---

# UNITED
STATESSECURITIES AND EXCHANGE COMMISSION  WASHINGTON, DC 20549

_________________

# FORM 10-QSB

# (Mark One)

|[X] | QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ---------------------------------------------------------------------------------------

# For the quarterly
period ended June 30, 2006

# OR

|[   ] | TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|----- | ----------------------------------------------------------------------------------------

# For the transition
period from ___________ to ____________

Commission File No.
2-98395 - NY

|MSO HOLDINGS, INC.                                    
|------------------------------------------------------
|(Exact name of Registrant as specified in its charter)

|Delaware                                 | 74-3134651                          
|---------------------------------------- | ------------------------------------
|(State or other jurisdiction of          | (I.R.S. Employer Identification No.)
|incorporation or organization)          
|2333 Waukegan Road, Suite 175            | 60015                               
|Bannockburn, Illinois                   
|(Address of Principal Executive Offices) | (Zip Code)                          

Issuers telephone
number, including area code: (847) 267-0801

|                                                                                   | 
|---------------------------------------------------------------------------------- | 
|                                                                                  
|(Former name, former address and formal fiscal year, if changed since last report)

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

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

The
number of shares outstanding of the Registrants common stock, par value $0.001, as of
August 8, 2006 the latest practicable date, was 6,316,698 shares.

Transitional
Small Business Disclosure Format:  Yes:    No:  X

---

# MSO HOLDINGS, INC.TABLE OF CONTENTS

|          
|----------
|PART I    
|Item 1.   
|          
|          
|          
|          
|          
|          
|          
|          
|          
|Item 2.   
|Item 3.   
|PART II   
|Item 1.   
|Item 2.   
|Item 3.   
|Item 4.   
|Item 5.   
|Item 6.   
|Signatures

2

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# MSO HOLDINGS, INC.CONSOLIDATED
BALANCE SHEETS

|                                                                                      | June 30,
2006 | December 31
2005
|------------------------------------------------------------------------------------- | ------------- | ----------------
|
|Current Assets                                                                        |               |                 
|Cash and cash equivalents                                                             |               |                 
|Accounts Receivable (net of allowance for bad debt and estimated contractual          |               |                 
|allowances of $701,000 and $1,432,000 as of June 30, 2006 and December 31, 2005,      |               |                 
|respectively)                                                                         |               |                 
|Prepaid expenses and other current assets                                             |               |                 
|                                                                                      |               |                 
|Total Current Assets                                                                  |               |                 
|Fixed Assets, net of accumulated depreciation                                         |               |                 
|Other Assets                                                                          |               |                 
|Deferred Financing Fees, net of amortization of $5,210 as of June 30, 2006            |               |                 
|Deposits                                                                              |               |                 
|                                                                                      |               |                 
|Total Other Assets                                                                    |               |                 
|                                                                                      |               |                 
|Total Assets                                                                          |               |                 
|                                                                                      |               |                 
|Liabilities and Shareholders' Equity (Deficit)                                        |               |                 
|Current Liabilities                                                                   |               |                 
|Accounts Payable                                                                      |               |                 
|Short Term Capital Lease                                                              |               |                 
|Accrued wages and benefits                                                            |               |                 
|Accrued expenses                                                                      |               |                 
|Unearned revenue                                                                      |               |                 
|                                                                                      |               |                 
|Total Current Liabilities                                                             |               |                 
|Long Term Liabilities                                                                 |               |                 
|Convertible Note, net of unamortized discount of $207,550                             |               |                 
|Stock based compensation liability                                                    |               |                 
|Warrants on convertible note                                                          |               |                 
|Capital Lease Payable                                                                 |               |                 
|                                                                                      |               |                 
|Total Long Term Liabilities                                                           |               |                 
|Redeemable Convertible Preferred Stock, $0.001 par value, 95,000,000 shares and       |               |                 
|15,000,000 shares authorized as of June 30, 2006 and December 31, 2005, respectively. |               |                 
|Series A Preferred Stock - 0 shares and 12,562,262 shares issued and outstanding      |               |                 
|as of June 30, 2006 and December 31, 2005, and net of unaccreted issuance costs of    |               |                 
|$826,763 as of December 31, 2005, (liquidation value of $0 and $11,525,000 as of      |               |                 
|June 30, 2006 and December 31, 2005, respectively).                                   |               |                 
|Series A1 Preferred Stock - 38,300,005 and 0 shares issued and outstanding as of      |               |                 
|June 30, 2006 and December 31, 2005, respectively (liquidation value of $9,575,000    |               |                 
|and $0 as of June 30, 2006 and December 31, 2005, respectively).                      |               |                 
|Stockholders Equity (Deficit)                                                         |               |                 
|Series A Preferred Stock, $.001 par value, 2,125,500 shares and 0 shares issued and   |               |                 
|outstanding as of June 30, 2006 and December 31, 2005, respectively.                  |               |                 
|Common Stock, $.001 par value, 120,000,000 shares and 40,000,000 shares               |               |                 
|authorized as of June 30, 2006 and December 31, 2005, respectively; 6,316,698         |               |                 
|shares and 6,604,870 shares issued and outstanding, as of June 30, 2006 and           |               |                 
|December 31, 2005, respectively.                                                      |               |                 
|Additional Paid in Capital                                                            |               |                 
|Accumulated Earnings (Deficit)                                                        |               |                 
|                                                                                      |               |                 
|Total Stockholders Equity (Deficit)                                                   |               |                 
|                                                                                      |               |                 
|Total Liabilities & Shareholder Equity (Deficit)                                      |               |                 
|                                                                                      |               |                 

The accompanying notes
to consolidated financial statements are an integral part of these statements.

3

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# MSO HOLDINGS, INC.CONSOLIDATED
STATEMENTS OF OPERATIONS(UNAUDITED)

|                                          | Three months ended June 30, | Six months ended June 30,
|----------------------------------------- | --------------------------- | -------------------------
|
|
|Revenue:                                  |                             |                          
|Professional Service Fees                 |                             |                          
|Hospital Management Fee                   |                             |                          
|Other Revenue                             |                             |                          
|                                          |                             |                          
|Total Revenue                             |                             |                          
|Operating Expenses:                       |                             |                          
|Payroll Expenses                          |                             |                          
|Marketing                                 |                             |                          
|Professional Fees                         |                             |                          
|Travel and Entertainment                  |                             |                          
|Rent                                      |                             |                          
|Utilities                                 |                             |                          
|Office Expenses                           |                             |                          
|Malpractice Insurance                     |                             |                          
|Business Insurance                        |                             |                          
|Bad Debt Expense                          |                             |                          
|Depreciation                              |                             |                          
|Reverse Merger expenses                   |                             |                          
|Other operating expenses                  |                             |                          
|                                          |                             |                          
|Total Operating Expenses                  |                             |                          
|Loss from Operations                      |                             |                          
|Other Income (Expense):                   |                             |                          
|Interest Income                           |                             |                          
|Interest Expense                          |                             |                          
|Loss on sale of securities                |                             |                          
|                                          |                             |                          
|Total Other Income (Expense)              |                             |                          
|Loss before Income Taxes                  |                             |                          
|Provision for Income Taxes                |                             |                          
|                                          |                             |                          
|Net Loss                                  |                             |                          
|                                          |                             |                          
|Deemed dividend to preferred shareholders |                             |                          
|Net Loss Available to Common Shareholders |                             |                          
|                                          |                             |                          
|Basic and diluted weighted average shares |                             |                          
|outstanding                               |                             |                          
|                                          |                             |                          
|Basic and diluted loss per common share   |                             |                          
|                                          |                             |                          

The accompanying notes to
consolidated financial statements are an integral part of these statements.

