UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON D.C. 20549

                                    FORM 10-K
            MARK ONE:
            [X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
                 THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
                    FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

                                       OR
            [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
                THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
                         FOR THE TRANSITION PERIOD FROM
                                       TO
                    -------------------- --------------------

                         COMMISSION FILE NUMBER 0-11453

                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
             (Exact name of registrant as specified in its charter)

                 TEXAS                                 75-1458323
     (State or other jurisdiction of                (I.R.S. Employer
      incorporation or organization)                identification No.)

               1301 CAPITAL OF TEXAS  HIGHWAY  AUSTIN, TEXAS 78746
          (Address of principal executive offices)       (Zip Code)

                                 (512) 328-0888
              (Registrant's telephone number, including area code)
          SECURITIES REGISTERED PURSUANT TO SECTION 12(b)OF THE ACT:

                            Name of Each Exchange on
            Title of Each Class                       Which Registered
            -------------------                   ------------------------
                   None                                      None

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g)OF THE ACT:
                          Common Stock, $.10 Par Value
                                (Title of Class)
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 [ ]

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best  of  the  registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in  Part  III of the  Form  10-K or any
amendment to this Form 10-K _____

State the aggregate market value of the voting stock held by  non-affiliates  of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold or the  average  bid and asked  prices of such
stock, as of a specified date within 60 days prior to the date of filing.
          Aggregate Market Value at March 25, 1999: $12,499,479

Indicate the number of shares  outstanding of each of the registrant's  class of
common stock, as of the latest practicable date.

                                               NUMBER OF SHARES
                                                OUTSTANDING AT
     TITLE OF EACH CLASS                        MARCH 25, 1999
     --------------------                      ----------------
Common Stock, $.10 par value                      4,153,683
                       DOCUMENTS INCORPORATED BY REFERENCE
Selected  portions of the  Registrant's  definitive  proxy material for the 1997
annual meeting of  shareholders  are  incorporated by reference into Part III of
the Form 10-K. In addition,  Item14(a) of Prime Medical Services,  Inc.'s Annual
Report on Form 10-K for the year ended  December  31,  1998 is  incorporated  by
reference.
============================================================================
<PAGE>

 
            AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES

                           ANNUAL REPORT ON FORM 10-K

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

                                     PART I

ITEM 1.  BUSINESS

GENERAL

     American  Physicians  Service  Group,  Inc.  (the  "Company"),  through its
subsidiaries,  provides services that include management services to malpractice
insurance  companies,  and brokerage and investment  services to individuals and
institutions.  The Company also owns space in the office building,  which serves
as its headquarters.  Through its real estate subsidiary it leases space that is
surplus to its needs.

     The Company was  organized  in October  1974 under the laws of the State of
Texas. The Company  maintains its principal  executive office at 1301 Capital of
Texas Highway,  Suite C-300,  Austin,  Texas 78746,  and its telephone number is
(512) 328-0888.  Unless the context otherwise requires, all references herein to
the  "Company"  shall mean  American  Physicians  Service  Group,  Inc.  and its
subsidiaries (other than Prime Medical, Syntera and Uncommon Care).

INVESTMENT SERVICES

     APS Investment Services,  Inc. ("Investment  Services"),  is a wholly-owned
subsidiary of the Company.  Through its subsidiaries,  APS Financial Corporation
("APS  Financial"),   and  APS  Asset  Management,   Inc.  (Asset  Management"),
Investment  Services  provides  investment and investment  advisory  services to
institutions  and individuals  throughout the United States.  Revenues from this
segment  were  60%,  44% and 32% of  Company  revenues  in 1998,  1997 and 1996,
respectively.

     APS  Financial,  a fully  licensed  broker/dealer,  provides  brokerage and
investment  services  primarily to  institutional  and high net worth individual
clients. APS Financial also provides portfolio accounting,  analysis,  and other
services, to insurance companies, banks, and public funds. APS Financial has its
main office in Austin, with a branch office in Houston.

     APS  Financial  is a  member  of the  National  Association  of  Securities
Dealers, Inc. ("NASD"), the Securities Investor Protection Corporation ("SIPC"),
the Securities Industry Association, and, in addition, is licensed in 45 states.

     Commissions  are  charged on both  exchange  and  over-the-counter  ("OTC")
transactions in accordance with industry  practice.  When OTC  transactions  are
executed  by APS  Financial  as a dealer,  APS  Financial  receives,  in lieu of
commissions, markups or markdowns.


                                       1
<PAGE>

     Every registered broker/dealer doing business with the public is subject to
stringent rules with respect to net capital requirements promulgated by the SEC.
These rules, which are designed to measure the financial soundness and liquidity
of broker dealers,  specify minimum net capital requirements.  Since the Company
is not itself a  registered  broker  dealer,  it is not subject to these  rules.
However, APS Financial is subject to these rules. Compliance with applicable net
capital  requirements  could limit  operations of APS Financial  such as trading
activities that require the use of significant amounts of capital. A significant
operating loss or an  extraordinary  charge against net capital could  adversely
affect the  ability of APS  Financial  to expand or even  maintain  its  present
levels of business.  At February 28, 1999, APS Financial was in compliance  with
all net capital requirements.

     APS Financial clears its transactions  through Southwest  Securities,  Inc.
("Southwest")  on a fully disclosed  basis.  Southwest also processes orders and
floor reports,  matches trades, transmits execution reports to APS Financial and
records all data  pertinent to trades.  APS Financial pays Southwest a fee based
on the number and type of transactions performed by Southwest.

     Asset  Management,   a  Registered   Investment  Adviser,  was  formed  and
registered with the Securities and Exchange Commission in 1998. Asset Management
was  organized to manage fixed income and equity  assets for  institutional  and
individual  clients on a fee  basis.  Asset  Management's  mission is to provide
clients  with  investment   results  within  specific   client-determined   risk
parameters.

INSURANCE SERVICES

     APS  Insurance  Services,  Inc.,  ("Insurance  Services"),   an  80%  owned
subsidiary of the Company through its  wholly-owned  subsidiaries APS Facilities
Management,   Inc.  ("FMI")  and  American  Physicians  Insurance  Agency,  Inc.
("Agency"),  provides  management  and agency  services  to medical  malpractice
insurance companies.  Revenues from this segment contributed 34%, 48% and 57% of
Company revenues in 1998, 1997 and 1996, respectively.  Substantially all of the
revenue was attributable to American  Physicians  Insurance  Exchange ("APIE") a
reciprocal   insurance   exchange.   A  reciprocal   insurance  exchange  is  an
organization which sells insurance only to its subscribers, who pay, in addition
to their annual insurance  premiums,  a contribution to the exchange's  surplus.
Such  exchanges  generally  have no paid  employees  but  instead  enter  into a
contract  with  an   "attorney-in-fact",   that  provides  all   management  and
administrative  services for the exchange. As the attorney-in-fact for APIE, FMI
receives a percentage  of the earned  premiums of APIE,  as well as a portion of
APIE's  profit.  The  amount of these  premiums  can be  adversely  affected  by
competition.   Substantial   underwriting   losses,  which  might  result  in  a
curtailment  or cessation of operations  by APIE,  would also  adversely  affect
FMI's revenue. To limit possible  underwriting  losses, APIE currently reinsures
its risk in excess  of  $250,000  per  medical  incident.  APIE  offers  medical
professional liability insurance for doctors in Texas and Arkansas. FMI's assets
are not subject to any insurance claims by policyholders of APIE. Termination of
the agreement with APIE would have a material adverse effect on the Company.


                                       2

<PAGE>

     FMI organized  APIE and has been its exclusive  manager since its inception
in 1975. The management  agreement  between FMI and APIE basically  provides for
full  management  by FMI of the  affairs of APIE under the  direction  of APIE's
physician Board of Directors.  Subject to the direction of this Board, FMI sells
and issues  policies,  investigates,  settles and defends claims,  and otherwise
manages APIE's  affairs.  In  consideration  for  performing  its services,  FMI
receives a percentage  fee based on APIE's earned  premiums  (before  payment of
reinsurance  premiums),  as well as a  portion  of APIE's  profit.  FMI pays all
salaries and personnel related expenses,  rent and office operations costs, data
processing costs and many other operating  expenses of APIE. APIE is responsible
for the payment of all claims, claims expenses, peer review expenses, directors'
fees and expenses, legal, actuarial and auditing expenses, its taxes and certain
other specific expenses. Under the management agreement,  FMI's authority to act
as manager of APIE is  automatically  renewed each year unless a majority of the
subscribers to APIE elect to terminate the management  agreement by reason of an
adjudication that FMI has been grossly negligent, has acted in bad faith or with
fraudulent  intent  or has  committed  willful  misfeasance  in  its  management
activities.

