UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

(MARK ONE)

[X]  Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
     Act of 1934

 For the quarterly period ended JUNE 30, 1998 or

[ ]  Transition report pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934.

              for the transition period from _________ to _________

                         Commission file number 1-12977

                             APPLE ORTHODONTIX, INC.
             (exact name of Registrant as specified in its charter)

               Delaware                                      74-2795193
      (State or other jurisdiction of                      (I.R.S. Employer
       incorporation or organization)                      Identification No.)

         2777 Allen Parkway, Suite 700, Houston, Texas            77019
    (Address of principal executive offices)                    (zip code)

       Registrant's telephone number, including area code:      (713) 852-2500

     Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
 
                        Yes [X]           No [ ]

     The number of shares of Class A Common Stock and Class B Common Stock of
the Registrant, par value $.001 per share, outstanding at August 13, 1998 was
11,117,624 and 2,759,828, respectively.
<PAGE>
                             FORM 10-Q REPORT INDEX

10-Q PART AND ITEM NO.



                                                                            PAGE
PART I - FINANCIAL INFORMATION

     Item 1 -- Financial Statements.........................................  3

     Item 2 -- Management's Discussion and Analysis of Financial Condition
               and Results of Operations...................................  10

PART II - OTHER INFORMATION
     Item 1 -- Legal Proceedings...........................................  15

     Item 6 -- Exhibits and Reports on Form 8-K............................  16

Signature..................................................................  17

                                      -2-
<PAGE>
                                     PART I
ITEM 1. FINANCIAL STATEMENTS

                    APPLE ORTHODONTIX, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                               JUNE 30,      DECEMBER 31,
                                                                                1998            1997
                                                                             ------------    ------------
                                                                              (UNAUDITED)
<S>                                                                          <C>             <C>         
                              ASSETS
Current assets:
    Cash and cash equivalents ............................................   $    524,872    $  2,114,449
    Restricted cash ......................................................      2,140,146       2,140,146
    Receivable from orthodontic practices, net ...........................      7,887,414       2,361,627
    Prepaid expenses .....................................................        459,578         250,205
    Other current assets .................................................      1,430,903         644,557
                                                                             ------------    ------------
        Total current assets .............................................     12,442,913       7,510,984
                                                                             ------------    ------------

Property and equipment, net ..............................................      8,999,164       6,025,430
Intangible assets, net ...................................................     58,108,601      39,146,371
Receivable from orthodontic practices, net of current portion ............      1,527,048       1,641,633
Deferred issuance costs ..................................................         21,061          34,325
Other assets .............................................................        853,244         821,508
                                                                             ------------    ------------
        Total assets .....................................................   $ 81,952,031    $ 55,180,251
                                                                             ============    ============
                          LIABILITIES AND
                       STOCKHOLDERS' EQUITY
Current liabilities:
    Current maturities of long-term debt .................................   $    140,991    $  1,022,710
    Accounts payable and accrued expenses ................................      5,396,541       3,242,000
    Payable to orthodontic practices .....................................      1,399,926         250,649
    Income tax payable ...................................................        780,812         351,013
                                                                             ------------    ------------
        Total current liabilities ........................................      7,718,270       4,866,372
                                                                             ------------    ------------
Long-term debt, net of current maturities ................................     15,177,738         247,624
Deferred income taxes ....................................................     17,488,394      14,544,383
Other long-term obligations ..............................................        122,013          29,099
                                                                             ------------    ------------
        Total liabilities ................................................     40,506,415      19,687,478
                                                                             ------------    ------------
Stockholders' equity
    Class A common stock , $0.001 par value, 25,000,000 shares authorized,
       11,117,624 and 9,980,192 shares issued and
       outstanding .......................................................         11,117           9,980
    Class B common stock, $0.001 par value, 4,106,852 shares
       authorized, 2,759,828 and 3,176,774 shares issued and
       outstanding .......................................................          2,760           3,177
    Additional paid-in capital ...........................................     64,227,985      58,295,163
    Warrants .............................................................        777,106         777,106
    Retained deficit .....................................................    (23,573,352)    (23,592,653)
                                                                             ------------    ------------
        Total stockholders' equity .......................................     41,445,616      35,492,773
                                                                             ------------    ------------
        Total liabilities and stockholders' equity .......................   $ 81,952,031    $ 55,180,251
                                                                             ============    ============
</TABLE>
   The accompanying notes are an integral part of these financial statements.