4

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# MSO HOLDINGS, INC.CONSOLIDATED
STATEMENTS OF CASH FLOWS(UNAUDITED)

|                                                                                    | Six months ended June 30,
|----------------------------------------------------------------------------------- | -------------------------
|
|
|Net Loss                                                                            |                          
|Adjustments to reconcile net loss to net cash used in operating                     |                          
|activities:                                                                         |                          
|Non cash stock compensation                                                         |                          
|Amortization of deferred financing costs                                            |                          
|Amortization of convertible note original discount                                  |                          
|Bad debt expense                                                                    |                          
|Depreciation                                                                        |                          
|Realized loss on sale of securities                                                 |                          
|Changes in assets and liabilities:                                                  |                          
|Accounts receivable                                                                 |                          
|Prepaid expenses and other current assets                                           |                          
|Other assets                                                                        |                          
|Accounts payable                                                                    |                          
|Accrued liabilities                                                                 |                          
|Accrued wages and benefits                                                          |                          
|Unearned revenue                                                                    |                          
|                                                                                    |                          
|Net Cash used in operating activities                                               |                          
|                                                                                    |                          
|Cash Flow from Investing Activities:                                                |                          
|Purchases of property and equipment                                                 |                          
|Purchase of securities available for sale                                           |                          
|Proceeds from sale of investments                                                   |                          
|                                                                                    |                          
|Net Cash (used in) provided by investing activities                                 |                          
|                                                                                    |                          
|Cash Flows Provided by Financing Activities                                         |                          
|Purchase of Common Stock                                                            |                          
|Payments on capital lease                                                           |                          
|Proceeds from issuance of convertible note                                          |                          
|Issuance costs for Convertible Note                                                 |                          
|                                                                                    |                          
|Net Cash provided by (used in) financing activities                                 |                          
|                                                                                    |                          
|Net (Decrease) Increase in Cash                                                     |                          
|Cash and cash equivalents at beginning of period                                    |                          
|                                                                                    |                          
|Cash and cash equivalents at end of period                                          |                          
|                                                                                    |                          
|Supplemental disclosure of cash flow information                                    |                          
|Cash paid for interest                                                              |                          
|Reclassification of shares no longer subject to repurchase right                    |                          
|Reclassification of Series A Preferred Stock no longer subject to redemption rights |                          
|Value of warrants issued in connection with convertible note financing              |                          

The accompanying notes to
consolidated financial statements are an integral part of these statements.

5

---

# MSO HOLDINGS, INC.CONSOLIDATED
STATEMENT OF SHAREHOLDERS EQUITY (DEFICIT)(UNAUDITED)

|                                       | Common Stock | Series A Preferred Stock |  | Retained  | Equity &
|-------------------------------------- | ------------ | ------------------------ |  | --------- | --------
|
|
|Balance at January 1, 2006             |              |                          |  | 6,604,870 |         
|Non cash compensation expense for      |              |                         
|stock options and warrants             |              |                          |  |           |         
|Reclassification of Series A Preferred |              |                         
|Stock no longer subject to redemption  |              |                         
|rights                                 |              |                          |  |           |         
|Reclassification of shares no longer   |              |                         
|subject to Company repurchase option   |              |                          |  | (288,172  | )       
|Deemed dividends to preferred          |              |                         
|shareholders                           |              |                          |  |           |         
|Net Loss for the six months ended June |              |                         
|shareholders                           |              |                          |  |           |         
|                                       |              |                          |  |           |         
|Balance at June 30, 2006               |              |                          |  | 6,316,698 |         
|                                       |              |                          |  |           |         

The accompanying notes to
consolidated financial statements are an integral part of these statements.

6

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# MSO HOLDINGS, INC.

# CONSOLIDATED STATEMENT
OF COMPREHENSIVE INCOME (LOSS)(UNAUDITED)

|                                                              | Three months ending June 30, | Six months ending June 30,
|------------------------------------------------------------- | ---------------------------- | --------------------------
|
|(unaudited)                                                   | (unaudited)                  | (unaudited)               
|Net Loss                                                      |                              |                           
|Unrealized gain (loss) in Investment Securities               |                              |                           
|Reclassification adjustement for losses on sale of investment |                              |                           
|securities realized in net income                             |                              |                           
|                                                              |                              |                           
|Comprehensive Loss                                            |                              |                           
|                                                              |                              |                           

The accompanying notes to
consolidated financial statements are an integral part of these statements.

7

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# MSO HOLDINGS, INC. AND
SUBSIDIARIESNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

# 1.    BASIS OF PRESENTATION

| | In
this discussion, the terms Company, we, us,
our and MSO Holdings refer to MSO Holdings, Inc. and our
subsidiaries except as expressly set forth otherwise.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
accompanying unaudited financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America for interim
financial information and with the instructions to Form 10-QSB and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial statements.
These condensed consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes for the years ended December 31, 2005 and
2004.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results could differ
from those estimates. In the opinion of management, all adjustments (consisting solely of
normal recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the three months and six months ended June 30, 2006 are
not necessarily indicative of the results that may be expected for the full year ending
December 31, 2006.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
accompanying consolidated financial statements have been prepared on a going concern basis
which contemplates the realization of assets and the satisfaction of liabilities in the
normal course of business. We have experienced operating losses and negative cash flows
from operations and currently have an accumulated deficit. Based upon the current level of
revenues and the cash position, we must raise additional capital in the fourth quarter of
2006, or cut expenses in order to fund our current operations. These factors raise
substantial doubt about our ability to continue as a going concern. We are pursuing
several strategic alternatives to address this situation, including a potential sale of
the business.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
May 9, 2006, we completed a convertible promissory note financing in the aggregate
principal amount of $694,205 (the Note Financing). In addition, the investors
in the Note Financing deposited an additional $1,524,039 into an escrow account, such
amount to be released to us in exchange for additional convertible promissory notes in one
or more tranches upon the achievement of certain business milestones by no later than
December 31, 2006. See Note 7 for additional information on this financing.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | There
can be no assurance that we will achieve the milestones required to obtain access to the
remaining funds that are in escrow. Should we be unable to raise sufficient funds, we will
be required to curtail our operating plans or in a worst case scenario, cease operations.
No assurance can be given that we will be able to operate profitably on a consistent
basis, or at all, in the future. The 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 possible
inability of us to continue as a going concern.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 2.    VARIABLE INTEREST
ENTITY

| | As
required under Financial Interpretation No. 46, Consolidation of Variable Interest
Entities, we have evaluated our relationship with MSO Physicians, P.C. (MSO
Physicians), an entity that provides professional medical services at the hospitals
for which MSO Medical, Inc. (MSO Medical) provides management services. MSO
Physicians only provides services at hospitals for which MSO Medical provides
management services and the operations of MSO Physicians have been fully funded by
advances from MSO Medical. As a result, MSO Medical is the primary beneficiary of MSO
Physicians, a variable interest entity. The accounts of MSO Physicians are included
in the consolidated financial statements of MSO Medical as of June 30, 2006 and December
31, 2005 and for the three months and six month periods ended June 30, 2006 and 2005.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8

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# 4.    STOCK COMPENSATION

| | The
Company adopted Statement of Financial Accounting Standards (SFAS) No. 123(R),
Share-Based Payment on January 1, 2006. SFAS No. 123(R) requires stock-based
compensation to be expensed over the vesting period of the awards based on the grant-date
fair value. The Company elected to adopt using the modified prospective transition method
which does not result in the restatement of the previously issued financial statements.
The provisions of SFAS No. 123(R) apply to all awards granted or modified after the date
of adoption. In addition, compensation expense must be recognized for any unvested stock
option awards outstanding as of the date of adoption. Prior to January 1, 2006, the
Company accounted for stock-based compensation in accordance with Accounting Principles
Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees.
Accordingly, no compensation expense has been recognized for stock options if
options granted had an exercise price equal to the market value of the underlying stock on
the grant date. The Company estimated the fair value of the stock options using the
Black-Scholes option pricing model. Significant assumptions used in estimating the fair
value of awards granted during the three months and six months ended June 30, 2006 and
2005 include a risk free average interest rate of 4.5% based on the U.S. Treasury Strip
(zero-coupon) bonds, a projected volatility rate of 100%, a dividend yield of 0% and an
expected life of 5 years for the grants.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Total
stock-based compensation expense (income) recognized in the Consolidated Statements of
Earnings was $(20,236) and $677,948 for the three months ended June 30, 2006 and 2005,
respectively and $(479,922) and $786,600 for the six months ended June 30, 2006 and 2005,
respectively. Amounts recorded in 2005 primarily represent expenses related to options
granted with exercise prices in excess of market (as no compensation expense was
previously recognized for options granted with strike prices at or above market in
accordance with APB No. 25) and compensation expense for stock subject to repurchase
rights. There were no options exercised during the three months and six months ended June
30, 2006.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of adopting SFAS No. 123(R) on January 1, 2006, the Companys net loss for
the three months and six months ended June 30, 2006 was higher by approximately $11,000
and $25,000, respectively, than if the Company had continued to account for stock-based
compensation under APB No. 25. Basic and diluted loss per share for the three months and
six months ended June 30, 2006, would have been ($0.19) and ($0.25), respectively, if the
Company had not adopted SFAS No. 123(R).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following table illustrates the pro forma effect on net earnings and earnings per share if
the Company had applied the fair value recognition provisions of SFAS No. 123(R) to
stock-based employee compensation for the three months and six months ended June 30, 2005:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                     | Three Monthsended June 30,2005 | Six Monthsended June 30,2005
|---------------------------------------------------- | ------------------------------ | ----------------------------
|Net Loss - as reported                               |                                |                             
|Add: Stock-based employee compensation included      |                                |                             
|in reported net income (loss), net of tax            |                                |                             
|Deduct stock-based compensation expense              |                                |                             
|determined under the fair value based method for all |                                |                             
|awards, net of tax                                   |                                |                             
|                                                     |                                |                             
|Net Loss - proforma                                  |                                |                             
|                                                     |                                |                             
|Basic and diluted net loss per share - as reported   |                                |                             
|Basic and diluted net loss per share - proforma      |                                |                             

