---

# 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 March 31, 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

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
May 5, 2006 the latest practicable date, was 6,316,698 shares.

Transitional
Small Business Disclosure Format:  Yes:    No:  X

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# MSO HOLDINGS,
INC.TABLE OF CONTENTS

|ITEM       |                                                                                          | PAGE
|---------- | ---------------------------------------------------------------------------------------- | ----
|PART I     | FINANCIAL INFORMATION                                                                    |     
|Item 1.    | Financial Statements:                                                                   
|           | Consolidated Balance Sheets as of March 31, 2006 and December 31, 2005                   | 2   
|           | Consolidated Statements of Operations for the three months ended March 31, 2006 and 2005 | 3   
|           | Consolidated Statements of Cash Flows for the three months ended March 31, 2006 and 2005 | 4   
|           | Consolidated Statement of Stockholders Equity for the three months ended March 31, 2006 | 5   
|           | Consolidated Statement of Comprehensive Income (Loss) for the three months ended        
|           | March 31, 2006 and 2005                                                                  | 6   
|           | Notes to Unaudited Consolidated Financial Statements                                     | 7   
|Item 2.    | Managements Discussion and Analysis or Plan of Operations                               | 15  
|Item 3.    | Controls and Procedures                                                                  | 19  
|PART II    | OTHER INFORMATION                                                                       
|Item 1.    | Legal Proceedings                                                                        | 19  
|Item 2.    | Unregistered Sale of Equity Securities and Use of Proceeds                               | 19  
|Item 3.    | Defaults upon Senior Securities                                                          | 19  
|Item 4.    | Submission of Matters to a Vote of Security Holders                                      | 20  
|Item 5.    | Other Information                                                                        | 20  
|Item 6.    | Exhibits                                                                                 | 20  
|Signatures

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# MSO HOLDINGS,
INC.CONSOLIDATED BALANCE SHEETS



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

2

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



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 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
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 ended March 31, 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 second quarter of
2006 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 alternatives to
address this situation, including raising additional funding through the issuance of debt
or equity securities.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | It
is anticipated that the cash received in the first tranche will allow us to operate for
approximately four additional months. 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 may 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. | RESTATEMENT
|-- | -----------

| | While
preparing the fiscal 2006 first quarter financial statements, the Company performed a
detailed review      of its accounting treatment for shares subject to repurchase option.
 The Company determined it had      incorrectly calculated its weighted average shares
outstanding during fiscal 2005 and 2004. This resulted in      an understatement of loss
per share. As discussed in Note 12, 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

7

---

| | 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 result in a variable      stock compensation
arrangement in accordance with APB 25. 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 a reduction of payroll expense of $184,069 for the three months
ended March      31, 2006 and an additional payroll expense of $78,046 for the three
months ended March 31, 2005 as a result      of shares subject to this repurchase feature.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the fourth quarter of 2004, one of the founding shareholders ceased providing services
to the      Company, and therefore 1,152,678 shares of common stock held by such founder
are subject to the repurchase      option. The Company exercised its option to repurchase
these shares in December 2004 for $105,000  at $0.09109 per share.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the second quarter of 2005, the Company acquired all of the 1,536,904 shares from this
founder (i.e.      both the 1,152,678 shares subject to repurchase and the remaining
384,226 shares not subject to the Company      repurchase provision) for $0.2505 per
share or $385,000 in total. This amount was initially recorded as a      reduction of
shareholders equity. The Company has determined that only the shares not subject to the
     Company repurchase provision should have been recorded against equity.  Payment for
the shares subject to      the repurchase provision should be classified as compensation
expense for the settlement of unvested shares      in accordance with guidance in APB No.
25.  The Company had initially accrued compensation expense of      $105,000 for the year
ended December 31, 2004 when the Company exercised its right to repurchase these
     shares at $0.09 per share. In fiscal 2005, the amount paid in excess of $0.09 per
share totaling $183,750      (for the shares subject to the repurchase provision) was
recorded as additional compensation expense.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the fourth quarter of fiscal 2005, two founding shareholders ceased proving services to
the company      and therefore 864,509 shares of common stock held by each of these
founders are subject to the repurchase      option. The Company exercised its option to
repurchase these shares in December 2005 and as a result in the      restated financial
statements, the Company has an accrued liability of $157,500 related to these shares at
     December 31, 2005.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
accompanying financial statements and notes reflect the restated amounts. The following
tables detail      the effects of the restatement:
| | ----------------------------------------------------------------------------------------------------------------------------------------------



8

---



9

---



10

---

|3. | 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 March 31, 2006 and December
31, 2005 and for the three month periods ended March 31, 2006 and 2005.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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 because all
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 ended March 31, 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 recognized in the Consolidated Statements of Earnings was
$(169,903) and $91,537 for the three months ended March 31, 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).
There were no options exercised during the three months ended March 31, 2006.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11