                                      -3-
<PAGE>
                    APPLE ORTHODONTIX, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                  THREE MONTHS                   SIX MONTHS
                                                                  ENDED JUNE 30,                ENDED JUNE 30,
                                                          ---------------------------    ---------------------------
                                                              1998            1997           1998          1997
                                                          ------------    -----------    ------------    -----------
<S>                                                       <C>             <C>            <C>             <C>        
Management service fee revenues .......................   $ 11,818,215    $ 1,685,957    $ 23,036,249    $ 1,685,957
Costs and expenses:
    Salaries and benefits .............................      4,349,430      1,216,315       8,278,442      1,450,385
    Orthodontic supplies ..............................      1,758,648        199,993       3,201,786        199,993
    Rent ..............................................      1,212,027        385,102       2,259,221        427,296
    Advertising and marketing .........................        418,236          7,705         856,058          7,705
    General and administrative ........................      1,682,041        422,104       3,571,993        615,115
    Depreciation and amortization .....................        761,439         65,671       1,207,497         70,306
    Special charge ....................................      3,745,000           --         3,745,000           --
                                                          ------------    -----------    ------------    -----------
        Total costs and expenses ......................     13,926,821      2,296,890      23,119,997      2,770,800
                                                          ------------    -----------    ------------    -----------
        Operating loss ................................     (2,108,606)      (610,933)        (83,748)    (1,084,843)

Interest expense, net .................................         92,722          5,271         110,176          6,683
Interest income .......................................        (98,908)       (13,592)       (187,275)       (13,592)
Other income ..........................................        (27,567)           (56)        (37,704)           (56)
                                                          ------------    -----------    ------------    -----------
        Income (loss) before income taxes .............     (2,074,853)      (602,556)         31,055     (1,077,878)
Income tax provision (benefit) ........................       (788,444)      (409,594)         11,754       (409,594)
                                                          ------------    -----------    ------------    -----------
        Net income (loss) .............................     (1,286,409)      (192,962)         19,301       (668,284)
                                                          ============    ===========    ============    ===========
Earnings (loss) per common and common equivalent share:
    Basic .............................................   $      (0.09)   $     (0.03)   $       0.00    $     (0.14)
                                                          ============    ===========    ============    ===========
    Diluted ...........................................   $      (0.09)   $     (0.03)   $       0.00    $     (0.14)
                                                          ============    ===========    ============    ===========
Number of shares used in calculating
  earnings (loss) per common and
  common equivalent share:
    Basic .............................................     13,783,336      6,079,863      13,598,434      4,721,022
                                                          ============    ===========    ============    ===========
    Diluted ...........................................     13,783,336      6,079,863      13,801,800      4,721,022
                                                          ============    ===========    ============    ===========
</TABLE>
   The accompanying notes are an integral part of these financial statements.

                                      -4-
<PAGE>
                    APPLE ORTHODONTIX, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                                   SIX MONTHS
                                                                                  ENDED JUNE 30,
                                                                            ---------------------------- 
                                                                                1998           1997
                                                                            ------------    ------------
<S>                                                                         <C>             <C>          
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income (loss) ...................................................   $     19,301    $   (668,284)
    Adjustments to reconcile net income (loss) to net cash used in
      operating activities:
        Depreciation and amortization ...................................      1,207,497          70,306
        Deferred income tax provision (benefit) .........................       (309,824)       (409,594)
        Provision for doubtful accounts .................................         86,732          17,031
    Changes in assets and liabilities, excluding effects of acquisitions:
        Receivable from orthodontic practices ...........................     (4,756,344)       (194,458)
        Prepaid expenses ................................................       (209,373)       (157,310)
        Other assets ....................................................       (808,174)      1,313,392
        Payables and other accrued liabilities ..........................      2,790,601        (898,639)
                                                                            ------------    ------------
                      Net cash used in operating activities .............     (1,979,584)       (927,556)
                                                                            ------------    ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
    Capital expenditures ................................................     (3,663,303)     (1,349,222)
    Payments for new affiliated practices ...............................     (9,332,881)           --
    Advances to affiliates ..............................................       (903,525)           --
    Repayment of advances by affiliates .................................        161,935            --
                                                                            ------------    ------------
                      Net cash used in investing activities .............    (13,737,774)     (1,349,222)
                                                                            ------------    ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
        Proceeds from borrowings ........................................     15,000,000       2,082,400
        Repayments of borrowings ........................................       (951,605)     (3,484,292)
        Proceeds from issuances of common stock .........................         79,386      17,593,277
        Cash paid related to common stock issuance costs ................           --        (4,102,443)
        Special dividend to founders ....................................           --        (6,429,443)
                                                                            ------------    ------------
                      Net cash provided by financing activities .........     14,127,781       5,659,499
                                                                            ------------    ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ....................     (1,589,577)      3,382,721

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ........................      2,114,449          21,254
                                                                            ------------    ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ..............................   $    524,872    $  3,403,975
                                                                            ============    ============
</TABLE>
   The accompanying notes are an integral part of these financial statements.

                                      -5-
<PAGE>
                    APPLE ORTHODONTIX, INC. AND SUBSIDIARIES
      CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                           (UNAUDITED)
<TABLE>
<CAPTION>
                                              CLASS A AND B 
                                              COMMON STOCK         ADDITIONAL                                 TOTAL
                                          ---------------------     PAID-IN                  RETAINED     STOCKHOLDERS'
                                            SHARES       AMOUNT     CAPITAL     WARRANTS     DEFICIT          EQUITY
                                          -----------   -------   -----------   --------   ------------    -----------
<S>                                       <C>           <C>       <C>           <C>        <C>             <C>        
BALANCE, December 31, 1997 ............    13,156,966   $13,157   $58,295,163   $777,106   $(23,592,653)   $35,492,773
    Issuances of common stock to
     new affiliated practices .........       455,604       456     3,469,414       --             --        3,469,870
    Issuances of common stock
     under stock option plan, including
     income tax benefit ...............        20,000        20        79,366       --             --           79,386
    Issuances of common stock
     options to non-employees .........          --        --         437,057       --             --          437,057
    Net income ........................          --        --            --         --           19,301         19,301
    Other .............................       244,882       244     1,946,985       --             --        1,947,229
                                          -----------   -------   -----------   --------   ------------    -----------
BALANCE, June 30, 1998 ................    13,877,452   $13,877   $64,227,985   $777,106   $(23,573,352)   $41,445,616
                                          ===========   =======   ===========   ========   ============    ===========
</TABLE>
   The accompanying notes are an integral part of these financial statements.