9

---

# 5.    RELATED PARTY
TRANSACTIONS

| | MSO
Physicians has an employment agreement with one of the founding physicians who is also one
of our principal stockholders. The agreement outlines the roles and responsibilities of
the physician, his compensation plan and contains confidentiality and non-compete clauses.
The compensation expense (excluding stock based compensation expense relating to shares
subject to repurchase rights) for the founding physicians was approximately $93,000 and
$199,000 for the three months and six months ended June 30, 2006 and approximately
$387,000 and $803,000 for the three months and six months ended June 30, 2005,
respectively. The stock based compensation expense (income) relating to shares subject to
repurchase rights for the founding physicians was approximately ($23,234) and ($397,675)
for the three months and six months ended June 30, 2006 and approximately $409,742 and
$468,276 for the three months and six months ended June 30, 2005, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Eugene
Terry, a member of our Board of Directors (the Board), provides business
development consulting to us. We incurred approximately $3,000 and $20,000 expenses for
the six months ended June 30, 2006 and 2005, respectively, for these consulting services.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 6.    CEO DEPARTURE

| | On
April 12, 2006, Albert Henry entered into a termination agreement pursuant to which he
resigned as a director effective immediately and resigned as our Chief Executive Officer
effective April 17, 2006. In connection with Mr. Henrys departure, our Board agreed
to waive our right to repurchase 576,340 shares of common stock held by Belusha, LP, an
entity controlled by Mr. Henry. Of the 576,340 shares of common stock which was subject to
repurchase rights, 288,168 shares were no longer subject to the repurchase option on
January 1, 2007 and the remaining 288,172 shares were no longer subject to the repurchase
option on January 1, 2008. In connection with the termination agreement, the Company did
not exercise the repurchase option on the 288,168 shares and the fair market value of
these shares of $83,569 was transferred from Stock based compensation liability to
additional paid in capital. The remaining 288,172 shares were forfeited and returned to us
for cancellation.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
lieu of any severance payment, Mr. Henry received a credit in the amount of
$141,250, which Mr. Henry used to acquire securities in our next round of financing that
results in gross proceeds to us in excess of $1,500,000 on the same terms applicable to
each of the other investors in such financing. In connection with the Convertible Note
Financing on May 9, 2006 (see Note 7), $44,205 out of the $141,250 credit was applied to
the Convertible Note Financing. The remaining balance of $97,045 is classified as an
accrued liability and will be converted to convertible notes if future tranches are
incurred as described below.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, Mr. Henry will also receive up to $50,000 in additional cash payments contingent
on us achieving certain business milestones.
| | ------------------------------------------------------------------------------------------------------------------------------------------

# 7.    CONVERTIBLE NOTE
FINANCING

| | On
May 9, 2006, in connection with the Private Placement to certain investors who are current
holders of our Series A Convertible Preferred Stock (the Series A
Preferred) (collectively, the Purchasers), we entered into the
following agreements: (i) a Securities Purchase Agreement (the Securities Purchase
Agreement); (ii) secured convertible promissory notes in the aggregate principal
amount of $694,205 (the Initial Notes); and (iii) warrants to purchase shares
of either Qualified Equity Securities (defined below) (the
Warrants) or shares of our Series A-1 Convertible Preferred Stock
(Series A-1 Preferred).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Pursuant
to the terms of the Securities Purchase Agreement, we may issue to the Purchasers and the
Purchasers may purchase secured convertible promissory notes (the Notes) in
the aggregate principal amount of up to $2,218,244 and Warrants to purchase shares of
either Qualified Equity Securities or shares of Series A-1 Preferred.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10

---

| | The
Securities Purchase Agreement contemplates multiple closings. The initial closing took
place on May 9, 2006 (the Initial Closing) in the aggregate principal
amount of $694,205. At the Initial Closing, we issued the Initial Notes and the Warrants
to the Purchasers. In the event we satisfy certain enumerated conditions on or before
December 31, 2006, the Securities Purchase Agreement contemplates a second closing (the
Second Closing), in which we will issue to the Purchasers and the Purchasers
will purchase Notes in the aggregate principal amount of $1,524,039 (the Second
Closing Amount). Additionally, at any time prior to the Second Closing, the holders
of a majority-in-interest of the principal amount then outstanding under the Notes may
require one or more interim closings (each, an Interim Closing), pursuant to
which we will issue to the Purchasers and the Purchasers will purchase Notes in an
aggregate principal amount identified by a majority-in-interest of the principal amount
then outstanding under the Notes (collectively, the Interim Closing Amount).
In the event we issues Notes to the Purchasers in one or more Interim Closing, the Second
Closing Amount shall be reduced by the Interim Closing Amount.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
unpaid balance of each Purchasers Note shall accrue simple interest at a rate of 10%
per annum and shall mature on the earlier to occur of: (i) the closing of a Qualified
Financing (as defined below); or (ii) January 1, 2008, unless the unpaid principal amount
of and all accrued interest on such Purchasers Notes are converted into shares of
our capital stock prior to such date. Subsequent to the Maturity Date, or upon any
default, interest shall accrue at the rate of 14%.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Notes may be convertible into shares of our capital stock by the Purchasers as follows:
(i) if we enter into a bona fide arms length transaction that results in aggregate gross
proceeds of new money to the Company of at least $2,000,000 (excluding the conversion of
indebtedness) (a Qualified Financing), a Purchaser may elect to convert the
outstanding principal balance and all unpaid accrued interest on such
Purchasers Notes, or any portion thereof (the Optional Conversion
Amount), into that number of shares of the equity security sold to the investors in
the Qualified Financing (the Qualified Equity Securities), determined by
dividing the Optional Conversion Amount by eighty percent (80%) of the price per share
paid by the investors in the Qualified Financing for the Qualified Equity Securities (the
Optional Conversion); or (ii) at any time after the date of the Initial
Closing and upon the due authorization of our Series A-1 Preferred and the filing of an
amended and restated certificate of incorporation (the Amended
Certificate)  setting forth the rights, privileges and preferences of such
Series A-1 Preferred, a Purchaser may elect to convert the amount of principal of, and all
accrued and unpaid interest on such Purchasers Notes, or any portion thereof (the
Voluntary Conversion Amount), into a number of shares of our Series A-1
Preferred determined by dividing the Voluntary Conversion Amount by $0.25 per share
(subject to adjustments for stock splits, reverse stock splits, stock dividends,
recapitalizations combinations, and the like) (the Voluntary Conversion).
Additionally, in the event a majority-in-interest of the principal amount then outstanding
under the Notes elect to convert their Notes in an Optional Conversion, then all of the
then outstanding principal balance and all unpaid accrued interest under the Notes shall
automatically convert pursuant to the terms of an Optional Conversion (the Mandatory
Conversion).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Warrants issued to the Purchasers allow the Purchasers to purchase shares of our capital
stock as follows: (i) in the event a Purchaser converts its Notes into Qualified Equity
Securities in either an Optional Conversion or a Mandatory Conversion, the Warrants shall
be exercisable for a number of Qualified Equity Securities equal to the outstanding
principal balance under such Purchasers Notes at the time of either the Optional
Conversion or the Mandatory Conversion of such Purchasers Notes, divided by the
price per share of the Qualified Equity Security in the Qualified Financing at an exercise
price equal to the price per share of such Qualified Equity Security; or (ii) prior to a
Qualified Financing or if a Purchasers Notes are not converted into Qualified Equity
Securities at the closing of a Qualified Financing, the Warrants shall be exercisable for
a number of shares of Series A-1 Preferred equal to the outstanding principal balance at
the time of exercise under the Notes held by such Purchaser, divided by $0.25, at an
exercise price equal to $0.25.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Series A-1 Preferred is senior in rights, preferences and privileges to the shares of our
outstanding common stock and Series A Preferred. In particular, the holders of our Series
A-1 Preferred Stock: (i) have a liquidation preference senior to our common stock and
Series A Preferred in the event of a liquidation event (as defined
in the Amended Certificate); (ii) have certain voting rights with respect to the
election of directors and other material transactions; and (iii) have effective voting
control of all outstanding capital stock.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
holders of our Series A-1 Preferred have the right to elect three (3) out of five (5)
members of our Board. All of our stockholders voting together as a single class shall vote
their shares so as to elect the remaining two (2) directors as follows: (i) one director
who shall be our then acting Chief Executive Officer, and (ii) one director who shall be
nominated by a majority of our then sitting Board. Additionally, we may not, without the
consent of the holders of a majority of the shares of our Series A-1 Preferred, take
certain actions, including, without limitation: (i) authorizing, paying or declaring a
dividend on any shares of our capital stock; (ii) altering, amending or repealing our
Amended Certificate or bylaws in a manner that would adversely affect the voting power or
any other rights, preferences or privileges of the Series A-1 Preferred; (iii) creating
any securities senior in rights, preferences or privileges to the Series A-1 Preferred;
and (iv) creating any securities equal in rights, preferences or privileges to the Series
A-1 Preferred.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11

