UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, 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, 2005

# 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      | (IRS Employer         
|of incorporation or organization) | Identification Number)

2333 Waukegan Road,
Suite 175, Bannockburn, IL 60015 (Address of
Principal Executive Offices, including Zip Code)

(847) 267-0801
(Registrant's telephone number, including area
code)

National Superstars(Registrant's former name)

Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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:
___

The
number of shares outstanding of the Registrants common stock, par value $.001, as of
August 1, 2005 the latest practicable date, was 6,552,615 shares.

Transitional
Small Business Disclosure Format:    Yes:____ No: X

---

# MSO HOLDINGS, INC.

# TABLE OF CONTENTS

|           |                                                                                       |     
|---------- | ------------------------------------------------------------------------------------- | ----
|ITEM       |                                                                                       | PAGE
|PART I     | FINANCIAL INFORMATION                                                                 |     
|Item 1     | Financial Statements:                                                                
|           | Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004                 | 2   
|           | Consolidated Statements of Operations for the three months and six months ended      
|           | June 30, 2005 and 2004                                                                | 3   
|           | Consolidated Statements of Cash Flows for the six months ended June 30, 2005 and 2004 | 4   
|           | Consolidated Statement of Stockholders' Equity for the six months ended June 30, 2005 | 5   
|           | Consolidated Statement of Comprehensive Income (Loss) for the three months and six   
|           | months ended June 30, 2005 and 2004                                                   | 6   
|           | Notes to Consolidated Financial Statements                                            | 7   
|Item 2     | Management's Discussion and Analysis or Plan of Operations                            | 11  
|Item 3     | Controls and Procedures                                                               | 19  
|PART II    | OTHER INFORMATION                                                                    
|Item 1     | Legal Proceedings                                                                     | 20  
|Item 2     | Unregistered Sale of Equity Securities and Use of Proceeds                            | 20  
|Item 3     | Defaults upon Senior Securities                                                       | 21  
|Item 4     | Submission of Matters to a Vote of Security Holders                                   | 21  
|Item 5     | Other Information                                                                     | 21  
|Item 6     | Exhibits                                                                              | 21  
|Signatures |                                                                                       | 22  

# EXPLANATORY NOTE

Effective May 26, 2005,
the Company completed a reincorporation into the State of Delaware and a reverse merger
with National Superstars. The information and disclosures relating to the number of
shares and the related price per share have been adjusted to reflect the impact of the
reincorporation and the recapitalization throughout this Form 10-QSB.

---

# MSO HOLDINGS, INC. CONSOLIDATED BALANCE
SHEETS



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

2

---

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



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

3

---

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



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

4

---

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



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

5

---

# MSO HOLDINGS, INC. CONSOLIDATED STATEMENT
OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)



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

6

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# MSO HOLDINGS, INC. AND
SUBSIDIARIES NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

# 1.   BASIS OF PRESENTATION

| | 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, 2004 and
2003, that is also included in the Form 8-K/A filed August 4, 2005.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 the six months ended June 30, 2005
are not necessarily indicative of the results that may be expected for the full year
ending December 31, 2005.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 2.   VARIABLE INTEREST
ENTITY

| | As
required under Financial Interpretation No. 46, Consolidation of Variable Interest
Entities, the Company has evaluated its relationship with MSO Physicians, P.C., an
entity that provides professional medical services at the hospitals for which MSO
Medical, Inc. provides management services. MSO Physicians only provides services
at hospitals for which MSO Medical, Inc. provided management services and the operations
of MSO Physicians, P.C. have been fully funded by advances from MSO Medical, Inc. As a
result, MSO Medical Inc. is the primary beneficiary of MSO Physicians., P.C., a variable
interest entity. The accounts of MSO Physicians P.C. are included in the
consolidated financial statements of MSO Medical, Inc. as of June 30, 2005 and December
31, 2004 and for the three and six months ended June 30, 2005 and 2004.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 3.   RECAPITALIZATION AND
MERGER

| | Immediately
prior to the recapitalization and merger transaction, each outstanding share of National
Superstars, Inc. common stock was exchanged for .005 shares of MSO Holdings, Inc. common
stock (with each fractional share rounded up to the nearest 100 shares on a per
certificate basis) and National Superstars, Inc. changed its name to MSO Holdings, Inc.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
May 26, 2005, MSO Holdings, Inc. (formerly known as National Superstars, Inc), a Delaware
corporation and publicly traded company with nominal operating activity acquired MSO
Medical, Inc. by issuing 6,146,617 shares of common stock of MSO Holdings, Inc. for all
of the outstanding common stock of MSO Medical, Inc and 12,562,260 shares of redeemable
convertible preferred stock of MSO Holdings, Inc. in exchange for all the outstanding
redeemable convertible preferred stock of MSO Medical, Inc. Prior to this transaction,
MSO Holdings, Inc. had no significant operations.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

