<PAGE>   1


                    U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                  FORM 10-QSB

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

               For the Quarterly Period Ended September 30, 1998

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

                 For the transition period from _____ to _____

                         Commission File No. 000-27836

                               ORTHODONTIX, INC.
                               -----------------
       (Exact name of small business issuer as specified in its charter)

            FLORIDA                                             65-0643773
-------------------------------                             -------------------
(State or other jurisdiction of                                (IRS Employer
incorporation or organization)                              Identification No.)

                      2222 Ponce de Leon Blvd., 3rd Floor
                          Coral Gables, Florida 33134
                    ----------------------------------------
                    (Address of principal executive offices)

                                 (305) 446-8661
                                 --------------
                          (Issuer's Telephone Number)

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

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

         On November 13, 1998, the number of shares of Common Stock of the
issuer outstanding was 5,881,721.

         Traditional Small Business Disclosure Format (check one) Yes [X] No [ ]

         Documents Incorporated By Reference                  None


<PAGE>   2


                               ORTHODONTIX, INC.
                                  FORM 10-QSB
                        QUARTER ENDED SEPTEMBER 30, 1998


                               TABLE OF CONTENTS


PART I   FINANCIAL INFORMATION................................................1

ITEM 1.  FINANCIAL STATEMENTS.................................................1
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
            OPERATION.........................................................1

PART II  OTHER INFORMATION....................................................6

ITEM 1.  LEGAL PROCEEDINGS....................................................6
ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS............................6
ITEM 3.  DEFAULTS UPON SENIOR SECURITIES......................................6
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................6
ITEM 5.  OTHER INFORMATION....................................................6
ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.....................................6

SIGNATURES....................................................................7

FINANCIAL STATEMENTS........................................................F-1


<PAGE>   3


                                     PART I
                             FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

         The unaudited, condensed consolidated financial statements included
herein, commencing at page F-1, have been prepared in accordance with the
requirements of Regulation S-B and, therefore, omit or condense certain
footnotes and other information normally included in financial statements
prepared in accordance with generally accepted accounting principles. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of the financial information for
the interim periods reported have been made. Results of operations for the
three and nine months ended September 30, 1998 are not necessarily indicative
of the results of operations expected for the year ending December 31, 1998.

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

         The following discussion and analysis contains certain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements are based on current plans and expectations of
Orthodontix, Inc. (the "Company") and involve risks and uncertainties that
could cause actual future activities and results of operations to be materially
different from those set forth in the forward-looking statements. Important
factors that could cause actual results to differ include, among others, risks
associated with affiliations, fluctuations in operating results because of
affiliations and variations in stock price, the ability of the Company to be
repaid certain cash advances made for the benefit of the Founding Practices (as
defined below), changes in government regulations, competition, risks of
operations and growth of existing and newly affiliated orthodontic practices,
and risks detailed in the Company's filings with the Securities and Exchange
Commission.

OVERVIEW

         On April 16, 1998, Orthodontix Subsidiary, Inc. (f/k/a Orthodontix,
Inc.) consummated a merger with Embassy Acquisition Corp. ("Embassy"), a
publicly held Florida corporation, resulting in Orthodontix becoming a wholly
owned subsidiary corporation of Embassy (the "Merger"). Under the terms of the
Merger, Embassy, among other things, issued a total of 3,341,721 shares of its
Common Stock (representing approximately 56.8% of its Common Stock subsequent
to the Merger) in exchange for all of the outstanding shares of Common Stock of
Orthodontix, the acquisition of certain assets and the assumption of certain
liabilities of 26 orthodontic practices (the "Founding Practices") and the
entering into of long-term administrative services agreements. In connection
with the closing of the Merger, Embassy changed its name to Orthodontix, Inc.
(the "Company") and began providing practice management services to the
Founding Practices. The Company's Registration Statement on Form S-4, (SEC File
No. 333-48677), relating to the Merger is incorporated by reference herein. The
Merger resulted in both a change in the majority equity ownership and
management of Embassy and the cessation of Embassy's business operations as


<PAGE>   4


previously conducted. The Merger was accounted for as a capital transaction
equivalent to the issuance of stock by the Company, for the net monetary assets
of Embassy accompanied by a recapitalization of Orthodontix. Results of
operations for the three and nine months ended September 30, 1997 reflect the
organizational efforts of the Company prior to the date of the Merger and
therefore, in the Company's opinion, are not comparable to the corresponding
period in the current year.