                                      -6-
<PAGE>
                             APPLE ORTHODONTIX, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

1. ORGANIZATION AND BASIS OF PRESENTATION

Apple Orthodontix, Inc. ("Apple" or the "Company") was founded in July 1996 to
provide practice management services to orthodontic practices in the United
States and Canada. On May 29, 1997, Apple acquired substantially all of the
tangible and intangible assets, and assumed certain of the liabilities of 31
orthodontic practices (collectively, the "Founding Affiliated Practices") in
exchange for 3.7 million shares of its class A common stock, par value $.001 per
share (the "Common Stock"), and $6.6 million (the "Initial Affiliations").
Simultaneous with the Initial Affiliations, Apple closed its initial public
offering (the "IPO") of 2.7 million shares of Common Stock. The net proceeds of
the Common Stock issued in the IPO (after deducting the underwriting discounts
and commissions) were $17.6 million. Total related offering costs were $5.5
million.

Apple effectively began operations with the Founding Affiliated Practices on
June 1, 1997. Apple has subsequently acquired the assets and assumed the
liabilities of additional practices (the "New Orthodontist Affiliations"). The
New Orthodontist Affiliations together with the Founding Affiliated Practices
are collectively referred to as the "Affiliated Practices."

The acquisitions of the Founding Affiliated Practices have been accounted for in
accordance with the Securities and Exchange Commission's Staff Accounting
Bulletin ("SAB") No. 48. In accordance with SAB No. 48, the acquisitions of
assets and assumption of certain liabilities for all of the Founding Affiliated
Practices has been accounted for by the Company at the transferors' historical
cost basis, with the shares of Common Stock issued in those transactions being
valued at the historical cost of the nonmonetary assets acquired net of
liabilities assumed. The cash consideration paid at closing on May 29, 1997, is
reflected as a dividend by the Company to the owners of the Founding Affiliated
Practices in the quarter ended June 30, 1997. SAB No. 48 is not applicable to
affiliations effected by the Company subsequent to the IPO.

The acquisitions of assets and liabilities of the New Orthodontist Affiliations
are accounted for by allocating the value of the consideration paid by Apple to
the assets acquired, net of liabilities assumed, including intangible assets. As
a result of this allocation process, the Company records a significant portion
of the consideration as a service fee intangible. The service fee intangible has
resulted and will continue to result in substantial noncash amortization charges
for intangible assets in the Company's condensed consolidated statements of
operations.

The condensed consolidated financial statements included herein have been
prepared by the Company without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission (the "SEC"). Pursuant to such
regulations, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The Company believes the presentation
and disclosures herein are adequate to make the information not misleading. The
financial statements reflect all elimination entries and normal adjustments that
are necessary for a fair presentation of the results for the interim periods
ended June 30, 1998 and 1997.

Operating results for interim periods are not necessarily indicative of the
results for full years. It is suggested that these condensed consolidated
financial statements be read in conjunction with the financial statements of
Apple and related notes thereto, and management's discussion and analysis
related thereto, all of which are included in the Company's annual report on
Form 10-K for the year ended December 31, 1997, as amended, as filed with the
SEC (the "1997 Form 10-K").

2. SIGNIFICANT ACCOUNTING POLICIES

INTANGIBLE ASSETS, NET

In reaction to recent trends in the practice management industry, the Company
has changed its estimate of the remaining useful life of its intangible assets
to a maximum of 25 years effective April 1, 1998. These costs have historically
been amortized over a period of 30 to 40 years to match the term of the related
service agreement.

There have been no other significant additions to or changes in accounting
policies of the Company since December 31, 1997. For a description of these
policies, see Note 2 of Notes to Consolidated Financial Statements in the 1997
Form 10-K.

                                      -7-
<PAGE>
                             APPLE ORTHODONTIX, INC.
       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
                                   (UNAUDITED)

NEW ACCOUNTING STANDARDS

In April 1998, Statement of Position ("SOP") 98-5, "Reporting on the Costs of
Start-Up Activities," was issued by the American Institute of Certified Public
Accountants. SOP 98-5 requires that all non-governmental entities expense the
costs of start-up activities as those costs are incurred. The Company is
required to adopt SOP 98-5 as of January 1, 1999. The Company does not expect
the adoption of SOP 98-5 to have a material effect on its financial position or
results of operations.