7

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| | For
financial reporting purposes, this transaction has been reflected in the accompanying
financial statements as a recapitalization of MSO Medical, Inc. and the financial
statements reflect the historical financial information of MSO Medical, Inc. Therefore,
for accounting purposes, the shares recorded as issued in the reverse merger are the
368,298 shares owned by the MSO Holdings, Inc. shareholders prior to the reverse merger.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 4.   REVERSE MERGER
EXCHANGE RATIO

| | In
connection with the reverse merger discussed in Note 3, the shareholders of MSO Medical,
Inc received 1.53690425 shares of MSO Holdings, Inc. common stock for each share of MSO
Medical, Inc. common stock. In addition, each preferred shareholder received 1.53690425
shares of MSO Holdings, Inc. redeemable preferred stock in exchange for each share of MSO
Medical, Inc. redeemable convertible preferred stock. As a result, the stockholders of
the Company effectively received 1.53690425 shares of common or preferred stock , as the
case may be, of the post-merger Company for each share of common or preferred stock held
in the pre-merger Company. All share amounts included in the financial statements have
been retroactively restated to reflect the impact of this exchange ratio.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 5.   STOCK COMPENSATION

| | The
Company maintains a stock incentive plan. The Company accounts for all options granted to
employees under the recognition and measurement principles of Accounting Board Opinion
No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As a result, no compensation expense is recognized for stock option
grants for which the exercise price is equal to or above the market value of the
underlying common stock on the date of grant. The following table illustrates the effect
on net loss if the Company had applied the fair value recognition provisions of Financial
Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No.
123, Accounting for stock-based Compensation, to stock-based compensation.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | The
amount of the pro forma charge has been determined using the Black-Scholes option pricing
model, as permitted by FAS 123. For purposes of the calculation for fiscal 2005,
management used a fair value of the common stock of $0.25 per share, 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 5 years for the grants. For
the three and six months ended June 30, 2004, there were no options issued or
outstanding.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8

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# 6.   INVESTMENTS

| | The
cost, unrealized losses and fair values of the Companys investment securities
available for sale at June 30, 2005 and December 31, 2004 are summarized as follows:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



# 7.   LINE OF CREDIT
AGREEMENT

| | In
January 2004, the Company entered into a secured revolving credit agreement that permits
a maximum borrowing capacity of $1.0 million. Amounts available under this credit
agreement depend on the amount of the Companys eligible receivables. The credit
agreement requires the Company to pay a commitment fee of 0.5% per annum on the average
daily unused portion of the revolving loan. Borrowings under this agreement are secured
by substantially all of the Companys assets. Among other restrictions, the credit
agreement includes certain restrictive covenants, including covenants related to
indebtedness, related party transactions and investment limitations and requires the
Company to comply with a number of affirmative covenants, including covenants related to
its net worth and liquidity. The Company was not in compliance with the financial
covenants at June 30, 2005. Had the Company been in compliance with the covenants, the
amount available under the line of credit was $1.0 million at June 30, 2005. As of July
27, 2005, the Company has not obtained a waiver for the defaults and continues to be in
default of the required financial covenants. The credit agreement has a three- year term
and borrowings bear interest at prime plus 2.0%, subject to a minimum interest rate of
7.5%. The Company had no borrowings under this credit facility as of June 30, 2005 and
December 31, 2004.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 8.   RELATED PARTY
TRANSACTIONS

| | MSO
Physicians, P.C. has employment agreements with the founding physicians who are also
shareholders of the company. The agreements outline the roles and responsibilities of the
physicians, their compensation plan and contain confidentiality and non-compete clauses.
The compensation expense for the founding physicians was approximately $416,000 and
$803,000 for the three months and six months ended June 30, 2005 and approximately
$450,000 and $814,000 for the three months and six months ended June 30, 2004,
respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Eugene
Terry, a member of the Board of Directors, provides business development consulting to
the Company. The Company incurred approximately $20,000 and $0 of expense for the six
months ended June 30, 2005 and 2004, respectively, for these consulting services.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9