     During 1997, FPIC Insurance Group, Inc. ("FPIC"),  purchased a 20% interest
in Insurance  Services  from the Company.  In  conjunction  with that  purchase,
FPIC's  subsidiary,   Florida  Physicians  Insurance  Company,   Inc.  ("Florida
Physicians"),  entered into  agreements with Agency and APIE granting Agency the
exclusive  right to market  Florida  Physician's  policies in Texas.  Agency has
sales,  marketing,  underwriting  and  claims  handling  authority  for  Florida
Physicians  in  Texas  and  receives  commissions  for  such  services.  Florida
Physicians  also entered into a  reinsurance  agreement  with APIE in which APIE
reinsures  substantially all of Florida  Physicians' risk in Texas under medical
professional  liability  policies  issued or renewed by  Florida  Physicians  on
behalf of Texas health care providers after March 27, 1997. The Company has also
granted  FPIC an option,  exercisable  at any time during  1999,  to purchase an
additional 35% interest in Insurance Services from the Company for $4,146,000.

     APIE is  authorized  to do  business  in the states of Texas and  Arkansas.
Florida Physicians is a stock company licensed in several states. Both companies
specialize in writing medical  professional  liability insurance for health care
providers. The insurance written in Texas is primarily through purchasing groups
and is not  subject to certain  rate and policy form  regulations  issued by the
Texas  Department of Insurance.  Applicants for insurance  coverage are reviewed
based  on the  nature  of  their  practices,  prior  claims  records  and  other
underwriting criteria. APIE is one of the largest medical professional liability
insurance  companies in the State of Texas.  APIE is the only insurance  company
based in Texas that is wholly-owned by its subscriber physicians.

     Florida  Physicians,  together  with its  affiliates,  insures  over  6,800
physicians nationwide. Florida Physicians is rated A- (Excellent) by AM Best.


                                       3
<PAGE>

     Generally,  medical professional liability insurance is offered on either a
"claims made" basis or an  "occurrence"  basis.  "Claims made"  policies  insure
physicians  only against  claims that occur and are  reported  during the period
covered by the policy.  "Occurrence"  policies insure physicians  against claims
based on  occurrences  during the policy period  regardless of when the claim is
actually made. APIE and Florida  Physicians offer only a "claims made" policy in
Texas  and  Arkansas,   but  provide  for  an  extended  reporting  option  upon
termination. APIE and Florida Physicians reinsure 100% of all Texas and Arkansas
coverage per medical incident between $250,000 and $1,000,000, primarily through
certain domestic and international insurance companies.

     The following  table presents  selected  financial and other data for APIE.
The management  agreement with FMI obligates APIE to pay management  fees to FMI
based on APIE's earned premiums before payment of reinsurance premiums.  The fee
percentage is 13.5% with the  provision  that any profits of APIE will be shared
equally with FMI so long as the total reimbursement (fees and profit sharing) do
not exceed a cap based on premium levels.  In 1998,  1997, 1996, 1995, and 1994,
management  fees  attributable  to profit sharing were  $1,750,000,  $1,961,000,
$1,191,000, $700,000, and $1,107,000, respectively.

         (In thousands, except for number of insureds)

<TABLE>
<CAPTION>

                                                  Years Ended December 31,
                                       1998            1997             1996            1995             1994
                                       ----            ----             ----            ----             ----
<S>                                    <C>             <C>              <C>             <C>              <C>    
Earned premiums before
 reinsurance premiums                  $22,931         $25,899          $28,754         $30,857          $30,261
Total assets                            75,173          81,594           90,193         101,251           98,302
Total surplus                           13,592          11,854           10,017           9,402            9,315
Management fees (including profit
 sharing) and commissions to FMI
 and Agency                              4,835  (3)      5,854  (3)      $5,281   (3)    $5,010   (3)     $4,703   (1)
Number of insureds                       2,743           2,629  (2)       3,019           3,226            3,216   (2)
----------------
</TABLE>

         (1)      Gross fee of $5,193 less tax credit of $490 attributable to 
                  APIE's association with FMI.

         (2)      The  decrease  was the  result  of  APIE's  decision  to raise
                  premiums and lose members on certain unprofitable specialties.
                  Included  in the totals are  doctors  for which APIE  provides
                  reinsurance  through a relationship  with another  malpractice
                  insurance company.

         (3)      Includes  commissions of $835, $1,214,  $860 and $676 in 1998,
                  1997, 1996 and 1995, respectively, from Florida Physicians and
                  other carriers directly related to APIE's controlled business.


                                       4
<PAGE>



REAL ESTATE

     APS Realty, Inc., ("APS Realty"), a wholly-owned  subsidiary of the Company
owns condominium space in an office project located in Austin, Texas. APS Realty
leases  approximately  58% of this space to the Company,  its  subsidiaries  and
affiliates. The remainder is leased to unaffiliated parties.

OTHER INVESTMENTS

     The  Company  owns  3,064,000  shares  of  common  stock of  Prime  Medical
Services,  Inc. ("Prime Medical"),  representing at March 15, 1999 approximately
18% of the  outstanding  shares of common stock of Prime  Medical.  Two of Prime
Medical's  seven  directors  are members of the  Company's  four member board of
directors.  The Company records its pro-rata share of Prime Medical's results on
the equity basis. Prime Medical is the largest provider of lithotripsy  services
in the United States, currently servicing over 450 hospitals and surgery centers
in 34 states.  Lithotripsy  is a non-invasive  method of treating  kidney stones
through the use of shock waves.  The common stock of Prime  Medical is traded on
the NASDAQ National Market under the symbol "PMSI".  Prime Medical is a Delaware
corporation  which is required to file annual,  quarterly  and other reports and
documents with the Securities and Exchange Commission (the "SEC"), which reports
and documents contain  financial and other information  regarding Prime Medical.
The summary information regarding Prime Medical contained herein is qualified in
its  entirety by  reference  to such  reports and  documents.  Such  reports and
documents  may be examined  and copies may be  obtained  from the offices of the
SEC.

     On January 1, 1998 the Company  invested  approximately  $2,000,000  in the
Convertible  Preferred  Stock of Uncommon  Care,  Inc.  ("Uncommon  Care").  The
Company also made  available to Uncommon Care a $2,400,000  line of credit.  The
loan is at ten percent  interest,  payable  quarterly  until January 1, 2003, at
which time the outstanding principal and any accrued but unpaid interest are due
and payable.  Uncommon Care is a developer and operator of dedicated Alzheimer's
care facilities.  The preferred shares owned by the Company are convertible into
approximately  a 34%  interest in the equity of Uncommon  Care.  Two of Uncommon
Care's five  directors  are members of the  Company's  board of  directors.  The
Company records its investment at cost.

     On October 1, 1997, the Company formed APS Practice Management, Inc., later
renamed Syntera HealthCare Corporation  ("Syntera") with an initial ownership of
85%.  Syntera  specializes  in the  management  of OB/GYN  and  related  medical
practices. In a typical transaction,  Syntera acquires the non-medical assets of
a physician's practice, signs a long-term management contract with the physician
to provide the majority of the non-medical requirements of the practice, such as
non-professional  personnel,  office space,  billing and  collection,  and other
day-to-day non-medical operating functions.  In turn, Syntera is paid a variable
management  fee that rewards the  efficient  operation  and the expansion of the
practice.  Medical  services  are not  provided  by  Syntera.  All of  Syntera's
directors  are  officers  of the  Company.  The Company  expects  its  ownership
interest in 


                                       5
<PAGE>

Syntera (62% as of March 15, 1999) to be reduced to a minority  level as Syntera
exchanges its stock for assets of  additional  physician  practices.  Due to the
short time frame  anticipated for this change in ownership to occur, the Company
has accounted for its ownership in Syntera on the equity basis.

