---

# 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 SECURITIESEXCHANGE ACT OF 1934
|--- | --------------------------------------------------------------------------------------

# For the quarterly
period ended September 30, 2005

# OR

|[   ] | TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES 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)

(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
November 4, 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 September 30, 2005 and December 31, 2004       | 2   
|           | Consolidated Statements of Operations for the three months and nine months ended
|           | September 30, 2005 and 2004                                                      | 3   
|           | Consolidated Statements of Cash Flows for the nine months ended                 
|           | September 30, 2005 and 2004                                                      | 4   
|           | Consolidated Statement of Stockholders Equity for the nine months ended        
|           | September 30, 2005                                                               | 5   
|           | Consolidated Statement of Comprehensive Income for the three months and nine    
|           | months ended September 30, 2005 and 2004                                         | 6   
|           | Notes to Consolidated Financial Statements                                       | 7   
|Item 2.    | Managements Discussion and Analysis or Plan of Operations                       | 12  
|Item 3.    | Controls and Procedures                                                          | 20  
|PART II    | OTHER INFORMATION                                                               
|Item 1.    | Legal Proceedings                                                                | 21  
|Item 2.    | Unregistered Sale of Equity Securities and Use of Proceeds                       | 21  
|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, Inc. 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

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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

---

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



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

4

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



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

5

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# MSO HOLDINGS,
INC.CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME  (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
|-- | ---------------------

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

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

| | The
accompanying consolidated financial statements have been prepared on the going concern
basis which contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. The Company has experienced operating losses and negative
cash flow from operations and currently has an accumulated deficit. The Companys
ability to continue as a going concern is ultimately dependent on its ability to increase
sales or reduce costs to a level that will allow it to operate profitably and sustain
positive operating cash flows. During the third quarter of 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 beginning in the fourth quarter
of 2005. In addition, there are a number of new hospital programs and obesity disease
management programs in the contract negotiation stage, which once completed will increase
revenue. Adding one or two of these new programs, depending on the size, could add enough
revenue to obtain positive cash flow. Furthermore, we expect to raise a minimum of $15
million through the sale of additional equity securities during the fourth quarter of
2005. The company has engaged a well recognized investment banking firm to raise this
equity financing from institutional investors, which is expected to be completed during
the fourth quarter. We currently have no commitments for any such sale of equity
securities. The capital raised may be used to fund potential acquisitions. In the event we
are unable to obtain adequate financing through the completion of the sale of equity
securities, or if the companys revenue does not grow as anticipated, we would
implement additional cost reductions in order to achieve positive cash flow. 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 the Company to continue as a
going concern.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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. provides 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 September 30, 2005 and
December 31, 2004 and for the three and nine months ended September 30, 2005 and 2004.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

7

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|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 6,147,617 shares of common stock of MSO Holdings, Inc. for all of
the outstanding common stock of MSO Medical, Inc and 12,562,262 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

8

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| | 
| | 

| | 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 on the date granted, 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 nine months ended September 30, 2004, there were no options issued or
outstanding.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|6. | INVESTMENTS
|-- | -----------

| | The
cost, unrealized losses and fair values of the Companys investment securities
available for sale at September 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 September 30, 2005. Had the Company been in compliance with the covenants,
the amount available under the line of credit was approximately $0.2 million at September
30, 2005. As of November 1, 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 September 30, 2005 and December 31, 2004.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9

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|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 $325,000 and
$1,128,000 for the three months and nine months ended September 30, 2005 and approximately
$255,000 and $1,069,000 for the three months and nine months ended September 30, 2004,
respectively. As of September 30, 2005, two of the founding surgeon contracts have expired
and as a result there has been a corresponding reduction in costs and obligations to these
surgeons.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Eugene
Terry, a member of the Board of Directors, provides business development consulting to the
Company. The Company incurred approximately $9,000 and $28,000 of expenses for the three
months and nine months ended September 30, 2005 and approximately $20,000 and $53,000 for
the three months and nine months ended September 30, 2004, respectively, for these
consulting services.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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 September 30, 2005, restructuring payments of $32,194 were
made for lease payments. The restructuring reserve balance was $61,590 as of September 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. | ACQUISITION
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 for no consideration because certain earn-out requirements
were not met. 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. Effective September 1, 2005, RS no longer performs billing and
collection services to any third party clients.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10

