, Inc. to The Ravich Revocable Trust
                of
                1989 (incorporated by reference to Exhibit 99.4 to the Company's
                Form 8K
                filed February 7, 2003).10.55
            
            Promissory
                Note Issued from Beyond the Wall, Inc. to Interequity Capital Partners,
                LP. incorporated by reference to Exhibit 99.5 to the Company's Form
                8K
                filed February 7, 2003.10.56
            
            Mutual
                Release by and between each of Ravich Revocable Trust of 1989, Libra
                Securities, LLC, the United States Small Business Administration
                as
                Receiver for Interequity Capital Partners, LP, TCW Shared Opportunity
                Fund
                II, L.P., Shared Opportunity Fund IIB, LLC, The Charles and Adele
                Thurnher
                Living Trust Dated December 7, 1989, The Morrish Community Property
                Trust
                Dated April 15, 1998, and Jean Smith, Stanley J. Schrager, Richard
                Coppersmith, Rand Ravich and Jess M. Ravich, individually, YouthStream
                Media Networks, Inc. and Network Event Theater, Inc. (incorporated
                by
                reference to Exhibit 99.6 to the Company's Form 8K filed February
                7, 2003.10.57
            
            Letter
                by Libra Securities, LLC. (incorporated by reference to Exhibit 99.7
                to
                the Company's Form 8K filed February 7, 2003)10.58
            
            Existing
                Director Release to YouthStream Media Networks, Inc. (incorporated
                by
                reference to Exhibit 99.8 to the Company's Form 8K filed February
                7,
                2003).





55




Exhibit
              No.
            
            Description10.59
            
            Ravich
                Security Agreement by and among YouthStream Media Networks, Inc.,
                and The
                Ravich Revocable Trust of 1989 and the United States Small Business
                Administration, as Receiver for Interequity Capital Partners, LP.
                (incorporated by reference to Exhibit 99.9 to the Company's Form
                8K filed
                February 7, 2003).10.60
            
            Amendment
                No. 1 to Restructuring Agreement dated as of January 23, 2003 by
                and among
                YouthStream Media Networks, Inc., and its subsidiary, Network Event
                Theater Inc., each of which is a Delaware corporation, and the Ravich
                Revocable Trust of 1989. (incorporated by reference to Exhibit 99.10
                to
                the Company's Form 8K filed February 7, 2003).10.61
            
            Amendment
                No. 2 to Restructuring Agreement dated as of January 24, 2003 by
                and
                between YouthStream Media Networks, Inc., its subsidiary, Network
                Event
                Theater Inc., each of which is a Delaware corporation, the Ravich
                Revocable Trust of 1989 and the United States Small Business
                Administration as Receiver for Interequity Capital Partners, LP.
                (incorporated by reference to Exhibit 99.11 to the Company's Form
                8K filed
                February 7, 2003).10.62
            
            Agreement
                dated June 9, 2003 by and among YouthStream Media Networks, Inc.,
                Network
                Event Theater, Inc., Beyond the Wall, Inc., the Ravich Revocable
                Trust of
                1989 and the United States Small Business Administration as Receiver
                for
                Interequity Capital Partners, LP. (incorporated by reference to Exhibit
                99.1 to the Company's Form 8K filed June 16, 2003).10.63
            
            Amendment
                No. 1 to Promissory Note dated January 24, 2003 issued to the Ravich
                Revocable Trust of 1989. (incorporated by reference to Exhibit 99.2
                to the
                Company's Form 8K filed June 16, 2003).10.64
            
            Amendment
                No. 1 to Promissory Note dated January 24, 2003 issued to Interequity
                Capital Partners, LP. (incorporated by reference to Exhibit 99.3
                to the
                Company's Form 8K filed June 16, 2003).10.65
            
            Inter-Creditor
                Agreement between the Ravich Revocable Trust of 1989 and Jonathan
                V.
                Diamond, dated August 13, 2003 (incorporated by reference to Exhibit
                10.1
                to the Company's Form 8K filed September 11, 2003).10.66
            
            Promissory
                Note for $100,000 from Beyond the Wall, Inc., to Jonathan V. Diamond,
                dated August 13, 2003 (incorporated by reference to Exhibit 10.2
                to the
                Company's Form 8K filed September 11, 2003).10.67
            
            Promissory
                Note for $100,000 from Beyond the Wall, Inc. to the Ravich Revocable
                Trust
                of 1989, dated August 13, 2003 (incorporated by reference to Exhibit
                10.3
                to the Company's Form 8K filed September 11, 2003).10.68
            
            Mortgage
                from Beyond the Wall, Inc. to Jonathan V. Diamond, dated August 13,
                2003
                (incorporated by reference to Exhibit 10.4 to the Company's Form
                8K filed
                September 11, 2003).10.69
            
            Mortgage
                from Beyond the Wall, Inc. to the Ravich Revocable Trust of 1989,
                dated
                August 13, 2003 (incorporated by reference to Exhibit 10.5 to the
                Company's Form 8K filed September 11, 2003).10.70
            
            Warrant
                Certificate to acquire 400,000 shares of common stock, dated August
                13,
                2003, issued by the Company to Jonathan V. Diamond (incorporated
                by
                reference to Exhibit 10.6 to the Company's Form 8K filed September
                11,
                2003).10.71
            
            Warrant
                Certificate to acquire 400,000 shares of common stock, dated August
                13,
                2003, issued by the Company to the Ravich Revocable Trust of 1989
                (incorporated by reference to Exhibit 10.7 to the Company's Form
                8K filed
                September 11, 2003).10.72
            
            Warrant
                Holder Rights Agreement with respect to 400,000 shares of common
                stock,
                between the Company and Jonathan V. Diamond, dated August 13, 2003
                (incorporated by reference to Exhibit 10.8 to the Company's Form
                8K filed
                September 11, 2003).10.73
            
            Warrant
                Holder Rights Agreement with respect to 400,000 shares of common
                stock,
                between the Company and the Ravich Revocable Trust of 1989, dated
                August
                13, 2003 (incorporated by reference to Exhibit 10.9 to the Company's
                Form
                8K filed September 11, 2003).10.74
            
            Promissory
                Note for $25,000 from the Company to Jonathan V. Diamond, dated August
                28,
                2003 (incorporated by reference to Exhibit 10.10 to the Company's
                Form 8K
                filed September 11, 2003).10.75
            
            Promissory
                Note for $25,000 from the Company to the Ravich Revocable Trust of
                1989,
                dated August 28, 2003 (incorporated by reference to Exhibit 10.11
                to the
                Company's Form 8K filed September 11, 2003).10.76
            
            Warrant
                Certificate to acquire 100,000 shares of common stock, dated August
                28,
                2003, issued by the Company to Jonathan V. Diamond (incorporated
                by
                reference to Exhibit 10.12 to the Company's Form 8K filed September
                11,
                2003).10.77
            
            Warrant
                Certificate to acquire 100,000 shares of common stock, dated August
                28,
                2003, issued by the Company to the Ravich Revocable Trust of 1989
                (incorporated by reference to Exhibit 10.13 to the Company's Form
                8K filed
                September 11, 2003).10.78
            
            Asset
                Purchase Agreement, by and among Beyond the Wall, Inc., Clive Corporation,
                Inc. and the Company (incorporated by reference to Exhibit 10.1 to
                the
                Company’s Form 8-K, filed March 11,
                2004).




56




Exhibit
              No.
            
            Description10.79
            
            Agreement
                of Sale between Beyond the Wall, Inc. and 1903 West Main Street Realty
                Management, LLC (incorporated by reference to Exhibit 10.2 to the
                Company’s Form 8-K, filed March 11, 2004).10.80
            
            Secured
                Promissory Note (incorporated by reference to Exhibit 10.3 to the
                Company’s Form 8-K, filed March 11, 2004).10.81
            
            Securities
                Purchase Agreement, dated as of February 25, 2005, by and among
                YouthStream Media Networks, Inc., YouthStream Acquisition Corp.,
                KES
                Holdings, LLC and Atacama Capital Holdings, Ltd.(incorporated
                by reference to Exhibit 10.81 to the Company’s Form 8-K, filed March 14,
                2005).10.82
            
            Note
                Purchase Agreement, dated as of February 25, 2005, and among YouthStream
                Media Networks, Inc., YouthStream Acquisition Corp., KES Holdings,
                LLC and
                Atacama Capital Holdings, Ltd.(incorporated
                by reference to Exhibit 10.82 to the Company’s Form 8-K, filed March 14,
                2005).10.83
            
            Amended
                and Restated Management Services Agreement, February 28, 2005, by
                and
                between KES Acquisition Company, LLC and Pinnacle Steel, LLC.(incorporated
                by reference to Exhibit 10.83 to the Company’s Form 8-K, filed March 14,
                2005).10.84
            
            Form
                of YouthStream Acquisition Corp. 8.0% Subordinated Secured Note Due
                February 28, 2015 in favor of KES Holdings, LLC(incorporated
                by reference to Exhibit 10.84 to the Company’s Form 8-K, filed March 14,
                2005).10.85
            
            Form
                of YouthStream Acquisition Corp. 8.0% Subordinated Secured Note Due
                February 28, 2015 in favor of Atacama Capital Holdings, Ltd.(incorporated
                by reference to Exhibit 10.85 to the Company’s Form 8-K, filed March 14,
                2005).10.86
            