---

| | Holders
of record of our Series A Preferred that also participated in the Private Placement
represented 10,436,762 shares out of the 12,562,262 shares of Series A Preferred that were
outstanding. All of these 10,436,762 shares of Series A Preferred were automatically
converted into shares of Series A-1 Preferred at a one (1) to 3.66972 ratio
into 38,300,005 shares of Series A-1 Preferred and 2,125,500 shares of Series A Preferred
remain outstanding. Please note that because we have
received the requisite vote of our stockholders necessary to effect the conversion and are
waiting only on the expiration of certain waiting periods mandated by the Securities
Exchange Act of 1934, as amended, our financial statements assume this conversion has
already taken place.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
book value for the 2,125,500 shares of Series A Preferred that remains outstanding was
$1,830,353, net of unaccreted issuance costs of $119,647 as of May 9, 2006, was
transferred to Shareholders Equity since the redemption/liquidation rights were eliminated
on Series A Preferred Stock.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
10,436,762 shares of Series A Preferred that were transferred and converted into
38,300,005 shares of Series A-1 Preferred Stock have a redemption/liquidation value
of $9,575,000. The book value of the 10,436,762 shares of Series A Preferred was
$8,987,502 net of unaccreted issuance costs of $587,498 as of May 9, 2006. The unaccreted
issuance cost of $587,498 was amortized as a deemed dividend to preferred shareholders
during the three months ended June 30, 2006.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Beginning
on March 24, 2008, the holders of at least a majority of the Series A-1 Preferred
Stock may require the Company to redeem all shares of the Series A-1 Preferred
Stock from all holders thereof at the higher of either the Liquidation Preference or the
fair market value of such shares (as determined by an independent appraiser selected by
the Company and the holders of a majority of the Series A-1 Preferred Stock);
provided, however that immediately following such redemption, at least one class of voting
stock remains outstanding. In addition, the Company shall not be required to redeem from
any holder of Series A-1 Preferred Stock, in connection with a redemption requested
after the Initial Redemption Date but before the first anniversary of the Initial
Redemption Date, a number of shares of Series A-1 Preferred Stock greater than
fifty percent (50%) of the aggregate number of shares of Series A-1 Preferred Stock
held by such holder immediately prior to such redemption. In the event the Company does
not have sufficient funds available to redeem all shares to be redeemed then it shall
redeem the same pro rata and in such event each holder of such shares of Series A-1
Preferred Stock that are entitled to redemption that are not so redeemed shall exchange
the unredeemed shares for a promissory note from the Company bearing simple
interest at a rate of 8% per annum and having a term of one (1) year.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
gross proceeds from the Convertible Note financing on May 9, 2006 was $694,205. Issuance
costs of $67,446, primarily legal costs, have been reflected as Deferred Financing Costs
and are being amortized using the effective interest method from the issuance date through
January 1, 2008 which is the maturity date. There was $5,210 of amortization of deferred
financing costs included in the statement of operations as interest expense for the three
months ended June 30, 2006.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
number of warrants to be issued as of the Initial Closing is equal to 2,776,820 warrants
(i.e. the outstanding principle of $694,205 divided by $0.25). The warrants provide the
holder the right to purchase the Companys common stock for a 3 year period at an
exercise price of $0.25 per share. The warrants were valued at $224,922 using the
Black-Scholes option pricing model and are reflected as a discount to the convertible
note. For purposes of the calculation, management used a fair value of the common stock of
$0.15 per share based on the quoted market price of the common stock, an average interest
rate of 4.5% based on the U.S. Treasury Strip (zero-coupon) bonds, a projected volatility
rate of 100%, a dividend yield of 0% and an expected life of 3 years for the grants. There
was $17,372 of amortization of the original discount included in the statement of
operations as interest expense for the three months ended June 30, 2006.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
connection with our Private Placement, the creation of our Series A-1 Preferred and the
Series A Conversion, our Board and stockholders have approved the amendment and
restatement of the rights, preferences and privileges of our Series A Preferred. Pursuant
to a covenant in the Securities Purchase Agreement, we have agreed to file, and intend to
file, the Amended Certificate on the date that is twenty (20) days after the date on which
this Information Statement is mailed to our stockholders.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12

---

| | The
Amended Certificate also: (i) increases the number of authorized shares of our common
stock from 40,000,000 shares to 120,000,000 shares; and (ii) increases the authorized
number of shares of our preferred stock from 15,000,000 shares to 95,000,000 shares of
preferred stock with rights, preferences and privileges to be designated by our Board from
time to time.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
amendment and restatement of our certificate of incorporation, among other things, (i)
eliminates each of the rights, preferences, and privileges of our existing Series A
Preferred, except for the right to vote with the common stock on an as-converted basis and
the right to receive proceeds from a liquidation event on a pari passu basis with our
common stock, and (ii) creates a new Series A-1 Preferred which will enjoy all of the
rights, preferences and privileges previously associated with the Series A Preferred.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company has received the written consent from the holders of the requisite number of
shares to effect the amendment and restatement of the Companys existing Amended and
Restated Certificate of Incorporation and has filed an Information Statement with the
Securities and Exchange Commission (SEC) for the purpose of informing
the remaining stockholders of the Company of such action by written consent. Upon the
expiration of the relevant waiting periods prescribed by the Securities and Exchange Act
of 1934, as amended, the Company will file such Amended Certificate with the State of
Delaware. The Financial Statements as of June 30, 2006 have been prepared as if the
conversion of Series A Preferred Stock has taken place since the required number of
shareholder votes have been received.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 8.    SUBSEQUENT EVENTS

| | On
May 9, 2006, a majority of the holders of our outstanding capital stock approved a two
hundred (200) to one (1) reverse stock split (the Reverse Stock Split)
of our common stock. On June 2, 2006, the Board approved the Reverse Stock Split
and directed our officers to effect the Reverse Stock Split. The Reverse Stock
Split will become effective upon the filing of the Amended Certificate with the Secretary
of State of the State of Delaware.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of the Reverse Stock Split, holders of record of our common stock will be reduced
to less than three hundred (300). The purpose of the Reverse Stock Split is to
position us so that we will no longer be required to file periodic reports and
other information with the SEC.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
intend to effect the Reverse Stock Split by filing the Amended Certificate with the
Secretary of State of the State of Delaware on the date that is twenty (20)
days after the date on which a definitive Information Statement is first
mailed to our stockholders with respect thereto. On the effective date of the
Amended Certificate, stockholders holding a stock certificate representing fewer than two
hundred (200) shares of our common stock immediately prior to the effectiveness of
the Amended Certificate, and stockholders holding a stock certificate representing
a number of shares of our common stock not evenly divisible by two hundred (200),
will receive a cash payment in lieu of a fraction of a share of new common stock
that would otherwise be issued following the Reverse Stock Split.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Promptly
after the effectiveness of the Reverse Stock Split, we intend to file a Form 15 with the
SEC which will terminate our obligations to file periodic reports under the
Securities Exchange Act of 1934, as amended. We anticipate that we will continue
future operations as a non-reporting company, thereby relieving us of the costs,
administrative burdens and competitive disadvantages associated with operating as
an SEC reporting company. In connection with the SEC deregistration process, we will also
request that NASDAQ no longer allow the quotation of our common stock on the
Over-the-Counter Bulletin Board.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 9.    RESTATEMENT

| | While
preparing the fiscal 2006 first quarter financial statements, the Company identified
certain errors in its accounting treatment for shares subject to repurchase option. These
errors required the Company to restate its financial statements for the years ended
December 31, 2005 and 2004. As discussed in Note 12 of our annual financial statements,
there are certain shares subject to a repurchase agreement. The number of shares subject
to the repurchase option decreased 18.75% on January 1, 2005 and will decrease by 18.75%
on January 1 of each year thereafter until 2008 at which time no shares will be subject to
this repurchase option. In accordance with Financial Accounting Standard 128, the Company
has determined that until these shares are no longer subject to the repurchase option,
they should be excluded from weighted average shares outstanding in the calculation of
basic and diluted loss per share.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