3. NEW ORTHODONTIST AFFILIATIONS

During the period from January 1, 1998 through June 30, 1998, the Company
completed New Orthodontist Affiliations with 15 practices representing 21
orthodontists and 23 office locations. In addition, four orthodontists joined
existing Affiliated Practices. The 1998 New Orthodontist Affiliations generated
patient revenue of $9.9 million for their most recently completed fiscal year.
Prior patient revenue is not necessarily indicative of the level of patient
revenue that these practices may be expected to generate in the future and is
not necessarily indicative of the future service fees that the Company will
receive in conjunction with these affiliations.

Total consideration related to the 1998 New Orthodontist Affiliations consisted
of 455,604 shares of common stock and $7.1 million of cash, assumed debt and
deferred purchase price.

The cost of each of the above 1998 New Orthodontist Affiliations has been
allocated on the basis of the estimated fair market value of the assets acquired
and liabilities assumed, resulting in gross service fee intangibles of $14.1
million. These allocations may be adjusted to the extent that management becomes
aware of additional information within one reporting year of the affiliation
date which results in a material change in the amount of any contingency or
changes in the estimated fair market value of assets acquired and liabilities
assumed.

4. LONG-TERM DEBT

A summary of long-term debt is as follows:

                                                          JUNE 30,  DECEMBER 31,
                                                           1998         1997
                                                        -----------   ----------
Unsecured revolving credit facility .................   $15,000,000   $     --
Notes payable, maturing in varying amounts through
    October 2002, with interest ranging from 7.5%
    to 9.25% ........................................       155,093    1,076,020
Capitalized lease obligations, due in monthly
    installments through April 2001with interest
    ranging from 9.5% to 24.66% .....................       163,636      194,314
                                                        -----------   ----------
                                                         15,318,729    1,270,334
    Less:  current maturities .......................       140,991    1,022,710
                                                        -----------   ----------
Long-term debt, net of current maturities ...........   $15,177,738   $  247,624
                                                        ===========   ==========

During 1998, the Company amended its unsecured bank credit facility in place at
December 31, 1997 to increase its size from $15 million to $25 million and to
increase its bank group from one to two banks. The bank credit facility provides
for a revolving credit period expiring on May 31, 2002. Availability under this
facility is tied to the Company's cash flow and liquidity. Advances bear
interest, at the Company's option, at a prime rate or LIBOR, in each case plus a
margin which is calculated based upon the Company's ratio of indebtedness to
cash flow. The Company is required to maintain certain financial covenants
regarding net worth, coverage ratios and additional indebtedness. As of June 30,
1998, the Company had $15.0 million drawn under this facility.

The notes payable relate to debts of the Affiliated Practices that were assumed
by the Company.

5. STOCK COMPENSATION PLAN

As allowed by Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," the Company accounts for awards under
its 1997 Stock Compensation Plan under Accounting Principles Board Opinion No.
25, under which no compensation cost has been recognized for stock options
issued to employees with exercise prices greater than or equal to the fair
market value at the date of grant. Had compensation cost for these plans been

                                      -8-
<PAGE>
determined consistent with SFAS No. 123, the Company's net loss and loss per
share would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
                                     THREE MONTHS                   SIX MONTHS
                                    ENDED JUNE 30,                ENDED JUNE 30,
                            ------------------------------  ---------------------------
                                1998             1997            1998         1997
                            -------------    -------------  ------------- -------------
<S>                         <C>              <C>            <C>           <C>           
Net income (loss)
    As reported .........   $  (1,286,409)   $    (192,962) $      19,301 $    (668,284)
    Pro forma ...........   $  (1,327,237)   $    (289,460) $     (62,354)$    (764,782)
Earnings (loss) per share
    As reported .........   $       (0.09)   $       (0.03) $        0.00 $       (0.14)
    Pro forma ...........   $       (0.10)   $       (0.05) $        0.00 $       (0.16)
</TABLE>
During the six months ended June 30, 1998, the Company issued options to
purchase 35,000 shares to individuals other than employees and directors of the
Company as consideration for the closing of New Orthodontist Affiliations. The
fair value of these options was determined using the Black-Scholes option
pricing model at the date of grant and capitalized as a cost of affiliation.

6. COMBINED PATIENT DATA

Combined operating data for the Affiliated Practices for the period from January
1, 1998 through June 30, 1998 is as follows:

                                              PATIENT        CASH
                                              REVENUES     COLLECTIONS
                                             -----------   -----------
Practices participating under the Standard
  Contract ...............................   $18,327,256   $16,967,255
Practices participating under the
  Alternative Contract ...................     4,982,421     5,165,736
Practices participating under flat fee
  agreements .............................     7,532,567     7,532,567
                                             -----------   -----------
                                             $30,842,244   $29,665,558
                                             ===========   ===========

Combined patient receivables, net of the Affiliated Practices as of June 30,
1998 is as follows:

Patient receivables .........................................       $ 3,890,144
Unbilled patient receivables ................................         4,562,894
Patient prepayments .........................................        (2,610,314)
                                                                    -----------
        Patient receivables, net of prepayments .............       $ 5,842,724
                                                                    ===========