            Form
                of YouthStream Media Networks, Inc. Limited Guaranty and Pledge Agreement
                in favor of Atacama Capital Holdings, Ltd.(incorporated by reference to Exhibit 10.86 to the Company’s Form 8-K,
                filed March 14, 2005).10.87
            
            Form
                of YouthStream Media Networks, Inc. Limited Guaranty and Pledge Agreement
                in favor of KES Holdings, LLC(incorporated
                by reference to Exhibit 10.87 to the Company’s Form 8-K, filed March 14,
                2005).10.88
            
            Loan
                and Security Agreement dated as of March 24, 2004, as amended, between
                General Electric Capital Corporation and KES Acquisition Company,
                LLC(incorporated
                by reference to Exhibit 10.88 to the Company’s Form 10-QSB, filed July 18,
                2005).10.89
            
            Letter
                Agreement, dated July 14, 2005, regarding 8% subordinated secured
                promissory notes(incorporated
                by reference to Exhibit 10.88 to the Company’s Form 10-QSB, filed July 18,
                2005).10.90
            
            Form
                of Promissory Note dated September 27, 2005 in the principal amount
                of
                $12,500(incorporated
                by reference to Exhibit 10.90 to the Company’s Form 10-QSB, filed October
                4, 2005).10.91
            
            Payoff
                and Settlement Agreement, dated September 30, 2005, by and among
                YouthStream Media Networks, Inc., Beyond the Wall, Inc., 1903 West
                Main
                Street Realty Management, LLC and Clive Corporation, Inc.(incorporated
                by reference to Exhibit 10.91 to the Company’s Form 10-QSB, filed October
                4, 2005).10.92
            
            Letter
                Agreement dated September 23, 2005 regarding 8% Subordinated Secured
                Promissory Notes(incorporated
                by reference to Exhibit 10.92 to the Company’s Form 10-QSB, filed October
                4, 2005).10.93*
            
            Letter
                Agreement dated April 11, 2006 regarding 8% Subordinated Secured
                Promissory Notes.10.94*
            
            Form
                of YouthStream Acquisition Corp. 8.0% Promissory Note Due February
                27,
                2007 in favor of KES Holdings, LLC.10.95*
            
            Form
                of YouthStream Acquisition Corp. 8.0% Promissory Note Due February
                27,
                2007 in favor of Atacama Capital Holdings, Ltd.10.96*
            
            Amendment
              No.
              11 to Loan and Security Agreement, dated October 31, 2005, among General
              Electric Capital Corporation, KES Acquisition Company, LLC, Atacam
              KES
              Holdings Corporation and Youthstream Acquisition Corp.14.1
            
            Code
                of Ethics—CEO (incorporated by reference to Exhibit 14.1 to the Company’s
                Amended Form 10-K/A, filed March 5, 2004).14.2
            
            Code
                of Ethics—CFO (incorporated by reference to Exhibit 14.2 to the Company’s
                Amended Form 10-K/A, filed March 5, 2004).21*
            
            Subsidiaries
                of the Company23.1*
            
            Consent
                of Independent Registered Public Accounting Firm31.1*
            
            Certification
                of CEO31.2*
            
            Certification
                of CFO32*
            
            Certification
                of CEO and CFO




*  Filed
      herewith





57


**ITEM
      14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**





**Audit
      and Audit Related Fees**





Weinberg
      & Company, P.A. ("Weinberg") was the Company's independent registered public
      accounting firm for the fiscal years ended September 30, 2005 and 2004. Services
      provided to the Company by Weinberg with respect to the fiscal year ended
      September 30, 2005 consisted of the audit of the Company's consolidated
      financial statements and limited reviews of the condensed consolidated financial
      statements included in Form 10-QSB Quarterly Reports; total fees and expenses
      with respect thereto aggregated approximately $174,000. Services provided to
      the
      Company by Weinberg with respect to the fiscal year ended September 30, 2004
      consisted of the audit of the Company’s consolidated financial statements and
      limited reviews of the condensed consolidated financial statements included
      in
      Form 10-Q Quarterly Reports; total fees and expenses with respect thereto
      aggregated approximately $114,000. During the fiscal years ended September
      30,
      2005 and 2004, Weinberg also provided certain services with respect to the
      audits of KES Acquisition, LLC and predecessor entities aggregating
      approximately $192,000 and $13,000, respectively.





**Tax
      Fees**





Weinberg
      did not provide any services to the Company with respect to the preparation
      of
      corporate income tax returns or tax planning matters.




**All
      Other Fees**





Weinberg
      did not provide any services with respect to any matters other than those
      related to audit and audit-related matters.





**Pre-Approval
      Policies and Procedures**





The
      Audit
      Committee meets periodically to review and approve the scope of the services
      to
      be provided to the Company by its independent accountant, as well to review
      and
      discuss any issues that may arise during an engagement. The Audit Committee
      considers various issues with respect to the services to be provided by its
      independent accountant, including the complexity of any engagement, its expected
      cost, the knowledge and expertise of the independent accountant's staff, any
      complex accounting or disclosure issues, new accounting pronouncements, and
      the
      capability of the Company's financial staff.





58





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


**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**





PageNumberReport
                of Independent Registered Public Accounting Firm -
              Weinberg
                & Company, P.A.
            F-2Consolidated
                Balance Sheets —
              September
                30, 2005 and 2004
            F-3Consolidated
                Statements of Operations —
              Years
                Ended September 30, 2005 and 2004
            F-5Consolidated
                Statement of Stockholders’ Deficiency —
              Years
                Ended September 30, 2005 and 2004
            F-6Consolidated
                Statements of Cash Flows —
              Years
                Ended September 30, 2005 and 2004
            F-7Notes
                to Consolidated Financial Statements —
              Years
                Ended September 30, 2005 and 2004
            F-8











**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**








The
      Board
      of Directors


YouthStream
      Media Networks, Inc.





We
      have
      audited the accompanying consolidated balance sheets of YouthStream Media
      Networks, Inc. and subsidiaries as of September 30, 2005 and 2004, and the
      related consolidated statements of operations, stockholders' deficiency and
      cash
      flows for the years ended September 30, 2005 and 2004. These consolidated
      financial statements are the responsibility of the Company's management. Our
      responsibility is to express an opinion on these consolidated financial
      statements based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audits to obtain reasonable assurance about whether the
      consolidated financial statements are free of material misstatement. An audit
      includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the consolidated financial statements. An audit also includes
      assessing the accounting principles used and significant estimates made by
      management, as well as evaluating the overall financial statement presentation.
      We believe that our audits provide a reasonable basis for our
      opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the consolidated financial position of YouthStream
      Media Networks, Inc. and subsidiaries as of September 30, 2005 and 2004, and
      the
      results of their consolidated operations and their consolidated cash flows
      for
      the years ended September 30, 2005 and 2004, in conformity with accounting
      principles generally accepted in the United States.





The
      accompanying consolidated financial statements have been prepared assuming
      that
      the Company will continue as a going concern. As discussed in Note 1 to the
      consolidated financial statements, 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. Management's plans concerning this matter are also described
      in
      Note 1. The accompanying consolidated financial statements do not include any
      adjustments to reflect the possible future effects on the recoverability and
      classification of assets or the amounts and classification of liabilities that
      may result from the outcome of this uncertainty.





/s/
      WEINBERG & COMPANY, P.A.





Certified
      Public Accountants


Los
      Angeles, California


May
      18,
      2006, except for Note 8, as to which the date is June 26, 2006








F-2


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


**CONSOLIDATED
      BALANCE SHEETS**


**SEPTEMBER
      30, 2005 AND 2004**





**2005**
            
            **2004**ASSETSCurrent
                assets:Cash
                and cash equivalents
            
            $
            998,835
            
            $
            674,880Current
                portion of note receivable, including accrued interest
            
            
            ---
            
            
            242,189Accounts
                receivable, less allowance for doubtful accounts of
                $747,399
            
            
            14,668,539
            
            
            ---Inventories
            
            
            17,880,805
            
            
            ---Prepaid
                expenses and other current assets
            
            
            2,167,382
            
            
            16,624Total
                current assets
            
            
            35,715,561
            
            
            933,693Property,
                plant and equipment
            
            
            6,630,012
            
            
            140,068Less
                accumulated depreciation and amortization
            
            
            (1,062,267
            )
            
            (114,658
            )Property,
                plant and equipment, net
            
            
            5,567,745
            
            
            25,410Other
                assets:Note
                receivable, including accrued interest, less current
                portion
            
            
            ---
            
            
            245,465Deferred
                loan costs, net of amortization of $438,913
            
            
            422,913
            
            
            ---Deposits
            
            
            216,035
            
            
            ---Deferred
                costs related to KES acquisition
            
            
            ---
            
            
            175,144Investment
                in KES Holdings
            
            
            ---
            
            
            125,000Total
                other assets
            
            
            638,948
            
            
            545,609Total
                assets
            
            $
            41,922,254
            
            $
            1,504,712





(continued)











F-3


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


**CONSOLIDATED
      BALANCE SHEETS****(continued)**


**SEPTEMBER
      30, 2005 AND 2004**





**2005**
            
            **2004**LIABILITIES
                AND STOCKHOLDERS’ DEFICIENCYCurrent
                liabilities:Accounts
                payable
            
            $
            9,008,612
            
            $
            910,074Accrued
                expenses
            
            
            2,048,481
            
            
            396,654Accrued
                interest payable:12%
                subordinated promissory notes payable to related parties
            