     On October 31, 1996, the Company invested $3,300,000 in the common stock of
Consolidated Eco-Systems,  Inc. (formerly Exsorbet Industries, Inc.) ("Con-Eco")
(NASDAQ:EXSO)  with a put option.  Con-Eco is a  diversified  environmental  and
technical services company.  On November 26, 1996, the Company exercised its put
in exchange for a promissory note from Con-Eco.  The promissory note was secured
by the  shares  which  were  subject  to the  put  plus  all  of the  stock  and
substantially all of the assets of a wholly-owned  subsidiary of Con-Eco and the
guarantees of all operating  subsidiaries of Con-Eco.  The Company  renegotiated
the debt with Con-Eco in November 1997. In connection  with the  renegotiations,
the  Company  extended  the debt for two years  and  refinanced  unpaid  accrued
interest,  resulting in a new promissory note for $3,788,000. No interest income
has been recognized by the Company.  Con-Eco provided  additional  collateral to
the Company in the form of stock of two  additional  subsidiaries,  and a second
lien on all  assets  of one of  these  subsidiaries.  The  Company  subsequently
declared  Con-Eco in default under the new promissory note and related  security
agreements.   In  March,   1999  the  Company   entered  into  a   comprehensive
Restructuring  Agreement  pursuant to which the Company retained its interest in
all of its existing  collateral,  obtained additional  collateral in the form of
stock of two more of Con-Eco's  subsidiaries  and obtained the highest  priority
security  interest  available in the assets of such  subsidiaries as well as the
assets of a third  subsidiary.  Under the Restructuring  Agreement,  the Company
agreed to refinance the existing  obligations of Con-Eco on more favorable terms
in the future,  provided the Company  receives  certain  minimum  payments  from
Con-Eco or from the  operations  of a subsidiary of Con-Eco that may be acquired
by the Company  through the enforcement of its security  interest.  Con-Eco also
agreed to make  specified  minimum  payments to the Company  upon the  favorable
resolution by Con-Eco of certain existing litigation or upon the sale of Con-Eco
or of Con-Eco's  or its  subsidiaries'  assets.  The Company has  established  a
reserve of $392,000  related to the principal  amount of the Con-Eco  receivable
and has  reserved  all  accrued  but unpaid  interest  related to the note.  The
Company may be required to establish additional reserves in the future depending
on the Company's ongoing evaluation of its collateral position and its estimates
of Con-Eco's future cash flows.

DISCONTINUED OPERATIONS

     The Company,  through its wholly owned subsidiary,  APS Systems, Inc. ("APS
Systems"),  had previously developed software and marketed it to medical clinics
and medical schools.  This business segment became unprofitable in 1996. A joint
venture with a software  developer was formed in 1996 with a plan to develop new
products, but was discontinued in 1997 when it was determined that the high cost
of developing  competitive  products precluded an adequate return on investment.
Subsequently, the Company ceased marketing the software and reduced the scope of
APS Systems'  operations to a level adequate to service existing clients through
the terms of their contracts.  The Company has reflected the expected  financial
impact of discontinuing this segment in the 1997 financial statements.


                                       6
<PAGE>


COMPETITION

     APS Financial and Asset Management are both engaged in a highly competitive
business.  Their  competitors  include,  with  respect to one or more aspects of
business,  all of the member  organizations  of the New York Stock  Exchange and
other  registered  securities  exchanges,  all  members of the NASD,  registered
investment  advisors,  members of the various commodity exchanges and commercial
banks and thrift  institutions.  Many of these organizations are national rather
than  regional  firms and have  substantially  greater  personnel  and financial
resources than the Company's.  Discount  brokerage  firms oriented to the retail
market,   including  firms   affiliated   with   commercial   banks  and  thrift
institutions,   are  devoting   substantial  funds  to  advertising  and  direct
solicitation of customers in order to increase their share of commission dollars
and  other  securities  related  income.  In many  instances  APS  Financial  is
competing directly with such  organizations.  In addition,  there is competition
for  investment  funds  from the real  estate,  insurance,  banking  and  thrift
industries.

     APIE  competes  with  numerous  insurance  companies in Texas and Arkansas,
primarily  Medical  Protective  Insurance  Company,  St.  Paul  Fire and  Marine
Insurance  Company,  State Volunteer Mutual Company,  Frontier  Insurance Group,
Texas Medical  Liability  Trust,  Medical  Interinsurance  Exchange Group of New
Jersey  and PHICO  Insurance.  Many of these  firms have  substantially  greater
resources than APIE. The primary  competitive  factor in selling  insurance is a
combination of price,  terms of the policies  offered,  claims and other service
and claims settlement philosophy.

REGULATION

     APS  Financial  and Asset  Management  are subject to extensive  regulation
under both federal and state laws.  The SEC is the federal  agency  charged with
administration  of the federal  securities and investment  advisor laws. Much of
the regulation of broker dealers, however, has been delegated to self-regulatory
organizations, principally the NASD and the national securities exchanges. These
self-regulatory organizations adopt rules (subject to approval by the SEC) which
govern the industry and conduct periodic examinations of member  broker/dealers.
APS  Financial is also subject to  regulation  by state and District of Columbia
securities commissions.

     The  regulations to which APS Financial is subject cover all aspects of the
securities  business,  including  sales methods,  trade  practices  among broker
dealers,  uses and  safekeeping  of  customers'  funds and  securities,  capital
structure of  securities  firms,  record  keeping and the conduct of  directors,
officers and employees. Additional legislation,  changes in rules promulgated by
the SEC and by self regulatory  organizations,  or changes in the interpretation
or  enforcement  of existing laws and rules,  may directly  affect the method of
operation  and  profitability  of  APS  Financial.   The  SEC,  self  regulatory
organizations  and  state  securities  commissions  may  conduct  administrative
proceedings  which can result in censure,  fine,  suspension or expulsion of APS
Financial,  its officers or employees.  The principal  purpose of regulation and
discipline of  broker/dealers  is the protection of customers and the securities
markets, rather than protection of creditors and shareholders of broker/dealers.


                                       7
<PAGE>

     APS Financial,  as a registered broker dealer and NASD member organization,
is required by federal law to belong to the SIPC. When the SIPC fund falls below
a certain  minimum  amount,  members are required to pay annual  assessments  in
varying  amounts not to exceed .5% of their  adjusted  gross revenues to restore
the fund. The last assessment was in 1995 and amounted to approximately  $7,300.
The SIPC fund  provides  protection  for  customer  accounts up to $500,000  per
customer, with a limitation of $100,000 on claims for cash balances.

     FMI has  received  certificates  of  authority  from the Texas and Arkansas
insurance departments,  licensing it on behalf of the subscribers of APIE. APIE,
as an insurance company,  is subject to regulation by the insurance  departments
of the  States of Texas  and  Arkansas.  These  regulations  strictly  limit all
financial  dealings  of a  reciprocal  insurance  exchange  with  its  officers,
directors,   affiliates  and   subsidiaries,   including  FMI.   Premium  rates,
advertising,  solicitation of insurance,  types of insurance  issued and general
corporate activity are also subject to regulation by various state agencies.

EMPLOYEES

     At March 1, 1999, the Company employed, on a full time basis, approximately
112 persons,  including 49 by Insurance Services, 46 by APS Financial,  4 by APS
Systems and 13 directly by the  Company.  The  Company  considers  its  employee
relations to be good. None of the Company's  employees is represented by a labor
union and the Company has experienced no work stoppages.

ITEM 2.  PROPERTIES

     APS Realty owns approximately 53,000 square feet of condominium space in an
office project in Austin,  Texas.  The Company,  its subsidiaries and affiliates
use approximately  31,000 square feet of this space as their principal executive
offices,  and APS  Realty  leases  the  remainder  to  third  parties.  The area
available for lease to third parties is  approximately  90% occupied as of March
24, 1999.  The lease of the largest  third party tenant,  (11,000  square feet),
expires in April 1999 and it is unknown  how long will be required to re-let the
space.

ITEM 3.  LEGAL PROCEEDINGS

     The  Company is  involved  in various  claims and legal  actions  that have
arisen  in the  ordinary  course  of  business.  Management  believes  that  any
liabilities  arising  from these  actions  will not have a  significant  adverse
effect on the financial condition of the Company.


                                       8
<PAGE>



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

     The Company's  annual meeting was held June 11, 1998. The agenda items were
the election of directors and approval of an amendment to the stock option plan.
Voting results follow:

    BOARD ELECTION

           Nominee                            For          Against      Abstain
           -------                            ---          -------      -------
           Jack Murphy                        3,392,847       301,516      --
           Robert L. Myer                     3,393,217       301,146      --
           William A. Searles                 3,393,217       301,146      --
           Kenneth S. Shifrin                 3,393,217       301,146      --
                    
    STOCK OPTION PLAN AMENDMENT
                                              2,122,854       799,372     9,842


                                     PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     The  following  table  represents  the high and low prices of the Company's
common  stock  in the  over-the-counter  market  as  reported  by  the  National
Association of Securities Dealers,  Inc.,  Automated Quotations System for years
ended   December  31,  1998  and  1997.  On  March  1,  1999,  the  Company  had
approximately 500 holders of record of its common stock.

