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 MARCH 31, 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 May 14, 1998 was
10,566,466 and 3,048,107, 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.......................................... 14

     Item 6 -- Exhibits and Reports on Form 8-K........................... 15

     Signature............................................................ 16

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

                    APPLE ORTHODONTIX, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS

                                                     MARCH 31,      DECEMBER 31,
                                                       1998            1997
                                                   ------------    ------------
                                                            (UNAUDITED)
                         ASSETS
Current assets:
   Cash and cash equivalents ...................   $    337,740    $  2,114,449
   Restricted cash .............................      2,168,222       2,140,146
   Receivable from orthodontic practices, net ..      5,526,879       2,361,627
   Prepaid expenses ............................        303,459         250,205
   Other current assets ........................        537,055         644,557
                                                   ------------    ------------
      Total current assets .....................      8,873,355       7,510,984
                                                   ------------    ------------
Property and equipment, net ....................      7,821,436       6,025,430
Intangible assets, net .........................     50,238,453      39,146,371
Receivable from orthodontic practices,
  net of current portion .......................      1,570,412       1,641,633
Deferred issuance costs ........................         24,314          34,325
Other assets ...................................        894,438         821,508
                                                   ------------    ------------
      Total assets .............................   $ 69,422,408    $ 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 .......      2,924,643       3,242,000
   Payable to orthodontic practices ............      1,836,792         250,649
   Income tax payable ..........................        800,198         351,013
                                                   ------------    ------------
      Total current liabilities ................      5,702,624       4,866,372
                                                   ------------    ------------
Long-term debt, net of current maturities ......      5,208,422         247,624
Deferred income taxes ..........................     18,295,648      14,544,383
Other long-term obligations ....................        137,004          29,099
                                                   ------------    ------------
      Total liabilities ........................     29,343,698      19,687,478
                                                   ------------    ------------
Stockholders' equity
   Class A common stock , $0.001 par value,
      25,000,000 shares authorized,
      10,360,796 and 9,980,192
      shares issued and outstanding ............         10,361           9,980
   Class B common stock, $0.001 par value,
      4,106,852 shares authorized,
      3,163,773 and 3,176,774 shares
      issued and outstanding ...................          3,164           3,177
   Additional paid-in capital ..................     61,575,022      58,295,163
   Warrant .....................................        777,106         777,106
   Retained deficit ............................    (22,286,943)    (23,592,653)
                                                   ------------    ------------
      Total stockholders' equity ...............     40,078,710      35,492,773
                                                   ------------    ------------
      Total liabilities and stockholders' equity   $ 69,422,408    $ 55,180,251
                                                   ============    ============

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

                                      -3-
<PAGE>
                     APPLE ORTHODONTIX, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

                                                        THREE MONTHS ENDED
                                                             MARCH 31,
                                                    ---------------------------
                                                         1998          1997
                                                    ------------    -----------
Management service fee revenues .................   $ 11,218,034    $      --
Costs and expenses:
   Salaries and benefits ........................      3,929,012        234,070
   Orthodontic supplies .........................      1,443,138           --
   Rent .........................................      1,047,194         42,194
   Advertising and marketing ....................        437,822           --
   General and administrative ...................      1,889,952        194,423
   Depreciation and amortization ................        446,058          4,635
                                                    ------------    -----------
      Total costs and expenses ..................      9,193,176        475,322
                                                    ------------    -----------
      Operating income (loss) ...................      2,024,858       (475,322)

Interest expense ................................         17,454           --
Interest income .................................        (88,367)          --
Other expense (income), net .....................        (10,137)          --
                                                    ------------    -----------
      Income (loss) before income tax provision .      2,105,908       (475,322)
Income tax provision ............................        800,198           --
                                                    ------------    -----------
      Net income (loss) .........................   $  1,305,710    $  (475,322)
                                                    ============    ===========
Earnings (loss) per common and common
  equivalent share:
       Basic ....................................   $       0.10    $     (0.14)
                                                    ============    ===========
       Diluted ..................................   $       0.10    $     (0.14)
                                                    ============    ===========
Number of shares used in calculating earnings
  (loss) per common and common equivalent share
       Basic ....................................     13,375,464      3,358,513
                                                    ============    ===========
       Diluted ..................................     13,666,852      3,358,513
                                                    ============    ===========