            
            1,085,753
            
            
            ---Notes
                payable to directors
            
            
            50,000
            
            
            ---Secured
                line of credit
            
            
            19,009,379
            
            
            ---Current
                portion of equipment contract payable
            
            
            77,091
            
            
            ---Current
                portion of capital lease obligation
            
            
            372,256
            
            
            ---Liabilities
                related to discontinued operations
            
            
            2,984,660
            
            
            3,012,386Total
                current liabilities
            
            
            34,636,232
            
            
            4,319,114Non-current
                liabilities:Accrued
                interest payable:
            
            
            ---
            
            
            67,4194%
                note payable to investor
            
            
            107,419
            
            
            ---8%
                subordinated promissory notes payable to related parties
            
            
            1,852,384
            
            
            ---4%
                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
            
            
            964,194
            
            
            961,4368%
                subordinated secured promissory notes payable to related
                parties
            
            
            39,493,000
            
            
            ---12%
                subordinated promissory notes payable to related parties
            
            
            7,000,000
            
            
            ---Equipment
                contract payable, less current portion
            
            
            172,714
            
            
            ---Capital
                lease obligation, less current portion
            
            
            1,312,064
            
            
            ---Deferred
                rent
            
            
            144,360
            
            
            ---Preferred
                stock of subsidiary subject to mandatory redemption; issued and
                outstanding 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
              $1,885,129
            
            
            26,618,129
            
            
            ---Preferred
                stock subject to mandatory redemption; issued and outstanding at
                September
                30, 2005 and
              2004
                - 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
            
            
            121,522,604
            
            
            14,570,077Commitments
                and contingenciesStockholders’
                deficiency:Preferred
                stock, $0.01 par value; authorized - 5,000,000 shares; issued and
                outstanding at September 30, 2005
              and
                2004 - 1,000,000 shares of Series A preferred stock (classified in
                long-termliabilities
                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 September 30, 2005 and 2004
            
            
            398,486
            
            
            398,486Additional
                paid-in capital
            
            
            268,096,138
            
            
            331,200,561Accumulated
                deficit
            
            
            (347,265,398
            )
            
            (343,834,836
            )Treasury
                stock - 607,500 shares, at cost
            
            
            (829,576
            )
            
            (829,576
            )Total
                stockholders’ deficiency
            
            
            (79,600,350
            )
            
            (13,065,365
            )Total
                liabilities and stockholders’ deficiency
            
            $
            41,922,254
            
            $
            1,504,712




See
      accompanying notes to consolidated financial statements.




F-4


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


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**YEARS
      ENDED SEPTEMBER 30,** **2005 AND 2004**





**2005**
            
            **2004**NET
                SALES
            
            $
            69,182,475
            
            $
            ---COSTS
                AND EXPENSESCost
                of sales
            
            
            62,939,014
            
            
            ---Selling
            
            
            735,381
            
            
            ---General
                and administrative
            
            
            2,816,125
            
            
            1,090,25666,490,520
            
            
            1,090,256Income
                (loss) from operations
            
            
            2,691,955
            
            
            (1,090,256
            )OTHER
                INCOME (EXPENSE)Interest
                income
            
            
            45,542
            
            
            49,566Interest
                expense:
              13%
                Series A Preferred Stock
            
            
            (1,885,129
            )
            
            ---Notes
                payable to related parties
            
            
            (2,344,877
            )
            
            ---Other
            
            
            (1,377,448
            )
            
            (41,509
            )Transaction
                costs related to KES acquisition
            
            
            (1,171,406
            )
            
            ---Gain
                on settlement of compensation obligations
            
            
            225,948
            
            
            ---Other
                income (expense), net
            
            
            (46,078
            )
            
            ---Other
                income (expense), net
            
            
            (6,553,448
            )
            
            8,057LOSS
                BEFORE INCOME TAXES AND MINORITY INTEREST
            
            
            (3,861,493
            )
            
            (1,082,199
            )Income
                tax benefit
            
            
            ---
            
            
            88,372LOSS
                BEFORE MINORITY INTEREST
            
            
            (3,861,493
            )
            
            (993,827
            )MINORITY
                INTEREST - related parties
            
            
            430,931
            
            
            ---LOSS
                FROM CONTINUING OPERATIONS
            
            
            (3,430,562
            )
            
            (993,827
            )LOSS
                FROM DISCONTINUED OPERATIONSDiscontinued
                operations
            
            
            ---
            
            
            (550,072
            )Disposal
                of discontinued operations
            
            
            ---
            
            
            (821,721
            )LOSS
                FROM DISCONTINUED OPERATIONS
            
            
            ---
            
            
            (1,371,793
            )NET
                LOSS
            
            $
            (3,430,562
            )
            $
            (2,365,620
            )NET
                LOSS PER COMMON SHARE -
              BASIC
                AND DILUTEDLoss
                from continuing operations
            
            $
            (0.09
            )
            $
            (0.03
            )Loss
                from discontinued operations
            
            
            ---
            
            
            (0.01
            )Loss
                on disposal of discontinued operations
            
            
            ---
            
            
            (0.02
            )NET
                LOSS PER COMMON SHARE -
              BASIC
                AND DILUTED
            
            $
            (0.09
            )
            $
            (0.06
            )WEIGHTED
                AVERAGE NUMBER OF COMMON
              SHARES
                OUTSTANDING - BASIC AND DILUTED
            
            
            39,242,251
            
            
            39,242,251





See
      accompanying notes to consolidated financial statements.




F-5




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


**CONSOLIDATED
      STATEMENT OF STOCKHOLDERS’ DEFICIENCY**


**YEARS
      ENDED SEPTEMBER 30, 2005 AND 2004**








**Common
                Stock****Shares**
            
            
            **Amount**
            
            
            **Additional**
                **Paid-in****Capital**
            
            
            **Accumulated****Deficit**
            
            
            **Treasury**
                **Stock**
            
            
            **Total**Balances
                at September 30, 2003
            
            
            39,849,751
            
            $
            398,486
            
            $
            331,200,561
            
            $
            (341,469,216
            )
            $
            (829,576
            )
            $
            (10,699,745
            )Net
                loss
            
            
            --
            
            
            --
            
            
            --
            
            
            (2,365,620
            )
            
            --
            
            
            (2,365,620
            )Balances
                at September 30, 2004
            
            
            39,849,751
            
            
            398,486
            
            
            331,200,561
            
            
            (343,834,836
            )
            
            (829,576
            )
            
            (13,065,365
            )Deemed
                distribution to sellers of KES
              Acquisition
                Company, LLC in
              excess
                of predecessor company’s basis
            
            
            --
            
            
            --
            
            
            (63,104,423
            )
            
            --
            
            
            --
            
            
            (63,104,423
            )Net
                loss
            
            
            --
            
            
            --
            
            
            --
            
            
            (3,430,562
            )
            
            --
            
            
            (3,430,562
            )Balances
                at September 30, 2005
            
            
            39,849,751
            
            $
            398,486
            
            $
            268,096,138
            
            $
            (347,265,398
            )
            $
            (829,576
            )
            $
            (79,600,350
            )









See
      accompanying notes to consolidated financial statements.




F-6




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


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**YEARS
      ENDED SEPTEMBER 30, 2005 AND 2004**




**2005**
            
            
            **2004**CASH
                FLOWS FROM OPERATING ACTIVITIESNet
                loss
            
            $
            (3,430,562
            )
            $
            (2,365,620
            )


Adjustments
                to reconcile net loss to net cash used in operating
                activities:Loss
                from discontinued operations
            
            
            ---
            
            
            550,072Loss
                on disposal of discontinued operations
            
            
            ---
            
            
            821,721Net
                change in liabilities related to discontinued operations
            
            
            (27,726
            )
            
            (206,619
            )Depreciation
                and amortization
            
            
            427,993
            
            
            19,921Amortization
                of original issue discount on subordinated notes payable
            
            
            2,758
            
            
            1,509Amortization
                of deferred loan costs
            
            
            207,445
            
            
            ---Write-off
                of fixed assets
            
            
            20,430
            
            
            ---Write-off
                of costs related to KES acquisition
            
            
            362,846
            
            
            ---Gain
                on settlement of compensation obligations
            
            
            (225,948
            )
            
            ---Loss
                on settlement of BTW note
            
            
            22,732
            
            
            ---Minority
                interest - related parties
            
            
            (430,931
            )
            
            ---Changes
                in operating assets and liabilities, net of effect of KES
                acquisition:(Increase)
                decrease in -Accounts
                receivable, net
            
            
            (4,215,054
            )
            
            ---Inventories
            
            
            881,413
            
            
            ---Accrued
                interest receivable
            
            
            (41,227
            )
            
            (44,454
            )Prepaid
                expenses
            
            
            (1,246,487
            )
            
            170,998Increase
                (decrease) in -Accounts
                payable
            
            
            (1,467,789
            )
            
            51,831Accrued
                interest payable
            
            
            4,270,006
            
            
            40,000Accrued
                expenses
            
            
            610,759
            
            
            59,199Deferred
                rent
            
            
            (21,053
            )
            
            ---NET
                CASH USED IN OPERATING ACTIVITIES
            
            
            (4,300,395
            )
            
            (901,442
            )CASH
                FLOWS FROM INVESTING ACTIVITIESProceeds
                from sale of BTW assets
            
            
            ---
            
            
            820,000Principal
                and interest payments on BTW note receivable
            
            
            506,149
            
            
            400,000Deferred
                costs related to KES transaction
            
            
            ---
            
            
            (175,144
            )NET
                CASH PROVIDED BY INVESTING ACTIVITIES
            
            
            506,149
            
            
            1,044,856CASH
                FLOWS FROM FINANCING ACTIVITIESNet
                borrowings under secured line of credit
            