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| | 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. Based on the
Companys actual performance during the relevant period, there will be no shares of
Series A preferred stock issued for the acquisition of Reimbursement Specialists, LLC.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 nine months ended September 30, 2004 for the Company and Reimbursement
Specialists, LLC, assuming the acquisition took place on January 1, 2004, are listed
below:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11

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| | 
| | 

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

| | 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 Registration Statement on Form SB-2 (No: 333-127838).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 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. 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 8,000 gastric bypass surgeries in the last twenty years.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12

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| | 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. provides 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 three and nine
months ended September 30, 2005 and 2004. MSO Physicians P.C. receives payments from third
party insurers for the performance of bariatric surgery and professional medical services.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Revenues. For
the three months ended September 30, 2005, revenues of $1,625,628
                    increased 6% as compared to revenues of $1,534,545 for the three
months ended                     September 30, 2004. The following is a discussion of
management fee revenues                     from hospital contracts and professional fee
revenues from surgeries and                     ancillary procedures performed, which are
the two primary sources of revenue for                     MSO. 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. Effective September 1, 2005, there are no billing and
                    collection services performed for third party clients.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Hospital
Management Fee Revenues were $1,129,298 for the three months ended September 30, 2005
versus $918,840 for the three months ended September 30, 2004, an increase of $210,458 or
23% as a result of new hospital programs. The new hospital contracts resulted in an
increase in revenue of approximately $305,000 for the three months ended September 30,
2005 as compared to 2004.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Despite
the increase in revenue, management fees were impacted by two hospital programs in New
York that filed for bankruptcy at which MSO had bariatric surgery programs. The two
bankruptcies in New York were Parkway Hospital, which filed in Q1 2005, and St.
Vincents Hospital, which filed in Q3 2005. MSO has outstanding claims, which have
been fully reserved, totaling approximately $364,000 for unpaid invoices and future
contractual commitments for management fees of approximately $3 million. We are pursuing
collection of these outstanding claims and hope to recover some amount, which if settled
would have a positive impact on MSOs financial results. We are working with our
attorneys to recover the contractual commitment. In addition, we are in negotiations
with one bankrupt liquidator for the St. Vincents open receivables. These two
bankruptcies have impaired MSOs ability to perform surgeries in New York, and had we
continued to operate under the contracts, the company would have realized additional
management fee revenues of approximately $420,000 for the three months ended September 30,
2005. The two bankrupt programs accounted for $41,000 decline in management fee revenues
for the three months ended September 30, 2005 compared to the three months ended September
30, 2004.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

13

---

| | Total
surgeries performed for the three months ended September 30, 2005 were 209 compared to 228
surgeries for the three months ended September 30, 2004, a decrease of 19 surgeries or 8%.
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 accounting for
15 surgeries in the prior period. The hospital management fee revenue from these three
terminated programs for the three months ended September 30, 2004 was $54,000 compared to
no revenue in the current year. In addition, the two bankrupt programs accounted for
approximately 40 less surgeries being performed during the three months ended September
30, 2005.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | MSO
is in contract negotiations with other New York hospitals to replace the bankrupt hospital
programs. With the replacement of the two bankrupt programs in New York, we expect
management fee revenue to grow in 2006 compared to 2005 with an expanded hospital program
network in New York and New Jersey.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Revenues
derived from professional fees were $486,871 for the three months ended September 30, 2005
versus $615,705 for the three months ended September 30, 2004, a decrease of 21%. This
decrease in professional fees is attributable to the lower number of surgeries performed
as well as a lower number of ancillary procedures and consultations performed. We do not
anticipate the professional fee revenue to grow as we are utilizing more contracted
physicians to perform the surgeries versus employed 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 MSO.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Expenses.                                        Operating
expenses were $2,454,808 for the three months ended September 30,
                    2005 versus $2,933,009 for the three months ended September 30, 2004,
a decrease                     of 16% or $478,201. The decrease in operating expenses is
primarily the result                     of lower payroll expenses and professional fees.
Payroll costs declined $231,593                     as a result of the closing of the
three hospital programs and reduced headcount                     at the corporate office
during the first quarter of 2005. Professional fees                     declined $238,787
due to less consulting fees for business development and                     capital
raise expenses. Partially offsetting these decreases were increases in
                    merger costs of $109,000 and other operating expenses due to costs
associated                     with outsourcing the companys payroll and benefits
processing as well as                     recruiting costs for the non-interventional
weight loss program.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
merger costs of $109,000 for the three months ended September 30, 2005 reflect legal and
printing costs associated with filing the SB-2 registration statement as a result of the
reverse merger (see Note 3 of the condensed consolidated financial statements).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | While
net marketing expenses as reported showed a decline over the prior year of $94,100, the
hospitals at which MSO manages its CORI Centers expended approximately $160,000 for the
three months ended September 30, 2005 to provide marketing support at such CORI Centers.
No marketing expenditures were made by the hospitals during the three months ended
September 30, 2004. Beginning in 2005, certain hospital program agreements require the
applicable hospital to incur marketing expenditures to support the bariatric surgery
programs at such hospital. Including the marketing expenditures of the applicable
hospitals, total marketing expenses for the three months ended September 30, 2005 for MSO
programs were $370,000 compared to $351,958 in the year ago period.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