                                      -9-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

THE FOLLOWING DISCUSSION AND ANALYSIS CONTAINS CERTAIN STATEMENTS OF A
FORWARD-LOOKING NATURE RELATING TO FUTURE EVENTS OR THE FUTURE FINANCIAL
PERFORMANCE OF THE COMPANY. SUCH STATEMENTS ARE ONLY PREDICTIONS AND THE ACTUAL
EVENTS OR RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, RISKS ASSOCIATED WITH AFFILIATIONS,
FLUCTUATIONS IN OPERATING RESULTS BECAUSE OF AFFILIATIONS AND VARIATIONS IN
STOCK PRICE, CHANGES IN GOVERNMENT REGULATIONS, COMPETITION, RISKS OF OPERATIONS
AND GROWTH OF EXISTING AND NEW AFFILIATED ORTHODONTIC PRACTICES, AND RISKS
DETAILED IN THE COMPANY'S SEC FILINGS. THE HISTORICAL RESULTS SET FORTH IN THIS
DISCUSSION AND ANALYSIS ARE NOT INDICATIVE OF TRENDS WITH RESPECT TO ANY ACTUAL
OR PROJECTED FUTURE FINANCIAL PERFORMANCE OF THE COMPANY. THIS DISCUSSION AND
ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS OF THE COMPANY AND THE RELATED NOTES THERETO INCLUDED
ELSEWHERE IN THIS FORM 10-Q AND THE ANNUAL CONSOLIDATED FINANCIAL STATEMENTS
INCLUDED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER
31, 1997, AS AMENDED.

OVERVIEW

The Company conducted no significant operations before its IPO in May 1997 when
the Company acquired the tangible and intangible assets and liabilities of, and
entered into Service Agreements with, the 31 Founding Affiliated Practices.
Since that time and through August 12, 1998, the Company has affiliated with an
additional 35 practices and 59 orthodontists operating in 64 offices. The
Company expects that its future growth will come from (i) implementing a
comprehensive practice operating approach designed to drive internal growth of
the Affiliated Practices, (ii) entering into Service Agreements with new
Affiliated Practices and (iii) developing new orthodontic centers, including
satellite offices (branch locations of existing Affiliated Practices), with
existing and future Affiliated Practices.

Through its Service Agreements, the Company provides a full complement of
practice management services to Affiliated Practices in return for management
service fees. The management service fees earned by the Company are in
accordance with three general types of Service Agreements --the standard form of
the Service Agreement (the "Standard Contract"), the alternative form of the
Service Agreement (the "Alternative Contract") and a Service Agreement based
upon a flat fee (the "Flat Fee Contract"). The Standard Contract calls for a
calculation of the monthly service fee based on the total patient revenues
earned by the Affiliated Practices, which is defined by the agreement to
represent 24% of the total contract value in the initial month of a patient's
treatment with the remainder of the contract balance earned evenly over the
balance of the contract term. From total patient revenues, the practices retain
a percentage of the Affiliated Practices' cash collections.

The Alternative Contract is used in certain jurisdictions where use of the
Standard Contract is not permitted. It is a cost-plus fee arrangement, whereby
the service fee includes the reimbursement of defined expenses incurred by Apple
in the course of providing services to the Affiliated Practice plus a percentage
of revenues.

The Flat Fee Contract is based on a flat fee subject to adjustment on an annual
basis. It is used when local jurisdictions do not allow use of the Standard
Contract or Alternative Contract.

The Company believes the fees generated by each of these formulas reflect the
fair market value of the services provided and are comparable to the fees earned
by other practice management service companies in the respective jurisdictions
where these arrangements exist.

The expenses incurred by the Company in fulfilling its obligations under the
Service Agreements are generally of the same nature as the operating costs and
expenses that would have otherwise been incurred by the Affiliated Practices,
including salaries, wages and benefits of practice personnel (excluding
orthodontists and, in some cases, orthodontic assistants and other professional
personnel), orthodontic supplies and office supplies used in administering their
clinic practices, the office (general and administrative) expenses of the
practices and depreciation and amortization of assets acquired from the Founding
Affiliated Practices. In addition to the operating costs and expenses discussed
above, the Company incurs personnel and administrative expenses in connection
with establishing and maintaining a corporate office, which provides management,
administrative, marketing and business development services.

In accordance with SAB No. 48, the acquisition of the assets and assumption of
certain liabilities for all of the Founding Affiliated Practices has been
accounted for by the Company at the transferors' historical cost basis, with the
shares of common stock issued in the Initial Affiliations being valued at the
historical cost of the nonmonetary assets acquired net of liabilities assumed.
The cash consideration paid at closing on May 29, 1997 is reflected as a
dividend by Apple to the owners of the Founding Affiliated Practices in the
quarter ended June 30, 1997. SAB No. 48 is not applicable to affiliations
effected by the Company after the IPO. The subsequent affiliations resulted in
substantial intangible assets being recorded and will continue to result in
substantial annual noncash amortization charges for intangible assets in the
Company's statements of operations. In this connection, the Company changed,
effective April 1, 1998, its estimate of the remaining useful life of its
intangible assets in light of recent trends in the practice management industry.
From that 

                                      -10-
<PAGE>
date, it will use a maximum 25-year useful life for amortizing intangible assets
attributable to Affiliations. Prior to that date, these costs were being
amortized over a period of 30 to 40 years to match the term of the related
Service Agreement.