                                      1998                         1997
                               ------------------          -------------------
                               High          Low             High         Low
        First Quarter         $ 7 5/8      $ 6 7/8          $7 5/8       $6 3/8
        Second Quarter        $ 7 1/2      $ 6 5/8          $6 7/8      $ 4 3/4
        Third Quarter         $ 7 1/4      $ 4 7/8          $8 7/8       $5 7/8
        Fourth Quarter        $ 5 1/2      $ 3 1/4          $8           $6


                                       9
<PAGE>

     The Company has not declared any cash  dividends on its common stock during
the last two years and has no present  intention of paying any cash dividends in
the  foreseeable  future.  It is the present policy of the Board of Directors to
retain  all  earnings  to  provide  funds  for the  growth of the  Company.  The
declaration  and payment of  dividends in the future will be  determined  by the
Board of  Directors  based upon the  Company's  earnings,  financial  condition,
capital  requirements  and such other factors as the Board of Directors may deem
relevant.

ITEM 6.  SELECTED FINANCIAL DATA

(In thousands, except per share data)
<TABLE>
<CAPTION>

                                  SELECTED FINANCIAL DATA

                                                             1998         1997        1996       1995       1994
                                                             ----         ----        ----       ----       ----
Selected income statement data:
<S>                                                        <C>           <C>        <C>        <C>        <C>   
   Revenues                                                $16,403       13,065     10,437     16,124     12,333
   Earnings from continuing operations before 
    income taxes and minority interests                     $2,255        5,984      3,006      3,007      1,784
   
   Net earnings                                             $1,545        2,538      1,924      2,024      1,254

Per share amounts - diluted:
   
   Net earnings                                               $.31          .59        .46        .53        .36

Diluted weighted average shares outstanding                  4,692        4,241      4,219      3,798      3,488

Selected balance sheet data:
   
   Total assets                                            $32,914       30,737     24,468     23,740     19,918
   
   Long-term obligations                                        --           --         --        574        878
  
   Total liabilities                                        $8,259        7,458      4,086      6,146      4,927
   
   Minority interests                                          $53          175         --         --         --
   
   Total equity                                            $24,602       23,104     20,382     17,594     14,991
   
   Book value per share                                      $5.91         5.55       5.03       4.80       4.47

</TABLE>


                                       10
<PAGE>

    ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                      RESULTS OF OPERATIONS OF THE COMPANY

FORWARD-LOOKING STATEMENTS

     The  statements  contained  in this Report on Form 10-K that are not purely
historical are  forward-looking  statements within the meaning of Section 27A of
the  Securities  Act of 1933 and Section 21E of the  Securities  Exchange Act of
1934,  including  statements  regarding  the  Company's   expectations,   hopes,
intentions or strategies  regarding the future.  Readers  should not place undue
reliance on forward-looking  statements. All forward-looking statements included
in this document are based on  information  available to the Company on the date
hereof, and the Company assumes no obligation to update any such forward-looking
statements.  It is important to note that the  Company's  actual  results  could
differ materially from those in such forward-looking  statements. In addition to
any risks and uncertainties specifically identified in the text surrounding such
forward-looking  statements,  the reader should consult the Company's reports on
Forms 10-Q and other filings under the Securities Act of 1933 and the Securities
Exchange  Act of 1934,  for factors  that could cause  actual  results to differ
materially from those presented.

     The  forward-looking  statements  included herein are necessarily  based on
various  assumptions  and estimates and are inherently  subject to various risks
and  uncertainties,  including risks and uncertainties  relating to the possible
invalidity of the underlying  assumptions and estimates and possible  changes or
developments  in  social,  economic,   business,  industry,  market,  legal  and
regulatory circumstances and conditions and actions taken or omitted to be taken
by  third  parties,  including  customers,   suppliers,  business  partners  and
competitors and  legislative,  judicial and other  governmental  authorities and
officials. Assumptions relating to the foregoing involve judgements with respect
to, among other things,  future economic,  competitive and market conditions and
future business  decisions,  all of which are difficult or impossible to predict
accurately  and many of which are beyond the  control of the  Company.  Any such
assumptions could be inaccurate and,  therefore,  there can be no assurance that
the  forward-looking  statements included in this Report on Form 10-K will prove
to be accurate.

RESULTS OF OPERATIONS

1998 Compared to 1997

     Revenues from continuing operations increased 26% in 1998 compared to 1997.
Net income  decreased  39% and diluted  earnings  per share  decreased  48%. The
reasons for these changes are described below.

Investment Services

     Investment  services'  revenues increased 73% in 1998 compared to 1997. The
increase  resulted from volatility in world bond markets which caused clients to
realign  portfolios.  This  activity  created  more  transactions  and thus more
commissions. Also contributing to the increase was the full development of a


                                       11
<PAGE>

second  office,  which  opened  in  1997.  Revenues  at  this  office  increased
approximately 90% over 1997.

     Investment  services' expenses increased 71% from 1997. 94% of the increase
was at the broker/dealer and was volume-related.  The large increase in revenues
resulted in proportionately greater sales commission expense,  support personnel
expense,  transaction charges and financial information services expense.  Lower
legal  fees  partially  offset  these  increases.  Greater  profits in 1998 also
increased  expenses under the incentive  compensation plan. The remainder of the
increase in expenses was the result of starting Asset Management in 1998.

     Results  in this  segment  can vary from year to year.  The  broker/dealer,
primarily a provider of fixed income  securities,  is subject to general  market
conditions  as well as  interest  rates and is in an industry  characterized  by
competition  for top  producing  brokers.  In an effort to add to the  segment's
overall  profitability,  and to add  stability  from year to year,  the  Company
entered  the asset  management  business  in 1998.  As a  registered  investment
advisor,  Asset  Management,  seeks to manage the portfolios of institutions and
high net worth  individuals. Asset management is a competitive  business and the
Company cannot say with certainty when or if it will achieve profitability.

Insurance Services

     Insurance  Service's  revenues  decreased 10% in 1998 compared to 1997. The
loss of a large  client by the  managed  insurance  company  caused  most of the
variance.  The client  purchased  extended  reporting period or "tail" coverage,
which increased  premiums in 1997.  1998 was lower by both the standard  premium
and the extra tail  premium.  The  Company's  premium-based  management  fee was
proportionately  lower.  The  remainder  of the  decrease  was related to profit
sharing.  The insurance management fee contract contains a provision to share in
the profits of the  managed  insurance  exchange.  Due to the loss of the client
mentioned above and an overall  increase in competition in medical  professional
liability insurance in Texas,  profits, and consequently,  profit sharing,  were
lower in 1998.

     Insurance  Services'  expenses  increased 8% over 1997. The increase was in
the  area  of  commission  expense  and was due to the  greater  utilization  of
commissioned  outside sales agents,  compared to salaried internal  personnel in
prior years.  Lower salary expense,  primarily due to lower incentive  payments,
partially offset the increased commissions.

     Due to the profit  sharing  provision  in this  segment's  major  contract,
results can vary from year to year.  In the last five years under the  contract,
profit sharing has ranged from 12% to 31% of the segment's revenues.

Real Estate

     Revenue increased 1% compared to 1997.  The increase reflects higher lease
rates, partially offset by a higher vacancy rate.

     The 5% increase in real estate  expenses  resulted from increased  property
taxes due to higher real estate values.


                                       12
<PAGE>

Investment and Other

     The  decline in  investment  and other  income was  primarily  due to lower
interest income, a result of available cash being fully invested in new start-up
companies, which yielded no current return.

General and Administrative Expenses

     General and administrative  expenses increased 37% over 1997. The increases
resulted  from  recognizing  bad debt expense  related to the  impairment of the
Con-Eco note receivable and from expenses  related to guaranteeing an individual
investor's investment return. The Company had agreed to the guaranteed return to
settle  a  dispute   on  the   customer's   account  in  1995.   The   portfolio
under-performed  in 1998 and additional  funds were  contributed by the Company.
Lower management incentive expenses partially offset these increases in 1998.

     Interest  expense  increased  from $21,000 in 1997 to $59,000 in 1998.  The
increase  reflects funds borrowed under the line of credit to fund the Company's
investments Syntera and Uncommon Care.

Affiliates

     The Company has two  affiliates  accounted for on the equity  basis,  Prime
Medical Services,  Inc. and Syntera  HealthCare  Corporation.  Prime's operating
income  increased  in 1998  but  net  earnings  were  reduced  by  non-recurring
financing  and  development  costs.  This  resulted in a 23%  decrease in equity
earnings compared to 1997. Syntera,  which was started in 1997, continued in the
development  phase and reported a loss in 1998. The Company's share of Syntera's
loss increased approximately 5% in 1998.

     Prime had issued additional shares in 1996 reducing the Company's ownership
from 21% to 16%. In 1998 Prime  established a stock  repurchase plan and reduced
its  shares  outstanding,  increasing  the  Company's  ownership  percentage  to
approximately   18%.  The  Company,   through  its  status  as  Prime's  largest
shareholder and through its  representation on Prime's board,  continues to have
significant  influence at Prime and accounts for its investment using the equity
method.