         The Founding Practices included 27 orthodontists operating 48 offices
in 11 states. Unless the context otherwise requires, references to
(i)"Affiliated Practices" include the Founding Practices, and any orthodontic
practice which entered or enters into a similar arrangement with the Company
whereby it is provided practice management services by the Company, with
orthodontic services provided by the Affiliated Orthodontists; and
(ii)"Affiliated Orthodontists" include orthodontists directly employed by the
PA Contractors or the Practitioner PAs, as hereinafter defined.

         The Company provides practice management services to the Affiliated
Practices pursuant to long-term Administrative Services Agreement with
separately organized affiliated professional associations (collectively, the
"PA Contractors"). Under the Administrative Services Agreements, the Company
has control over all non-orthodontic functions of the PA Contractors, including
all administrative, management, billing and support functions. Pursuant to the
Administrative Services Agreements, the Company incurs the expenses necessary
to manage and administer each Affiliated Practice. Such expenses include, but
are not limited to, salaries, wages and benefits of Affiliated Practice
non-professional personnel (excluding orthodontists and, in some cases, certain
clinical personnel) and the office (general and administrative) expenses of the
Affiliated Practices. The Company also incurs personnel and administrative
expenses in connection with maintaining corporate offices, from which the
Company provides the management services. The PA Contractors pay the Company a
management fee for its services. In certain states, the fee is equal to a
percentage of the gross revenue generated by the underlying Affiliated
Practices contracting with the PA Contractors as well as a percentage of the
income of such underlying Affiliated Practices. In other states, the management
fee consists of a flat base fee, which is determined on an annual basis. Each
of the Administrative Services Agreements has a term of 40 years and is subject
to renegotiation at the end of such term.

         The PA Contractors directly employ Affiliated Orthodontists pursuant
to Employment Agreements or affiliate with other separately formed professional
associations owned by Affiliated Orthodontists pursuant to Service Agreements
(the "Practitioner PAs"), where such Practitioner PAs directly employ the
Affiliated Orthodontists to provide orthodontic services. The Employment
Agreements and Service Agreements have terms ranging from two to ten years. The
Affiliated Orthodontists generally receive a percentage of the gross revenue
generated at the Affiliated Practice as well as a percentage of the income
derived from the Affiliated Practice. The Affiliated Orthodontists are required
to hold a valid license to practice orthodontics in the jurisdiction in which
the Affiliated Orthodontist practices. The Company is responsible for
administering the billing of patients and third party payors for services
rendered by the Affiliated Orthodontist. All of the Affiliated Orthodontists
have agreed, for a period of one to two years after the termination of


                                       2
<PAGE>   5


employment or affiliation, not to compete with the Company or the PA Contractor
within a defined geographic area and not to solicit Affiliated Orthodontists,
other employees or patients of the Affiliated Practices. In all cases, the
Company directly employs all non-orthodontic personnel and subject to
applicable law directly owns the tangible equipment and other assets used in
the practices.

RESULTS OF OPERATIONS (UNAUDITED)

THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS
AND NINE MONTHS ENDED SEPTEMBER 30, 1997.

MANAGEMENT SERVICE FEE REVENUE

         Management service fee revenue reported by the Company is derived by
applying the appropriate management fee percentage against adjusted accrual
based patient revenue, and adding the reimbursement from the Affiliated
Practices of practice expenses paid by the Company. Management service fee
revenue for the three months and nine months ended September 30, 1998 was
approximately $2.9 million and $5.2 million, respectively. For the three and
nine months ended September 30, 1997, the Company did not have any management
service fee revenue because the Company had not yet affiliated with any
Affiliated Practices.

DIRECT PRACTICE AND CORPORATE EXPENSES

         Direct practice expenses include clinical and other practice expenses
and corporate expenses include corporate general and administrative expenses.
The Company incurred direct practice expenses of approximately $2.3 million and
$4.1 million for the three and nine months ended September 30, 1998,
respectively. The Company's direct practice expenses consist primarily of
salaries and benefits, orthodontic supplies, rent, advertising and marketing,
general and administrative and depreciation and amortization expenses. The
Company also incurred corporate general and administrative expenses of
approximately $0.7 million and $1.4 million for the three and nine months ended
September 30, 1998, respectively. For the three and nine months ended September
30, 1997, the Company incurred corporate general and administrative expenses of
approximately $199,000 and $442,000, respectively, which represented corporate
organizational costs.