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# 9.   RESTRUCTURING CHARGES

| | During
the first quarter of 2005, as a result of the closing of certain programs and
consolidation of certain functions, the Company reduced headcount and other operating
expenses. Accordingly, $158,126 was charged to operations in 2005, consisting of $33,126
for severance costs for reductions in staff and $125,000 relating to early lease
termination cost.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the three month period ending June 30, 2005, restructuring payments of $33,126 were made
for employee separations and $31,216 for lease payments. The restructuring reserve
balance was $93,784 as of June 30, 2005.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following table provides a roll-forward of the liabilities incurred in connection with
the business restructuring.
| | ----------------------------------------------------------------------------------------------------------------------



# 10.   REPURCHASE OF COMMON
STOCK

| | In
April 2005, in connection with a settlement of a dispute with a shareholder, the Company
repurchased 1,536,904 shares of its Common Stock for $385,000. These shares have been
retired and are no longer outstanding.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 11.   ACQUISTION OF
REIMBURSEMENT SPECIALISTS

| | Effective,
October 1, 2004, the Company acquired all of the outstanding common units of an
affiliated entity, Reimbursement Specialists, LLC, a Delaware limited liability Company (Reimbursement
Specialists or RS) from the members of Reimbursement Specialists, LLC.
The Chairman & CEO of MSO Medical, Inc. was the Manager of Reimbursement Specialists,
LLC. and had day to day operating responsibility for this entity. In addition, all of the
outstanding stock of Reimbursement Specialists, Inc., the majority shareholder of
Reimbursement Specialists, LLC is held by a trust, of which the Chairman and CEO of MSO
Medical, Inc. is a co-trustee, for the benefit of certain members of his immediate
family.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Reimbursement
Specialists is a healthcare financial services company that provides billing
reimbursement and collection services to entities in the healthcare industry.
Reimbursement Specialists provided these billing and collection services to MSO Medical,
Inc. prior to the acquisition.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
consideration for the acquisition was to consist of a number of shares of the Companys
Series A preferred stock to be determined based on certain performance criteria of the
Company, including a minimum defined earnings target for the twelve months ending June
30, 2005. The maximum purchase price was set at $1,200,000 which was expected to equal
approximately 1,308,004 shares of Series A preferred stock. However, in the event that
the Company does not achieve certain minimum defined earnings targets, no consideration
will be paid to the sellers. Based on the Companys performance, there will be no
shares of Series A preferred stock issued for the acquisition of Reimbursement
Specialists, LLC>
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10

---

| | At
the date of the acquisition, RS had approximately $538,000 of notes payable and accrued
interest due to members as well as $134,000 of advances due to a member. In connection
with the acquisition, the members surrendered these notes payable, the related accrued
interest and advances due from RS in effect canceling this debt in exchange for the right
to receive up to 545,002 of the 1,308,004 shares of Series A preferred stock of MSO
Medical, Inc that could be issued as consideration for the acquisition.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
assets acquired and liabilities assumed in the acquisition are summarized below:
| | ------------------------------------------------------------------------------------



| | During
the fourth quarter of 2004, as the Company was performing below expectations, the Company
determined the goodwill related to this acquisition was impaired resulting in an
impairment charge of approximately $73,000 being included in the statement of operations
for the year ended December 31, 2004.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
acquisition was accounted for by the purchase method and, accordingly, the results of the
Reimbursement Specialists, LLC operations have been included in the consolidated
statement of operations since October 1, 2004. Unaudited pro forma results of operations
for the three and six months ended June 30, 2004 for the Company and Reimbursement
Specialists, LLC, assuming the acquisition took place on January 1, 2004, are listed
below:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

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

Overview

| | MSO
Holdings, Inc. (MSO or the Company) is 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. The Company was formed in July 2002 and began operations in January
2003.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11