1997 Compared to 1996

     Revenues from continuing operations increased 25% in 1997 compared to 1996.
Net income  increased  32% and diluted  earnings  per share  increased  28%. The
reasons for these changes are described below.

INVESTMENT SERVICES

     Investment  Services'  revenues  increased  73% in 1997  compared  to 1996.
Approximately   71%  of  the  increase  was   attributable   to  expanding   the
broker/dealer sales force with the opening of an additional office location. The
balance of the increase was primarily a result of lower  interest rates creating
more activity in the bond market.


                                       13
<PAGE>

     Investment  Services'  expenses  increased  38%  from  1996.  The  increase
reflects  increased  sales and expanded office  operations at the  broker/dealer
with the resultant  higher  commissions and payroll  expense.  Better control of
legal costs and a lower  allocation of corporate  overhead  partially offset the
increases.

INSURANCE SERVICES

     Revenues increased  6% as a result of a higher  contingent  fee,  which was
based on improved  profits at the  managed  insurance company.

     Expenses decreased 11% from 1996.  Decreases in legal and professional fees
and lower allocated  corporate  overhead were the  significant  areas of expense
reduction.

REAL ESTATE

     Revenue  decreased 2% compared to 1996. The small decrease reflects greater
utilization of the office building by the Company and affiliates at lower rental
rates than outside tenants.

     The 3% decrease in real estate  expenses in 1997 reflects  lower  corporate
overhead allocations.

INVESTMENT AND OTHER

     The  decline in  investment  and other  income was  primarily  due to lower
interest income,  the result of the Con-Eco note receivable being on non-accrual
during all of 1997.

GENERAL AND ADMINISTRATIVE EXPENSES

     The 800%  increase  in  expenses  was a result  of  changes  in  accounting
estimates  rather  than  fundamental  changes  in  operations.  1996's  expenses
reflected  favorable  adjustments  to  a  contingency  provision  related  to  a
guarantee, as well as favorable adjustments to allowances for doubtful accounts,
a result of collecting the accounts. No such adjustments were required in 1997.

     Interest  expense  declined 61%  primarily  due to paying off the Company's
real estate loan early in 1997.

AFFILIATES

     Earnings  from  affiliates  increased  43% compared to 1996.  Prime Medical
continued  to grow and did not have the  substantial  offering  and  acquisition
expenses it incurred in 1996. As a result, the Company's equity in earnings grew
67% in 1997. Partially offsetting this increase was a loss in equity earnings of
Syntera.  Syntera was  established  in 1997 and the loss  reflects  start-up and
development costs incurred in this early phase.


                                       14
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

     Net working  capital was $503,000 and  $3,360,000  at December 31, 1998 and
1997, respectively.  The decrease in working capital reflects the Company's cash
investment  of  approximately  $2,000,000 in new business  opportunities  during
1998. Also reducing working capital was the reclassification of short-term notes
receivable to long-term upon the maker's default on the notes. Historically, the
Company has maintained a strong working  capital  position and, using that base,
has been able to satisfy its  operational and capital  expenditure  requirements
with cash  generated  from its operating and  investing  activities.  These same
sources  of funds  have  also  allowed  the  Company  to pursue  investment  and
expansion opportunities consistent with its growth plans.

     In 1998, the Company entered into a three year $10,000,000 revolving credit
agreement  with  NationsBank  of Texas,  N.A. Funds advanced under the agreement
bear  interest  at the  prime  rate  less 1/4 %,  such  interest  to be  payable
quarterly.  The Company will pledge shares of Prime Medical to the bank as funds
are advanced under the line. No funds had been advanced as of December 31, 1998.
At March 25, 1999 $1,600,000 had been advanced.

     Capital expenditures for equipment were $148,000,  $312,000,  and $123,000,
in 1998, 1997, and 1996, respectively.  In addition, the Company improved office
space in 1998 and  1996 for  $58,000  and  $21,000,  respectively.  The  Company
expects  capital  expenditures in 1999 to be within the range of the prior three
years.

     The Company's ability to make scheduled payments of principal of, or to pay
the interest on, or to refinance,  its indebtedness,  or to fund planned capital
expenditures will depend on its future performance,  which, to a certain extent,
is subject to general economic, financial, competitive,  legislative, regulatory
and other  factors that are beyond its control.  Based upon the current level of
operations and anticipated  revenue growth,  management  believes that cash flow
from operations and available cash, together with available borrowings under its
bank line of credit,  will be adequate to meet the  Company's  future  liquidity
needs for at least the next several  years.  However,  there can be no assurance
that the Company's business will generate  sufficient cash flow from operations,
that anticipated  revenue growth and operating  improvements will be realized or
that future  borrowings  will be available under the line of credit in an amount
sufficient  to enable the  Company to service  its  indebtedness  or to fund its
other liquidity needs.

INFLATION

     The operations of the Company are not  significantly  affected by inflation
because, having no manufacturing operations, the Company is not required to make
large  investments in fixed assets.  However,  the rate of inflation will affect
certain of the Company's expenses, such as employee compensation and benefits.


                                       15
<PAGE>

YEAR 2000 PROJECT

The Company  formed a Year 2000 Committee in mid 1998. The Committee was charged
with  examining  (1)  internal  hardware  and  software  systems;  (2)  physical
facilities;  and (3)  outside  suppliers,  as these  items  relate to  potential
problems that could be caused by the inability to process dates beyond  December
31, 1999.

The  Committee  divided  its task  into  four  parts -  assessment,  remediation
planning,  implementation and testing and contingency  planning.  Assessment and
remediation  planning  have been  completed for all three phases of the project.
Implementation and testing and contingency planning are discussed below.

Internal hardware and software systems: The Company has completed  substantially
all of the needed  upgrades  to its  hardware  and  software  systems.  Software
testing is expected to be  complete  by April 30,  1999 and  remaining  hardware
purchases are expected to be complete by June 30, 1999.

 Physical facilities: The Committee has evaluated its non-computer equipment and
has determined that, except for its telephone system, there are no devices whose
failure  would  materially  affect the ability to carry out the  business of the
Company.  A compliant  telephone  system is expected to be installed by June 30,
1999. The outside  managers of the Company's office buildings have reported that
all aspects of the physical  facilities - elevators,  fire and security systems,
etc. are compliant.  Their further inquiry of those supplying  public  utilities
have produced assurances of best efforts but no guarantee of performance.

Outside  suppliers:  The  Company  has  inquired  about  the  state of Year 2000
readiness of those outside  suppliers who were  determined to be critical to the
Company's  ability to carry out its  business.  One  services  supplier has been
identified  as  being  behind  in its  readiness.  The  services  are  not of an
exclusive nature and alternative  suppliers are being evaluated.  A switch to an
alternative  would be made on September 1, 1999 if the current  supplier remains
non-compliant.

Contingency  planning:  The Company cannot be certain that it has identified and
will be successful in bringing into  compliance  all Year 2000 issues within its
control.  It can be even less  certain of critical  services  being  supplied by
third parties  beyond its control.  Upon  completion of the testing phase of the
plan, the Company will formalize plans for carrying on its business in the event
of unanticipated  Year 2000-related  failures.  Presently,  the Company believes
that the most  reasonably  likely  worst  case  scenario  would be a failure  of
relatively  short duration of basic third party services such as the power grid.
With such a failure the Company's  planning will be directed  toward a temporary
suspension  of  operations  followed  by  plans  for  resumption  and  catch  up
operations.  Due to the  magnitude  of the  uncertainties  related  to Year 2000
issues,  the  Company is unable to fully  assess the  consequences  of Year 2000
failures  and,  consequently,  there could be a material  adverse  effect on the
Company's results of operations, financial position and cash flows.

Year 2000 costs: The Company  estimates that total  expenditures to address Year
2000 issues will be $350,000, of which approximately 60% will be for capitalized
hardware  purchases.   The  remainder  of  the  expenditures  are  labor  costs.
Approximately  40% of the expenditures have been 


                                       16
<PAGE>

made to  date.  Since  the  Company  is in a  constant  state of  upgrading  its
technology  and since all labor costs involve  existing in- house staff,  few of
the costs incurred are incremental.  Extensive use of in-house MIS personnel for
Year 2000 issues has delayed  implementation  of other work  designed to improve
user  productivity and the value of information  provided.  The Company does not
believe  such  delays  will have a  material  adverse  effect on the  results of
operations, financial position, or cash flows.

ITEM 7. (a)       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company has some exposure to cash flow and fair value risk from changes
in interest rates, which may affect its financial position, results of operation
and cash flows.  The Company does not use financial  instruments for speculative
purposes,  but does  maintain a trading  account  inventory  to  facilitate  the
business  of its  broker/dealer  subsidiary.  At the end of 1998  the  inventory
balance was  $535,000.  Historically,  the  Company  has turned  this  inventory
rapidly and has neither significant realized gains nor losses.