14

---

| | Depreciation
expense increased $11,561 to $46,306 for the three months ended September 30, 2005 as
compared to $34,745 for the three months ended September 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 $8,716 for the three months ended September 30,
2005 decreased $8,731 over the same period a year ago due to lower amount of cash to
invest.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Interest
Expense.  For the three months ended September 30, 2005, the interest
expense of $11,977 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 September 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. As of September 30, 2005,
there is no cash held for investment purposes.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Provision
for Income Taxes. The effective tax rate for the three months ended
September 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 losses incurred during 2005 and 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 $867,449 for the three months ended
September 30, 2005 compared to a net loss of $1,405,478 for the same period in 2004, an
improvement in the net loss of $538,029. The improvement in the net loss is primarily the
result of lower operating expenses.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Amortization
of redeemable convertible preferred stock issuance cost. The amortization
expense increased $46,232 to $88,470 for the three months ended September 30, 2005 as the
majority of the issuance costs from the preferred stock financing occurred during 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 $955,919 for the three months ended September 30, 2005 compared
to a net loss of $1,447,716 for the same period in 2004, an improvement of $491,797,
primarily as a result of lower operating expenses.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Nine
Months Ended September 30, 2005 Compared With Nine Months Ended September 30, 2004
| | ---------------------------------------------------------------------------------------

| | Revenues. For
the nine months ended September 30, 2005, revenues of $5,565,692 were
                    essentially flat with prior years revenues of $5,579,279 for
the nine                     months ended September 30, 2004. The following is a
discussion of management fee                     revenues from hospital contracts and
professional fee revenues from surgeries                     ancillary procedures
performed, which are the two primary sources of revenue for                     MSO.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