13

---

| | The
Company also determined that compensation expense should be recognized over the period for
which the repurchase option of these shares lapses. Previously, the Company had not
recorded compensation expense for these shares. The Company determined that the shares
subject to this repurchase feature are liability-classified awards under FAS 123(R). As
such, the value of the unvested shares is remeasured each period (until the repurchase
right is exercised or expired) based on the quoted market price of the Companys
common stock. As a result, compensation accrued in each period for unvested shares is
adjusted in subsequent periods for changes, either increases or decreases, in the quoted
market value of the shares. The Company recorded an increase in payroll expenses of
$97,558 and $763,030 for the three and six months ended June 30, 2005, respectively, as a
result of shares subject to this repurchase feature.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the second quarter of 2005, the Company acquired 1,536,904 shares from a founder for
$0.2505 per share or $385,000 in total. 1,152,678 of these shares were subject to the
Companys repurchase provision and 384,226 shares were not subject to the
Companys repurchase provision. This full payment was initially recorded as a
reduction of shareholders equity. The Company has determined that only the amount
relating to shares not subject to the Company repurchase provision should have been
recorded against equity. As a result, $288,750 of the cash paid for the shares has been
recorded as a reduction of the stock based compensation liability in 2005, of which
$138,750 and $150,000 of this amount was recorded as stock compensation expense in 2005
and 2004, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
accompanying financial statements and notes reflect the restated amounts. Amounts
indicated as previously reported in the following table represent the amounts
initially reported in the Companys Form 10-QSB filed on August 5, 2005.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                          | Three months ended June 30, 2005 | Six months ended June 30, 2005
|----------------------------------------- | -------------------------------- | ------------------------------
|
|Income Statement Data:                    |                                  |                               
|Net sales                                 |                                  |                               
|Payroll Expenses                          |                                  |                               
|Loss from Operations                      |                                  |                               
|Net loss                                  |                                  |                               
|Net Loss Available to Common Shareholders |                                  |                               
|Basic & Diluted weighted average shares   |                                  |                               
|outstanding                               |                                  |                               
|Basic & Diluted net loss per share        |                                  |                               
|Cash Flow Data:                           |                                  |                               
|Operating cash flow                       |                                  |                               
|Investing cash flow                       |                                  |                               
|Financing cash flow                       |                                  |                               

(1) As discussed above, during 2006,
the Company restated historical financial statements to revise the accounting forcertain
shares of common stock subject to a repurchase option.

14

---

# ITEM 2.  MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

| | You
should read the following discussion of our financial condition and results of operations
in conjunction with the financial statements and the notes to those statements
included elsewhere in this report. This discussion may contain forward-looking
statements that involve risks and uncertainties. Our actual results may differ
materially from those anticipated in these forward-looking statements as a result of
certain factors, such as those set forth under Risk Factors
contained in our filings with the Securities and Exchange Commission, including
our Annual Report on Form 10-KSB/A for the year ended December 31, 2005.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Company
Overview
| | ----------------

| | We
are an Obesity Disease Management company, which offers both a surgical and
non-interventional weight loss treatment option to members of health plans, employees of
self insured corporations and the general public.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
were originally incorporated in the State of Nevada in 1983 under the name Valley Tech
Industries, Inc. We subsequently changed our name to National Superstars, Inc. and ceased
operations in 1989. Our business plan since that time had been to seek to enter into a
business combination with an entity that had ongoing operations through a reverse merger
or other similar type of transaction.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
furtherance of that business plan, on May 26, 2005, we reincorporated into the State of
Delaware and acquired MSO Medical through a merger of a wholly-owned subsidiary with and
into MSO Medical (the Merger). Prior to this transaction, MSO Holdings, Inc.
had no significant operations.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
financial reporting purposes, the Merger has been reflected as a recapitalization of MSO
Medical and the historical financial statements of MSO Medical are reported as the
historical financial statements of the registrant.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
are an obesity disease management company, which manages the provision of both a
non-interventional weight loss (W-L) treatment option and a bariatric surgery option to
members of health plans, employees of self insured corporations and the general public.
Our obesity disease management programs have demonstrated measurable outcomes for obese
individuals. Our programs utilize behavioral assessment in addition to a clinical
evaluation of the individuals health status and assessment of co-morbidities due to
the disease of obesity. Many major US health plans require a certain number of months of
non-interventional weight loss treatment before an individual may be qualified for the
surgery option. Gastric bypass surgery is an elective surgical option covered by most
health plans.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
are building a non-interventional clinically and medically supervised weight-loss program
to complement our bariatric surgery program. In July 2005, we initiated a three year
contract to jointly establish an enhanced, non-interventional weight-loss program with a
third party outsourced behavioral coaching company. The non-interventional weight loss
treatment programs include individualized telephonic counseling sessions supplemented by
online coaching services performed by licensed behavioral healthcare professionals. Such
therapists develop unique weight-loss plans for each enrollee, which include nutritional
guidance from a licensed dietician, self-directed online weight loss support, web-based
educational resources and interactive goal-setting using proprietary tracking software.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
surgical treatment of obesity is offered by us through acute care hospitals where we have
established a dedicated bariatric surgery center (each, a Center for Obesity
Related Illness Center or CORI Center). The expertise required to identify,
screen, treat and follow-up with bariatric surgery patients is significant. We address
these issues by offering acute care hospitals the ability to out-source many aspects of
the management of such bariatric surgery programs, while allowing them to benefit from
offering patients an on-site solution. We operate our CORI Centers under a management
services agreement with each acute care hospital.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
do not provide professional medical or other health services to patients; however,
throughout this document we may refer to services that we offer that include professional
services. These professional services are provided by a variable interest
entity, MSO Physicians, an entity that is wholly-owned by Dr. James Sapala and other
professional service providers that are not managed by us. Dr. Sapala is one of our
founders and a principal stockholder.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

15

---

| | As
required under Financial Interpretation No. 46, Consolidation of Variable Interest
Entities, we have evaluated our relationship with MSO Physicians, an entity that
provides professional medical services at the hospitals for which MSO Medical provides
management services. MSO Physicians only provides services at hospitals for which
MSO Medical provide management services and the operations of MSO Physicians have been
fully funded by advances from MSO Medical. As a result, MSO Medical is the primary
beneficiary of MSO Physicians, a variable interest entity. The accounts of MSO
Physicians are included in the consolidated financial statements of MSO Medical. MSO
Physicians receives payments from third party insurers for the performance of bariatric
surgery and professional medical services in the form of professional fees.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following discussion should be read in conjunction with the information contained in the
Consolidated Financial Statements, including the related footnotes.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Three
Months Ended June 30, 2006 Compared With Three Months Ended June 30, 2005
| | -------------------------------------------------------------------------------

| | Revenues.  For the three months ended June 30, 2006, revenues of $997,872
decreased                     50% as compared to revenues of $1,995,255 for the three
months ended June 30,                     2005. The following is a discussion of
management fee revenues from hospital                     contracts and professional fee
revenues from surgeries and ancillary procedures                     performed, which are
our two primary sources of revenue. Other revenue includes                     revenue
derived from the non-interventional weight loss program as well as from
                    billing and collections services performed for third party customers.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Management
fee revenue:
| | -----------------------

| | Hospital
Management Fee Revenues were $701,950 for the three months ended June 30, 2006 versus
$1,251,792 for the three months ended June 30, 2005, a decrease of $549,842 or 44%
primarily as a result of (i) a lower management fee at two hospital programs as a result
of a reduced program size, (ii) two hospital programs in New York filing for bankruptcy at
which we had bariatric surgery programs, and (iii) closing of two hospital programs that
were unprofitable.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
primary reason for the lower monthly management fee at the two hospital programs was due
to a reduced program size. The management fee revenue for these hospital programs
decreased for the three months ended June 30, 2006 by $234,000 compared to the three
months ended June 30, 2005.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
two bankruptcies in New York were Parkway Hospital, which filed in the first quarter of
2005, and St. Vincents Hospital, which filed in the third quarter of 2005. The two
bankrupt programs accounted for $201,292 decline in management fee revenues for the three
months ended June 30, 2006 compared to the three months ended June 30, 2005. We are no
longer providing management services to these two New York hospitals.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
two unprofitable programs that were closed during the second quarter accounted for
$115,000 decline in management fee revenues for the three months ended June 30, 2006
compared to the three months ended June 30, 2005.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Total
surgeries performed for the three months ended June 30, 2006 were 133 compared to 259
surgeries for the three months ended June 30, 2005, a decrease of 126 surgeries or 49%.
Out of the 126 surgery decline, 83 surgeries were performed at hospitals where we no
longer have programs. We terminated two hospital programs because the surgical volumes did
not cover the costs of operating these programs, accounting for a decline of 22 surgeries
from the prior period. In addition, the two bankrupt programs accounted for approximately
61 less surgeries being performed during the three months ended June 30, 2006. The
remaining decline can be attributable to more competition as well as health plans
requiring documented weight loss and/or behavioral health counseling before approving the
surgery.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Professional
fee revenue:
| | -------------------------

| | Revenues
derived from professional fees were $293,367 for the three months ended June 30, 2006
versus $729,955 for the three months ended June 30, 2005, a decrease of $436,588 or 60%.
This decrease in professional fees is attributable to the lower number of surgeries
performed, closing of some hospital programs due to size or the hospital filing for
bankruptcy, as well as utilizing contracted physicians to perform surgeries versus
physicians employed by MSO Physicians. The professional fees for surgeries performed by
contracted physicians are not consolidated with our financial results and are therefore
not a revenue source for us.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