     The Company has notes receivable, the largest of which is described in Item
1 and is  currently  in  default.  The  fair  value  of this  defaulted  note is
determined by collateral  and cash flows of the maker and is influenced  little,
if any, by interest rate changes.  The other notes receivable are in the form of
lines of credit to  related  companies  and are at fixed 10%  rates.  Their fair
value will increase and decrease inversely with interest rates.

     The Company had no debt at December 31, 1998, but has a $10 million line of
credit  with a floating  interest  rate.  For each $1 million  that the  Company
should  borrow in 1999,  a 1 1/2 % increase in interest  rate would  result in a
$15,000 annual increase in interest expense.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The  information  required by this item is contained in Appendix A attached
hereto.

     Financial  information  and schedules  relating to Prime Medical  Services,
Inc. are  contained in Item 14(a) of the Annual Report on Form 10-K for the year
ended  December 31, 1998 of Prime Medical  Services,  Inc.,  which Item 14(a) is
incorporated herein by reference.

ITEM 9.          CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
                  FINANCIAL DISCLOSURE

     None.


                                       17

<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information  required by this item is contained in the definitive proxy
material of the Company to be filed in connection  with its 1999 annual  meeting
of shareholders,  except for the information regarding executive officers of the
Company,  which is  presented  below.  The  information  required  by this  item
contained in such definitive proxy material is incorporated herein by reference.

As of March 15, 1999, the executive officers of the Company are as follows:

Name                     Age                Position

Kenneth S. Shifrin       49                Chairman of the Board, President and
                                              Chief Executive Officer

Duane K. Boyd, Jr.       54                Senior Vice President - Insurance

William H. Hayes         51                Senior Vice President - Finance and  
                                              Secretary

George S. Conwill        42                Vice President - Investment Services

Thomas R. Solimine       40                Controller

     All officers  serve until the next annual  meeting of  directors  and until
their successors are elected and qualified.

     Mr.  Shifrin has been Chairman of the Board since March 1990. He has been 
President  and Chief  Executive  Officer  since March 1989 and was President and
Chief Operating  Officer from June 1987 to February 1989. He has been a Director
of the Company since  February  1987.  From  February 1985 until June 1987,  Mr.
Shifrin  served as Senior Vice  President - Finance and  Treasurer.  He has been
Chairman of the Board of Prime Medical since October 1989.  Mr. Shifrin has been
President  and a Director of Syntera since October 1997 and has been a member of
the Board of Directors of Uncommon  Care since January  1998.  Mr.  Shifrin is a
Certified   Public   Accountant  and  is  a  member  of  the  Young   Presidents
Organization.

     Mr. Boyd has been Senior Vice  President - Insurance  since July 1991 and 
has also been President and Chief Operating  Officer of FMI since July 1991. Mr.
Boyd has been a  Director  of  Syntera  since  October  1997 and a  Director  of
Uncommon Care since January 1998. Mr. Boyd is a Certified Public  Accountant and
was with KPMG LLP from 1974 to June 1991. He was a partner  specializing  in the
insurance industry prior to joining the Company.


                                       18
<PAGE>

     Mr. Hayes has been the Senior Vice  President - Finance since June 1995.  
Mr. Hayes was Vice President from June 1988 to June 1995 and was Controller from
June 1985 to June 1988. He has been Secretary of the Company since February 1987
and Chief  Financial  Officer since June 1987.  Mr. Hayes is a Certified Public
Accountant.

     Mr. Conwill has been Vice President - Investment  Services since June 1998.
He has served as Chief Operating Officer of APS Financial since May 1995, and as
President and Chief  Operating  Officer since March 1998. In May 1998 he assumed
responsibility as President of APS Investment Services.

     Mr.  Solimine has been  Controller  since June 1994. He has served as 
Secretary for APS Financial  since February 1995.  From July 1989 to June 1994, 
Mr. Solimine served as Manager of Accounting for the Company.

     There are no family  relationships,  as  defined,  between any of the above
executive officers,  and there is no arrangement or understanding between any of
the above  executive  officers  and any other  person  pursuant  to which he was
selected as an officer.  Each of the above executive officers was elected by the
Board of Directors to hold office until the next annual election of officers and
until his successor is elected and qualified or until his earlier resignation or
removal.  The Board of Directors  elects the officers in  conjunction  with each
annual meeting of the stockholders.

ITEM 11. EXECUTIVE COMPENSATION

   The  information  required by this item is contained in the definitive  proxy
statement of the Company to be filed in connection  with its 1999 annual meeting
of shareholders, which information is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information  required by this item is contained in the definitive proxy
statement of the Company to be filed in connection  with its 1999 annual meeting
of shareholders, which information is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information  required by this item is contained in the definitive proxy
statement of the Company to be filed in connection  with its 1999 annual meeting
of shareholders, which information is incorporated herein by reference.


                                       19
<PAGE>

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

         (a)      1.       Financial Statements

                  The information required by this item is contained in Appendix
A attached hereto.

                  2.       Financial Statement Schedules

                  All schedules are omitted  because they are not  applicable or
                  not  required  or  because  the  required  information  is not
                  material  or  is  presented  in  the  Consolidated   Financial
                  Statements and related notes.

         (b)      Reports on Form 8-K

                  None.

         (c)      Exhibits (1)

                     3.1     Restated Articles of Incorporation of the Company, 
                              as amended. (5)

                     3.2     Amended and Restated Bylaws of the Company. (5)

                     4.1     Specimen of Common Stock Certificate. (2)

                   *10.1     American Physicians Service Group, Inc. Employees
                              Stock Option Plan. (2)

                   *10.2     Form of Employees Incentive Stock Option Agreement.
                              (2)

                   *10.3     Form of Employees Non-Qualified Stock Option 
                              Agreement. (2)

                   *10.4     American Physicians Service Group, Inc. Directors 
                              Stock Option Plan. (2)

                   *10.5     Form of Directors Stock Option Agreement. (2)

                   *10.6     1995 Non-Employee Directors Stock Option Plan of 
                              American Physicians Service Group, Inc. (6)

                   *10.7     Form of Non-Employee Directors Stock Option 
                              Agreement. (6)

                   *10.8     1995 Incentive and Non-Qualified Stock Option Plan 
                              of American Physicians Service Group, Inc. (6)

                   *10.9     Form of Stock Option Agreement (ISO). (6)



                                       20
<PAGE>

                   *10.10    Form of Stock Option Agreement (Non-Qualified). (6)

                    10.11    Management  Agreement  of  Attorney-in-Fact,  
                              dated  August  13,  1975,  between  FMI and 
                              American Physicians Insurance Exchange. (2)

                    10.12    Rights   Agreement  dated  August  16,  1989
                              between  the  Company  and  Texas   American
                              Bridge  Bank  N.A.,  as  rights  agent,  and
                              letter to the  Company  stockholders,  dated
                              August 16, 1989. (4)

                   *10.14    Profit Sharing Plan or Trust, effective December 1,
                              1984, of the Company. (3)

                    10.17    Stock  Purchase Agreement dated  September 30, 1996
                              between the Company and Exsorbet  Industries, Inc.
                              (7)

                    10.18    Stock Put Agreement dated September 30, 1996 
                              between the Company and Exsorbet Industries, Inc. 
                              (7)

                    10.19    Shareholder Rights Agreement dated September 30, 
                              1996 between the Company and Exsorbet  Industries,
                              Inc. (7)

                    10.20    Warrant  dated  September  30,  1996 for shares of 
                              common  stock  issued to the Company by Exsorbet
                              Industries, Inc. (7)

                    10.21    Contingent Warrant  Agreement dated  September  30,
                              1996 for shares of common stock issued to the
                              Company by Exsorbet Industries, Inc. (7)

                    10.22    Option  Agreements  dated September 30, 1996 for
                              shares of Exsorbet  common  stock issued to the
                              Company by officers and  directors of Exsorbet 
                              Industries, Inc. (7)

                    10.23    Agreement  dated  September 30, 1996 with Exsorbet 
                              Industries,  Inc.  related to options issued by
                              officers and directors of Exsorbet. (7)

                    10.24    Guaranty  Agreements  dated  September  30, 1996  
                              between the Company and  subsidiaries  of
                              Exsorbet Industries, Inc. (7)

                    10.25    Promissory Note dated November 26, 1996 executed by
                              Exsorbet  Industries,  Inc. and payable to the
                              Company in the amount of $3,300,000. (7)