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| | Surgical
treatment for obesity is offered through acute care hospitals where we have established a
dedicated bariatric surgery center (each, a CORI Center). We enter into
management services agreements with acute care hospitals to establish CORI Centers under
our proprietary name Center for Obesity Related Illness (CORI). There
are currently five such CORI Centers in operation. We also enter into management services
agreements with highly skilled and experienced surgeons trained to perform the
Sapala-Wood Micropouch® surgery as well as laparoscopic gastric bypass surgery and
the Lap-Band procedure. These surgeons perform the surgeries at each CORI Center.
Compensation from the hospital clients comes in the form of management fees which are
based on the fair market value of the services we provide to the applicable hospital. The
surgeons currently performing obesity related surgery at our CORI Centers have
collectively performed over 7,000 gastric bypass surgeries in the last twenty years.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
the third quarter of 2005, the Company began to provide non-interventional weight loss
programs for obesity. The weight loss programs includes individualized telephone and
online coaching sessions, self-directed online weight loss support, web-based educational
resources, online self-directed components, a personalized journal, and interactive
goal-setting software. Many U.S. health plans require a certain number of months of
non-interventional weight loss treatment before such health plan will cover an elective
gastric bypass surgery. Therefore, the weight loss program we offer complements the
surgical treatment for obesity which we offer.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
required under Financial Interpretation No. 46, Consolidation of Variable Interest
Entities, the Company has evaluated its relationship with MSO Physicians, P.C., an
entity that provides professional medical services at the hospitals for which MSO
Medical, Inc. provides management services. MSO Physicians only provides services
at hospitals for which MSO Medical, Inc. provided management services and the operations
of MSO Physicians, P.C. have been fully funded by advances from MSO Medical, Inc. As a
result, MSO Medical Inc. is the primary beneficiary of MSO Physicians., P.C., a variable
interest entity. The accounts of MSO Physicians P.C. are included in the
consolidated financial statements of MSO Medical, Inc. as of and for the years ended
December 31, 2004 and 2003. MSO Physicians P.C. receives payments from third party
insurers for the performance of bariatric surgery and professional medical services.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Three
Months Ended June 30, 2005 Compared With Three Months Ended June 30, 2004
| | -------------------------------------------------------------------------------

| | Revenues.  For
the three months ended June 30, 2005, revenues of $1,995,255 decreased
                    17% as compared to revenues of $2,400,603 for the three months ended
June 30,                     2004. Following is a discussion of management fee revenues
from hospital                     contracts and professional fee revenues from surgeries
performed, which are the                     two primary sources of revenue for MSO.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Revenues
from hospital contracts were $1,251,792 for the three months ended June 30, 2005 versus
$1,588,895 for the three months ended June 30, 2004, a decrease of $337,103 or 21%. The
decrease is a result of the renegotiation of one large hospital management contract,
effective July 2004, at a lower management fee than the previous contract. The management
fee revenue from this hospital was $780,000 for the three months ended June 30, 2005
compared to $1,382,000 for the year ago period, a decrease of $602,000. The primary
reason for the reduction in the monthly management fee at this hospital was lower actual
patient volume than expected when the contract was originally entered into in 2004. The
decrease in patient volume is a result of a major health insurance company requiring
three to twelve months of documented weight loss and/or behavioral health counseling
before approving the procedure.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12

---

| | Total
surgeries performed for the three months ended June 30, 2005 were 259 compared to 314
surgeries for the three months ended June 30, 2004, a decrease of 55 surgeries or 18%.
During the first quarter of 2005, MSO terminated three small hospital programs because
the surgical volumes did not cover the fixed costs of operating these programs. The
management fee revenue from these three terminated programs for the three months ended
June 30, 2004 was $159,000 compared to no revenue in the current year.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Four
new hospital contracts in the second quarter of 2005 partially offset the decreased
revenue from the terminated programs and the reduced management fee from the one contract
discussed above. These new contracts resulted in an increase in revenue of $427,000 for
the three months ended June 30, 2005. These new programs are in the New York market,
which should become the Companys largest market over the next six to nine months.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Revenues
derived from professional fees were $729,955 for the three months ended June 30, 2005
versus $811,588 for the three months ended June 30, 2004, a decrease of 10%. This
decrease in professional fees is attributable to the closing of the three small programs
during the first quarter of 2005. Overall professional fee revenues are expected to be
higher than prior year for the second half of 2005 and for the entire year as the new
programs added during the first half continue to expand and grow.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