---

| | As
a result of adopting SFAS No. 123(R) on January 1, 2006, the Companys net loss for
the three months ended March 31, 2006 is approximately $3,000 higher 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 ended March 31, 2006, would have been ($0.12), 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 ended March 31, 2005:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|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 for the founding physician was approximately $105,000 and
$416,000 for the three months ended March 31, 2006 and 2005, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Eugene
Terry, a member of our Board of Directors (the Board), provides business
development consulting to us. We incurred approximately $4,000 and $0 expenses for the
three months ended March 31, 2006 and 2005, respectively, for these consulting services.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12

---

|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 has
agreed to waive our right to repurchase 576,340 shares of common stock currently held by
Belusha, LP, an entity controlled by Mr. Henry such that Belusha, L.P. will own 1,248,733
shares of our common stock. The remaining 288,171 shares of our common stock owned by
Belusha L.P., but still subject to our right to repurchase such common stock, will be
immediately forfeited and returned to us for cancellation. Our Board has also agreed that
in lieu of any severance payment to Mr. Henry, Mr. Henry will receive a credit in the
amount of $141,250 which Mr. Henry may use 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 addition, Mr. Henry will
also receive up to $50,000 in additional cash payments contingent on us achieving certain
business milestones. In connection with the termination agreement, the Company will incur
compensation expense of approximately $300,000 during the second quarter of 2006. This
compensation cost is the result of (i) $141,250 of securities which Mr. Henry will receive
in our next financing in excess of $1.5 million and (ii) the fair value of the 576,340
shares of common stock which the Company waived it right to repurchase.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|7. | CONVERTIBLE
NOTE FINANCING
|-- | --------------------------

| | 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | It
is anticipated that the cash received in the first tranche will allow us to operate for
approximately four additional months. 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 may 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Each
Convertible Note will mature on the earliest to occur of: (a) the exercise of the
Conversion Right (defined below), (b) the completion of a Qualified Financing (defined
below), or (c) January 1, 2008 (the Maturity Date), provided that the lenders
give us 90 days prior written notice of the Maturity Date.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Conversion Right is the right of the holder of a Convertible Note to convert
the outstanding amount under such Convertible Note in the event that (i) we issue and sell
shares of equity to investors (the Investors) in a bona-fide arms-length
transaction for aggregate consideration (excluding conversion of any outstanding
indebtedness) of at least $2,000,000 (the Qualified Financing) and (ii) the
Convertible Note has not been paid in full. If the holder elects to exercise such
Conversion Right, then the outstanding principal balance and all unpaid accrued interest
of the Convertible Note, or any portion thereof, shall convert at the sole option of the
holder into shares of the new equity security at a conversion price equal to eighty
percent (80%) of the price per share paid by the Investors purchasing the equity (the
Conversion Price) on the same terms and conditions as given to the purchasers
of the new equity.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition to the Conversion Right described above, the holder of each Convertible Note may
convert all or any portion of the outstanding principal balance thereof and all unpaid
accrued interest thereon into shares of Series A-1 Preferred at a conversion price of
$0.25 per share, as adjusted for stock splits, stock dividends, recapitalizations,
combinations or the like.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Each
Convertible Note shall bear interest at the rate of 10% per annum which shall accrue and
be paid on the Maturity Date, at the option on the lenders in either (a) cash, or (b)
shares of our Series A-1 Convertible Preferred Stock valued at $0.25 per share
(Series A-1 Preferred). Subsequent to the Maturity Date, or upon any default,
interest shall accrue at the rate of 14%.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

13

---

| | The
holders of each Convertible Note were also issued warrants, exercisable for three years at
an exercise price of $0.25 per share, which contain cashless exercise provisions and
full-ratchet anti-dilution protection. The shares to be issued upon exercise of the
warrants will be either (a) if the applicable Convertible Note is converted into shares of
new equity securities in connection with the closing of a Qualified Financing, shares of
the new equity security equal to one hundred percent (100%) of the principal of the
applicable Convertible Note then outstanding, divided by the per share price of the new
equity sold in the Qualified Financing, or (b) that number of shares of Series A-1
Preferred Stock equal to 100 percent (100%) of the principal and interest balance of the
Convertible Note then outstanding, divided by $0.25.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Conversion
of Series A Preferred Stock
| | --------------------------------------