INTEREST INCOME

         Interest income represents interest earned on excess cash balances
invested primarily in short-term money market accounts and overnight repurchase
agreements as well as loans to certain of the Affiliated Orthodontists. For the
three and nine months ended September 30, 1998, the Company's interest income
was approximately $35,000 and $50,000, respectively.


                                       3
<PAGE>   6


NET INCOME (LOSS)

         For the three months ended September 30, 1998, the Company derived
management service fee revenue of approximately $2.9 million and incurred
expenses of approximately $2.9 million. Included in expenses for the three
months ended September 30, 1998 are non-cash expense items of approximately
$93,000 related to, among other things, the issuance of stock options to
Affiliated Orthodontists (the "Three Month Non-Cash Charge"). After giving
effect to the Three Month Non-Cash Charge, the Company incurred a net loss of
approximately $10,000. Before giving effect to the Three Month Non-Cash Charge,
the Company generated net income of approximately $83,000.

         For the nine months ended September 30, 1998, the Company derived
management service fee revenue of approximately $5.22 million and incurred
expenses of approximately $5.47 million for a net loss of approximately $252,000
or approximately $.06 per share. Included in the expenses for the nine months
ended September 30, 1998 are expenses of approximately $196,000 incurred during
the period prior to the commencement of the Company's operations and non-cash
expense items of approximately $202,000, principally related to the issuance of
stock options to Affiliated Orthodontists and certain key employees. Since April
16, 1998, the date of the Merger, the Company's net income, excluding non-cash
expense items, was approximately $146,000.

         Net income excluding non-cash expense items is not presented as an
alternative to operating results or cash flow from operations as determined by
generally accepted accounting principles (GAAP) but rather to provide additional
information related to the ability of the Company to meet its cash flow needs.
This information should not be considered in isolation from, or construed as
having greater importance than GAAP operating income/loss or cash flows from
operations as a measure of an entity's performance.

         For the three and nine months ended September 30, 1997, the Company
generated a net loss of approximately $203,000 and $445,000, or $.16 and $.34
per share, respectively.

         The following table sets forth the percentage of certain items in
relation to revenues for the three month period ended September 30, 1998.

                  Management service fee revenue....................100.0%

                  Direct practice expenses
                      Salaries and benefits .........................36.8%
                      Orthodontic supplies...........................15.6%
                      Rent...........................................12.0%
                      Depreciation and amortization...................2.2%
                      Other..........................................11.7%
                  Total direct practice expenses ....................78.3%

                      Corporate depreciation and
                         amortization.................................0.3%
                      Corporate general and administrative...........22.8%
                  Total expenses....................................101.4%

                  Net operating loss.................................(1.4%)
                  Other income (expense)
                      Interest income.................................1.2%
                      Interest expense...............................(0.1%)
                  Total other income..................................1.1%

                  Net loss...........................................(0.3%)


                                       4
<PAGE>   7


LIQUIDITY AND CAPITAL RESOURCES/PLAN OF OPERATION

         Patient accounts receivable are recorded on the Company's balance
sheet at net realizable value on the date such account receivable is created.
These accounts receivable should generate funds required for (i) the expenses
incurred by the Company to manage and administer the Affiliated Practices, (ii)
the management fees, and (iii) salaries for the professional and
non-professional staff employed at the Affiliated Practices.

         As of September 30, 1998, the Company had a working capital balance of
approximately $2.8 million. The Company continues to anticipate the primary
uses of capital will include additional affiliation with orthodontic practices,
certain costs related to the development of operational efficiencies and
funding the working capital needs of the Company and the Affiliated Practices.
The Administrative Services Agreements provide for advances by the Company for
the benefit of the Affiliated Practices for working capital requirements and
other purposes. The Company believes that such loans are repayable over varying
periods of time as adequate funds are generated by the Affiliated Practices.
The balance of advances for the benefit of Affiliated Practices as of September
30, 1998 was approximately $1.4 million, of which $400,000 is classified as a
long term asset as such amounts will not be repaid within the current operating
cycle.

         As of September 30, 1998 and December 31, 1997, the Company had cash
and cash equivalents of $1,778,871 and $84,920, respectively. As of September
30, 1998 and December 31, 1997, the Company had total liabilities of $1,239,725
and $851,290, respectively. The Company's cash is currently invested in money
market accounts and overnight repurchase agreements. The Company believes that
its operating funds will be sufficient for its cash expenses for at least the
next twelve months. The Company is currently seeking debt financing and other
sources of financing. There can be no assurance that such additional sources of
financing will be found.