            
            3,389,284
            
            
            ---Proceeds
                from notes payable
            
            
            50,000
            
            
            ---Principal
                payments on equipment contract payable and capital lease
                obligation
            
            
            (234,277
            )
            
            ---NET
                CASH PROVIDED BY FINANCING ACTIVITIES
            
            
            3,205,007
            
            
            ---NET
                CASH PROVIDED BY (USED IN) OPERATING, INVESTING AND FINANCING
                ACTIVITIES
            
            
            (589,239
            )
            
            143,414CASH
                ACQUIRED IN CONNECTION WITH KES ACQUISITION
            
            
            913,194
            
            
            ---CASH
                AND CASH EQUIVALENTSNet
                increase
            
            
            323,955
            
            
            143,414Balance
                at beginning of year
            
            
            674,880
            
            
            531,466


Balance
                at end of year
            
            $
            998,835
            
            $
            674,880


SUPPLEMENTAL
                CASH FLOW INFORMATIONCash
                paid for -Interest
            
            $
            1,334,690
            
            $
            ---Income
                taxes
            
            $
            ---
            
            $
            ---NON-CASH
                INVESTING AND FINANCING ACTIVITIESPreferred
                stock issued in connection with acquisition of KES Acquisition Company,
                LLC
            
            $
            24,733,000
            
            $
            ---Notes
                payable issued in connection with acquisition of KES Acquisition
                Company,
                LLC
            
            $
            39,493,000
            
            $
            ---Non-cash
                assets acquired in connection with acquisition of KES Acquisition
                Company,
                LLC
            
            $
            37,019,827
            
            $
            ---Liabilities
                assumed in connection with acquisition of KES Acquisition Company,
                LLC
            
            $
            36,255,513
            
            $
            ---Deemed
                distribution to sellers of KES Acquisition Company, LLC in excess
                of
                predecessor’s basis
            
            $
            63,104,423
            
            $
            ---Loan
                fees capitalized and added to secured line of credit
            
            $
            125,000
            
            $
            ---




See
      accompanying notes to consolidated financial statements.




F-7




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


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**YEARS
      ENDED SEPTEMBER 30, 2005 AND 2004**








**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 3) (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.





On
      February 25, 2004, the Company sold the assets and operations of its Beyond
      the
      Wall subsidiary. Beyond the Wall had been engaged in the sale of decorative
      wall
      posters through on-campus sales events, retail stores and internet sales,
      primarily to teenagers and young adults. During the period from October 1,
      2003
      through February 25, 2004, Beyond the Wall operated 17 stores in 12 states,
      plus
      Washington, D.C., throughout the East and mid-West, as well as a warehouse
      and
      distribution center in Stroudsburg, Pennsylvania, and was the Company’s only
      revenue-generating business operation. The consolidated financial statements
      for
      the year ended September 30, 2004 present Beyond the Wall’s operations as a
      discontinued operation as a result of the disposal of its assets and operations
      on February 25, 2004 (see Note 4).





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
      (see Note 3).





**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 (see Note 3). 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 3). 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. 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.





F-8


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.





**2.
      Significant Accounting Policies**




**Cash
      and Cash Equivalents**





Cash
      and
      equivalents include all cash, demand deposits and money market accounts with
      original maturities of three months or less.





**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
      periodically to reflect current changes in cost inputs.





**Property,
      Plant and Equipment**





Property,
      plant and equipment are recorded at cost. Expenditures for routine maintenance
      and repairs are charged to expense as incurred. Expenditures for equipment
      renewals and improvements, which extend the useful life of an asset, are
      capitalized. Certain equipment held under capital lease is classified as
      property, plant and equipment, and the related obligation is recorded as a
      liability. Lease amortization is included in depreciation expense.





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





**Impairment
      of Long-Lived 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.




F-9


**Loan
      Costs**




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




**Deferred
      Acquisition Costs**




Deferred
      acquisition costs related to pending transactions are accounted for as part
      of
      the purchase consideration if and when the transaction is completed.
      I f
      the
      Company does not complete the transaction, those costs are charged to operations
      in the period that the Company’s efforts to complete the transaction are
      terminated.




**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.





**Shipping
      and Handling Fees and Costs**





In
      accordance with EITF No. 00-10, “Accounting for Shipping and Handling Fees and
      Costs”, shipping and handling fees and costs billed to customers are included in
      net sales, and the actual costs incurred by the Company are included in cost
      of
      sales.





**Operating
      Leases**





Leases
      where substantially all the risks and rewards of ownership of the assets remain
      with the leasing company are accounted for as operating leases. Rent payable
      under operating leases is recorded as an operating cost in the statement of
      operations on a straight-line basis over the lease terms.





**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.





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.





F-10


**Discontinued
      Operations**




The
      Company has accounted for the operations of its Beyond the Wall subsidiary
      as
      discontinued operations for all periods presented in accordance with SFAS
      No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”
(see Note 4).





**Asset
      Retirement Obligations**




The
      Company accounts for its asset retirement obligations in accordance with SFAS
      No. 143, “Accounting for Asset Retirement Obligations”, which addresses
      financial accounting and reporting for obligations associated with the
      retirement of tangible long-lived assets and associated costs. SFAS No. 143
      requires that the discounted fair value of a liability for an asset retirement
      obligation be recognized in the period in which it is incurred if a reasonable
      estimate of the fair value can be made. The associated asset retirement costs
      are capitalized as part of the carrying amount of the long-lived asset.





All
      material environmental remediation liabilities for non-capital expenditures,
      which are probable and estimable, are recorded in the financial statements
      based
      on current technologies and current environmental standards at the time of
      evaluation. Adjustments are made when additional information is available that
      suggests different remediation methods or periods may be required which affect
      the total cost.





**Self-Insurance**





KES
      Acquisition is self-insured for health care costs up to $25,000 per subscriber
      annually. Insurance coverage is carried for risks in excess of this amount.
      During 2005, KES Acquisition recognized self-insured health care expense of
      approximately $1,063,000. At September 30, 2005, estimated claims incurred
      but
      not reported were approximately $321,000, which are included in accrued
      liabilities in the consolidated balance sheet at such date.





**Fair
      Value of Financial Instruments**





The
      carrying amounts of financial instruments, which includes cash and cash
      equivalents, accounts receivable, accounts payable, accrued liabilities, notes
      payable to directors, and secured line of credit as of September 30, 2005
      approximates their respective fair values due to the demand or short-term nature
      of those instruments and their underlying liquidity. T he
      carrying value of long-term obligations approximates the fair value based on
      the
      effective interest rates compared to current market rates.




All
      long-term debt and preferred stock classified as long-term debt are presented
      at
      face value plus accrued interest and dividends through the due
      date.




**Concentrations**





The
      Company’s cash balances exceeded federally-insured levels at 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
      2005, the Company had two suppliers that accounted for approximately 65% of
      raw
      materials purchases, one providing approximately 37% and the other providing
      approximately 28%, of which $2,634,161 was included in accounts payable at
      September 30, 2005. During 2005, the Company had two customers that each
      accounted for 4% or more of net sales (aggregate 9%), of which $4,352,730 was
      included in accounts receivable at September 30, 2005.





Information
      with respect to the year ended September 30, 2005 relating to KES
      Acquisition reflects only the seven-month period in which KES Acquisition has
      been included in the Company’s consolidated results of operations.





F-11


**Net
      Loss Per Share**





The
      Company calculates net loss per share as required by SFAS No. 128, "Earnings
      per
      Share". Basic income (loss) per share excludes any dilution for common stock
      equivalents and is computed by dividing net loss by the weighted average number
      of common shares outstanding during the relevant period. Diluted income (loss)
      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 income (loss)
      per share does not consider such dilution if its effect would be anti-dilutive
      (i.e., to increase income per share or decrease loss per share). Accordingly,
      basic and diluted loss per share is the same for all periods presented.





Securities
      entitling the holder thereof to acquire shares of common stock that have been
      excluded from the calculation of diluted loss per share due to their
      anti-dilutive effect are as follows at September 30, 2005 and 2004:





**2005**
            
            **2004**Stock
                options
            
            
            1,405,404
            
            
            1,205,404Common
                stock purchase warrants
            
            
            1,000,000
            
            
            1,000,000





**Stock-Based
      Compensation**





The
      Company accounts for stock-based employee compensation in accordance with the
      provisions of Accounting Principles Board (“APB”) Opinion No. 25 and FASB
      Interpretation No. 44 (“FIN 44”), “Accounting for Certain Transactions
      Involving Stock Compensation”, and complies with the disclosure requirements of
      SFAS No. 123 (as modified by SFAS No. 148), “Accounting for Stock-Based
      Compensation”. Under APB No. 25, compensation expense is recorded based on
      the difference, if any, between the fair value of the Company’s stock and the
      exercise price on the measurement date. The Company accounts for stock issued
      to
      non-employees in accordance with SFAS No. 123, which requires 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 addresses the measurement
      date and recognition approach for such transactions.




The
      Company recognizes 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” (“FIN 28”). For fixed awards,
      the Company recognizes expense over the vesting period or the period of
      service.




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 begin 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
      will no longer be 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.