| | Upon
the receipt of the requisite stockholder consent and the filing of our amended and
restated certificate of incorporation with the Secretary of State of the State of
Delaware, those holders of Series A Convertible Preferred Stock (Series A
Preferred) that participated in the Qualified Financing shall have each share of
Series A Preferred then held by them automatically converted into 3.66972 shares of newly
created Series A-1 Preferred.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
intend to promptly solicit and expect to receive the requisite consent of our stockholders
to the amendment and restatement of our certificate of incorporation to, among other
things, (i) eliminate 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) create a new Series A-1 Preferred which will enjoy all of
the rights, preferences and privileges previously associated with the Series A Preferred.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Upon
the receipt of the requisite consent from our stockholders to the amendment and
restatement of our certificate of incorporation, we intend to file an Information
Statement on Schedule 14C informing each of our remaining stockholders of such consent and
upon expiration of the waiting period prescribed by Rule 14c-2 of the Securities Exchange
Act of 1934, as amended, we will file the amended and restated certificate of
incorporation with the Secretary of State of the State of Delaware thereby effecting the
conversion of such Series A Preferred into Series A-1 Preferred.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
are currently reviewing the convertible note financing transaction to determine the proper
accounting treatment.
| | -------------------------------------------------------------------------------------------------------------------

14

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# 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 behavarioral 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
establishd 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 March 31, 2006 Compared With Three Months Ended March 31, 2005
| | ---------------------------------------------------------------------------------

| | Revenues. For
the three months ended March 31, 2006, revenues of $1,020,218 decreased
                    48% as compared to revenues of $1,944,809 for the three months ended
March 31,                     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 $745,200 for the three months ended March 31, 2006 versus
$1,112,250 for the three months ended March 31, 2005, a decrease of $367,050 or 33%
primarily as a result of (i) a lower management fee at one of our hospitals as a result of
a reduced program size, and (ii) two hospital programs in New York filing for bankruptcy
at which we had bariatric surgery programs.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
primary reason for the lower monthly management fee at one of our hospital programs was
due to a reduced program size. The program size was lowered as a result of health
insurance plans requiring three to twelve months of documented weight loss and/or
behavioral health counseling before approving a surgical procedure as well as increased
competition from new programs started. The management fee revenue for this hospital
program decreased for the three months ended March 31, 2006 by $156,000 compared to the
three months ended March 31, 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 $224,850 decline in management fee revenues for the three
months ended March 31, 2006 compared to the three months ended March 31, 2005. We are no
longer providing management services to these two New York hospitals.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Total
surgeries performed for the three months ended March 31, 2006 were 176 compared to 277
surgeries for the three months ended March 31, 2005, a decrease of 101 surgeries or 36%.
Out of the 101 surgery decline, 83 surgeries were performed at hospitals where we no
longer have programs. We terminated three small hospital programs because the surgical
volumes did not cover the fixed costs of operating these programs, accounting for a
decline of 9 surgeries from the prior period. In addition, the two bankrupt programs
accounted for approximately 74 less surgeries being performed during the three months
ended March 31, 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 $272,096 for the three months ended March 31, 2006
versus $824,500 for the three months ended March 31, 2005, a decrease of $552,404 or 67%.
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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| | Expenses. Operating
expenses were $1,364,831for the three months ended March 31, 2006
                    versus $3,501,898 for the three months ended March 31, 2005, a
decrease of 61%                     or $2,137,067. The decrease in operating expenses is
primarily the result of                     lower payroll expenses, marketing,
professional fees, travel and entertainment,                     rent, malpractice
insurance, office expenses and lower bad debt 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 $1,254,858 or 65% for the three months ended March 31, 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Marketing
expenses decreased by $219,464 or 66% for the three months ended March 31, 2006 compared
to the same period in the prior year as a result of closing unprofitable hospital
programs.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Professional
fees declined $181,918 or 47% for the three months ended March 31, 2006 compared to the
same period in the prior year due to less consulting fees for business development and
financial advisor fees. Partially offsetting these decreases were increases in legal and
audit fees.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Rent
expense decreased by $191,373 or 76% for the three months ended March 31, 2006 compared to
the same period in the prior year as we have closed unprofitable facilities. Rent expense
for the three months ended March 31, 2005 includes a charge of $125,000 representing the
estimated remaining lease payments for the closed facilities.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Malpractice
insurance declined $50,084 or 63% for the three months ended March 31, 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Merger costs of $34,303 for the three months ended March 31, 2005 reflect legal feess
associated with the reverse merger.
| | -----------------------------------------------------------------------------------------------------------------------------

