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 March 31, 1999

[ ]      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 May 11, 1999, the number of shares of Common Stock of the issuer
outstanding was 5,767,101.

Traditional Small Business Disclosure Format (check one) Yes [X] No [ ]
Documents Incorporated By Reference      None

2

ORTHODONTIX, INC.
FORM 10-QSB
QUARTER ENDED MARCH 31, 1999

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.......................................................................................5

Item 1.  Legal Proceedings........................................................................................5

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.........................................................................7

SIGNATURES........................................................................................................8

INDEX TO FINANCIAL STATEMENTS...................................................................................F-1

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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
months ended March 31, 1999 are not necessarily indicative of the results of
operations expected for the year ending December 31, 1999.

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 with orthodontists, 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

Embassy Acquisition Corp. (now known as Orthodontix, Inc. (the
"Company")) was formed in November 1995 to seek to effect a merger, exchange of
capital stock, asset acquisition or similar business combination with an
acquired business. On April 16, 1998, the Company consummated a merger with
Orthodontix Subsidiary, Inc. (formerly known as Orthodontix, Inc. ("Ortho
Sub")), resulting in Ortho Sub becoming a wholly owned subsidiary corporation of
the Company (the "Merger"). Ortho Sub was an orthodontic practice management
company formed to affiliate with orthodontic practices and manage the business
aspects of such practices, including billing, collections, cash management,
payroll processing, financial reporting and analysis and productivity reporting
and analysis, in exchange for a management fee. Under the terms of the Merger,
the Company, among other things, issued a total of 3,341,721 shares of its
common stock, par value $.0001 (the "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 Ortho Sub, 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

4

connection with the closing of the Merger, the Company changed its name to
Orthodontix, Inc. and began providing practice management services to the
Founding Practices. The Merger resulted in both a change in the majority equity
ownership and management of the Company and the cessation of the Company's
business operations as previously conducted. The Merger was accounted for as a
capital transaction equivalent to the issuance of stock for the net monetary
assets of the Company accompanied by a recapitalization of Ortho Sub. As further
discussed in Note 1 to the Company's Consolidated Financial Statements for the
fiscal year ended December 31, 1998, the acquisition of certain assets and the
assumption of certain liabilities of the Founding Practices was accounted for in
accordance with Securities and Exchange Commission's Staff Accounting Bulletin
No. 48 "Transfers of Nonmonetary Assets by Promoters or Shareholders."

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 may enter 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 Agreements with
separately organized affiliated professional associations (collectively, the "PA
Contractors"). Under the Administrative Services Agreements, the Company has
control over non-orthodontic functions of the PA Contractors, including
administrative, management, billing and support functions. Pursuant to the
Administrative Services Agreements, from an accounting perspective, 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 administers the billing of
patients and third party

2

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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 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)

MANAGEMENT SERVICE FEE REVENUE

Management service fee revenue reported by the Company is derived by
principally applying the appropriate management fee percentage to the 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 ended March 31, 1999 was approximately $2.16
million. For the three months ended March 31, 1998, the Company did not have any
management service fee revenue because the Company had not yet commenced
practice management operations.

During the period subsequent to the consummation of the Merger, the
Company, from time to time, advanced funds for the benefit of the Affiliated
Practices to cover expenses and for working capital purposes of the Affiliated
Practices (the "Working Capital Advances"). In addition, during the two week
period following the consummation of the Merger, certain amounts were collected
and disbursed by the Affiliated Practices in order to facilitate the transition
to the Company's centralized cash collection and disbursement procedures. To the
extent the net amounts (the difference between the collections and disbursements
during this initial period) have not been remitted by the Affiliated Practices
to the Company, the Company has recorded such net amounts as an advance to
Affiliated Practices (the "Transition Advances" and together with the "Working
Capital Advances", the "Advances"). As of March 31, 1999, the Advances totaled
approximately $1.91 million. The Company believes that these amounts will be
repaid by the Affiliated Practices over varying periods of time as adequate
funds are generated by the Affiliated Practices. Due to the ongoing efforts of
the Company to (i) pursue amended management arrangements with certain
Affiliated Practices and/or (ii) terminate its affiliation with certain
Affiliated Practices, the Company has recorded an allowance related to the
collectability of the Advances of $840,000 as of March 31, 1999 (the
"Allowance"), of which $40,000 was recorded by the Company during the three
months ended March 31, 1999.