Public
      companies are permitted to adopt the requirements of SFAS No. 123R using
      one of two methods:




(1) A
      “modified prospective” method in which compensation cost is recognized beginning
      with the effective date (a) based on the requirements of SFAS No. 123R
      for all share-based payments granted after the effective date and (b) based
      on the requirements of SFAS No. 123R for all awards granted to employees
      prior to the effective date of SFAS No. 123R that remain unvested on the
      effective date.




F-12


(2) A
      “modified retrospective” method which includes the requirements of the modified
      prospective method described above, but also permits entities to restate based
      on the amounts previously recognized under SFAS No. 123 for purposes of pro
      forma disclosures for either (a) all prior periods presented or
      (b) prior interim periods of the year of adoption.




The
      Company will adopt SFAS No. 123R effective January 1, 2006 and will
      use the modified prospective method in which compensation cost is recognized
      beginning with the effective date (a) based on the requirements of SFAS
      No. 123R for all share-based payments granted after the effective date and
      (b) based on the requirements of SFAS No. 123R for all awards granted
      to employees prior to the effective date of SFAS No. 123R that remain
      unvested on the effective date. 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, and has
      been determined as if the Company had accounted for its employee stock options
      under the fair value method of such statement. The fair value for these options
      was estimated at the grant date using the Black-Scholes option-pricing model.
      The assumptions used in the model and the weighted-average
      assumptions for the years
      ended September 30, 2005 and 2004 are as follows:





**2005**
            
            **2004**Risk-free
                interest rate
            
            
            4.50
            %
            
            4.00
            %Dividend
                yield
            
            
            0
            %
            
            0
            %Volatility
                factor
            
            
            118.5
            %
            
            100.2
            %Average
                life (years)
            
            
            7.0
            
            
            7.0Weighted
                average fair value of options
            
            $
            0.1225
            
            $
            0.156





For
      the
      purpose 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 pro forma information for the years ended
      September 30 2005 and 2004 is summarized as follows:







**2005**
            
            
            **2004**Net
                loss - as reported
            
            $
            (3,430,562
            )
            $
            (2,365,620
            )Add:
                Total stock-based compensation expense included in reported net
                loss
            
            
            ---
            
            
            ---


Less:
                Total stock-based compensation expense determined under fair
                value method for all awards not charged to operations
            
            
            (24,500
            )
            
            (39,000
            )Net
                loss - pro forma
            
            $
            (3,455,062
            )
            $
            (2,404,620
            )Basic
                and diluted net loss per common share:As
                reported
            
            $
            (0.09
            )
            $
            (0.06
            )Pro
                forma
            
            $
            (0.09
            )
            $
            (0.06
            )





**Comprehensive
      Income (Loss)**





The
      Company has adopted the provisions of Statement of Financial Accounting
      Standards No. 130, “Reporting Comprehensive Income” (“SFAS No. 130”).
      SFAS No. 130 establishes standards for the reporting and display of
      comprehensive income, its components and accumulated balances in a full set
      of
      general purpose financial statements. SFAS No. 130 defines comprehensive
      income (loss) to include all changes in equity except those resulting from
      investments by owners and distributions to owners, including adjustments to
      minimum pension liabilities, accumulated foreign currency translation, and
      unrealized gains or losses on marketable securities. The Company did not have
      any items of comprehensive income (loss) for the years ended September 30,
      2005
      and 2004.





F-13


**Use
      of Estimates**





The
      preparation of the financial statements in conformity with accounting principles
      generally accepted in the United States 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 periods. Actual results could differ from those
      estimates.





**Reclassification**





Certain
      2004 amounts have been reclassified to conform to the presentation in 2005.





**Recent
      Accounting Pronouncements and Developments**





In
      November 2004, the Financial Accounting Standards Board (“FASB”) issued
      SFAS No. 151, “Inventory Costs — An Amendment of ARB No. 43,
      Chapter 4” (SFAS No. 151). SFAS No. 151 clarifies that abnormal
      amounts of idle facility expense, freight, handling costs and spoilage should
      be
      expensed as incurred and not included in overhead. Further, SFAS No. 151
      requires that allocation of fixed and production facilities overhead to
      conversion costs should be based on normal capacity of the production
      facilities. The provisions in SFAS No. 151 are effective for inventory
      costs incurred during fiscal years beginning after June 15, 2005.
      Accordingly, the Company adopted SFAS No. 151 effective October 1, 2005. The
      adoption of SFAS No. 151 did not have any impact on the Company’s financial
      statement presentation or disclosures.





In
      December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary
      Assets, an amendment to APB Opinion No. 29” (“SFAS No. 153”). SFAS No.
      153 amends Accounting Principles Board Opinion No. 29, “Accounting for
      Nonmonetary Transactions”, to require that exchanges of nonmonetary assets be
      measured and accounted for at fair value, rather than at carryover basis, of
      the
      assets exchanged. Nonmonetary exchanges that lack commercial substance are
      exempt from this requirement. SFAS No. 153 is effective for nonmonetary
      exchanges entered into in fiscal periods beginning after June 15, 2005.
      Accordingly, the Company adopted SFAS No. 153 effective July 1, 2005. The
      adoption of SFAS No. 153 did not have any impact on the Company’s financial
      statement presentation or disclosures.





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. Accordingly, the Company
      will adopt the provisions of SFAS No. 154 effective October 1, 2006. The
      adoption of SFAS No. 154 is not expected to have any impact on the Company’s
      financial statement presentation or 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 year ending September 30, 2007 to comply with the
      internal control reporting requirements.





F-14


**3.
      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
      hours worked, is approximately 200,000 short-tons per year, and the Mill is
      currently operating at approximately 94% 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”) and the owner of the remaining 62.55% membership interest
      in KES Acquisition. As consideration for the Acquisition, Acquisition Corp.
      issued to the Sellers (i) $40,000,000 in promissory notes (the “Notes”), (ii)
      25,000 shares of 13% Series A Non-Convertible Preferred Stock with an aggregate
      liquidation value of $25,000,000 (the “13% Series A Preferred Stock”) and (iii)
      100% of its authorized shares of Series B Non-Voting Common Stock. With respect
      to the $65,000,000 of purchase consideration, $19,000,000 of the Notes and
      $10,000,000 of the 13% Series A Preferred Stock were issued to KES Holdings,
      and
      $21,000,000 of the Notes and $15,000,000 of the 13% Series A Preferred Stock
      were issued to Atacama. YouthStream also contributed an aggregate of $500,000
      of
      cash to Acquisition Corp. as consideration for the issuance by Acquisition
      Corp.
      of 100% of its Series A Voting Common Stock. In addition, YouthStream will
      periodically be required to purchase shares of Series B Preferred Stock of
      Acquisition Corp. in amounts equal to distributions it receives on its KES
      Holdings membership interest.





As
      a
      result of these transactions, YouthStream owns 80.01% of the common stock,
      and
      100% of the voting stock, of Acquisition Corp. The remaining 19.99% common
      stock
      interest in Acquisition Corp. is owned 62.55% by Atacama and 37.45% by KES
      Holdings. YouthStream currently has a 2.67% equity interest in KES Holdings
      (this percentage has increased from 1.00% as a result of the redemption of
      another member’s interest), as a result of which the Company has eliminated its
      $507,000 interest in the Notes and $267,000 interest in the 13% Series A
      Preferred Stock in the consolidated balance sheet at September 30, 2005.
      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.





F-15


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.





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





Years
                Ending September 30,
            
            **KES
                Holdings -**
              **$19,000,000
                Note**
            
            **Atacama
                -**
              **$21,000,000
                Note**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.





F-16


For
      the
      nine months ending September 30, 2005, Acquisition Corp., KES Acquisition and
      Atacama KES are 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
      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 was $1,885,129.





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, almost all of which was paid subsequent to
      fiscal year end.




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. 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.


F-17


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.





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 table summarizes 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


F-18





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
            )


$
            1,345,527




Total
                purchase consideration, net of intercompany eliminations of 2.67%
                interest
                held by KES Holdings:


8%
                Subordinated secured promissory notes payable
            
            $
            39,493,000


13%
                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





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





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





Minority
      interest - related parties was $430,931 on February 28, 2005. For the year
      ended
      September 30, 2005, the net loss of Acquisition Corp. allocable to the 19.99%
      minority shareholders was $747,961, 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 $317,030
      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.





The
      following pro forma operating data presents the results of operations for the
      years ended September 30, 2005 and 2004, as if the Acquisition had occurred
      on
      the last day of the immediately preceding fiscal year. Accordingly, transaction
      costs of $1,171,406 related to the Acquisition for the year ended September
      30,
      2005 are not included in the net loss from continuing operations shown below.
      In
      addition, discontinued operations for the year ended September 30, 2004 are
      not
      included. The Mill commenced generating revenues in late January 2004. 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 years ended September 30, 2005 and 2004 is summarized as
      follows:





F-19




**2005**
            
            
            **2004**Net
                sales
            
            $
            113,786,971
            
            $
            48,944,338Cost
                of sales
            
            
            105,265,441
            
            
            51,158,622Gross
                margin (deficit)
            
            
            8,521,530
            
            
            (2,214,284
            )Operating
                income (loss)
            
            
            3,169,836
            
            
            (7,469,548
            )Interest
                expense
            
            
            (9,469,875
            )
            
            (7,243,971
            )Minority
                interest
            
            
            199,109
            
            
            199,109Net
                loss from continuing operations
            
            $
            (5,786,987
            )
            $
            (14,134,628
            )Basic
                and diluted net loss per common share
            
            $
            (0.15
            )
            $
            (0.36
            )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.  A summary of the Company's
      restricted and unrestricted assets, liabilities and equity at September 30,
      2005
      is presented below.