16

---

| | Expenses.  Operating
expenses were $1,434,767 for the three months ended June 30, 2006
                    versus $3,679,744 for the three months ended June 30, 2005, a
decrease of 61% or                     $2,244,977. The decrease in operating expenses is
primarily the result of lower                     payroll expenses, marketing,
professional fees, travel and entertainment, rent,                     utilities,
malpractice insurance, office expenses, lower bad debt expenses and
                    reverse merger expenses. Partially offsetting these decreases were
increases in                     business insurance, depreciation and other operating
expenses. The decrease in                     operating expenses is primarily a result of
the closing of the unprofitable                     clinics and shifting the business
model away from employing physicians by MSO                     Physicians and operating
clinics to contracting with physicians. In addition, we                     have reduced
and outsourced many functions at corporate as well as cut back on
                    outside consultants.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Payroll
expenses decreased by $1,375,456 or 66% for the three months ended June 30, 2006 compared
to the same period in the prior year as a result of closing unprofitable hospital programs
and reduced headcount at the corporate office. In addition, a variable stock compensation
arrangement (discussed in Note 16 of our annual financial statements) resulted in a
decrease in payroll expense of $715,000. Under this variable stock compensation
arrangement, the value of unvested common shares is remeasured each period (until the
repurchase right is exercised or expires) based on the quoted market price of the
Companys common stock. As a result, compensation accrued in each period for unvested
shares is adjusted in subsequent periods for changes, either increases or decreases, in
the quoted market value of the shares.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Marketing
expenses decreased by $175,230 or 60% for the three months ended June 30, 2006 compared to
the same period in the prior year as a result of closing unprofitable hospital programs.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Professional
fees declined $43,778 or 16% for the three months ended June 30, 2006 compared to the same
period in the prior year due to less consulting fees for business development and
financial advisor fees.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Rent
expense decreased by $39,354 or 39% for the three months ended June 30, 2006 compared to
the same period in the prior year as we have closed unprofitable facilities.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Office
expense decreased by $54,601 or 65% for the three months ended June 30, 2006 compared to
the same period in the prior year as we have closed unprofitable facilities.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Malpractice
insurance declined $47,430 or 58% for the three months ended June 30, 2006 compared to the
same period in the prior year due to shifting the business model away from employing
physicians by MSO Physicians to contracting with physicians.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Bad
debt expense decreased $122,635 for the three months ended June 30, 2006 compared to the
same period in the prior year due to write-offs from the hospital program bankruptcies
occurring in 2005.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Reverse Merger expenses of $412,958 for the three months ended June 30, 2005 reflect
acquisition and legal cost associated with the reverse merger. The reverse merger expenses
consisted of a payment of $280,000 to the shareholders of National Superstars, a
finders fee commission of $33,000, and legal and transfer agent expenses of $90,783.
In addition, the Company issued 36,700 shares to the finders valued at $9,175 based upon
the fair value of the stock at the time of issuance.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Partially
offsetting the decreases in operating expenses, depreciation expense increased $25,431 to
$68,526 for the three months ended June 30, 2006 as compared to $43,095 for the three
months ended June 30, 2005. Depreciation expense increased due to a change in the
estimated useful life of computer equipment and software from 60 months to 36 months.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Business
insurance increased $16,955 or 73% due to directors & officers insurance premiums as a
result of being a public company.
| | ---------------------------------------------------------------------------------------------------------------------------------

| | Other
operating expenses increased $43,487 for the three months ended June 30, 2006 due to
expenses relating to the aborted acquisition of Resources for Living, LP and the
associated financing that did not close.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

17

---

| | Interest
Income.  Interest income of $3,743 for the three months ended June 30, 2006
decreased $15,532 over the same period a year ago due to lower amount of cash to invest.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Interest
Expense.  For the three months ended June 30, 2006, the interest expense of
$34,247 represents interest on the capital lease, accrued interest on the Convertible
Notes of $10,080, and amortization expense of $22,582 on the original issuance costs for
the Convertible Note. The interest expense for the three months ended June 30, 2005
includes unused commitment fees and amortization of deferred financing fees of $8,945
relating to the Line of Credit Facility that was terminated in December 2005.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Loss
on sale of securities.  The loss on sale of securities of $25,513 for the
three months ended June 30, 2005 represents realized losses from the sale of securities
held for investment purposes. There are no securities held for investment purposes during
the three months ended June 30, 2006.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Provision
for Income Taxes.  The effective tax rate for the three months ended June
30, 2006 and 2005 was 0% as our tax benefit was offset by a corresponding increase in the
valuation allowance for deferred income taxes. Due to the significant losses incurred
during 2005 and 2004 and our limited operating history, management determined that it was
more likely than not that our deferred tax assets would not be realized.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Net
Loss.  We had a net loss of $467,399 for the three months ended June 30,
2006 compared to a net loss of $1,702,541 for the same period in 2005, an improvement in
the net loss of $1,235,142. The improvement in the net loss is primarily the result of
closing unprofitable operations and lower operating expenses, which includes a reduction
in non cash stock compensation expense of $715,000.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Deemed
dividend to preferred shareholders.  The deemed dividend to preferred
shareholders represents the amortization of the issuance costs on the Preferred Stock
Financing. The deemed dividend increased $529,555 to $617,480 for the three months ended
June 30, 2006. The unaccreted issuance costs of $587,498 relating to Series A Preferred
shareholders who participated in the Convertible Note financing was amortized as a
deemed dividend (see Note 6).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Net
Loss available to common shareholders.  We had a net loss available to
common shareholders of $1,084,879 for the three months ended June 30, 2006 compared to a
net loss of $1,790,466 for the same period in 2005, an improvement of $705,587, primarily
as a result of closing unprofitable operations and lower operating expenses, which
includes a reduction in non cash stock compensation expense of $715,000, partially offset
by the amortization of the unaccreted issuance costs of $587,498 relating to the Series A
Preferred Stock.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Six
Months Ended June 30, 2006 Compared With Six Months Ended June 30, 2005
| | ---------------------------------------------------------------------------

| | Revenues.  For the six months ended June 30, 2006, revenues of $2,018,090 decreased
                    49% as compared to revenues of $3,940,064 for the six months ended
June 30,                     2005. The following is a discussion of management fee
revenues from hospital                     contracts and professional fee revenues from
surgeries and ancillary procedures                     performed, which are our two
primary sources of revenue. Other revenue includes                     revenue derived
from the non-interventional weight loss program as well as from
                    billing and collections services performed for third party customers.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Management
fee revenue:
| | -----------------------

| | Hospital
Management Fee Revenues were $1,447,150 for the six months ended June 30, 2006 versus
$2,364,042 for the six months ended June 30, 2005, a decrease of $916,892 or 39% primarily
as a result of (i) a lower management fee at two hospital programs as a result of a
reduced program size, (ii) two hospital programs in New York filing for bankruptcy at
which we had bariatric surgery programs, and (iii) closing of two hospital programs that
were unprofitable.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
primary reason for the lower monthly management fee at the two hospital programs was due
to a reduced program size. The management fee revenue for these hospital programs
decreased for the six months ended June 30, 2006 by $359,000 compared to the six months
ended June 30, 2005.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