YEAR 2000 COMPLIANCE

         Many computer systems in use today were designed and developed using
two digits, rather than four, to specify the year. As a result, such systems
will recognize the year 2000 as 00. This could cause many computer applications
to fail completely or to create erroneous results unless corrective measures
are taken. The Company utilizes software and related computer technologies
essential to its operations that may be affected by the Year 2000 issue. The
Company presently intends to implement a plan of action which the Company
believes will result in the Company's computer systems being Year 2000
compliant by June 30, 1999. Although there can be no assurances as to the cost
associated with this plan, the Company currently believes that such cost is not
expected to be material as it relates to the Company's financial condition.


                                       5
<PAGE>   8


                                    PART II
                               OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

         The Company is not a party to, nor is it aware of, any pending
litigation to which it is a party or of which its property is subject.

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

         None.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

         None.

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

         During the third quarter ended September 30, 1998, no matters were
submitted to a vote of security holders of the Company through the solicitation
of proxies or otherwise.

ITEM 5.  OTHER INFORMATION

         Effective September 1, 1998, Robert J. Leahy resigned as the Chief
Financial Officer and Edward Strongin became the Acting Chief Financial Officer
of the Company. In October 1998, Mel Gottlieb resigned as a member of the
Company's Board of Directors and Stephen Bittel was appointed as a member of
the Company's Board of Directors.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (a)      Exhibits.

                  11.1     Statement Re: Computation of Per Share Earnings
                  27.1     Financial Data Schedule
                  99.1     Safe Harbor Compliance Statement

         (b)      Reports on Form 8-K

                  None.


                                       6
<PAGE>   9


                                   SIGNATURES

         In accordance with the requirements 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.


                                 ORTHODONTIX, INC.
                                 (Registrant)


Date: November 13, 1998          By:  /s/ F.W. Mort Guilford
                                    -------------------------------------------
                                      F.W. Mort Guilford
                                      President (Principal Executive Officer)


Date: November 13, 1998          By:  /s/ Edward Strongin
                                    -------------------------------------------
                                      Edward Strongin
                                      Acting Chief Financial Officer (Principal
                                      Financial and Accounting Officer)


                                       7
<PAGE>   10


                         INDEX TO FINANCIAL STATEMENTS

Condensed Consolidated Balance Sheets as of September 30, 1998
  and December 31, 1997.....................................................F-2

Condensed Consolidated Statements of Operations for the Three and
  Nine Months Ended September 30, 1998 and 1997.............................F-3

Condensed Consolidated Statements of Cash Flows for the Nine Months
  Ended September 30, 1998 and 1997.........................................F-4

Notes to Condensed Consolidated Financial Statements........................F-5


                                      F-1
<PAGE>   11


PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

ORTHODONTIX, INC.
F/K/A EMBASSY ACQUISITION CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                     SEPTEMBER 30, 1998      DECEMBER 31,
                                     ASSETS                                              (UNAUDITED)             1997
                                                                                         ------------        ------------
<S>                                                                                      <C>                 <C>         
Current assets:
     Cash and cash equivalents                                                           $  1,778,871        $     84,920
     Patient receivables and unbilled patient receivables, net of allowance
         of $951,234 at September 30, 1998                                                  1,144,721                   0
     Prepaid expenses and other current assets, principally advances
         to affiliated practices                                                            1,060,879                 130
                                                                                         ------------        ------------

       Total current assets                                                                 3,984,471              85,050

Property and equipment, net of accumulated depreciation of
   $3,980,217 at September 30, 1998 and $377 at December 31, 1997                             812,693               3,400
Notes and other receivables                                                                   400,080              50,000
Other assets                                                                                   31,672               5,215
                                                                                         ------------        ------------

       Total assets                                                                      $  5,228,916        $    143,665
                                                                                         ============        ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Accounts payable and accrued liabilities                                            $    476,278        $     57,502
     Patient prepayments                                                                      319,688                   0
     Bank line of credit                                                                            0             496,283
     Income taxes payable                                                                     375,945                   0
                                                                                         ------------        ------------

       Total current liabilities                                                            1,171,911             553,785

Leases payable                                                                                 67,814                   0
Due to shareholders                                                                                 0             297,505
                                                                                         ------------        ------------

       Total liabilities                                                                    1,239,725             851,290
                                                                                         ------------        ------------