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





**4.
      Discontinued 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),
      for $1,920,000, consisting of a cash payment of $820,000 and a subordinated
      secured promissory note (the “Note”) for $1,100,000, with interest at 10% per
      annum, due October 31, 2006.  The buyer had the right to make certain
      optional principal pre-payments on the Note by June 30, 2004, which would result
      in the principal balance of the Note being adjusted downward, in excess of
      such
      principal pre-payments, based on an agreed-upon sliding scale as set forth
      in
      the Note.




On
      April
      30, 2004, the buyer made an optional principal pre-payment on the Note of
      $400,000.  Accordingly, under the provisions of the sale agreement, the
      buyer received a credit of $106,800 against the $1,100,000 note (in excess
      of
      the $400,000 payment), as well as an additional $150,000 back-end credit on
      the
      Note. On October 31, 2004, the buyer made its scheduled principal payment on
      the
      Note of $197,734, plus accrued interest of $49,493. On
      September 30, 2005, the Company received a cash payment of $258,922 as
      settlement in full of the outstanding note receivable with a balance, including
      accrued interest, of $281,654, and recognized a loss in connection therewith
      of
      $22,732.





F-20


The
      Company initially recognized a loss of $564,921 with respect to the BTW sale
      before taking into consideration the effect of the $400,000 principal
      pre-payment made on April 30, 2004.  Inclusive of such payment, the effect
      of the accelerated payment credit and the back-end credit resulted in an
      additional loss of $256,800, which decreased the carrying value of the note
      receivable from $1,100,000 to $843,200 and increased the loss on the BTW sale
      from $564,921 to $821,721.  The loss on the BTW sale was reported as a loss
      on the disposal of discontinued operations for the year ended September 30,
      2004.  As a result of the sale, the retail segment operations have been
      presented as a discontinued operation for the year ended September 30, 2004.




The
      Company’s net revenues and loss from discontinued operations for the year ended
      September 30, 2004 are summarized as follows:





Net
                revenues
            
            $
            2,513,000Loss
                from discontinued operations
            
            $
            (550,072
            )Loss
                on disposal of discontinued operations
            
            
            (821,721
            )Loss
                from discontinued operations
            
            $
            (1,371,793
            )





As
      of
      September 30, 2005 and 2004, the Company has accrued liabilities of $2,984,660
      and $3,012,386, respectively, 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.





**5.
      Accounts Receivable**





The
      Company’s accounts receivable are summarized as follows at September 30, 2005
      and 2004:





**2005**
            
            **2004**Accounts
                receivable
            
            $
            15,415,938
            
            $
            ---Less:
                Allowance for doubtful accounts
            
            
            (747,399
            )
            
            ---Accounts
                receivable, net
            
            $
            14,668,539
            
            $
            ---





Activity
      in the Company’s allowance for doubtful accounts during the years ended
      September 30, 2005 and 2004 is summarized as follows:





**2005**
            
            **2004**Balance
                at beginning of year
            
            $
            ---
            
            $
            ---Add:
                Balance acquired in Acquisition transaction
            
            
            328,351
            
            
            ---Add:
                Amounts provided during year
            
            
            419,048
            
            
            ---Less:
                Amounts written off during year
            
            
            ---
            
            
            ---Balance
                at end of year
            
            $
            747,399
            
            $
            --





F-21


**6.
      Inventories**





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





Raw
                materials and scrap
            
            $
            2,954,405Semi-finished
                goods
            
            
            6,556,006Finished
                goods
            
            
            8,370,394Total
            
            $
            17,880,805





**7.
      Property, Plant and Equipment**





Property,
      plant and equipment consisted of the following at September 30, 2005 and 2004:





**2005**
            
            **2004**Land
            
            $
            142,498
            
            $
            ---Buildings
                and improvements
            
            
            672,529
            
            
            ---Machinery
                and equipment
            
            
            5,814,985
            
            
            ---Office
                equipment
            
            
            ---
            
            
            140,068Total
            
            
            6,630,012
            
            
            140,068Less:
                Accumulated depreciation and amortization
            
            
            (1,062,267
            )
            
            (114,658
            )Property,
                plant and equipment, net
            
            $
            5,567,745
            
            $
            25,410








Assets
      recorded under capitalized lease arrangements at September 30, 2005 and 2004
      that are included above in property, plant and equipment consist of the
      following:





**2005**
            
            **2004**Machinery
                and equipment
            
            $
            2,101,730
            
            $
            ---Less:
                Accumulated depreciation and amortization
            
            
            (560,461
            )
            
            ---Property,
                plant and equipment, net
            
            $
            1,541,269
            
            $
            ---





Depreciation
      expense for the years ended September 30, 2005 and 2004 was $427,993 and
      $19,921, respectively.





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





**8.
      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 from the sale of the assets
      and operations of Beyond the Wall in February 2004 and any tax sharing payments
      received under the Tax Sharing Agreement with Acquisition Corp. and Atacama
      KES
      (see Note 3). The Company repaid the notes payable to directors subsequent
      to
      September 30, 2005 from the proceeds from the settlement of the Beyond the
      Wall
      note receivable, which were received on September 30, 2005 (see Note
      4).




F-22


**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. 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 General Electric Capital Corporation. 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 General
      Electric Capital Corporation 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 secured promissory notes payable was $1,085,753.




**Secured
      Line of Credit**





Effective
      March 24, 2004, KES Acquisition entered into a loan and security agreement,
      as
      amended, with General Electric Capital Corporation. 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
      September 30, 2005, the balance outstanding on the line of credit was
      $19,009,379, 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 3), 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
      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.




F-23


**Equipment
      Contract Payable**





The
      equipment contract payable is due in 47 equal monthly installments of $8,099,
      including interest at 9.35% per annum, with a balloon payment of $35,252 due
      on
      May 8, 2008. The equipment contract payable is secured by the related equipment.
      As of September 30, 2005, the balance outstanding on the equipment contract
      payable was $249,805. Future scheduled principal payments on the equipment
      contract payable are summarized as follows:





Years
                Ending September 30,2006
            
            $
            77,0912007
            
            
            84,6162008
            
            
            88,098Total
                principal payments
            
            
            249,805Less
                current portion
            
            
            (77,091
            )Non-current
                portion
            
            $
            172,714





**Capital
      Lease Obligation**





The
      Company leases a ladle metallurgy furnace facility under a capital lease
      arrangement requiring monthly payments of $50,000 per month for a term of 5
      years commencing June 1, 2004, reflecting a total obligation of $3,000,000.
      The
      Company has the option to renew the lease for an additional 5 years. The Company
      determined that the fair value of this asset at the date of acquisition,
      calculated utilizing an effective interest rate of 15% per annum, was
      $2,101,730. At September 30, 2005, future minimum annual lease payments under
      this capital lease arrangement are summarized as follows:





Years
                Ending September 30,2006
            
            $
            600,0002007
            
            
            600,0002008
            
            
            600,0002009
            
            
            350,000Total
                minimum payments
            
            
            2,150,000Amount
                representing interest
            
            
            (465,680
            )Obligations
                under capital lease
            
            
            1,684,320Less
                current portion
            
            
            (372,256
            )Non-current
                portion
            
            $
            1,312,064





**Restructured
      Debt Obligations**





In
      July 1998, the Company issued subordinated notes to accredited investors in
      the aggregate amount of $5,000,000 less an original discount of $188,000 (the
      "NET Notes"). These notes bore interest at 11% per annum and were due in
      July 2003. On September 8, 2002, NET failed to make the interest
      payment due on the NET Notes, constituting an event of default under the terms
      of the NET Notes, and as a result, the holder of a majority of the NET Notes
      declared these notes due and payable under the terms of the NET Notes. In
      January 2003, the Company reached a debt restructuring agreement with the
      holders of the NET Notes to cancel all the principal of and interest on the
      NET
      Notes in exchange for aggregate cash payments of $3,000,000. The settlement
      of
      the NET Notes resulted in a gain totaling $2,448,000.





F-24


In
      June 2000, the Company issued subordinated notes to an accredited investor
      in the amount of $12,000,000, less an original issue discount of $420,000 (the
      "YSTM Notes"). The notes bore interest at 11% per annum and were due in
      June 2005. On August 31, 2002, the Company failed to make interest
      payments due on the YSTM Notes, constituting an event of default under the
      terms
      of the YSTM Notes. On September 9, 2002, the holders of the YSTM Notes
      declared this note due and payable under the terms of the YSTM Notes. In
      January 2003, as part of the debt restructuring, the Company reached an
      agreement with the holders of the YSTM Notes to cancel all of the principal
      and
      interest on the YSTM Notes in exchange for: (a) cash of $1,500,000;
      (b) 1,000,000 shares of redeemable preferred stock of the Company;
      (c) 3,486,875 shares of common stock of the Company; and (d) a
      $3,000,000 promissory note issued by Beyond the Wall and secured by a pledge
      of
      the Company's stock in Beyond the Wall. The promissory note with a face value
      of
      $3,000,000 and total future interest payments of $952,775 is due December 31,
      2010, with interest at 4% per annum. The transaction was accounted for as a
      troubled debt restructuring involving a combination of a partial debt settlement
      and a continuation of debt with modified terms. As the total undiscounted future
      cash payments from the promissory note were less than the adjusted carrying
      value of the YSTM Notes, the promissory note was recorded at the undiscounted
      future cash value of $3,952,775, with no interest expense to be recognized
      over
      the remaining life of the new note. The restructuring of the YSTM Notes resulted
      in a gain of approximately $306,000, which was recognized in the fiscal year
      ended September 30, 2003. As of September 30, 2005 and 2004, the restructured
      promissory note is reflected in the consolidated balance sheets at its carrying
      value of $3,952,775.