18

---

| | The
two bankruptcies in New York were Parkway Hospital, which filed in the first quarter of
2005, and St. Vincents Hospital, which filed in the third quarter of 2005. The two
bankrupt programs accounted for $426,000 decline in management fee revenues for the six
months ended June 30, 2006 compared to the six months ended June 30, 2005. We are no
longer providing management services to these two New York hospitals.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
two unprofitable programs that were closed during the second quarter accounted for
$131,000 decline in management fee revenues for the six months ended June 30, 2006
compared to the six months ended June 30, 2005.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Total
surgeries performed for the six months ended June 30, 2006 were 309 compared to 536
surgeries for the six months ended June 30, 2005, a decrease of 227 surgeries or 42%. Out
of the 227 surgery decline, 147 surgeries were performed at hospitals where we no longer
have programs. We terminated two hospital programs because the surgical volumes did not
cover the costs of operating these programs, accounting for a decline of 13 surgeries from
the prior period. In addition, the two bankrupt programs accounted for approximately 134
less surgeries being performed during the six months ended June 30, 2006. The remaining
decline can be attributable to more competition as well as health plans requiring
documented weight loss and/or behavioral health counseling before approving the surgery.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Professional
fee revenue:
| | -------------------------

| | Revenues
derived from professional fees were $565,463 for the six months ended June 30, 2006 versus
$1,554,455 for the six months ended June 30, 2005, a decrease of $988,992 or 64%. This
decrease in professional fees is attributable to the lower number of surgeries performed,
closing of some hospital programs due to size or the hospital filing for bankruptcy, as
well as utilizing contracted physicians to perform surgeries versus physicians employed by
MSO Physicians. The professional fees for surgeries performed by contracted physicians are
not consolidated with our financial results and are therefore not a revenue source for us.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Expenses.  Operating expenses were $2,517,192 for the six months ended June 30, 2006
                    versus $7,201,154 for the six months ended June 30, 2005, a decrease
of 65% or                     $4,683,962. The decrease in operating expenses is primarily
the result of lower                     payroll expenses, marketing, professional fees,
travel and entertainment, rent,                     utilities, malpractice insurance,
office expenses, lower bad debt expenses and                     reverse merger expenses.
Partially offsetting these decreases were increases in                     business
insurance, depreciation and other operating expenses. The decrease in
                    operating expenses is primarily a result of the closing of the
unprofitable                     clinics and shifting the business model away from
employing physicians by MSO                     Physicians and operating clinics to
contracting with physicians. In addition, we                     have reduced and
outsourced many functions at corporate as well as cut back on                     outside
consultants.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Payroll
expenses decreased by $2,932,232 or 73% for the six months ended June 30, 2006 compared to
the same period in the prior year as a result of closing unprofitable hospital programs
and reduced headcount at the corporate office. In addition, a variable stock compensation
arrangement (discussed in Note 16 of our annual financial statements) resulted in a
decrease in payroll expense of $1,279,000. Under this variable stock compensation
arrangement, the value of unvested common shares is remeasured each period (until the
repurchase right is exercised or expires) based on the quoted market price of the
Companys common stock. As a result, compensation accrued in each period for unvested
shares is adjusted in subsequent periods for changes, either increases or decreases, in
the quoted market value of the shares.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Marketing
expenses decreased by $394,694 or 63% for the six months ended June 30, 2006 compared to
the same period in the prior year as a result of closing unprofitable hospital programs.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Professional
fees declined $225,696 or 34% for the six months ended June 30, 2006 compared to the same
period in the prior year due to less consulting fees for business development and
financial advisor fees.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Rent
expense decreased by $230,727 or 66% for the six months ended June 30, 2006 compared to
the same period in the prior year as we have closed unprofitable facilities. In addition,
rent expense for the six months ended June 30, 2005 includes a charge of $125,000
representing the estimated remaining lease payments for the closed facilities.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

19

---

| | Office
expense decreased by $150,013 or 67% for the six months ended June 30, 2006 compared to
the same period in the prior year as we have closed unprofitable facilities.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Malpractice
insurance declined $97,514 or 61% for the six months ended June 30, 2006 compared to the
same period in the prior year due to shifting the business model away from employing
physicians by MSO Physicians to contracting with physicians.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Bad
debt expense decreased $183,978 for the six months ended June 30, 2006 compared to the
same period in the prior year due to write-offs from the hospital program bankruptcies.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Reverse Merger expenses decreased $438,444 for the six months ended June 30, 2006 compared
to the same period in the prior year. The prior year reverse merger expenses reflect
acquisition and legal cost associated with the reverse merger. The reverse merger expenses
consisted of a payment of $280,000 to the shareholders of National Superstars, a
finders fee commission of $33,000, and legal and transfer agent expenses of
$125,086. In addition, the Company issued 36,700 shares to the finders valued at $9,175
based upon the fair value of the stock at the time of issuance.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Partially
offsetting the decreases in operating expenses, depreciation expense increased $60,630 to
$147,350 for the six months ended June 30, 2006 as compared to $86,720 for the six months
ended June 30, 2005. Depreciation expense increased due to a change in the estimated
useful life of computer equipment and software from 60 months to 36 months.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Business
insurance increased $28,605 or 55% due to directors & officers insurance premiums as a
result of being a public company.
| | ---------------------------------------------------------------------------------------------------------------------------------

| | Other
operating expenses increased $57,081 for the six months ended June 30, 2006 due to
expenses relating to the aborted acquisition of Resources for Living, LP and the
associated financing that did not close.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Interest
Income.  Interest income of $6,489 for the six months ended June 30, 2006
decreased $41,449 over the same period a year ago due to lower amount of cash to invest.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Interest
Expense.  For the six months ended June 30, 2006, the interest expense of
$35,782 represents interest on the capital lease, accrued interest on the Convertible
Notes of $10,080, and amortization expense of $22,582 on the original issuance costs for
the Convertible Note. The interest expense for the six months ended June 30, 2005 includes
unused commitment fees and amortization of deferred financing fees of $17,890 relating to
the Line of Credit Facility that was terminated in December 2005.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Loss
on sale of securities.  The loss on sale of securities of $37,191 for the
six months ended June 30, 2005 represents realized losses from the sale of securities held
for investment purposes. There are no securities held for investment purposes during the
six months ended June 30, 2006.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Provision
for Income Taxes.  The effective tax rate for the six months ended June 30,
2006 and 2005 was 0% as our tax benefit was offset by a corresponding increase in the
valuation allowance for deferred income taxes. Due to the significant losses incurred
during 2005 and 2004 and our limited operating history, management determined that it was
more likely than not that our deferred tax assets would not be realized.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Net
Loss.  We had a net loss of $528,395 for the six months ended June 30, 2006
compared to a net loss of $3,273,376 for the same period in 2005, an improvement in the
net loss of $2,744,981. The improvement in the net loss is primarily the result of closing
unprofitable operations and lower operating expenses, which includes a reduction in non
cash stock compensation expense of $1,279,000.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Deemed
dividend to preferred shareholders.  The deemed dividend to preferred
shareholders represents the amortization of the issuance costs on the Preferred Stock
Financing. The deemed dividend increased $531,804 to $707,115 for the six months ended
June 30, 2006. The unaccreted issuance costs of $587,498 relating to Series A Preferred
shareholders who participated in the Convertible Note financing was amortized as a
deemed dividend (see Note 6).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

20

---

| | Net
Loss available to common shareholders.  We had a net loss available to
common shareholders of $1,235,510 for the six months ended June 30, 2006 compared to a net
loss of $3,448,687 for the same period in 2005, an improvement of $2,213,177, primarily as
a result of closing unprofitable operations and lower operating expenses, which includes a
reduction in non cash stock compensation expense of $1,279,000.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# LIQUIDITY AND CAPITAL
RESOURCES

| | On
June 30, 2006, we had $444,406 in cash and negative working capital of $925,726 compared
to $911,690 in cash and negative working capital of $729,627 as of December 31, 2005. The
decline in cash and working capital is principally due to the loss from operations. We
have suffered recurring losses from operations and have an accumulated deficit and working
capital deficiency at June 30, 2006 that raises substantial doubt about our ability to
continue as a going concern. As a result of these factors our independent registered
public accounting firm modified their opinion to contain a paragraph wherein they
expressed a substantial doubt about our ability to continue as a going concern.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
the six months ended June 30, 2006, we used $1,084,499 of cash from operations primarily
to fund the operating loss. Changes in assets and liabilities during the six months ended
June 30, 2006 used cash of $301,536, primarily from the reduction in accounts payable,
accrued liabilities and accrued wages and benefits due to payments for audit fees,
advertising expenses and employee termination costs. Partially offsetting the uses of cash
was a decrease in accounts receivable primarily as a result of quicker collections of
professional fee billings.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the six months ended June 30, 2005, we used $2,864,695 of cash from operations due to the
net loss of $3,273,376. Changes in assets and liabilities during the six months ended June
30, 2005 used cash of $473,320, primarily due to increases in accounts receivables due to
delays in getting provider numbers in order to invoice the payers and prepaid expenses due
to business insurance premium payments. Partially offsetting these above uses of cash is
an increase in accounts payable primarily as a result of unpaid invoices from legal fees
and insurance premiums and accrual for remaining lease obligations for closed facilities.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
the six months ended June 30, 2006, we used $3,849 of cash from investing activities for
the purchase of computer and office equipment.
| | -------------------------------------------------------------------------------------------------------------------------------------------