RESULTS OF OPERATIONS FOR THE INTERIM PERIODS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)

MANAGEMENT SERVICE FEE REVENUES

The Company generated management service fee revenues of $11.8 million and $23.0
million for the three- and six-month periods ended June 30, 1998, respectively,
as compared with $1.7 million for each of the three- and six-month periods in
1997. The Company conducted no significant operations through the date of the
IPO. Following completion of the IPO and the Initial Affiliations on May 29,
1997, the Company began operations effective June 1, 1997. Thus, management
service fee revenues for each of the three- and six-month periods in 1997
reflect only one month of operations.

COSTS AND EXPENSES

The Company incurred costs and expenses of $13.9 million (117.8% of management
service fee revenues) and $23.1 million (100.4% of management service fee
revenues) for the three- and six-month periods ended June 30, 1998,
respectively. The Company's recurring costs and expenses consisted primarily of
salaries and benefits, orthodontic supplies, rent, advertising and marketing,
general and administrative and depreciation and amortization. Costs and expenses
for the 1998 periods also included a $3.7 million special charge which reflected
severance costs associated with a series of management changes, costs of
terminated transaction negotiations and certain other items. Exclusive of this
$3.7 million charge, costs and expenses were $10.2 million (86.2% of management
service fee revenues) and $19.4 million (84.1% of management service fee
revenues) for the three- and six-month periods ended June 30, 1998,
respectively. As described more fully in MANAGEMENT SERVICE FEE REVENUES above,
costs and expenses for each of the three- and six- month periods ended June 30,
1997 reflect only one month of operations. Costs and expenses for the 1997
periods do, however, reflect corporate office expenses (consisting primarily of
various legal, accounting, travel, personnel and marketing costs incurred in
connection with the IPO and the Initial Affiliations) for the entire periods
presented.

OPERATING INCOME (LOSS)

The Company generated operating losses of $2.1 million and $83,748 for the
three- and six- month periods ended June 30, 1998, respectively. Exclusive of
the $3.7 million special charge discussed in COSTS AND EXPENSES above, the
Company generated operating income of $1.6 million and $3.7 million for the
respective periods. These operating income amounts comprised 13.8% and 15.9% of
management service fee revenues, respectively, for such periods. The Company
generated operating losses of $610,933 and $1,084,843 for the three- and
six-month periods ended June 30, 1997, respectively. As described more fully in
MANAGEMENT SERVICE FEE REVENUES and COSTS AND EXPENSES above, the three- and
six- month periods ended June 30, 1997 reflect only one month of operations, but
full periods of corporate office expenses.

INTEREST EXPENSE

Interest expense of $92,722 and $110,176 for the three- and six- month periods
ended June 30, 1998, respectively, reflected the cost of borrowings under the
Company's revolving credit facility, certain indebtedness of the Founding
Affiliated Practices that was assumed by the Company and certain capital lease
obligations for computer and office equipment. Interest expense of $5,271 and
$6,683 for the three- and six- month periods ended June 30, 1997, respectively,
reflected certain indebtedness of the Founding Affiliated Practices that was
assumed by the Company and certain capital lease obligations for computer and
office equipment

INTEREST INCOME

Interest income of $98,908 and $187,275 for the three- and six- month periods
ended June 30, 1998, respectively, reflected interest earned on notes receivable
from certain of the Founding Affiliated Practices and certain funds held in an
escrow account related to a Canadian affiliation. Interest income of $13,592 for
each of the three- and six- month periods ended June 30, 1997, respectively,
reflected interest earned on notes receivable from certain of the Founding
Affiliated Practices.

INCOME TAXES

The Company generated an income tax provision (benefit) of $(788,444) and
$11,754 for the three-and six-month periods ended June 30, 1998. The Company
generated an income tax (benefit) of $(409,594) for each of the three- and
six-month periods ended June 30, 1997. These income tax benefits resulted from
net operating losses generated by the Company during those periods.

                                      -11-
<PAGE>
NET INCOME (LOSS)

As a result of the foregoing factors, the Company generated net income (loss) of
$(1.3) million and $19,301 for the three- and six-month periods ended June 30,
1998, respectively, or earnings (loss) of $(0.09) and $0.00 per share,
respectively. Exclusive of the $3.7 million special charge discussed in COSTS
AND EXPENSES above, the Company generated net income of $1.0 million and $2.3
million for the respective periods, or basic earnings per share of $0.08 and
$0.17, respectively. This net income comprised 8.8% and 10.2% of management
service fee revenues for the respective periods. The Company generated net
losses of $192,962 and $668,284 for the three- and six-month periods ended June
30, 1997, respectively. As described more fully in MANAGEMENT SERVICE FEE
REVENUES and COSTS AND EXPENSES above, the three- and six- month periods ended
June 30, 1997 reflect only one month of operations, but full periods of
corporate office expenses.