In
      July 2000, the Company issued a subordinated note to an accredited investor
      in the amount of $1,000,000, less an original issue discount of $35,000 (the
      "YSTM 2 Note"). The note bore interest at 11% per annum and was due in
      July 2005. On August 31, 2002, the Company failed to make an interest
      payment due on the YSTM 2 Note, constituting an event of default under the
      terms
      of the YSTM 2 Note, and the holder of the note had the right to declare this
      note immediately due and payable. In January 2003 the Company reached an
      agreement with the holder of the YSTM 2 Note to cancel all of the principal
      and
      interest on the YSTM 2 Note in exchange for: (a) a $1,000,000 promissory
      note issued by Beyond the Wall and secured by a pledge of the Company's stock
      in
      Beyond the Wall; and (b) 498,125 shares of the Company's common stock. The
      promissory note with a face value of $1,000,000 and total future interest
      payments of $318,000 is due December 31, 2010, with interest at 4% per annum.
      The transaction was accounted for as a troubled debt restructuring involving
      a
      combination of a partial debt settlement and a continuation of debt with
      modified terms. As the total undiscounted future cash payments from the
      promissory note, including principal and accrued interest, were greater than
      the
      adjusted carrying value of the YSTM 2 Note, the promissory note issued was
      recorded at the adjusted carrying value of the YSTM 2 Note surrendered,
      resulting in an imputed discount of $40,386. No gain or loss was recognized
      on
      the settlement. As of September 30, 2005 and 2004, the restructured promissory
      note is reflected in the consolidated balance sheets at its carrying value,
      net
      of unamortized original issue discount, of $964,194 and $961,436,
      respectively





In
      summary, the Company’s January 2003 debt restructuring involved the holders
      of all of its and its Network Event Theater subsidiary's outstanding notes
      (NET
      Notes, YSTM Notes and YSTM 2 Note), in the aggregate principal amount of
      $18,000,000. In exchange for cancellation of all of the principal due on these
      old notes, including accrued interest of $2,062,000, the note holders received
      in aggregate $4,500,000 in cash, redeemable preferred stock with a face value
      of
      $4,000,000 (see Note 9), and 3,985,000 shares of common stock valued at
      $255,000, and $4,000,000 aggregate principal amount of promissory notes due
      December 31, 2010 issued by the Company's retail subsidiary, Beyond the
      Wall, Inc., secured by the Company's pledge of all of its stock in Beyond
      the Wall. Additionally, the Company recognized a gain from the troubled debt
      restructuring of approximately $2,808,000. The gain was classified as part
      of
      continuing operations in accordance with SFAS No. 145, "Rescission of SFAS
      Nos. 4, 44 and 64, Amendment of SFAS No. 13, and Technical Corrections as
      of April 2000” for the year ended September 30, 2003.





The
      terms
      and conditions of the January 2003 debt restructuring agreement qualified
      as a troubled debt restructuring for accounting purposes in accordance with
      SFAS
      No. 15 "Accounting by Debtors and Creditors for Troubled Debt
      Restructurings". In determining the proper accounting treatment, the Company
      evaluated the nature of the economic consequences of each of the three separate
      transactions for purposes of determining the gain, if any, in connection with
      the extinguishment of the NET Notes, YSTM Notes and YSTM 2 Note in accordance
      with SFAS No. 15.





At
      the
      closing of the January 2003 debt restructuring, all of the Company's
      previous directors and officers resigned, and three new directors were
      appointed. Jonathan V. Diamond, who previously had been a director and interim
      Chief Executive Officer of the Company, was appointed as Chairman of the Board
      of Directors, and Hal G. Byer and Robert Scott Fritz were appointed as directors
      of the Company. Mr. Diamond was appointed as Chief Executive Officer and
      Robert N. Weingarten was appointed as Chief Financial Officer.





During
      June 2003, the Company amended the original provisions of the $4,000,000 of
      promissory notes issued in conjunction with the January 2003 restructuring
      to provide for the following:





F-25


a.
      Beyond
      the Wall was replaced by the Company as the issuer of the notes, and was
      released from any liability with respect to the notes.





b.
      The
      note holders agreed to convert the notes from secured to unsecured, and to
      release their security interest in all of the outstanding common stock of Beyond
      the Wall.





c.
      The
      note holders agreed to delete all provisions in the notes requiring the issuer
      of the notes to make mandatory prepayments based on the occurrence of certain
      events.





d.
      The
      note holders agreed to delete provisions in the notes prohibiting the issuer
      from: (i) incurring any indebtedness for borrowed money; (ii) selling,
      or entering into any agreement to sell, all or substantially all of the assets
      or all or substantially all of the capital stock of the issuer; or
      (iii) entering into any transaction with an affiliate, other than
      transactions with the Company, Network Event Theater, Inc. and/or their
      successors, that have fair and reasonable terms which are no less favorable
      to
      the issuer than would be obtained in a comparable arms-length transaction with
      a
      person or entity that is not an affiliate.





**9.
      Redeemable Preferred Stock**





**4%
      Series A Preferred Stock**





In
      connection with the January 2003 debt restructuring agreement with the
      holders of the YSTM Notes (see Note 8), and pursuant to the Company's amended
      articles of incorporation, authorizing the issuance of up to 5,000,000 shares
      of
      preferred stock, the Company issued 1,000,000 shares of 4% Series A
      Preferred Stock with the following characteristics:





a.
      Dividend Rights. The holders of the shares of 4% Series A Preferred Stock are
      entitled to receive, when and as declared by the Company's board of directors,
      out of funds legally available for that purpose, cumulative preferential
      dividends in cash at the rate of 4% per year on the face amount of $4 per share
      payable quarterly.





b.
      Redemption. The Company shall redeem all of the outstanding shares of 4% Series
      A Preferred Stock as of December 31, 2010 at $4.00 per share, plus all
      accrued and unpaid dividends thereon. As of September 30, 2005 and 2004,
      the redemption value of the issued and outstanding shares of 4% Series A
      Preferred Stock recorded on the Company’s consolidated balance sheet was
      $5,269,333.




c.
      Convertibility and Voting Rights. The 4% Series A Preferred Stock is not
      convertible into any other security of the Company, and the holders thereof
      have
      no voting rights except with respect to any proposed changes in the
      preferences and special rights of such stock or except as granted to holders
      by
      law.





Pursuant
      to SFAS No. 150, “Accounting for Certain Financial Instruments with
      Characteristics of Both Liabilities and Equity”, because the 4% Series A
      Preferred Stock provides for mandatory redemption in cash, it is classified
      as a
      long-term liability at the future redemption value of $5,269,333, including
      cumulative dividends of $1,269,333, with no future accretion adjustments to
      the
      balance to be taken against stockholders' equity (deficit) in subsequent
      periods.





**13%
      Series A Preferred Stock**





In
      connection with the acquisition of the steel mini-mill (see Note 3), and
      pursuant to its articles of incorporation, authorizing the issuance of up to
      50,000 shares of preferred stock, YouthStream Acquisition Corp., a subsidiary
      of
      the Company, issued 25,000 shares of its 13% Series A Preferred Stock with
      the following characteristics:





a.
      Dividend Rights. The holders of the shares of 13% Series A Preferred Stock
      are
      entitled to receive, when and as declared by the Company's board of directors,
      out of funds legally available for that purpose, cumulative preferential
      dividends in cash at the rate of 13% per year on the face amount of $1,000
      per
      share payable concurrent with the redemption of the 13% Series A Preferred
      Stock.





b.
      Redemption. The Company shall redeem the outstanding shares of 13% Series A
      Preferred stock at $1,000 per share, beginning annually on February 22, 2007,
      in
      lots of at least $4,000,000, plus all related accrued and unpaid dividends
      thereon, out of assets legally available for redemption. As of
      September 30, 2005, the redemption value of the total issued and
      outstanding shares of 13% Series A Preferred Stock, including cumulative
      dividends, was $26,618,129.





F-26


c.
      Convertibility and Voting Rights. The 13%
      Series A Preferred Stock is
      not
      convertible into any other security of the Company, and the holders thereof
      have
      no voting rights except with respect to any proposed changes in the
      preferences and special rights of such stock or except as granted to holders
      by
      law.





Pursuant
      to SFAS No. 150, “Accounting for Certain Financial Instruments with
      Characteristics of Both Liabilities and Equity”, because the 13% Series A
      Preferred Stock provides for mandatory redemption in cash, it is classified
      as a
      long-term liability at the redemption value at September 30, 2005 of
      $26,618,129, including cumulative dividends of $1,885,129.




**10.
      Income Taxes**





At
      September 30, 2005, the Company had a net operating loss carryforward 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.





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 and 2004, the Company recorded a 100% valuation allowance against its
      net
      deferred tax assets for financial reporting purposes. The
      valuation allowance increased by approximately $3,214,000 and $3,082,000 for
      the
      years ended September 30, 2005 and 2004, respectively.





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 is more likely than not that the
      deferred tax assets will be realized.