13

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| | Expenses.    Operating
expenses were $3,014,272 for the three months ended June 30, 2005
                    versus $2,703,402 for the three months ended June 30, 2004, an
increase of 11%                     or $310,870. The increase in operating expenses is
primarily the result of                     merger costs. The merger costs of $412,958
for the three months ended June 30,                     2005 reflect costs associated
with the reverse merger (see Note 3 of the                     condensed consolidated
financial statements). The merger costs 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 increase in merger costs are declines in payroll, marketing and office
expenses. Payroll costs declined as a result of the closing of the three hospital
programs during the first quarter of 2005.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | While
net marketing expenses as reported showed a decline over prior year of $168,201, there
was approximately $194,000 of marketing expenditures that was expended on the MSO
programs by the hospitals for the three months ended June 30, 2005 to provide marketing
support. No marketing was expended by the hospitals during the three months ended June
30, 2004. Beginning in 2005, some hospital program agreements include the requirement of
the hospital for marketing expenditures to support the bariatric surgery programs.
Including the marketing expenditures of the hospital, total marketing expenses for the
three months ended June 30, 2005 for MSO programs were $421,959 compared to $396,437 in
the year ago period.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Professional
fees increased $185,476 to $330,259 for the three months ended June 30, 2005 as a result
of approximately $91,000 of additional spending for business development activities,
$81,000 for a long term consulting project documenting MSO clinical results, and $14,000
for additional IT consulting due to outsourcing this function.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Depreciation
expense increased $15,996 to $43,095 for the three months ended June 30, 2005 as compared
to $27,099 for the three months ended June 30, 2004. The increase in depreciation expense
relates to the purchase of additional computer and medical equipment for the new
programs.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Interest
Income. Interest income of $19,275 for the three months ended June 30,
2005 increased $17,968 over the same period a year ago due to the interest from
securities held for investments.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Interest
Expense. For the three months ended June 30, 2004, the interest expense of
$11,814 represents amortization of the deferred financing fees and the unused commitment
fee on the line of credit facility. The interest expense for the three months ended June
30, 2004 included interest on the borrowings under the line of credit as well as the
amortization of the deferred financing fees and unused commitment fee.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Loss
on sale of securities. The loss on sale of securities represents realized
losses from the sale of securities held for investment purposes.
| | -----------------------------------------------------------------------------------------------------------------------------------------------

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

| | Net
Loss.The company had a net loss of $1,037,069 for the three months ended
June 30, 2005 compared to a net loss of $325,013 for the same period in 2004, a decrease
of $712,056 The majority of the decline is due to the merger costs of $412,958 for the
reverse merger transaction as well as the impact of lower revenue of $602,000 associated
with the renegotiation of one of the hospital management fee contracts. These two items
impacted the net loss by $1.0 million during the three months ended June 30, 2005.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

14

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| | Deemed dividends to preferred stockholders. The deemed dividends, relating to accretion of preferred stock issuance costs,
increased $86,178 to $87,925 for the three months ended June 30, 2005 as the
majority of the issuance costs from the preferred stock financing was related to the
closing in third quarter of 2004. The issuance costs are being accreted from the
issuance date through March 2008 which is the earliest redemption date.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Net
Loss available to common shareholders.The company had a net loss
available to common shareholders of $1,124,994 for the three months ended June 30, 2005
compared to a net loss of $326,760 for the same period in 2004, a decrease of $798,234.
The decline is due to merger costs of $412,958 for the reverse merger transaction, the
impact of lower revenue of $602,000 associated with the renegotiation of one of the
hospital management fee contracts and the increased amortization costs of $86,178 for the
issuance costs on the redeemable convertible preferred stock. These items impacted the
net loss by $1.1 million during the three months ended June 30, 2005.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Six
Months Ended June 30, 2005 Compared With Six Months Ended June 30, 2004
| | ---------------------------------------------------------------------------