15

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

| | Revenues
from hospital contracts were $3,493,340 in 2005 versus $3,516,825 in 2004, a decrease of
$23,485 or 1%. Hospital management fees from the new hospital programs were offset by a
decrease in management fees from one large hospital management contract, effective July
2004, which was entered into at a lower management fee than the previous contract with
such hospital. 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 a surgical procedure. The management fee revenue from
this hospital was $2,340,000 for the nine months ended September 30, 2005 compared to
$3,017,000 for the year ago period, a decrease of $677,000.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Total
surgeries performed for the nine months ended September 30, 2005 were 745 compared to 795
surgeries for the nine months ended September 30, 2004, a decrease of 50 surgeries or 6%.
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 surgeries performed at these terminated programs were 132 surgeries in the
nine months ended September 30, 2004 compared to 5 surgeries in the nine months ended
September 30, 2005. The management fee revenue from these three programs was $15,000 and
$365,000 for the nine months ended September 30, 2005 and 2004, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Also
the management fee revenue was impacted by two hospital programs in New York filing for
bankruptcy at which MSO had bariatric surgery programs. 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. MSO has outstanding claims, which have
been fully reserved, totaling approximately $364,000 for unpaid invoices and future
contractual commitments for management fees of approximately $3 million. We are pursuing
collection of these outstanding claims and hope to recovery some amount, which if settled
would have a positive impact on MSOs financial results. We are working with our
attorneys to recover the contractual commitment. In addition, we are in negotiations
with one bankrupt liquidator for St. Vincents open receivables. These two
bankruptcies have impaired MSOs ability to perform surgeries in New York, and had we
continued to operate under the contracts, the company would have realized additional
management fee revenues of approximately $763,000 for the nine months ended September 30,
2005.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
new hospital contracts for the nine months ended September 30, 2005 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 $1,003,000 for
the nine months ended September 30, 2005 as compared to 2004. The two bankrupt programs
accounted for $335,000 of the increase in management fee revenues for the nine months
ended September 30, 2005 compared to the nine months ended September 30, 2004.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Also,
MSO is in contract negotiations with other New York hospitals to replace the bankrupt
hospital programs. With the replacement of the two bankrupt programs in New York, we
expect management fee revenue to grow in 2006 compared to 2005 with an expanded hospital
program network in New York and New Jersey.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Revenues
derived from professional fees were $2,041,326 for the nine months ended September 30,
2005 versus $2,062,454 for the nine months ended September 30, 2004, a decrease of 1%.
This decrease in professional fees is attributable to the lower number of surgeries
performed, partially offset by an increase in professional fees from other ancillary
procedures and consultations performed. We do not anticipate the professional fee revenue
to grow as we are utilizing more contracted physicians to perform the surgeries versus
employed 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 MSO.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

16

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| | Expenses.                                       Operating
expenses for the nine months ended September 30, 2005 were $8,892,932
                    in 2005 versus $8,314,335 in 2004, an increase of 7% or $578,597. The
increase                     in operating expenses is primarily the result of merger
costs, professional fees                     and restructuring costs.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
merger costs of $556,261 for the nine months ended September 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 $234,086. In addition, the Company issued 36,700 shares to the finders valued
at $9,175 based upon the fair value of the stock at the time of issuance.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 $124,637 to $845,621 for the nine months ended September 30, 2005 primarily
as a result of additional spending for a consulting project documenting MSO clinical
results of $158,000, and an increase in IT consulting of $72,000 due to outsourcing the IT
function. Partially offsetting these increases were decreases in legal and business
development fees.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | While
net marketing expenses as reported showed a decline over prior year of $286,291, the
hospitals at which MSO manages its CORI Centers expended approximately $389,000 for the
nine months ended September 30, 2005 to provide marketing support at such CORI Centers. No
marketing expenditures were made by the hospitals during the nine months ended September
30, 2004. Beginning in 2005, certain hospital program agreements require the applicable
hospital to incur marketing expenditures to support the bariatric surgery programs at such
hospital. Including the marketing expenditures of the applicable hospitals, total
marketing expenses for the nine months ended September 30, 2005 for MSO programs were
$1,272,000 compared to $1,169,000 in the year ago period.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Bad
Debt expense decreased $105,209 to $239,791 for the nine months ended September 30, 2005
compared to $345,000 for the nine months ended September 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 $54,207 to $133,026 for the nine months ended September 30, 2005 as
compared to $78,819 for the nine months ended September 30, 2004. The increase in
depreciation expense relates to the purchase of additional computer and medical equipment
for the new programs.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