YEAR 2000 IMPACT ON INFORMATION TECHNOLOGY INFRASTRUCTURE

During 1997, the Company completed a comprehensive evaluation of its information
technology infrastructure to analyze the impact of the technical problems
anticipated for the year 2000. Following its evaluation, the Company determined
that substantially all its information technology infrastructure would be
unaffected by such problems and that the financial impact of the year 2000 on
the Company's information technology infrastructure would be negligible.

                                      -12-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES

FINANCING ACTIVITIES

The Company has financed its capital requirements to date with borrowings from
banks and issuances of securities. To date, the Company has been able to obtain
satisfactory financing for its operations and believes that it will be able to
obtain such financing as required in the future. During 1998, the Company
amended its unsecured bank credit facility in place at December 31, 1997 to
increase its size from $15 million to $25 million and to increase its bank group
from one to two banks. The bank credit facility provides for a revolving credit
period expiring on May 31, 2002. Availability under this facility is tied to the
Company's cash flow and liquidity. Advances bear interest, at the Company's
option, at a prime rate or LIBOR, in each case plus a margin which is calculated
based upon the Company's ratio of indebtedness to cash flow. The Company is
required to maintain certain financial covenants regarding net worth, coverage
ratios and additional indebtedness. As of June 30, 1998, the Company had $15.0
million drawn under this facility.

In May 1997, the Company issued and sold 2,702,500 shares of Common Stock in the
IPO. The IPO provided the Company with net proceeds of $12.1 million, which it
used to fund cash paid for the Initial Affiliations ($6.6 million) and
subsequent affiliations ($5.5 million). In November 1997, the Company issued and
sold 1,490,014 shares of Common Stock in a public offering (the "Offering"). The
Company has used the net proceeds of the Offering ($15.3 million) to repay $12.2
million under the Chase Facility, to affiliate with additional orthodontists, to
develop new offices, for capital expenditures and for general corporate
purposes.

Total long-term debt increased from $247,624 at December 31, 1997, to $15.2
million at June 30, 1998. The increase is attributable to borrowings for the
affiliation of new orthodontic practices, the purchase of property and equipment
and general working capital needs. The Company's weighted average cost of
indebtedness was 7.2% for the second quarter of 1998.

WORKING CAPITAL MANAGEMENT

The Company's strategy in managing working capital is to maintain sufficient
availability under the Chase Facility to finance short-term capital needs in
excess of internally generated funds and minimize excess cash on its balance
sheet.

The cash and cash equivalents balance of $2.1 million at December 31, 1997
primarily consisted of net proceeds remaining from the Offering.

The restricted cash balance of $2.1 million at June 30, 1998 consisted primarily
of borrowings under the Chase Facility which were placed into escrow pending the
resolution of certain post-closing contingencies related to a new affiliate
orthodontist transaction closed during the third quarter of 1997. A favorable
resolution of these post-closing contingencies would result in payment of the
$2.1 million to the sellers in January 1999. The Company has the right to post a
letter of credit in order to have the $2.1 million refunded from escrow to the
Company prior to January 1999.

CAPITAL EXPENDITURES AND NEW AFFILIATIONS

The Company made capital expenditures for the Affiliated Practices during the
six months ended June 30, 1998, of approximately $3.7 million to fund, among
other things, the development of satellite offices. The average cost of
developing a satellite office (which may vary by geographic market) is estimated
to be approximately $250,000 to $400,000, including initial working capital
requirements. The Service Agreements provide for advances by the Company to the
Affiliated Practices for working capital requirements (including any deficits in
cash flows of Affiliated Practices resulting from, among other things,
development of satellite offices) and other purposes. Such loans bear interest
at prime plus one percent and are repayable over varying periods of time not to
exceed five years. Total notes receivable from Affiliated Practices were $1.5
million at June 30, 1998. It is anticipated that capital expenditures will be
funded from the Company's cash flow from operations and borrowings under the
Chase Facility.

The Company's expansion strategy requires substantial capital resources. Capital
is needed for future affiliations and the effective integration, operation and
expansion of the existing and future Affiliated Practices. In addition, the
Affiliated Practices may from time to time require capital for renovation and
expansion and for the addition of equipment and technology. The extent to which
the Company is able or willing to use shares of Common Stock to enter into
future affiliations or provide future financing will depend on the market value
of the Common Stock from time to time and, in the case of affiliations, the
willingness of owners of potential Affiliated Practices to accept Common Stock
as full or partial payment of consideration for affiliations. The Company will
require additional capital from outside financing sources in order to continue
its expansion program. There can be no assurance that the Company will be able
to obtain additional funds when needed on satisfactory terms or at all. Any
limitation on the Company's ability to obtain additional financing could have a
material adverse effect on the Company's business, financial condition and
results of operations.

                                      -13-
<PAGE>
The availability of capital from outside financing sources will depend upon
prevailing market conditions, interest rates and the then existing financial
condition of the Company. During the six months ended June 30, 1998, total
consideration related to the New Orthodontist Affiliations consisted of 455,604
shares of common stock and $7.1 million of cash, assumed debt and deferred
purchase price.