| | Revenues.  For
the six months ended June 30, 2005, revenues of $3,940,064 declined 3%
                    as compared to revenues of $4,044,734 for the six months ended June
30, 2004.                     Following is a discussion of management fee revenues from
hospital contracts and                     professional fee revenues from surgeries
performed, which are the two primary                     sources of revenue for MSO.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Revenues
from hospital contracts were $2,364,042 in 2005 versus $2,597,985 in 2004, a decrease of
$233,943 or 9%. The decrease is a result of the renegotiation of one large hospital
management contract, effective July 2004, at a lower management fee than the previous
contract. The primary reason for the reduction in the monthly management fee at this
hospital was lower patient volume than expected when the contract was originally entered
into in 2004. The decrease in patient volume is a result of a major health insurance
company requiring three to twelve months of documented weight loss and/or behavioral
health counseling before approving the procedure. The management fee revenue from this
hospital was $1,560,000 for the six months ended June 30, 2005 compared to $2,237,000 for
the year ago period, a decrease of $677,000.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Total
surgeries performed for the six months ended June 30, 2005 were 536 compared to 567
surgeries for the six months ended June 30, 2004, a decrease of 31 surgeries or 5%.
During the first quarter of 2005, MSO terminated three small hospital programs because
the surgical volumes did not cover the fixed costs of operating these programs as
discussed earlier. The management fee revenue from these three programs was $15,000 and
$310,000 for the six months ended June 30, 2005 and 2004, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

15

---

| | Four
new hospital contracts for the six months ended June 30, 2004 partially offset the
decreased revenue from the terminated programs and the reduced management fee from the
one contract discussed above. These new contracts resulted in an increase in revenue of
$738,000 for the six months ended June 30, 2005 as compared to 2004.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Revenues
derived from professional fees were $1,554,455 in 2005 versus $1,446,749 in 2004, an
increase of 7%. The professional fee revenue includes revenue from office visits,
consultations and other procedures performed in addition to bariatric surgeries. The
other procedures and consultations helped drive the growth in professional fee revenues.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Expenses.   Operating
expenses for the six months ended June 30, 2005 were $6,438,124 in
                    2005 versus $5,381,326 in 2004, an increase of 20% or $1,056,798. The
increase                     in operating expenses is primarily the result of merger
costs, professional fees                     and restructuring costs.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
merger costs of $447,261 for the six months ended June 30, 2005 reflect costs associated
with the reverse merger (see Note 3 to the condensed consolidated financial statements).
The merger costs consisted of a payment of $280,000 to the shareholders of National
Superstars, a finders fee commission of $33,000, legal and transfer agent expenses
of $125,087. 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the first quarter of 2005, as a result of the closing of certain programs and
consolidation of certain functions, the Company reduced headcount and other operating
expenses. Accordingly, $158,126 was charged to operations in 2005, consisting of $33,126
for severance costs, which is included in payroll expenses, and $125,000 for earlier
lease termination costs, which is included in rent expense.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Professional
fees increased $363,424 to $658,631 for the six months ended June 30, 2005 primarily as a
result of additional spending for business development activities of approximately
$191,000, consulting project documenting MSO clinical results of $158,000, and an
increase in IT consulting of $59,000 due to outsourcing the IT function.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | While
net marketing expenses as reported showed a decline over prior year of $192,191, there
was approximately $231,000 of marketing expenditures that was expended on the MSO
programs by the hospitals for the six months ended June 30, 2005 to provide marketing
support. No marketing was expended by the hospitals during the three months ended June
30, 2004. Beginning in 2005, some hospital program agreements include the requirement of
the hospital for marketing expenditures to support the bariatric surgery programs.
Including the marketing expenditures of the hospital, total marketing expenses for the
six months ended June 30, 2005 for MSO programs were $856,000 compared to $817,000 in the
year ago period.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Bad
Debt expense decreased $77,630 to $222,370 for the six months ended June 30, 2005
compared to $300,000 for the six months ended June 30, 2004. The decrease is a result of
the new billing system implemented in 2004, which has resulted in better tracking and
follow up of unpaid invoices.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Depreciation
expense increased $42,646 to $86,720 for the six months ended June 30, 2005 as compared
to $44,074 for the six months ended June 30, 2004. The increase in depreciation expense
relates to the purchase of additional computer and medical equipment for the new
programs.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| | Interest
Income. Interest income of $47,938 for the six months ended June 30, 2005
increased $46,509 over the same period a year ago due to the interest from securities
held for investments.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Interest
Expense. For the six months ended June 30, 2004, the interest expense of
$23,033 represents amortization of the deferred financing fees and the unused commitment
fee on the line of credit facility. The interest expense for the six months ended June
30, 2004 included interest on the borrowings under the line of credit as well as the
amortization of the deferred financing fees and unused commitment fee.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Loss
on sale of securities. The loss on sale of securities represents realized
losses from the sale of securities held for investment purposes.
| | -----------------------------------------------------------------------------------------------------------------------------------------------