17

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| | Interest
Income.  Interest income of $56,654 for the nine months ended September 30,
2005 increased $37,778 over the same period a year ago due to the interest from securities
held for investments.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Interest
Expense.  For the nine months ended September 30, 2004, the interest expense
of $35,010 represents amortization of the deferred financing fees and the unused
commitment fee on the line of credit facility. The interest expense for the nine months
ended September 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. As of September 30, 2005,
there is no cash held for investment purposes.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Provision
for Income Taxes.  The effective tax rate for the nine months ended
September 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 $3,377,795 for the nine months ended
September 30, 2005 compared to a net loss of $2,789,492 for the same period in 2004, an
increase of $588,303. The majority of the increase is due to the merger costs of $556,261
for the reverse merger transaction as well as the impact of lower revenue of $677,000
associated with the renegotiation of one hospital management fee contract. These two items
impacted the net loss by $1.1 million during the nine months ended September 30, 2005.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Amortization
of redeemable convertible preferred stock issuance cost. The amortization
expense increased $219,796 to $263,781 for the nine months ended September 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 $3,641,576 for the nine months ended September 30, 2005 compared
to a net loss of $2,833,477 for the same period in 2004, an increase of $808,099. The
increase is due to merger costs of $588,303 for the reverse merger transaction, the impact
of lower revenue of $677,000 associated with the renegotiation of one hospital management
fee contract and the increased amortization costs of $219,796 for the issuance costs on
the redeemable convertible preferred stock. These items impacted the net loss by $1.3
million during the nine months ended September 30, 2005.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# LIQUIDITY AND CAPITAL
RESOURCES

| | On
September 30, 2005, the Company had $1.3 million in cash and positive working capital of
$1.2 million compared to $5.6 million in cash and investments and $4.9 million in working
capital as of December 31, 2004.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
the nine months ended September 30, 2005, the Company used $3.7 million of cash from
operations primarily to fund the operating loss. Changes in assets and liabilities during
the year ended September 30, 2005 used cash of $841,000, primarily from increases in
accounts receivables due to slower collections of hospital management fees. In addition,
accrued liabilities have been reduced due to payments for audit fees, reverse merger
costs, and contract settlements. Partially offsetting these above uses of cash was an
increase in accounts payable primarily as a result of unpaid invoices from legal fees and
a consulting project documenting clinical results.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

18

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| | During
the nine months ended September 30, 2004, the Company used $1.1 million of cash from
operations due to the operating loss of $2.8 million. Partially offsetting the operating
loss, cash of $1.2 million was generated from changes in assets and liabilities during the
nine months ended September 30, 2004. The cash generated was primarily due to collections
of accounts receivables (as a result of the implementation of the new billing system),
higher accrued wages and benefits due to timing of payroll period cutoff, and an increase
in deferred revenue as a result of prepayments of hospital management fees.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
the nine months ended September 30, 2005, the Company generated $5.10 million of cash from
investing activities of which $5.3 million (net of purchases) was from the sale of
securities held for sale. The securities were held in a Fidelity short-term municipal
mutual fund and could be liquidated immediately upon notice. Partially offsetting the
proceeds from the sale of securities, the Company used $171,000 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
patient tracking software.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
the nine months ended September 30, 2004, the Company used cash of $371,000 from investing
activities for the purchase of furniture, computer and medical equipment, leasehold
improvements and patient tracking software.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
the nine months ended September 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 nine months ended September 30, 2004, the Company generated cash of $9.9 million from
financing activities. The Company received net proceeds of $10.1 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 incurred $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 months. During the third quarter of 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 beginning in the
fourth quarter of 2005.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | There
are a number of new hospital programs and obesity disease management 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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, we expect to raise a minimum of $15 million through the sale of additional
equity securities during the fourth quarter of 2005. The company has engaged a well
recognized investment banking firm to raise this equity financing from institutional
investors, which is expected to be completed during the fourth quarter. We currently have
no commitments for any such sale of equity securities. The capital raised may be used to
fund potential acquisitions.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
the event we are unable to obtain adequate financing through the completion of the sale of
equity securities, or if the companys revenue does not grow as anticipated, we would
implement additional cost reductions in order to achieve positive cash flow.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

19

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

# PART II OTHER
INFORMATION

# ITEM 1. LEGAL PROCEEDINGS

| | In
the ordinary course of our business, we become involved in various disputes regarding our
business; however, we do not believe that the ultimate resolution of any such dispute will
be material to our business, financial position or results of operations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

# ITEM 3. DEFAULTS UPON
SENIOR SECURITIES

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

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

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

# ITEM 5. OTHER INFORMATION

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

20

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# ITEM 6. 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: November 9, 2005 | By:  /s/ Albert Henry               
|                       | Albert Henry                        
|                       | Chairman and Chief Executive Officer
|                       | By:  /s/ Tom Mason                  
|                       | Tom Mason                           
|                       | Chief Financial Officer             

22