Commitments and contingencies

Stockholders' equity:
     Preferred stock, $.0001 par value, 100,000,000 and 1,000,000 shares
         authorized at September 30, 1998 and December 31, 1997, respectively,
         0 shares issued and outstanding                                                            0                   0
     Common stock, $.0001 par value, 100,000,000 shares authorized,
         5,881,721 shares and 1,300,000 shares issued and outstanding
         at September 30, 1998 and December 31, 1997, respectively                                588                 130
     Additional paid-in capital                                                             5,390,516                   0
     Less: deferred compensation - stock options                                             (441,932)                  0
     Accumulated deficit                                                                     (959,981)           (707,755)
                                                                                         ------------        ------------

       Total stockholders' equity (deficit)                                                 3,989,191            (707,625)
                                                                                         ------------        ------------

       Total liabilities and stockholders' equity                                        $  5,228,916        $    143,665
                                                                                         ============        ============
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.


                                      F-2
<PAGE>   12


ORTHODONTIX, INC.
F/K/A EMBASSY ACQUISITION CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
                                                          THREE MONTHS ENDED               NINE MONTHS ENDED
                                                             SEPTEMBER 30,                   SEPTEMBER 30,
                                                     ------------------------------  ------------------------------
                                                         1998            1997            1998             1997
                                                     -------------   --------------  --------------   -------------

<S>                                                  <C>             <C>             <C>              <C>         
Management service fee revenue                       $  2,899,515    $           0   $   5,218,152    $          0
                                                     -------------   --------------  --------------   ------------ 

Direct practice expenses:
     Salaries and benefits                              1,066,932                0       1,907,734               0
     Orthodontic supplies                                 452,230                0         778,289               0
     Rent                                                 348,213                0         580,217               0
     Depreciation and amortization                         64,581                0         121,414               0
     Other                                                339,548                0         695,493               0
                                                     -------------   --------------  --------------   ------------  

       Total direct practice expenses                   2,271,504                0       4,083,147               0

Depreciation and amortization                               8,585                0           9,269               0
General and administrative                                661,070          199,486       1,378,295         441,525
                                                     -------------   --------------  --------------   ------------ 

       Total expenses                                   2,941,159          199,486       5,470,711         441,525
                                                     -------------   --------------  --------------   ------------ 

       Net operating loss                                 (41,644)        (199,486)       (252,559)       (441,525)

Other income (expense):
     Interest income                                       35,430               15          49,878              29
     Interest expense                                      (3,986)          (4,001)        (49,545)         (4,001)
                                                     -------------   --------------  --------------   ------------ 

       Total other income (expense)                        31,444           (3,986)            333          (3,972)
                                                     -------------   --------------  --------------   ------------ 

Net loss                                             $    (10,200)   $    (203,472)  $    (252,226)   $   (445,497)
                                                     =============   ==============  ==============   ============ 

Earnings per common and common equivalent share:
     Basic                                           $      (0.01)   $       (0.16)  $       (0.06)   $      (0.34)
                                                     =============   ==============  ==============   ============ 
     Diluted                                         $      (0.01)   $       (0.16)  $       (0.06)   $      (0.34)
                                                     =============   ==============  ==============   ============ 

Weighted average number of common and
   common equivalent shares outstanding -
    basic and diluted
                                                        5,881,721        1,300,000       4,119,521       1,300,000
                                                    ==============  =============== ===============  ============= 
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.


                                      F-3
<PAGE>   13


ORTHODONTIX, INC.
F/K/A EMBASSY ACQUISITION CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

<TABLE>
<CAPTION>
                                                                                         NINE MONTHS ENDED
                                                                                           SEPTEMBER 30,
                                                                                       1998              1997
                                                                                  ---------------   ---------------
<S>                                                                              <C>                 <C>           
Cash flows from operating activities:
     Net loss                                                                    $      (252,226)    $    (445,497)
     Adjustments to reconcile net loss to net cash used in operating
         activities:
       Depreciation and amortization                                                     130,683                 0
       Noncash expenses                                                                  201,842                 0
       Changes in assets and liabilities (net of practice assets acquired):
          Patient receivables and unbilled patient receivables                          (214,834)                0
          Prepaid expenses and other current assets, principally                                                 0
              advances to affiliated practices                                        (1,110,749)
          Other assets                                                                   (26,457)             (932)
          Accounts payable and accrued liabilities                                       418,776             3,442
          Patient prepayments                                                            319,688                 0
                                                                                  ---------------   ---------------

             Net cash used in operating activities                                      (533,277)         (442,987)
                                                                                  ---------------   ---------------

Cash flows from investing activities:
     Purchase of property and equipment                                                  (42,020)                0
     Purchase of practice assets                                                      (3,365,589)                0
     Payment of notes receivable                                                          56,607                 0
     Investment in notes receivable                                                     (406,687)                0
                                                                                  ---------------   ---------------