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

| | Net
Loss.The company had a net loss of $2,510,346 for the six months ended
June 30, 2005 compared to a net loss of $1,384,014 for the same period in 2004, a
decrease of $1,126,332. The majority of the decline is due to the merger costs of
$447,261 for the reverse merger transaction as well as the impact of lower revenue of
$677,000 associated with the renegotiation of one of the hospital management fee
contracts. These two items impacted the net loss by $1.1 million during the six months
ended June 30, 2005.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Amortization
of redeemable convertible preferred stock issuance cost. The amortization
expense increased $173,564 to $175,311 for the six months ended June 30, 2005 as the
majority of the issuance costs from the preferred stock financing was related to the
closing in the third quarter of 2004. The issuance costs are being amortized from the
issuance date through March 2008 which is the earliest redemption date.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Net
Loss available to common shareholders.The company had a net loss
available to common shareholders of $2,685,657 for the six months ended June 30, 2005
compared to a net loss of $1,385,761 for the same period in 2004, a decrease of
$1,299,896. The decline is due to merger costs of $447,261 for the reverse merger
transaction, the impact of lower revenue of $677,000 associated with the renegotiation of
one of the hospital management fee contracts and the increased amortization costs of
$173,564 for the issuance costs on the redeemable convertible preferred stock. These
items impacted the net loss by $1.3 million during the six months ended June 30, 2005.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# LIQUIDITY AND CAPITAL
RESOURCES

On June 30, 2005, the Company had
$2.5 million in cash and short term investments that can be converted to cash and positive
working capital of $2.0 million compared to $5.6 million in cash and investments and $4.9
million in working capital as of December 31, 2004.

The Company used $2.6 million of cash
from operations for the six months ended June 30, 2005 primarily to fund the operating
loss. Changes in assets and liabilities during the year ended June 30, 2005 used $473,000
of cash 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.

17

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During the six months ended June 30,
2004, the Company used $862,000 of cash from operations due to the operating loss. Changes
in assets and liabilities during the year ended June 30, 2004 generated $206,000 of cash
primarily due to collections of accounts receivables (as a result of the implementation of
the new billing system) and higher accrued wages and benefits due to timing of payroll
period cutoff. Partially offsetting these items were payments made for accounts payable
and accrued expenses out of the proceeds from the redeemable preferred stock.

For the six months ended June 30,
2005, the Company generated $3.0 million of cash from investing activities of which $3.1
million (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 $121,000 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,
2004, the Company used cash of $267,000 from investing activities from the purchase
furniture, computer and medical equipment, leasehold improvements and software to track
patients.

For the six months ended June 30,
2005, the Company used cash of $385,000 to repurchase 1,536,904 shares of common stock
(see Note 10 of the Notes to Consolidated Financial Statements).

For the six months ended June 30,
2004, the Company generated cash of $2.3 million from the sale of Series A Convertible
Preferred Stock offering to new shareholders. The Company received net proceeds of $2.2
million from the Series A Convertible Preferred Stock offering. Partially offsetting the
proceeds from the financing, the Company paid a distribution of $157,000 to the
shareholders. In addition, the Company had net borrowings under the Line of Credit of
$282,000 less $99,046 for financing fees associated with the line of credit.

As a result of cost reductions
implemented in the second and third quarter of 2005, the Company believes it has adequate
liquidity to meet current and planned liquidity needs to fund operations for at least the
next 12  18 months. In August 2005, the Company implemented cost reductions
including salary and headcounts reductions, expected to result in a reduction of expenses
of approximately $100,000 per month.

There are a number of new hospital
programs in the contract negotiation stage, which once completed will increase revenue.
Adding one or two of these new programs, depending on the size, will add enough revenue to
obtain positive cash flow.