DIRECT PRACTICE AND CORPORATE EXPENSES

Direct practice expenses include clinical and other practice expenses.
Corporate expenses include corporate general and administrative expenses. The
Company incurred direct practice expenses of approximately $1.66 million for the
three months ended March 31, 1999. The Company's direct practice expenses
consist primarily of salaries and benefits, orthodontic supplies, rent,
advertising and marketing, general and administrative and depreciation. The
Company also incurred corporate general and administrative expenses of
approximately $564,000 for the three months ended March 31, 1999. In addition,
for the three months ended March 31, 1999, the

3

6

Company recorded non-cash expenses consisting of depreciation of approximately
$9,000, an expense related to the prior issuance of stock options of $43,000,
a provision for losses on Advances to Affiliated Practices of $40,000 and an
impairment charge of approximately $285,000 as a result of the sale by the
Company of certain practice assets subsequent to March 31, 1999. For the three
months ended March 31, 1998, the Company incurred corporate general and
administrative expenses of approximately $187,000, 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 months ended March 31, 1999, the Company's interest income was
approximately $26,000.

NET LOSS

For the three months ended March 31, 1999, the Company recorded a net
loss of approximately $372,000 or approximately $.06 per share primarily due to
the Company's recording of an impairment charge in the amount of $285,000 as a
result of the sale of certain practice assets subsequent to March 31, 1999.

Included in the expenses for the three months ended March 31, 1999 are
non-cash expense items of approximately $377,000 related to (i) the issuance of
certain stock options to employees and Affiliated Orthodontists ($43,000); (ii)
depreciation ($9,000); (iii) an impairment charge resulting from the sale of
certain practice assets subsequent to March 31, 1999 ($285,000); and (iv) a
provision for losses on Advances to Affiliated Practices ($40,000). During the
three months ended March 31, 1999, the Company's earnings, excluding non-cash
expense items, was approximately $5,500. Earnings 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.

LIQUIDITY AND CAPITAL RESOURCES/PLAN OF OPERATION

As of March 31, 1999, the Company had a working capital balance of
approximately $1,080,000. The Company continues to anticipate the primary uses
of capital will include costs related to the development of operational
efficiencies and funding the working capital needs of the Company.

As of March 31, 1999 and December 31, 1998, the Company had cash and
cash equivalents of approximately $755,000 and $1,289,000, respectively. As of
March 31, 1999 and December 31, 1998, the Company had total liabilities of
approximately $1,200,000 and $1,418,000, respectively. The Company's cash is
currently invested in money market accounts and overnight repurchase
agreements. 

4

7

YEAR 2000 COMPLIANCE

The Year 2000 ("Year 2000") computer issue is the result of computer
programs using a two-digit format, as opposed to a four-digit format to indicate
the year. Such computer programs will be unable to recognize date information
correctly when the year changes to 2000. The Year 2000 issue poses risks for the
Company's information technology systems, including those used by the Company in
providing its practice management and marketing services to its Affiliated
Practices.

The Company's information technology systems are based upon software
licenses and software maintenance agreements with third party software
companies. Based upon the Company's internal assessments and communications with
its software vendors, the Company believes the costs involved with causing the
Company's corporate software to become Year 2000 Compliant will not be material.
The Company will continue to monitor its Year 2000 readiness.

Each of the Affiliated Practices has its own information technology
systems (including systems for billing and collecting patient fees) based on
third party software licenses and maintenance agreements with various vendors.
The Company believes that a significant number of its Affiliated Practices
information technology systems currently are not Year 2000 compliant and the
costs which may be incurred to cause the systems at the Affiliated Practices to
become Year 2000 Compliant may be material to the Company, provided, however,
over time the Company believes it will recover such costs from the Affiliated
Practices.

There is no assurance the Affiliated Practices' systems, upon which the
Company relies, will be timely converted to be Year 2000 compliant.
Consequently, there is no assurance that a material adverse effect on the
Company's operations and cash flows will not occur.