| | Partially
offsetting the decreases in operating expenses, depreciation expense increased $35,199 to
$78,824 for the three months ended March 31, 2006 as compared to $43,625 for the three
months ended March 31, 2005. Depreciation expense increased due to a change in the
estimated useful life of computer equipment and software from 60 months to 36 months.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Interest
Income.  Interest income of $2,746 for the three months ended March 31, 2006
decreased $25,917 over the same period a year ago due to lower amount of cash to invest.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Interest
Expense.  For the three months ended March 31, 2006, the interest expense of
$1,535 represents interest on the capital lease. The interest expense for the three months
ended March 31, 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 $11,678 for the
three months ended March 31, 2005 represents realized losses from the sale of securities
held for investment purposes. There is no cash held for investment purposes during the
three months ended March 31, 2006.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Provision
for Income Taxes. The effective tax rate for the three months ended March
31, 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| | Net
Loss. We had a net loss of $343,402 for the three months ended March 31,
2006 compared to a net loss of $1,551,323 for the same period in 2005, an improvement in
the net loss of $1,207,921. The improvement in the net loss is primarily the result of
closing unprofitable operations and lower operating expenses.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Amortization
of redeemable convertible preferred stock issuance cost. The amortization
expense increased $2,249 to $89,635 for the three months ended March 31, 2006. The
issuance costs associated with the preferred stock financing are being amortized from the
issuance date through March 2008 which is the earliest redemption date.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Net
Loss available to common shareholders. We had a net loss available to
common shareholders of $433,037 for the three months ended March 31, 2006 compared to a
net loss of $1,638,709 for the same period in 2005, an improvement of $1,205,672,
primarily as a result of closing unprofitable operations and lower operating expenses.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# LIQUIDITY AND CAPITAL
RESOURCES

| | On
March 31, 2005, we had $264,142 in cash and negative working capital of $1,162,257
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 March 31, 2006 that raises substantial doubt
about our ability to continue as a going concern as noted in the report of our Independent
Registered Public Accounting Firm.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
the three months ended March 31, 2006, we used $640,902 of cash from operations primarily
to fund the operating loss. Changes in assets and liabilities during the three months
ended March 31, 2006 used cash of $214,130, primarily from the reduction in accounts
payable and accrued liabilities due to payments for audit fees and advertising expenses.
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 three months ended March 31, 2005, we used $1,445,084 of cash from operations due to
the net loss of $1,551,323. Changes in assets and liabilities during the three months
ended March 31, 2005 used cash of $118,598, primarily due to increases in accounts
receivables due to delays in getting provider numbers in order to invoice the payers.
Partially offsetting these above uses of cash is an increase in accounts payable and
accrued expenses primarily as a result of unpaid invoices from legal fees and accrual for
remaining lease obligations for closed facilities.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
the three months ended March 31, 2006, we used $3,850 of cash from investing activities
for the purchase of computer and office equipment.
| | ----------------------------------------------------------------------------------------------------------------------------------------------

| | For
the three months ended March 31, 2005, we generated $1,460,477 of cash from investing
activities of which $1,524,463 (net of purchases) was from the sale of securities held for
sale. The securities were held in a short-term municipal mutual fund and could be
liquidated immediately upon notice. Partially offsetting the proceeds from the sale of
securities, we used $63,986 for the purchase of property and equipment. The purchase of
property and equipment primarily reflect the addition of computer equipment and medical
equipment as well as computer software purchased for billing and accounting.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
the three months ended March 31, 2006, we used cash of $2,796 for payments on capital
leases.
| | -------------------------------------------------------------------------------------------------

| | Based
upon the current level of revenues and the cash position, we will need to raise additional
capital in the second quarter of 2006 in order to fund current operations. These factors
raise substantial doubt about our ability to continue as a going concern.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| | It
is anticipated that the cash received in the first tranche will allow us to operate for
approximately four additional months. 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 may 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 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      March 31, 2006 our
disclosure controls and procedures were not effective, specifically relating to the accounting
for shares subject to a Company repurchase option. Management has concluded that the Company did not      properly account for these shares subject to repurchase
in accordance with Financial Accounting Standard No.      128, Earnings per Share and APB
Opinion No. 25, Accounting for Stock Issued to Employees.  As a result, the      Company
will restate its financial statements as of December 31, 2005 and 2004 and for
the years      then ended to properly account for such shares.  Financial management of the Company has      subsequently completed a
thorough review of the accounting treatment for shares subject to repurchase by the
     Company in order  to ensure that this item is properly recorded in accordance with
generally accepted      accounting standards.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b)
                     There has been no change in our internal control over financial
reporting that                     occurred during the fiscal quarter ended March 31,
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

| | None
| | ----

# ITEM 3. DEFAULTS UPON
SENIOR SECURITIES

| | None
| | ----

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

| | None
| | ----

# 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.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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).
|---- | -----------------------------------------------------------------------------------------------------------------------------

20

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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:  May 22, 2006 | By:  /s/ Steven Straus  
|                    | Steven Straus           
|                    | President               
|                    | By:  /s/ Thomas M. Mason
|                    | Thomas M. Mason         
|                    | Chief Financial Officer 

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