                    10.26    Stock  Purchase  Agreement  dated  October 1, 1997
                              between the Company,  APS Practice  Management,
                              Inc.,  Michael Beck, John Hendrick, and et al. (8)


                                       21
<PAGE>

                    10.27    Bylaws of APS Practice Management, Inc., (8)

                    10.28    Amended and Restated Articles of Incorporation APS 
                              Practice Management, Inc., (8)

                    10.29    APS Practice  Management,  Inc.,  Certificate  of 
                              Designation  of Rights and  Preferences  Series A
                              Serial Founder's Common Stock dated September 30, 
                              1997. (8)

                    10.30    Resolutions to organizational matters concerning 
                              Syntera, Inc. dated October 1, 1997. (8)

                    10.31    Master  Refinancing  Agreement  dated  November  6,
                              1997  between  the  Company  and  Consolidated
                              Eco-Systems, Inc. (8)

                    10.32    Promissory  Note dated November 6, 1997 executed by
                              Consolidated  Eco-Systems,  Inc. and payable to
                              the Company in the amount of $3,788,580. (8)

                    10.33    Assignment  and Security  Agreement dated  November
                              6, 1997  between the Company and  Consolidated
                              Eco-Systems, Inc. (8)

                    10.34    Security  Agreement dated November 6, 1997 between 
                              the Company and Consolidated  Eco-Systems,  Inc.
                              (8)

                    10.35    Share Exchange  Agreements dated October 31, 1997
                              between the Company and Devin Garza, M.D., Robert
                              Casanova, M.D. and Shelley Nielsen, M.D. (8)

                   *10.36    First Amendment to 1995 Incentive and Non-Qualified
                              Stock  Option Plan of American  Physicians Service
                              Group, Inc. Dated December 10, 1997. (8)

                   *10.37    First  Amendment to 1995  Non-Employee  Director 
                              Stock Option Plan of American  Physicians  Service
                              Group, Inc. Dated December 10, 1997. (8)

                    10.38    Share Exchange Agreement dated February 16, 1998
                              between the Company and Michael T. Breen, M.D. (9)

                    10.39    Share Exchange Agreement dated April 1, 1998 
                              between the Company and Antonio Cavazos, Jr., M.D.
                              (9)

                    10.40    Share Exchange Agreement dated April 1, 1998 
                              between the Company and Antonio Cavazos, III, M.D.
                              (9)


                                       22
<PAGE>

                    10.41    Share Exchange Agreement dated May 18, 1998 between
                              the Company and Jonathan B. Buten, M.D. (9)

                    10.42    Share Exchange Agreement dated June 30, 1998 
                              between the Company and Gary R. Jones, M.D. (9)

                    10.43    Share Exchange Agreement dated July 31, 1998 
                              between the Company and Joe R. Childress, M.D. (9)

                    10.44    Share Exchange Agreement dated August 1, 1998
                              between the Company and M. Reza Jafarnia, M.D. (9)

                    10.45    Share Exchange Agreement dated September 15, 1998 
                              between the Company and Donald Columbus, M.D. (9)

                    10.46    Share Exchange Agreement dated December 31, 1998 
                              between the Company and David L. Berry, M.D. (9)

                    10.47    Contribution  and Stock  Purchase  Agreement
                             dated  January 1, 1998  between the Company,
                             Additional  Purchasers,  Barton Acquisition,
                             Inc.,  Barton House,  Ltd.,  Barton House at
                             Oakwell Farms,  Ltd.,  Uncommon Care,  Inc.,
                             George  R.   Bouchard,   John  Trevey,   and
                             Uncommon Partners, Ltd. (9)

                    10.48    Stock Transfer  Restriction and Shareholders
                             Agreement  dated January 1, 1998 between the
                             Company,   Additional   Purchasers,   Barton
                             Acquisition,   Inc.,  Barton  House,   Ltd.,
                             Barton   House  at  Oakwell   Farms,   Ltd.,
                             Uncommon  Care,  Inc.,  George R.  Bouchard,
                             John Trevey, and Uncommon Partners, Ltd. (9)

                    10.49    Loan Agreement dated January 1, 1998 between the 
                              Company and Barton Acquisition, Inc. (9)

                    10.50    Promissory Note (Line of Credit) dated January 1, 
                              1998 between the Company and Barton Acquisition, 
                              Inc. in the amount of $2,400,000. (9)

                    10.51    Security Agreement dated January 1, 1998 between 
                              the Company and Barton Acquisition, Inc. (9)

                    10.52    Participation Agreement dated March 16, 1998 
                              between the Company and Additional Purchasers 
                              referred to as Participants. (9)


                                       23
<PAGE>

                    10.53    Revolving Credit Loan Agreement dated February 10, 
                              1998 between the Company and NationsBank of Texas,
                              N.A. in an amount not to exceed $10,000,000. (9)

                    10.54    Revolving Credit Note dated February 10, 1998 
                              between the Company and NationsBank of Texas, N.A.
                              in the amount of $10,000,000. (9)

                    10.55    Pledge Agreement dated February 10, 1998 between 
                              the Company and NationsBank of Texas, N.A. (9)

                    10.56    Continuing and Unconditional Guaranty dated 
                              February 10, 1998 between the Company and 
                              NationsBank of Texas, N.A. (9)

                    10.57    Restructuring Agreement dated March 25, 1998
                              between   the   Company   and   Consolidated
                              Eco-Systems,  Inc., and all of the wholly or
                              partially owned subsidiaries of Consolidated
                              Eco-Systems, Inc. (except for 7-7, Inc.).
                              (9)

                    10.58    Assignment and security Agreement dated March 25,
                              1998 between the Company and Consolidated Eco-
                              Systems, Inc. (9)

                    10.59    Security Agreement dated March 25, 1998 between the
                              Company and Consolidated Eco-Systems, Inc. (9)

                    10.60    Security Agreement dated March 25, 1998 between the
                              Company and Eco-Acquisition,  Inc. (9)

                    10.61    Security Agreement dated March 25, 1998 between the
                              Company and Exsorbet Technical Services,  Inc. (9)

                    10.62    Security Agreement dated March 25, 1998 between the
                              Company and KR Industrial Service of Alabama, Inc.
                              (9)

                     21.1    List of subsidiaries of the Company. (9)

                    23.1.1   Independent Auditors Consent of KPMG LLP. (9)

                      27.1   Financial Data Schedule (EDGAR filing).

         (*)       Executive Compensation plans and arrangements.
-----------------


                                       24
<PAGE>

(1)      The Company is subject to the informational requirements of the 
          Securities  Exchange Act of 1934, as amended,  and, in accordance  
          therewith,  files reports,  proxy  statements and other  information  
          with the  Commission. Reports,  proxy statements and other information
          filed by the Company can be inspected and copied at the public  
          reference facilities maintained by the Commission at 450 Fifth Street,
          N.W.,  Washington,  D.C.  20549,  and at the  Commission's  Regional
          Offices at Seven World Trade Center,  13th Floor, New York, New York 
          10048 and CitiCorp Center, 500 West Madison Street, Suite 1400,  
          Chicago,  Illinois  60661-2511.  Copies of such material can be 
          obtained by mail from the Public  Reference Section of the Commission 
          at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed 
          rates. Such reports, proxy statements and other information concerning
          the Company are also available for inspection at the offices of The 
          NASDAQ National Market, Reports Section, 1735 K Street, N.W., 
          Washington,  D.C. 20006. The Commission maintains a Web site that
          contains reports,  proxy and information statements and other 
          information regarding registrants that file electronically with the  
          Commission  at  "http://www.sec.gov  " and makes  available the same  
          documents  through  Disclosure,  Inc. at 800-638-8241.

(2)      Filed as an Exhibit to the  Registration  Statement on Form S-1, 
          Registration No. 2-85321,  of the Company,  and incorporated herein by
          reference.

(3)      Filed as an Exhibit to the Annual  Report on Form 10-K of the Company 
          for the year ended  December  31, 1984 and  incorporated herein by 
          reference.

(4)      Filed as an Exhibit to the Current  Report on Form 8-K of the  Company 
          dated  September  5, 1989 and  incorporated  herein by  reference.

(5)      Filed as an Exhibit to the Annual  Report on Form 10-K of the Company 
          for the year ended  December  31, 1990 and  incorporated herein by 
          reference.

(6)      Filed as an Exhibit to the Annual Report on Form 10-KSB of the Company 
          for the year ended  December 31, 1995 and  incorporated herein by 
          reference.

(7)      Filed as an Exhibit to the Annual Report on Form 10-KSB of the Company 
          for the year ended  December 31, 1996 and  incorporated herein by 
          reference.

(8)      Filed as an Exhibit to the Annual  Report on Form 10-K of the Company 
          for the year ended  December  31, 1997 and  incorporated herein by 
          reference.