PART II
OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

In February 1999, the Company received from two Affiliated
Orthodontists, written demands for damages arising out of their allegations that
the Company has breached its obligations under lease agreements and Service
Agreements. One Affiliated Orthodontist has alleged damages in the amount of
$1,655,324.86 and the other Affiliated Orthodontist has alleged damages in the
amount of $588,993.52. The Company believes the allegations contained in the
written demands from these Affiliated Orthodontists are without merit. To the
extent these Affiliated Orthodontists or either of them pursue their alleged
claims, the Company intends to vigorously defend itself.

The Company received from seven Affiliated Orthodontists notice that
the Affiliated Orthodontists believed that the Company had delivered less than
should have been delivered to the

5

8

Affiliated Orthodontists for compensation amounts owing under agreements the
Affiliated Orthodontists are party to. In the aggregate, the amounts in question
total approximately $60,000. If the Affiliated Orthodontists pursue their
beliefs further, the Company intends to vigorously defend itself. Certain of the
Affiliated Orthodontists who have delivered notice regarding the amounts in
question are in discussions with the Company regarding termination of their
affiliation.

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

In April and May 1999, the Company entered arrangements with five
Affiliated Practices (consisting of six Affiliated Orthodontists and
representing annual practice revenue of approximately $2.68 million) pursuant to
which these Affiliated Orthodontists terminated their affiliation with the
Company and repurchased practice assets in exchange for, in the aggregate,
$264,713 cash and 347,157 shares of the Company's Common Stock. Upon receipt by
the Company of its shares of Common Stock in connection with these asset sales,
the Company retired such shares and the shares became authorized but unissued
shares of the Company.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None.

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

During the first quarter ended March 31, 1999, no matters were
submitted to a vote of security holders of the Company through the solicitation
of proxies or otherwise.

ITEM 5.  OTHER INFORMATION

As of May 15, 1999, in addition to the five Affiliated Practices which
terminated their affiliation with the Company, the Company has commenced
discussions with several other Affiliated Practices regarding the termination of
their affiliation with the Company and the repurchase by the respective
Affiliated Orthodontists of certain practice assets in exchange for cash and
shares of the Company's Common Stock.

As a result of the sale of certain practice assets to two Affiliated
Practices, the Company recorded an asset impairment charge during the three
months ended March 31, 1999 of $285,000. Such amount is reflected as a reduction
in cost in excess of fair value, in the accompanying financial statements,
representing the difference between the carrying value of certain practice
assets and the estimated proceeds from the sale of such assets to these two
Affiliated Practices. In connection with the sale of certain practice assets to
the three other Affiliated Practices the Company anticipates recording a gain of
approximately $135,000 during the three months ended June 30, 1999.

In addition to continuing discussions with certain Affiliated Practices
regarding the sale of practice assets and the overall termination of the
affiliation of these Affiliated Practices with the Company, the Company is
contemporaneously exploring to what extent it should continue its practice
management operations as a stand alone company, together with another company
pursuant to a business combination or if at all. As of the date hereof there are
no agreements, agreements in principle or understandings with respect to any
business combination. There can be no assurances that the Company will terminate
its affiliation with any other Affiliated Practices.

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9

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)      Exhibits.

27.1     Financial Data Schedule
99.1     Safe Harbor Compliance Statement

(b)      Reports on Form 8-K

None.

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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: May 14, 1999           By: /s/ F.W. Mort Guilford       
----------------------------------------
F.W. Mort Guilford

President 

Date: May 14, 1999           By: /s/ Edward Strongin               
---------------------------------------
Edward Strongin
Acting Chief Financial Officer 

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11

INDEX TO FINANCIAL STATEMENTS

PAGES

Condensed Consolidated Balance Sheets as of March 31, 1999 (Unaudited)
and December 31, 1998                                                                      F-2

Condensed Consolidated Statements of Operations for the Three Months
Ended March 31, 1999 and 1998 (Unaudited)                                                  F-3

Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1999 and 1998 (Unaudited)                                                  F-4

Notes to the Condensed Consolidated Financial Statements                                        F-5

F-1

12

ORTHODONTIX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

MARCH 31, 1999         DECEMBER 31,
ASSETS                                          (UNAUDITED)              1998
-----------           -----------