             Net cash used in investing activities                                    (3,757,689)                0
                                                                                  ---------------   ---------------

Cash flows from financing activities:
     Payment of lease obligation                                                         (17,068)                0
     (Payment of) proceeds from bank line of credit, net                                (496,283)          186,283
     Proceeds from merger, net of costs                                                6,795,773                 0
     (Repayments to) advances from shareholders, net                                    (297,505)          263,342
                                                                                  ---------------   ---------------

             Net cash provided by financing activities                                 5,984,917           449,625
                                                                                  ---------------   ---------------

Net increase in cash and cash equivalents                                              1,693,951             6,638

Cash and cash equivalents at beginning of period                                          84,920             2,682
                                                                                  ---------------   ---------------

Cash and cash equivalents at end of period                                        $    1,778,871    $        9,320
                                                                                  ===============   ===============
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.


                                      F-4
<PAGE>   14


ORTHODONTIX, INC.
F/K/A EMBASSY ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)

1.     BASIS OF PRESENTATION:

       The accompanying unaudited condensed consolidated interim financial
       statements of Orthodontix, Inc. (f/k/a Embassy Acquisition Corp.) (the
       "Company" or "Orthodontix") presented herein do not include all
       disclosures required by generally accepted accounting principles for a
       complete set of financial statements. In the opinion of management,
       these financial statements include all adjustments, consisting of normal
       recurring adjustments, necessary for a fair presentation of the results
       of interim periods.

       The results of operations for the three and nine months ended September
       30, 1998 are not necessarily indicative of the results of operations to
       be expected for the year ended December 31, 1998. The unaudited
       condensed consolidated interim financial statements should be read in
       conjunction with the Form S-4 of Embassy Acquisition Corp. ("Embassy")
       as filed with the U.S. Securities and Exchange Commission on March 26,
       1998.

       The consolidated financial statements are prepared in accordance with
       the consensus reached by the Financial Accounting Standards Board's
       Emerging Issues Task Force with respect to physician practice management
       companies. The Company does not meet the conditions and, therefore, does
       not consolidate the results of operations of the Founding Practices (See
       Note 2) into its consolidated statements of operations.

2.     ORGANIZATION:

       Effective April 16, 1998, the merger of Orthodontix and Embassy with and
       into Embassy (the "Merger") was completed. Each Orthodontix common share
       converted to one share of Embassy common stock. As a result of the
       Merger, the outstanding common stock of Orthodontix converted into
       shares of Embassy common stock. Embassy's outstanding common stock and
       Embassy's articles of incorporation were amended to change Embassy's
       name to Orthodontix, Inc. Additionally, the Company authorized a class
       of Preferred Stock consisting of 100,000,000 shares, par value $.0001.
       The Merger has been treated as a capital transaction equivalent to the
       issuance of stock by the Company for the net monetary assets of Embassy
       of approximately $7.4 million at the closing accompanied by a
       recapitalization of Orthodontix. The Company incurred merger costs of
       approximately $600,000 in connection with the Merger.


                                      F-5
<PAGE>   15


ORTHODONTIX, INC.
F/K/A EMBASSY ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)

2.     ORGANIZATION, CONTINUED:

       On April 16, 1998, the Company acquired, simultaneously with the closing
       of the Merger, certain assets and assumed certain liabilities of 26
       orthodontic practices (the "Founding Practices") (collectively referred
       to as the "Affiliated Acquisitions"), with a net book value of
       approximately $1.4 million, in exchange for 2,041,721 million shares of
       common stock and approximately $3.4 million in cash. The Company will
       not employ orthodontists or control the practice of orthodontics by the
       orthodontists employed by the professional corporations (collectively,
       the "PCs"). The Company executed Administrative Service Agreements and
       does not hold any equity ownership interest in the PCs, therefore, the
       Affiliated Acquisitions were not deemed to be business combinations.
       Because each of the owners of the Founding Practices was a Promoter of
       the transaction, in accordance with the Securities and Exchange
       Commission's Staff Accounting Bulletin No. 48, "Transfers of Nonmonetary
       Assets by Promoters or Shareholders", transferred nonmonetary assets and
       assumed liabilities are accounted for at the historical cost basis of
       the Founding Practices and any monetary assets assumed and any monetary
       liabilities included in the Affiliated Acquisitions are recorded at fair
       value. The cash consideration paid in excess of net assets transferred
       is reflected as a dividend paid by the Company.