   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)

                                                             THREE MONTHS
                                                            ENDED MARCH 31,
                                                     --------------------------
                                                         1998           1997
                                                     -----------    -----------

CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss) .............................   $ 1,305,710    $  (475,322)
    Adjustments to reconcile net income (loss)
     to net cash used in operating activities:
      Depreciation and amortization ..............       446,058          4,635
      Deferred income tax expense ................        62,266           --
      Provision for doubtful accounts ............        42,233           --
   Changes in assets and liabilities,
    excluding effects of acquisitions:
      Receivable from orthodontic practices ......    (3,193,320)          --
      Prepaid expenses ...........................       (53,254)          --
      Other assets ...............................     1,128,480           --
      Payables and other accrued liabilities .....      (822,114)       (87,873)
                                                     -----------    -----------
                  Net cash used in operating
                   activities ....................    (1,083,940)      (558,560)
                                                     -----------    -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Capital expenditures ..........................    (1,638,261)          --
   Payments for new affiliated practices .........    (2,659,281)          --
   Advances to affiliates ........................       (16,801)          --
   Repayment of advances by affiliates ...........        73,857           --
                                                     -----------    -----------
                  Net cash used in investing
                   activities ....................    (4,240,487)          --
                                                     -----------    -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
      Proceeds from borrowings ...................     5,000,000      1,638,206
      Repayments of borrowings ...................      (920,921)          --
      Cash paid related to common stock
       issuance costs ............................      (531,361)    (1,100,900)
                                                     -----------    -----------
                  Net cash provided by financing
                   activities ....................     3,547,718        537,306
                                                     -----------    -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS ........    (1,776,709)       (21,254)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .     2,114,449         21,254
                                                     -----------    -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .......   $   337,740    $      --
                                                     ===========    ===========

    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                                                   TOTAL
                                                          COMMON STOCK         ADDITIONAL                              STOCKHOLDERS'
                                                      ---------------------     PAID-IN                 RETAINED         EQUITY
                                                        SHARES       AMOUNT     CAPITAL     WARRANTS     DEFICIT        (DEFICIT)
                                                      -----------   -------   -----------   --------   ------------    -----------
<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
   Issuance of stock to new affiliated practices ...      367,603       368     2,842,802       --             --        2,843,170
   Issuances of options to non-employees ...........         --        --         437,057       --             --          437,057
   Net income ......................................         --        --            --         --        1,305,710      1,305,710
                                                      -----------   -------   -----------   --------   ------------    -----------
BALANCE, March 31, 1998 ............................   13,524,569   $13,525   $61,575,022   $777,106   $(22,286,943)   $40,078,710
                                                      ===========   =======   ===========   ========   ============    ===========
</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 March 31, 1998 and 1997.

Operating results for interim periods are not necessarily indicative of the
results for full years. It is suggested that these 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.

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 a 25-year useful life 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 for the year
ended December 31, 1997 in the Company's annual report on Form 10-K, as amended.

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

3. NEW ORTHODONTIST AFFILIATIONS

During the period from January 1, 1998 through March 31, 1998, the Company
completed New Orthodontist Affiliations with six practices representing 12
orthodontists and 13 office locations. In addition, four orthodontists joined
existing Affiliated Practices. The New Orthodontist Affiliations generated
patient revenue of $5.8 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 New Orthodontist Affiliations consisted of
367,603 shares of common stock and $2.3 million of cash, assumed debt and
deferred purchase price.