Current assets:
Cash and cash equivalents                                                       $   754,788           $ 1,289,481
Patient receivables and unbilled patient receivables, net of allowance
of $230,000 at March 31, 1999 and $267,000 at December 31, 1998                   995,050             1,113,254
Assets held for sale                                                                303,123                    -- 
Prepaid expenses and other current assets                                           186,664               183,736
-----------           -----------

Total current assets                                                          2,239,625             2,586,471

Property and equipment, net                                                           540,229               839,193
Advances to Founding Practices, net of allowance of $840,000 at                     1,070,844               950,328
March 31, 1999 and $800,000 at December 31, 1998
Notes and other receivables                                                           287,421               303,040

Deferred tax asset                                                                     73,825                73,825
Other assets                                                                           14,314                20,094
-----------           -----------

Total assets                                                                $ 4,226,258           $ 4,772,951
===========           ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable and accrued liabilities                                        $   531,880           $   705,525
Amounts payable to Founding Practices                                               403,445               466,626
Patient prepayments                                                                 133,037               108,009
Lease payable - current portion                                                      17,000                16,200
Deferred tax liability                                                               73,825                73,825
-----------           -----------

Total current liabilities                                                     1,159,187             1,370,185

Lease payable                                                                          40,832                47,937
-----------           -----------

Total liabilities                                                             1,200,019             1,418,122
-----------           -----------

Commitments and contingencies

Stockholders' equity:
Preferred stock, $.0001 par value, 100,000,000 shares authorized
at March 31, 1999 and December 31, 1998, no shares issued
and outstanding                                                                        --                    -- 
Common stock, $.0001 par value, 100,000,000 shares authorized,
5,881,721 shares issued and outstanding at March 31, 1999
and December 31, 1998                                                                 588                   588
Additional paid-in capital                                                        5,607,261             5,607,261
Accumulated deficit                                                              (2,226,616)           (1,854,557)
Less: deferred compensation - stock options                                        (354,994)             (398,463)
-----------           -----------

Total stockholders' equity                                                    3,026,239             3,354,829
-----------           -----------

Total liabilities and stockholders' equity                                  $ 4,226,258           $ 4,772,951
===========           ===========

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

F-2

13
ORTHODONTIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

THREE MONTHS ENDED              
MARCH 31,
---------------------------------       
1999                 1998
-----------           -----------

Management service fee revenue                                  $ 2,162,728           $        --
-----------           -----------
Direct practice expenses:
Salaries and benefits                                             799,926                    --
Orthodontic supplies                                              274,820                 1,309
Rent                                                              282,598                    --
Depreciation and amortization                                      51,240                    --
Other                                                             253,310                 2,555
-----------           -----------
Total direct practice expenses                                1,661,894                 3,864

General and administrative                                          564,183               182,776
Provision for losses on advances to Founding Practices               40,000                    --
Asset impairment charge (Note 5)                                    285,000                    --
Depreciation and amortization                                         9,059                   189
-----------           -----------
Total expenses                                                2,560,136               186,829
-----------           -----------
Net operating loss                                             (397,408)             (186,829)
-----------           -----------
Other income (expense):
Interest income                                                    25,822                    14
Interest expense                                                     (473)               (9,371)
-----------           -----------
Total other income (expense)                                     25,349                (9,357)
-----------           -----------
Net loss                                                        $  (372,059)          $  (196,186)
===========           ===========

Loss per common and common
equivalent share:

Basic                                                         $     (0.06)          $     (0.15)
===========           ===========
Diluted                                                       $     (0.06)          $     (0.15)
===========           ===========

Weighted average number of common and
common equivalent shares outstanding -
basic and diluted                                               5,881,721             1,300,000
===========           ===========

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

F-3

14

ORTHODONTIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

THREE MONTHS ENDED              
MARCH 31,             
---------------------------------
1999                  1998
-----------           -----------

Cash flows from operating activities:
Net loss                                                           $  (372,059)          $  (196,186)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization                                         60,299                   189
Bad debt expense                                                      63,050                    -- 
Noncash compensation expense                                          43,469                    -- 
Provision for advances to Founding Practices                          40,000                    -- 
Asset impairment charge                                              285,000                    -- 
Changes in assets and liabilities                                   (631,039)              118,283
-----------           -----------