AFFORDABLE PAYMENT PLANS

A part of the Company's business strategy is to encourage Affiliated Practices
to offer more affordable payment plans to patients. The Company does not expect
the affordable payment plans, or any potential increase in bad debt expense
resulting from these plans, to have any significant negative impact on the
working capital or liquidity of the Affiliated Practices. Existing Affiliated
Practices using such payment plans have experienced an initial decrease in
working capital; however, the Company believes that the decrease in working
capital generally will be offset by an increase in the number of patients
receiving orthodontic treatment because of the combined effect of advertising,
offering more affordable payment plans and the use of the Company's
practice-building program. Moreover, the Company believes the Affiliated
Practices have the financial wherewithal to sustain any negative impact that may
result from these payment plans. Therefore, Apple does not anticipate that the
offering by the Affiliated Practices of more affordable payment plans will
impair the Company's ability to collect management service revenues from the
Affiliated Practices.

                                      -14-
<PAGE>
                                     PART II

ITEM 1. LEGAL PROCEEDINGS

In November 1997, the Company received notice that Mr. Donald Rose, an
acquaintance of Dr. John G. Vondrak, the Chairman of the Board of the Company,
was threatening to sue the Company, John G. Vondrak Apple Orthodontix, Inc., Dr.
Vondrak and John G. Vondrak, P.C., alleging, among other things, certain
breaches of an alleged oral agreement with Dr. Vondrak pursuant to which Dr.
Vondrak was to award Mr. Rose 10% of any stock issued to Dr. Vondrak in the IPO
in exchange for Mr. Rose's effort to obtain venture capital for the Company. On
January 8, 1998, Dr. Vondrak filed a declaratory judgment action in the District
Court of Harris County, Texas (269th Judicial District) seeking a finding by the
court that Mr. Rose was not entitled to any of Dr. Vondrak's stock or any other
remuneration. Mr. Rose has filed a special appearance challenging jurisdiction
and a general denial. The Company is not a party to the declaratory judgment
action filed by Dr. Vondrak. While the Company was not a party to the alleged
oral agreement, Mr. Rose has maintained that the Company should be bound by its
terms as a result of the relationship between Dr. Vondrak and the Company.
Although the Company believes that these allegations are without merit, there
can be no assurance that a lawsuit will not be filed and, if filed, that the
Company will obtain a successful outcome.

On April 14, 1998, Orthosoft, Inc. ("Orthosoft") filed a complaint in the
District Court of Harris County, Texas against the Company alleging, among other
things, breach of a Software License and Asset Purchase Option Agreement dated
January 31, 1997 among Orthosoft, Glenn W. Woods, Robert J. Dennington, D.D.S.
and the Company. The complaint alleges that Orthosoft has suffered damages of
approximately $3.1 million. The Company strenuously denies any wrongdoing and
intends to vigorously defend against the claims made by Orthosoft, which the
Company believes are without merit, and has instituted counterclaims for
breaches of the agreement by Orthosoft, Mr. Woods and Dr. Dennington.

The Company is not currently a party to any material claims, suits or complaints
relating to services and products provided by the Company or the existing
Affiliated Practices, although there can be no assurance that such claims will
not be asserted against the Company in the future. The Company is subject to
certain pending claims as a result of successor liability in connection with its
affiliations with existing Affiliated Practices; however, the Company believes
that the ultimate resolution of those claims will not have a material adverse
effect on the financial position or operating results of the Company.

ITEM 2. CHANGE 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.

None.

ITEM 5. OTHER INFORMATION.

On August 12, 1998, the Company announced the appointment of A. Stone Douglass,
51, a managing partner of Compass Partners, LLC, as Chief Executive Officer and
President, replacing John G. Vondrak, D.D.S., who will continue as Chairman of
the Board. In addition, Mr. Douglass was elected to the Board of Directors. The
Company also announced that James E. Bobbitt, 54, would be replacing Michael W.
Harlan as Vice President and Chief Financial Officer. Mr. Harlan will continue
as a consultant to the Company on financial matters and will assist in the
transition of his responsibilities to Mr. Bobbitt.


                                      -15-
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

   (a)  Exhibits.

Exhibit
NUMBER                DESCRIPTION

*3.1   --   Restated Certificate of Incorporation (Incorporated herein by 
            reference to Exhibit 3.1 of the Company's Registration Statement on
            Form S-1 (Registration No. 333-22785)).

*3.2   --   Bylaws (Incorporated herein by reference to Exhibit 3.2 of the 
            Company's Registration Statement on Form S-1 (Registration No. 
            333-22785)).

27.1   --   Financial Data Schedule.


*Incorporated herein by reference as indicated.

   (b)  Reports on Form 8-K

       None

                                      -16-
<PAGE>
                                    SIGNATURE

     Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant, Apple Orthodontix, Inc., has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                                         APPLE ORTHODONTIX, INC.

Dated:  August 14, 1998                                  /S/ JAMES E. BOBBITT
                                                         By: James E. Bobbitt
                                                         Vice President - Chief
                                                         Financial Officer

                                      -17-