Deferred
      income taxes reflect the net tax effects of temporary differences between the
      carrying amounts of assets and liabilities for financial reporting purposes
      and
      the amounts used for income tax purposes. Significant components of the
      Company's deferred tax assets as of September 30, 2005 and 2004 are as
      follows:





**2005**
            
            **2004**Net
                operating loss carryforwards
            
            $
            116,134,000
            
            $
            113,646,000Depreciation
            
            
            (66,000
            )
            
            (10,000
            )Allowance
                for bad debts
            
            
            242,000
            
            
            ---Acquisition
                costs
            
            
            427,000
            
            
            ---Accrued
                dividends
            
            
            433,000
            
            
            ---Amortization
            
            
            85,000
            
            
            ---Investment
                in partnership
            
            
            (401,000
            )
            
            ---Accrued
                compensation
            
            
            134,000
            
            
            224,000Accrued
                interest
            
            
            48,000
            
            
            48,000Other
            
            
            86,000
            
            
            ---Total
                deferred tax assets
            
            
            117,122,000
            
            
            113,908,000Valuation
                allowance
            
            
            (117,122,000
            )
            
            (113,908,000
            )Net
                deferred tax asset
            
            $
            ---
            
            $
            ---





No
      federal tax provision has been provided for the periods ended September 30,
      2005 and 2004 due to the significant losses incurred to date.





F-27


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 any 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 3) 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.





**11.
      Common Stock**





In
      May 2001, the Board of Directors authorized the Company to make open market
      purchases of the Company’s common stock aggregating up to $2,000,000. As of
      September 30, 2005, the Company held in treasury 607,500 shares purchased
      on the open market at a cost of $829,576.





In
      January 2003, the Company completed a debt restructuring transaction
      whereby a total of 3,985,000 shares of common stock valued at $255,000 were
      issued to the holders of the YSTM Notes and YSTM 2 Note, in accordance with
      the
      terms of the debt restructuring to extinguish the YSTM Notes and YSTM 2 Note
      (see Note 8). The additional common shares were valued using the three-day
      average trading price one day before and one day after the effective date of
      the
      debt restructuring.





**12.
      Stock Options**





In
      February 2000, the Company adopted the YouthStream 2000 Stock Option Plan
      (the “2000 Plan”) in order to grant employees providing services to the Company
      incentive stock options. The 2000 Plan allows for the granting of options to
      purchase up to 5,000,000 shares of the Company’s common stock. All option plans
      of the Company in existence at the formation of the 2000 Plan were merged into
      the 2000 Plan. The terms of the options were not changed upon merging the plans.
      The exercise price of the options granted was at fair market value on the date
      of the grant. Options generally vest over three years.





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





On
      June
      3, 2004, the Company
      issued an option to purchase 200,000 shares of common stock to a
      new
      director, exercisable through June 3, 2011 at $0.14 per share, which was the
      fair market value on the date of issuance. The option was fully vested upon
      issuance.





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 option
      vests in equal monthly installments over the 12 months beginning March 1, 2005.





F-28


The
      following table summarizes stock option activity under the 2000 Plan for the
      years ended September 30, 2004 and 2005:





**Number
                of**
              **Shares**
            
            **Weighted-**
              **Average**
              **Exercise**
              ******Price**Options
                outstanding at September 30, 2003
            
            
            1,086,544
            
            $
            0.25Options
                granted
            
            
            250,000
            
            $
            0.16Options
                canceled
            
            
            (131,140
            )
            $
            0.92Options
                exercised
            
            
            ---
            
            
            ---Options
                outstanding at September 30, 2004
            
            
            1,205,404
            
            $
            0.16Options
                granted
            
            
            200,000
            
            $
            0.30Options
                canceled
            
            
            ---
            
            
            ---Options
                exercised
            
            
            ---
            
            
            ---Options
                outstanding at September 30, 2005
            
            
            1,405,404
            
            $
            0.18





As
      of
      September 30, 2005 and 2004, all stock options outstanding were exercisable
      and
      options to acquire 3,594,596 shares of common stock were available for future
      grant. Additional information regarding options outstanding under the 2000
      Plan
      at September 30, 2005 is as follows:





**Options
                Outstanding**
            
            **Options
                Exercisable****Exercise**
              ******Price**
            
            **Number
                of**
              **Shares**
            
            **Weighted-**
              **Average**
              **Exercise**
              **Price**
            
            **Weighted-**
              **Average**
              **Remaining**
              **Contractual**
              **Life
                (in years)**
            
            **Number
                of**
              ******Shares**
            
            **Weighted-**
              **Average**
              **Exercise**
              **Price**$0.04
            
            875,000
            
            $0.04
            
            4.6
            
            875,000
            
            $0.04$0.14
            
            200,000
            
            $0.14
            
            5.7
            
            200,000
            
            $0.14$0.26
            
            50,000
            
            $0.26
            
            5.0
            
            50,000
            
            $0.26$0.30
            
            200,000
            
            $0.30
            
            6.3
            
            116,667
            
            $0.30$1.17
            
            40,000
            
            $1.17
            
            6.3
            
            40,000
            
            $1.17$1.63
            
            40,404
            
            $1.63
            
            5.6
            
            40,404
            
            $1.631,405,404
            
            $0.177
            
            5.1
            
            1,322,071
            
            $0.169





The
      weighted average fair value of options granted during the years ended
      September 30, 2005 and 2004 was $0.30 and $0.16, respectively.





**13.
      Common Stock Warrants**





The
      following table summarizes common stock warrant activity for the years ended
      September 30, 2005 and 2004:





**Number
                of**
              **Shares**
            
            **Weighted-**
              **Average**
              **Exercise**
              **Price**Warrants
                outstanding at September 30, 2003
            
            
            1,000,000
            
            $
            0.12Warrants
                granted
            
            
            ---
            
            
            ---Warrants
                canceled
            
            
            ---
            
            
            ---Warrants
                exercised
            
            
            ---
            
            
            ---Warrants
                outstanding at September 30, 2004
            
            
            1,000,000
            
            $
            0.12Warrants
                granted
            
            
            ---
            
            
            ---Warrants
                canceled
            
            
            ---
            
            
            ---Warrants
                exercised
            
            
            ---
            
            
            ---Warrants
                outstanding at September 30, 2005
            
            
            1,000,000
            
            $
            0.12





F-29


As
      of
      September 30, 2005 and 2004, all common stock warrants outstanding were
      exercisable. Additional information regarding the common stock warrants
      outstanding at September 30, 2005 is as follows:





**Warrants
                Outstanding**
            
            **Warrants
                Exercisable****Exercise**
              **Price**
            
            **Number
                of**
              **Shares**
            
            **Weighted-**
              **Average**
              **Exercise**
              **Price**
            
            **Weighted-**
              **Average**
              **Contractual**
              **Life
                (in years)**
            
            **Number**
              **of
                Shares**
            
            **Weighted-Average**
              **Exercise**
              ******Price**$0.11
            
            800,000
            
            $0.11
            
            2.9
            
            800,000
            
            $0.11$0.16
            
            200,000
            
            $0.16
            
            2.9
            
            200,000
            
            $0.161,000,000
            
            $0.12
            
            2.9
            
            1,000,000
            
            $0.12





**14.
      Commitments and Contingencies**





**Operating
      Leases**





Future
      minimum rental payments required under operating leases that have initial or
      remaining non-cancelable lease terms in excess of one year are as follows at
      September 30, 2005:





Years
                Ending September 30,2006
            
            $
            425,8682007
            
            
            406,2872008
            
            
            390,3632009
            
            
            370,791Total
                minimum payments
            
            
            1,593,309Less
                current portion
            
            
            (425,868
            )Non-current
                portion
            
            $
            1,167,441





Rent
      expense was approximately $374,625 and $168,000 for the years ended
      September 30, 2005 and 2004, respectively.





F-30


**Operating
      Commitments**





The
      Mill
      has been operating under a Management Services Agreement with a management
      company effective through October 31, 2009 pursuant to which the
      management company provides, 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. Pursuant to the Management Services
      Agreement, 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 $7,962,000 at September 30, 2005.





**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 September 30, 2005 and 2004.





KES
      Acquisition has been named in a wrongful death lawsuit in West Virginia with
      respect to an employee of a 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.





**15.
      Subsequent Events (Unaudited)**





During
      December 2005, 10,000 shares of 13% Series A Preferred Stock with a face amount
      of $10,000,000 originally issued by Acquisition Corp. to KES Holdings in
      February 2005 (see Note 3) were transferred to two charities.




F-31


**SIGNATURES**





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


YOUTHSTREAM
                MEDIA
                NETWORKS, INC.
              (Registrant)Date: June 30, 2006
            By:
            /s/ JONATHAN
              V. DIAMONDJonathan
              V. DiamondChief
                Executive Officer





Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of the registrant and in the
      capacity and on the dates indicated.





**Signature**
            **Title**
            **Date**/s/
                JONATHAN V. DIAMONDJonathan
                V. Diamond
            Chief
                Executive Officer and Chairman of the Board
            June
                30, 2006/s/
                ROBERT N. WEINGARTENRobert
                N. Weingarten
            Chief
                Financial Officer
            June
                30, 2006/s/
                HAL BYERHal
                Byer
            Director
            June
                30, 2006/s/
                ROBERT SCOTT FRITZRobert
                Scott Fritz
            Director
            June
                30, 2006/s/
                PATRICK J. PANZARELLAPatrick
                J. Panzarella
            Director
            June
                30, 2006/s/
                JAMES N. LANEJames
                N. Lane
            Director
            June
                30, 2006/s/
                JESS M. RAVICHJess
                M. Ravich
            Director
            June
                30, 2006