Net cash used in operating activities                           (511,280)              (77,714)
-----------           -----------

Cash flows from investing activities:
Purchase of property and equipment                                     (34,255)                   -- 
Payment of notes receivable                                             17,147                    -- 
-----------           -----------

Net cash used in investing activities                            (17,108)                   -- 
-----------           -----------

Cash flows from financing activities:
Payment of lease obligation                                             (6,305)                   -- 
Proceeds from bank line of credit, net                                      --                 3,100
Payment of merger costs                                                     --               (94,353)
Advances from stockholders, net                                             --               114,861
-----------           -----------

Net cash (used in) provided by financing activities               (6,305)               23,608
-----------           -----------

Net decrease in cash and cash equivalents                               (534,693)              (54,106)

Cash and cash equivalents, beginning of period                         1,289,481                84,920
-----------           -----------

Cash and cash equivalents, end of period                             $   754,788           $    30,814
===========           ===========

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

F-4

15

ORTHDONTIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)

1.     BASIS OF PRESENTATION:

The accompanying unaudited condensed consolidated financial statements of
Orthodontix, Inc. ("Orthodontix" or the "Company") 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 months ended March 31, 1999 are
not necessarily indicative of the results of operations to be expected
for the year ended December 31, 1999. The unaudited condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-KSB as filed with the Securities and
Exchange Commission on April 15, 1999.

2.     ACCOUNTS PAYABLE AND ACCRUED EXPENSES:

Accounts payable and accrued expenses consists of the following:

March 31,           December 31,
1999                  1998
----------           ------------

Accounts payable                  $  351,427            $  430,027 
Accrued salaries and benefits        120,695               188,084 
Other accrued expenses                59,758                87,414 
----------           ------------
$  531,880            $  705,525 
==========           ============

3.     EARNINGS PER SHARE:

Basic earnings per share is calculated by dividing net income or loss by
the weighted average number of common shares outstanding during the
period. Diluted earnings per share is calculated by dividing net income
or loss by the weighted average number of common shares and potential
common equivalent shares outstanding during the period. Potential common
equivalent shares consist of the dilutive effect of outstanding options
calculated using the treasury stock method. For the three month period
ended March 31, 1999, the potential common equivalent shares were
antidilutive; thus there was no difference in the basic earnings per
share and the diluted earnings per share. The Company did not have any
options outstanding for the three month period ended March 31, 1998.

F-5

16
ORTHDONTIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)

4.     CONTINGENCIES:

During 1999, the Company received written demands for damages from two
Founding Practices arising from their allegations that the Company has
breached its obligations under certain agreements including lease
agreements with the orthodontists associated with these Founding
Practices. Pursuant to the demand letter, these Founding Practices have
alleged damages, in aggregate, of approximately $2.2 million.

In addition, during 1999, the Company received notice from an additional
seven Founding Practices arising out of their allegations that the
Company delivered less than should be delivered to the orthodontists for
amounts owed under certain agreements. These Founding Practices have
alleged damages, in the aggregate, of approximately $60,000.

The Company believes the matters described in the two preceding
paragraphs are without merit and intends to vigorously defend itself. The
Company does not believe such matters will have a material impact on the
Company's consolidated financial position, results of operations, or
liquidity.

5.     ASSETS HELD FOR SALE AND TERMINATION OF AFFILIATION WITH CERTAIN
FOUNDING PRACTICES

Subsequent to March 31, 1999, the Company has sold certain practice
assets consisting principally of accounts receivable and property and
equipment to five of the Founding Practices. As a result of these
transactions, the Company has classified such practice assets as assets
held for sale at March 31, 1999 as follows:

Patient receivables and unbilled patient receivables, net   $ 287,152
Property and equipment, net                                   272,919
Prepaid expenses and other current assets                      28,052
---------
588,123
Less: impairment charge                                      (285,000)
---------
$ 303,123
=========

As a result of the sale of certain practice assets to two Founding
Practices subsequent to March 31, 1999, the Company recorded an asset
impairment charge for the three month period ended March 31, 1999 of
$285,000. In accordance with Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed Of", such charge represents the amount
necessary to reduce cost in excess of fair value to reflect the
difference between the carrying value of certain practice assets and the
estimated proceeds from the sale of such assets to these two Founding
Practices.