The cost of each of the above 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 $11.4
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:

                                                    MARCH 31,  DECEMBER 31,
                                                      1998         1997
                                                   ----------   ----------
      Unsecured revolving credit facility ......   $5,000,000   $     --
      Notes payable, maturing in varying amounts
         through October 2002, with interest
         ranging from 7.5% to 9.25% ............      171,897    1,076,020
      Capitalized lease obligations, due in
         monthly installments through April
         2001with interest ranging from 9.5%
         to 24.66% .............................      177,515      194,314
                                                   ----------   ----------
                                                    5,349,412    1,270,334
         Less:  current maturities .............      140,991    1,022,710
                                                   ----------   ----------
      Long-term debt, net of current maturities    $5,208,421   $  247,624
                                                   ==========   ==========

On July 28, 1997, the Company entered into a three-year, $15 million revolving
credit facility with Chase Bank. of Texas, N.A. Advances under this facility
bear interest, at the Company's option, at prime rate or LIBOR, in each case
plus a margin which is calculated based upon the Company's ratio of indebtedness
to cash flow. On May 1, 1998, the Company received a commitment to increase the
size of its credit facility from $15 million to $25 million.

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

5. STOCK COMPENSATION PLAN

As allowed by 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 with exercise prices greater than or
equal to the fair market value at the date of grant. Had compensation cost for
these plans been 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:

                                               THREE MONTHS
                                              ENDED MARCH 31,
                                        -----------------------------
                                             1998            1997
                                        -------------   -------------
            Net income (loss)
               As reported ..........   $   1,305,710   $    (475,322)
               Pro forma ............   $   1,274,438   $    (506,594)
            Income (loss) per share
               As reported ..........   $        0.10   $       (0.14)
               Pro forma ............   $        0.09   $       (0.15)

                                      -8-
<PAGE>
During the three months ended March 31, 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 March 31, 1998 is as follows:

                                                 PATIENT         CASH
                                                 REVENUES      COLLECTIONS
                                                -----------    -----------
      Practices participating under the
        Standard Contract ..................    $ 8,819,753    $ 8,164,379
      Practices participating under the
        Alternative Contract ...............      2,333,188      2,350,493
      Practices participating under flat
        fee agreements .....................      3,850,010      3,850,010
                                                -----------    -----------
                                                $15,002,951    $14,364,882
                                                ===========    ===========

Combined patient receivables, net of the Affiliated Practices as of March 31,
1998 is as follows:

      Patient receivables ...............................     $ 3,774,728
      Unbilled patient receivables ......................       3,553,174
      Patient prepayments ...............................      (1,787,772)
                                                              -----------
            Patient receivables, net of prepayments .....     $ 5,540,130
                                                              ===========

7. SUBSEQUENT EVENTS

NEW ORTHODONTIST AFFILIATIONS

Since March 31, 1998, three additional orthodontists have affiliated with the
Company. All of these orthodontists had established practices. These
orthodontists operate four locations and generated historical patient revenue of
$1.7 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 to these new
orthodontists consisted of approximately 90,000 shares of common stock and $1.4
million of cash, assumed debt and deferred purchase price.

MANAGEMENT REALIGNMENT

In May 1998, the Company announced a series of management changes. In
conjunction with these management changes, the Company announced that it would
record a special pretax nonrecurring charge of approximately $3.7 million during
the second quarter of 1998, which reflects severance costs associated with these
management changes, costs of terminated transaction negotiations and certain
other items.

                                      -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 May 4, 1998, the Company has affiliated with an
additional 28 practices and 53 orthodontists operating in 53 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 pursuant to the
Acquisitions 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 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 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 date, it will use a
maximum 

                                      -10-
<PAGE>
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 MARCH 31, 1998 AND 1997
(UNAUDITED)

MANAGEMENT SERVICE FEE REVENUES

The Company generated management service fee revenues of $11.2 million for the
three months ended March 31, 1998. The Company conducted no significant
operations through the date of the IPO. Following completion of the IPO and the
Acquisitions on May 29, 1997, the Company began operations effective June 1,
1997. Thus, there were no management service fee revenues for the three months
ended March 31, 1997.