       In addition, the Company recorded additional paid-in capital of
       approximately $594,000 in connection with stock options issued in
       connection with the Merger (see Note 5).

       The Company provides practice management services and has entered
       long-term Administrative Service Agreements with the PCs or
       orthodontists. Under the Administrative Service Agreements, the Company
       will provide management services which include consultation and other
       activities regarding the suitability of facilities and equipment,
       nonprofessional staffing, regulatory compliance, productivity
       improvements, inventory and supplies management, information systems
       management, and, subject to applicable law, other services as the
       Company deems necessary to meet the day-to-day requirements of the
       Founding Practices. The practices pay the Company a management fee for
       its services under the Administrative Service Agreements which have
       terms of 40 years and are subject to renegotiation at the end of such
       terms.

3.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

       CASH AND CASH EQUIVALENTS

       For the purposes of the statement of cash flows, the Company considers
       all highly liquid financial instruments with maturities of three months
       or less at the date of purchase to be cash equivalents.


                                      F-6
<PAGE>   16


ORTHODONTIX, INC.
F/K/A EMBASSY ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)

3.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

       PROPERTY AND EQUIPMENT, NET

       Property and equipment is stated at historical cost. Depreciation of
       property and equipment is calculated using the straight line method over
       the estimated useful lives of the assets of three to five years. Routine
       maintenance and repairs are charged to expense as incurred, while costs
       of betterments and renewals are capitalized.

       ACCOUNTS RECEIVABLE

       After the Affiliated Acquisitions by the Company, the Company continues
       to purchase patient accounts receivable generated by the Founding
       Practices and records these receivables on the balance sheet of the
       Company. The receivables are recorded at net realizable value on the
       date of purchase. Any subsequent uncollectible account is written off by
       the Company and the Founding Practice revenue is reduced accordingly.
       The impact on the Company from such write-offs is a loss of management
       fees revenue because practice revenue is reduced.

       Unbilled patient receivables represent the earned revenue in excess of
       billings to patients as of the end of each period. Patient prepayments
       represent collections from patients or their insurance companies which
       are received in advance of the performance of the related services.

       MANAGEMENT FEE REVENUE

       Revenue from managing the practices is recognized on a monthly basis as
       the services are provided. The revenue of the Company consists of the
       sum of the management service fees and such amounts equal to the
       operating expenses of orthodontic practices assumed by the Company under
       such Administrative Service Agreements.

       In general, the Administrative Service Agreements provide for the
       payment of fees to the Company based on a negotiated percentage of the
       accrued patient revenue of each Founding Practice. Patient revenue is
       recognized by the Founding Practice as orthodontic services are
       performed. If the patient enters into a long-term orthodontic contract,
       approximately 24% of the contract value is recognized at the initial
       treatment date. The 24% estimated revenue is based on the estimated
       costs incurred by each Founding Practice at that time as compared to the
       total costs of providing the contracted services and is consistent with
       industry standards. The percentage includes the estimated costs of
       diagnosis and treatment plan development, initial treatment by
       orthodontic personnel, orthodontic supplies, and associated
       administrative services. Expenses not required to be paid by the Company
       pursuant to the Administrative Service Agreements primarily consist of
       professional expenses of the orthodontists.


                                      F-7
<PAGE>   17


ORTHODONTIX, INC.
F/K/A EMBASSY ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)

3.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

       INCOME TAXES

       The Company accounts for income taxes in accordance with Statement of
       Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
       Taxes," which requires recognition of deferred tax assets and
       liabilities for expected future tax consequences of events that have
       been recognized in the financial statements or tax returns. Under this
       method, deferred tax assets and liabilities are determined based on the
       differences between the financial statement carrying amounts and the tax
       bases of such assets and liabilities using enacted tax rates and laws in
       effect in the years in which the differences are expected to reverse.

       The Company has incurred a net loss for the nine months ended September
       30, 1998. The Company has recognized no tax benefit from this loss.
       Management is currently evaluating whether such losses can be utilized to
       offset the income tax liability related to certain assets acquired in
       connection with the Affiliated Acquisitions. Due to the uncertainty
       associated with the recognition of such income tax benefits, no amounts
       have been reflected in the accompanying consolidated statements of
       operations.