As of May 15, 1999, the Company has commenced discussion with several
other Founding Practices regarding the termination of their affiliation
with the Company and the repurchase by the respective Founding Practices
of certain practice assets in exchange for cash and shares of the
Company's common stock.

F-6

17

ORTHDONTIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)

6.     STOCK OPTIONS:

In March 1999, the Company granted to each non-employee director, an
option for a period of two years to acquire 20,000 shares (100,000 shares
in total) of the Company's common stock at an option price of $1.75 per
share. In addition, the Company granted one of the non-employee directors
an additional option to acquire 80,000 shares of the Company's common
stock under the same terms.

F-7

1

EXHIBIT 99.1

SAFE HARBOR COMPLIANCE STATEMENT

The Company believes that the following factors could cause actual
results to differ materially from those in forward-looking statements set forth
in this Form 10-QSB. 

1.       The terms upon which the Company may terminate the delivery of
management services to certain Affiliated Practices, including the
consideration received by the Company for the sale of the assets
associated with these Affiliated Practices.

2.       The Company's ability to monitor the expenses at the Affiliated
Practices.

3.       The Company's ability to timely and successfully implement its plan to
amend its existing arrangements or unwind affiliations as well as
satisfactorily resolve certain disputes with its Affiliated
Orthodontists.

4.       The level of competition in the orthodontic practice management
industry.

5.       Regulatory development and changes in the United States healthcare
system and dental and orthodontic professions that may affect the
profitability of the Company or the enforceability of the Company's
operative agreements with its Affiliated Practices and Affiliated
Orthodontists.

6.       The Company's dependence on revenues generated by the Affiliated
Orthodontists of the Affiliated Practices and the ability of the
Affiliated Practices to repay loans made to the Affiliated Practices to
fund deficits in monthly cash flows of the Affiliated Practices.

7.       The Company's ability to secure capital, and the related cost of such
capital, needed to fund the future growth of the Company.

8.       The Company's ability to staff the Affiliated Practices with
appropriate qualified personnel.

9.       The continued availability to the Company of adequate insurance.

10.      The Affiliated Practices' reputation for delivering high-quality
patient care and their ability to attract and retain patients.

11.      The Company's ability to attract and retain skilled management.

12.      Liability risks associated with providing orthodontic services.

The foregoing factors should not be construed as exhaustive or as an
admission regarding the adequacy of disclosures previously made by the Company.
All capitalized terms used in this Exhibit 99.1 not otherwise defined herein
have the same meanings as prescribed to such terms in the Form 10-QSB.

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS OF
ORTHODONTIX, INC. FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>

<PERIOD-TYPE>                   3-MOS
<FISCAL-YEAR-END>                          DEC-31-1999
<PERIOD-START>                             JAN-01-1999
<PERIOD-END>                               MAR-31-1999
<CASH>                                         754,788
<SECURITIES>                                         0
<RECEIVABLES>                                1,225,050
<ALLOWANCES>                                   230,000
<INVENTORY>                                          0
<CURRENT-ASSETS>                             2,239,625
<PP                                         803,110
<DEPRECIATION>                                 262,881
<TOTAL-ASSETS>                               4,226,258
<CURRENT-LIABILITIES>                        1,159,187
<BONDS>                                              0
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                          0
<COMMON>                                           588
<OTHER-SE>                                   3,025,651
<TOTAL-LIABILITY-AND-EQUITY>                 4,226,258
<SALES>                                      2,162,728
<TOTAL-REVENUES>                             2,162,728
<CGS>                                                0
<TOTAL-COSTS>                                        0
<OTHER-EXPENSES>                             2,560,136
<LOSS-PROVISION>                              (397,408)
<INTEREST-EXPENSE>                                (473)
<INCOME-PRETAX>                               (372,059)
<INCOME-TAX>                                         0
<INCOME-CONTINUING>                           (372,059)
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                  (372,059)
<EPS-PRIMARY>                                    (0.06)
<EPS-DILUTED>                                    (0.06)