If we are successful in penetrating
other hospitals, we may need additional capital to fund that growth. We anticipate this
additional capital will come from both operations as well as debt financing such as our
line of credit. Currently, we have a $1 million line of credit agreement which expires in
January 2007. This line of credit bears interest at prime plus 2% subject to a minimum
interest of 7.5%. This line of credit includes certain restrictive covenants, including
covenants relating to the Companys net worth and liquidity. Currently, the Company
is in default of the required financial covenants. The Company is actively working with
the lender to obtain a waiver of these defaults and reinstate the credit line
availability.

18

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In addition, we are also considering
the possibility of raising additional funds through the sale of additional equity
securities. We currently have no commitments for any such sale of equity securities.

In the event we are unable to obtain
adequate financing through reinstating our line of credit, complete the sale of equity
securities, or if the companys revenue does not grow as anticipated, we may not have
adequate capital to implement our growth strategies and we would implement additional cost
reductions in order to achieve positive cash flow.

# DISCLOSURE REGARDING
FORWARD-LOOKING STATEMENTS

This report contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. These statements appear in a number of places in this report and include all
statements that are not historical facts. Some of the forward-looking statements relate to
the intent, belief or expectations of the Company and its management regarding the
Companys strategies and plans for operations and growth. Other forward-looking
statements relate to trends affecting the Companys financial condition and results
of operations, and the Companys anticipated capital needs and expenditures.

Investors are cautioned that such
forward-looking statements are not guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially from those that are
anticipated in the forward-looking statements as a result of the impact of competition and
competitive pricing, business conditions and growth in the industry, general and economic
conditions and other risks. Investors should review the more detailed description of these
and other possible risks contained in the Companys filings with the Securities and
Exchange Commission, including the Companys Form 8-K filed June 2, 2005.

# ITEM 3.  CONTROLS AND
PROCEDURES

(a)              The
Company carried out an evaluation, under the supervision and with the
          participation of the Companys management, including the Companys
          Chief Executive Officer (CEO) and Chief Financial Officer
          (CFO), of the effectiveness of the Companys disclosure
          controls and procedures. Based upon that evaluation, the CEO and CFO concluded
          that as of June 30, 2005 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, 2005 that has materially
          affected, or is reasonably likely to materially affect, the Companys
          internal control over financial reporting.

# LIMITATIONS ON THE
EFFECTIVENESS OF INTERNAL CONTROLS

The Companys management,
including the CEO and CFO, does 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 control issues and instances of fraud, if
any, within the Company 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.

19

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# PART II   OTHER INFORMATION

# ITEM 1.  LEGAL PROCEEDINGS

| | Not applicable
| | --------------

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

During the quarter ended June 30,
2005, in connection with the consummation of the MSO Merger Transaction, the Company
issued an aggregate of 6,146,617 shares of its common stock and 12,562,260 shares of its
Series A Preferred Stock in exchange for all of the outstanding capital stock of MSO
Medical, Inc., a Delaware corporation.

The offers, sales and issuances 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 by the issuer
not involving a public offering. The recipients of the securities 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 the
share certificates or notes in such transactions. All recipients had adequate access to
information about us.

# ITEM 3.   DEFAULTS UPON
SENIOR SECURITIES

| | Not
applicable
| | --------------

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

| | Not
applicable
| | --------------

# ITEM 5.   OTHER INFORMATION

| | Not
applicable
| | --------------

# ITEM 6.   EXHIBITS

20

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# Exhibits

31.1
    Certification by Albert Henry pursuant to Rule 13a-14(a) and 15d-14(a), as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2
    Certification by Thomas M. Mason pursuant to Rule 13a-14(a) and 15d-14(a), as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1
    Certification by Albert Henry pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley   Act of 2002.

32.2
    Certification by Thomas Mason pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.

21

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# SIGNATURES

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

|                       |                                                                                                 
|---------------------- | ------------------------------------------------------------------------------------------------
|                       | MSO Holdings, Inc.                                                                              
|                       | (Registrant)                                                                                    
|Date:   August 5, 2005 | By: /s/ Albert Henry    
         Albert Henry    
         Chairman and Chief Executive Officer
|                       | By: /s/ Tom Mason    
         Tom Mason    
         Chief Financial Officer                   

22