       EARNINGS PER SHARE

       Basic earnings per share is calculated by dividing the net income or
       loss by the weighted average number of common shares outstanding during
       the period. Diluted earnings per share is calculated by dividing the net
       income or loss by the weighted average number of common and potential
       common equivalent shares outstanding during the period. Potential common
       shares consist of the dilutive effect of outstanding options calculated
       using the treasury stock method. Potential common shares for 1998 are
       antidilutive and, thus, are excluded from the calculation of earnings
       per share.

       STOCK OPTIONS

       SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but
       does not require, companies to recognize compensation expense for grants
       of stock, stock options and other equity instruments based on fair value
       accounting rules. The Company has chosen not to apply the fair value
       accounting rules in the statements of operations for employee
       stock-based compensation. Such treatment is required for non-employee
       stock-based compensation, including options granted to the
       orthodontists.


                                      F-8
<PAGE>   18


ORTHODONTIX, INC.
F/K/A EMBASSY ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)

4.     ACCOUNTS PAYABLE AND ACCRUED EXPENSES:

       Accounts payable and accrued expenses consists of the following:

<TABLE>
<CAPTION>
                                                   SEPTEMBER 30,       DECEMBER 31,
                                                       1998               1997
                                                 -----------------   ----------------
<S>                                              <C>                 <C>            
       Accounts payable                          $        354,373    $        54,279
       Accrued salaries and benefits                      121,905              3,223
                                                 -----------------   ----------------

                                                 $        476,278    $        57,502
                                                 =================   ================
</TABLE>


5.     STOCK OPTIONS:

       In conjunction with the Merger, the Company adopted an option plan (the
       "Option Plan") that provides for granting up to 500,000 shares of common
       stock by November 18, 2007. The Option Plan provides for the issuance of
       incentive stock options and non-qualified stock options. Under the
       Option Plan, options may be granted at not less than the fair market
       value of the stock on the date of the grant. The term of each option
       generally may not exceed ten years. At September 30, 1998, no options
       had been granted under the Option Plan.

       In connection with the Merger, certain directors, officers, employees
       and non-employees of the Company were awarded 956,303 stock options
       outside the Option Plan at exercise prices ranging from $7.29 to $9.11
       per share. The options generally vest over varying periods of time.

       As part of the 956,303 stock options granted, the Company recognized
       compensation expense of approximately $72,000 for the nine months ended
       September 30, 1998 related to 185,000 options granted to employees for
       which the fair value of the stock on the date of the granted exceeded
       the exercise price. In addition, the Company determined the fair market
       value of the 97,500 options granted to members of the Advisory Board,
       who are non-employees, to be approximately $522,000 based on the
       Black-Scholes option-pricing model (the "Model"). Such amount was
       recorded as unearned compensation and will be amortized over the three
       year period that these options vest. At September 30, 1998, the
       unamortized unearned compensation, which is included as a separate
       component of stockholder's equity, was $441,932. The compensation
       expense for the three and nine months ended September 30, 1998 were
       $43,469 and $79,693, respectively. The fair value of each option granted
       to a nonemployee is estimated on the date of grant using the Model with
       the following weighted average assumptions used: no dividend yield;
       expected volatility of the underlying stock of 70%; risk-free interest
       rate of 5.57% covering the related option periods; and expected lives of
       the options of 2 to 5 years based on the related option periods.


                                      F-9
<PAGE>   19


ORTHODONTIX, INC.
F/K/A EMBASSY ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)

5.     STOCK OPTIONS, CONTINUED:

       As part of the 956,303 stock options granted, options to purchase up to
       291,303 shares were granted to certain orthodontists. Such options are
       not exercisable until the orthodontists' practices reach certain revenue
       levels over a five year period. If such options were exercisable on the
       date of the Merger, the Company would have recorded additional
       compensation expense of $1.4 million over a five year period based on
       the Model. Compensation expense, if any, will be recorded to the extent
       the performance criteria are attained based on the value of the options
       using the Model on the date such performance criteria are attained.

6.     COMMITMENTS AND CONTINGENCIES:

       The Company leases office facilities, primary care medical facilities,
       certain furniture and equipment, and automobiles under noncancelable
       operating leases which expire at various dates. Additionally, the
       Company leases equipment under a capital lease which expires at June 30,
       2002.

7.     RELATED PARTIES:

       During 1998, the Company advanced approximately $405,000 to six
       shareholders of the Company. The interest for these notes is 6% per
       annum. At September 30, 1998, the outstanding balance on such notes
       receivable from shareholders was approximately $400,000, of which notes
       with remaining principal balances of $149,000 and $148,000 are due in
       monthly installments through May 2013 and July 2008, respectively.


                                     F-10