COSTS AND EXPENSES

The Company incurred costs and expenses of $9.2 million (82.0% of management
service fee revenues) for the three months ended March 31, 1998. The Company's
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 of $475,322 for the three
months ended March 31, 1997 represented corporate office expenses consisting
primarily of various legal, accounting, travel, personnel and marketing costs
incurred in connection with the IPO and affiliations with the Founding
Affiliated Practices.

OPERATING INCOME

The Company generated operating income of $2.1 million for the three months
ended March 31, 1998. This operating income amount comprised 18.0% of management
service fee revenues for the period. The Company generated an operating loss of
$475,322 for the three months ended March 31, 1997. As stated above, there were
no management service fee revenues for the three months ended March 31, 1997.

INTEREST EXPENSE

Interest expense of $17,454 for the three months ended March 31, 1998 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.
No interest expense was incurred during the 1997 period.

INTEREST INCOME

Interest income of $88,368 for the three months ended March 31, 1998 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. No interest income was generated during the 1997 period.

INCOME TAXES

The Company incurred an income tax provision of $800,198 for the three months
ended March 31, 1998. The Company incurred no income taxes for the 1997 period.
The benefit of the net operating loss generated during that period was fully
reserved.

NET INCOME (LOSS)

As a result of the foregoing factors, the Company generated net income of $1.3
million for the three months ended March 31, 1998, or earnings of $0.10 per
share. This net income comprised 11.6% of management service fee revenues for
the period. The net loss of $475,322 for the 1997 period represented a loss of
$0.14 per share.

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.

                                      -11-
<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. On July 28, 1997, the Company
entered into a three-year, $15 million revolving credit facility with Chase Bank
of Texas, N.A. (the "Chase Facility"). Availability under the Chase Facility is
tied to the Company's cash flow and liquidity. Advances under the Chase Facility
bear interest, at the Company's option, at prime rate or LIBOR, in each case
plus a margin which is calculated based upon the Company's ratio of indebtedness
to cash flow. On May 1, 1998, the Company received a commitment to increase the
size of the Chase Facility from $15 million to $25 million. At March 31, 1998,
the Company had $5.0 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 $5.2
million at March 31, 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 8.7% for the first 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 $2.2 million at March 31, 1998 consisted 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
three months ended March 31, 1998, of approximately $1.6 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 March 31, 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.

The availability of these capital sources will depend upon prevailing market
conditions, interest rates and the then 

                                      -12-
<PAGE>
existing financial condition of the Company. During the quarter ended March 31,
total consideration related to the New Orthodontist Affiliations consisted of
367,603 shares of common stock and $2.3 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 Founding
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.

                                      -13-
<PAGE>
                                     PART II

ITEM 1. LEGAL PROCEEDINGS

In November 1997, the Company received notice that Mr. Donald Rose, an
acquaintance of Dr. Vondrak, 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.

None.

                                      -14-
<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)).

 *10.1 -- Second Amendment to Employment Agreement of H. Steven Walton
          (Incorporated herein by reference to Exhibit 99.2 of the Company's
          Current Report on Form 8-K dated February 24, 1998).

 *10.2 -- First Amendment to Employment Agreement of Robert J. Syverson
          (Incorporated herein by reference to Exhibit 99.1 of the Company's
          Current Report on Form 8-K dated February 24, 1998).

  27.1 -- Financial Data Schedule.
------------
* Incorporated herein by reference as indicated.

 (b) Reports on Form 8-K

     The Company filed a report on Form 8-K, dated February 24, 1998, relating
     to amendments to employment agreements of two of its executive officers.

                                      -15-
<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:  May 14, 1998                    /s/ MICHAEL W. HARLAN
                                        By: Michael W. Harlan
                                        Vice President - Chief Financial Officer