| | For
the six months ended June 30, 2005, the Company generated $2,999,400 of cash from
investing activities of which $3,120,198 (net of purchases) was from the sale of
securities held for sale. The securities are held in a Fidelity short-term municipal
mutual fund and can be liquidated immediately upon notice. Partially offsetting the
proceeds from the sale of securities, the Company used $120,798 for the purchase of
property and equipment. The purchase of property and equipment primarily reflect the
addition of computer equipment and medical equipment to expand the programs as well as
computer software purchased for billing and accounting.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
the six months ended June 30, 2006, we generated $621,064 from financing activities. The
convertible note financing generated 626,759 net of transaction costs. Partially
offsetting the convertible note financing, we used cash of $5,695 for payments on capital
leases.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
the six months ended June 30, 2005, the Company used cash of $96,250 from financing
activities to repurchase 384,226 shares of common stock.
| | ------------------------------------------------------------------------------------------------------------------------------------------------

| | Based
upon the current level of revenues and the cash position, we will need to cut expenses in
order to continue to operate. The company is reducing our expenses by approximately
$100,000 per month through reductions in headcount and going private, which will reduce
our legal, audit and insurance costs. These cost reductions which are being
implemented during the third quarter, are expected to result in positive cash flow based
on current revenues. There can be no assurance that the revenue will continue at the
current levels. These factors raise substantial doubt about our ability to continue as a
going concern.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
described in Note 7, in the event we satisfy certain business milestones on or before
December 31, 2006, the Securities Purchase Agreement contemplates a second closing, in
which we will issue to the Purchasers and the Purchasers will purchase Notes in the
aggregate principal amount of $1,524,039. There can be no assurance that the company will
achieve the business milestones in order to have access to the additional financing.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

21

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| | No
assurance can be given that we will be able to operate profitably on a consistent basis,
or at all, in the future. The 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 possible inability
of us to continue as a going concern.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# ITEM 3.  CONTROLS AND
PROCEDURES

| | (a)
We carried out an evaluation, under the supervision and with the participation
                    of our management, including our President (President)
and Chief                     Financial Officer (CFO), of the effectiveness
of our disclosure                     controls and procedures. Based upon that
evaluation, the President and CFO                     concluded that as of June 30, 2006
our disclosure controls and procedures were                     effective.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b)
There has been no change in our internal control over financial reporting that
                    occurred during the fiscal quarter ended June 30, 2006 that has
materially                     affected, or is reasonably likely to materially affect,
our internal control                     over financial reporting.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Limitations
on the Effectiveness of Internal Controls
| | -----------------------------------------------------

| | Our
management, including the President and CFO, do not expect that our disclosure controls
and procedures or our internal control over financial reporting will necessarily prevent
all fraud and material error. An internal control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the objectives of the
control system are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all of our control issues and instances of
fraud, if any, have been detected. These inherent limitations include the realities that
judgments in decision-making can be faulty, and that breakdowns can occur because of
simple error or mistake. Additionally, controls can be circumvented by the individual acts
of some persons, by collusion of two or more people, or by management override of the
internal control. The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future conditions.
Over time, control may become inadequate because of changes in conditions, and/or the
degree of compliance with the policies or procedures may deteriorate.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# PART II OTHER
INFORMATION

# ITEM 1.  LEGAL PROCEEDINGS

| | None.
| | -----

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

| | In
connection with the convertible note financing on May 9, 2006 (discussed in Note 7 to the
Consolidated Financial Statements), we issued notes in an aggregate principal
amount of $694,205 to certain purchasers pursuant to the Securities Purchase
Agreement. The unpaid balance of each note will accrue simple interest at a rate
of 10% per annum and shall mature on the earlier to occur of (i) the closing of a
Qualified Financing or (ii) January 1, 2008, unless the unpaid principal amount of
and all accrued interest on such purchasers notes are converted into shares
of our capital stock prior to such date. The notes are convertible into either (i)
Series A-1 Preferred in a Voluntary Conversion or (ii) Qualified Equity Securities
in either an Optional Conversion or a Mandatory Conversion.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Additionally,
in connection with the convertible note financing on May 9, 2006, we issued to the
purchasers warrants which allow the purchasers to purchase a number of shares of
our capital stock determined as follows: (i) in the event that a purchaser
converts its notes into Qualified Equity Securities in either an Optional
Conversion or a Mandatory Conversion, the warrants shall be exercisable for a number of
Qualified Equity Securities equal to the outstanding principal balance at the time
of either the Optional Conversion or the Mandatory Conversion, divided by the
price per share of the Qualified Equity Security in the Qualified Financing at an
exercise price equal to the price per share of such Qualified Equity Security; or
(ii) prior to a Qualified Financing or if the notes are not converted into Qualified
Equity Securities at the closing of a Qualified Financing, the warrants shall be
exercisable for a number of shares of Series A-1 Preferred equal to the
outstanding principal balance at the time of exercise under the notes held by such
purchaser, divided by $0.25, at an exercise price equal to $0.25.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

22

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| | The
offers and sales of these securities were deemed to be exempt from registration under the
Securities Act of 1933, as amended (the Securities Act), in
reliance on Section 4(2) of the Securities Act and/or Regulation D promulgated
thereunder as transactions not involving a public offering. The recipients of the
securities in each such transaction represented their intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to share
certificates issued in such transactions. All recipients had adequate access to
information about us.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# ITEM 3.  DEFAULTS UPON
SENIOR SECURITIES

| | None
| | ----

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

| | On
June 14, 2006, holders of a majority of our common stock and our Series A Preferred,
voting together as a single class, had executed a written consent in favor of the
actions described above. In addition, holders of our Series A Preferred, voting as a
separate class, had executed a written consent in favor of the actions described above.
Each of the foregoing actions was approved by 11,685,495 shares, or 61.89% of all shares
entitled to vote thereon and 10,436,763 shares of Series A Preferred, or 83.1% of Series A
Preferred entitled to vote thereon. This consent satisfies the stockholder approval
requirement for the proposed action.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Action
No. 1:A reverse stock split to be effected at any time prior to December 31,
2006, in a ratio of two hundred (200) shares to one (1) share of our common stock,
the timing of such Reverse Stock Split to be determined by our Board of Directors
in its discretion.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Action
No. 2:Designating a new series of preferred stock to be called the Series A-1
Convertible Preferred Stock with rights, preferences and privileges as set forth
in an amendment and restatement to our Amended and Restated Certificate of
Incorporation;
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Action
No. 3:The conversion of a certain portion of our existing Series A Convertible
Preferred Stock into newly created shares of Series A-1 Preferred as set forth in
the Amended Certificate;
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Action
No. 4:  Amending and  restating  the rights,  preferences  and  privileges  of our
 existing  Series A      Preferred as set forth in the Amended Certificate; and
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Action
No. 5:Amending and restating our existing Amended and Restated Certificate of
Incorporation to (i) increase the authorized number of shares of our common stock
from 40,000,000 shares to 120,000,000 shares; and (ii) increase the authorized
number of shares of our preferred stock from 15,000,000 shares to 95,000,000
shares of preferred stock with rights, preferences and privileges to be designated by our
Board from time to time.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# ITEM 5. OTHER INFORMATION

| | None
| | ----

# ITEM 6. EXHIBITS

|31.1 | Certification
of our Chief Executive Officer, pursuant to Securities Exchange Act rule 13a-14(a)
and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|31.2 | Certification
of our Chief Financial Officer, pursuant to Securities Exchange Act rule 13a-14(a) and
15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

23

---

|32.1 | Statement
of our Chief Executive Officer under Section 906 of the Sarbanes Oxley Act
                                of 2002. (18 U.S.C. Section 1350).
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------

|32.2 | Statement
of our Chief Financial Officer under Section 906 of the Sarbanes Oxley Act
                                of 2002. (18 U.S.C. Section 1350).
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------

24

---

# SIGNATURES

| | In
accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                      |                        
|--------------------- | -----------------------
|                      | MSO Holdings, Inc.     
|                      | (Registrant)           
|Date: August 14, 2006 | By: /s/ Steven Straus  
|                      | Steven Straus          
|                      | President              
|Date: August 14, 2006 | By: /s/ Thomas M. Mason
|                      | Thomas M. Mason        
|                      | Chief Financial Officer