(9)      Filed herewith.


                                       25
<PAGE>

                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                         AMERICAN PHYSICIANS SERVICE GROUP, INC.



                                          By: /s/ Kenneth S. Shifrin            

                                             Kenneth S. Shifrin, Chairman of the
                                             Board and Chief Executive Officer

                                          Date:  March 26, 1999

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.



By: /s/ Kenneth S. Shifrin                               

     Kenneth S. Shifrin
     Chairman of the Board and
     Chief Executive Officer
     (Principal Executive Officer)

Date:    March 26, 1999



By: /s/ W. H. Hayes                                      

     W. H. Hayes
     Senior Vice President - Finance, Secretary
     and Chief Financial Officer
     (Principal Financial Officer)

Date:    March 26, 1999


                                       26
<PAGE>



By: /s/ Thomas R. Solimine                               

     Thomas R. Solimine
     Controller
     (Principal Accounting Officer)

Date:    March 26, 1999



By: /s/ Robert L. Myer                                       

     Robert L. Myer, Director

Date:    March 26, 1999



By: /s/ William A. Searles                               

     William A. Searles, Director

Date:    March 26, 1999


                                       27
<PAGE>


                                    APPENDIX A



                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                         Page

Independent Auditors' Report                                              A-2

Financial Statements

         Consolidated Statements of Earnings for the years
         ended December 31, 1998, 1997, and 1996                          A-3

         Consolidated Balance Sheets at December 31, 1998
         and December 31, 1997                                            A-5

         Consolidated Statements of Cash Flows for the years
         ended December 31, 1998, 1997 and 1996                           A-7

         Consolidated Statements of Shareholders' Equity
         at December 31, 1998, 1997 and 1996                              A-9

         Notes to Consolidated Financial Statement                        A-10


                                      A-1
<PAGE>


                          Independent Auditors' Report





         The Board of Directors and Shareholders
         American Physicians Service Group, Inc.:


         We have audited the accompanying  consolidated  financial statements of
         American Physicians Service Group, Inc. and subsidiaries ("Company") as
         listed  in  the  accompanying   index.  These  consolidated   financial
         statements  are the  responsibility  of the Company's  management.  Our
         responsibility is to express an opinion on these consolidated financial
         statements based on our audits.

         We conducted our audits in accordance with generally  accepted auditing
         standards.  Those standards  require that we plan and perform the audit
         to obtain reasonable  assurance about whether the financial  statements
         are free of material  misstatement.  An audit includes examining,  on a
         test basis,  evidence  supporting  the amounts and  disclosures  in the
         financial  statements.  An audit also includes assessing the accounting
         principles used and significant  estimates made by management,  as well
         as evaluating the overall financial statement presentation.  We believe
         that our audits provide a reasonable basis for our opinion.

         In our opinion, the consolidated financial statements referred to above
         present fairly,  in all material  respects,  the financial  position of
         American  Physicians  Service Group,  Inc. and subsidiaries at December
         31, 1998 and 1997,  and the results of their  operations and their cash
         flows for each of the years in the three-year period ended December 31,
         1998, in conformity with generally accepted accounting principles.


                                                       /s/ KPMG LLP
                                                  --------------------------
         Austin, Texas
         March 9, 1999


                                      A-2
<PAGE>
 
<TABLE>
<CAPTION>
            AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF EARNINGS
                                                                                       Year Ended
                                                                                       December 31,

                                                                         1998             1997            1996
                                                                         ----             ----            ----
<S>                                                                   <C>               <C>              <C>    
Revenues:
  Investment services                                                  $9,914            5,726            3,302
  Insurance services (Note 2)                                           5,655            6,287            5,942
  Real estate (Note 5)                                                    713              704              717
  Investments and other                                                   121              348              476
                                                                     --------          -------          -------
    Total revenues                                                     16,403           13,065           10,437
                                                                      -------          -------          -------


Expenses:
  Investment services                                                   9,039            5,299            3,828
  Insurance services                                                    4,129            3,819            4,289
  Real estate                                                             527              503              521
  General and administrative                                            1,851            1,352              150
  Interest                                                                 59               21               54
                                                                       ------           ------          -------
    Total expenses                                                     15,605           10,994            8,842
                                                                       ------           ------          -------

  Operating income                                                        798            2,071            1,595


  Equity in earnings of
    unconsolidated affiliates (Note 13)                                 1,457            2,014            1,411

  Gain on sale of interest in subsidiary                                   --            1,899               --
                                                                       ------          -------          -------

  Earnings from continuing operations before
    income taxes and minority interests                                 2,255            5,984            3,006

  Income tax expense (Note 9)                                             863            2,341            1,058

  Minority interests                                                     (178)            (175)              --
                                                                       -------        --------         --------

  Earnings from continuing operations                                   1,214            3,468            1,948
                                                                       ------           ------           ------

Discontinued operations:
   Profit/(loss) from discontinued  operations net of  
   income tax expense/(benefit) of $171, (48)  
   and ($19) in 1998, 1997 and 1996, respectively                         331             (94)              (24)

   Estimated loss on disposal of discontinued segment,
   net of income tax benefit of $431 in 1997                               --            (836)               --
                                                                        ------        --------          --------

Net gain/(loss) from discontinued operations                              331            (930)              (24)
                                                                       -------        ---------         --------

Net earnings                                                           $1,545            2,538            1,924
                                                                       ======          =======          =======

</TABLE>

See accompanying notes to consolidated financial statements.

                                       A-3

<PAGE>


            AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF EARNINGS, continued

(In thousands, except per share amounts)
<TABLE>
<CAPTION>

                                                                                  Year Ended
                                                                                December 31,
                                                                       -------------------------------------
                                                                       1998             1997            1996
                                                                       ----             ----          ------

  <S>                                                                 <C>              <C>             <C>    
  Earnings per common share:

  Basic:
    Earnings from continuing operations                               $0.29             0.84            0.48

    Discontinued operations                                            0.08            (0.22)             --
                                                                     ------            -----           ------

       Net earnings                                                   $0.37             0.62            0.48
                                                                     ======            =====          ======

   Diluted:
    Earnings from continuing operations                               $0.24             0.81            0.46

    Discontinued operations                                            0.07            (0.22)             --
                                                                      -----            -----          ------

    Net earnings                                                      $0.31             0.59            0.46
                                                                      =====            =====          ======


  Basic weighted average shares
    outstanding                                                       4,163            4,106           4,025
                                                                      =====            ======         =======


  Diluted weighted average
    shares outstanding                                                4,692            4,241           4,219
                                                                      =====            ======         =======

</TABLE>

  See accompanying notes to consolidated financial statements.



                                       A-4

<PAGE>


            AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS


(In thousands, except share data)
                                                           Year Ended
                                                          December 31,
                                                   -------------------------
                                                     1998              1997


ASSETS

Current assets:
 Cash and cash equivalents                         $3,214             5,188
 Trading account securities                           535               449
 Management fees and other receivables
   (Note 2)                                           968               815
 Notes receivable, net - current (Note 3)             196             1,157
 Receivable from clearing broker                    1,036               543
 Prepaid expenses and other                           339               508
 Deferred income tax asset                          1,279             1,336
                                                    -----            ------
   Total current assets                             7,567             9,996



Notes receivable, net less current portion
  (Note 3)                                          4,287             2,982
Property and equipment, net (Note 5)                1,653             1,830
Investment in affiliates (Note 13)                 17,063            15,611
Preerred stock investment                           2,078                --
Other assets                                          266               318
                                                   ------            ------
   Total assets                                   $32,914            30,737
                                                   ======            ======





See accompanying notes to consolidated financial statements.

                                       A-5
<PAGE>
            AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
                     CONSOLIDATED BALANCE SHEETS, continued


(In thousands, except share data)

                                                         Year Ended
                                                        December 31,
                                                   ----------------------
                                                   1998              1997
LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
 Accounts payable - trade                           910               901
 Payable to clearing broker                         487               441
 Income taxes payable                               292               226
 Accrued compensation                               823               446
 Accrued expenses and other liabilities 
   (Note 6)                                       3,273             3,286
                                                  -----            ------
  Total current liabilities                       5,785             5,300

Deferred income tax liability 
   (Note 9)                                       2,474             2,158
                                                  -----            ------
  Total liabilities                               8,259             7,458
                                                 ------            ------

Minority interest                                    53               175

Shareholders' equity:
 Preferred stock, $1.00 par value, 
   1,000,000 shares authorized                       --                --
 Common stock, $0.10 par value, 
   20,000,000 shares authorized; 4,160,083
   issued at 12/31/98 and 4,160,861 at 
   12/31/97                                         416               416
 Additional paid-in capital                       5,481             5,528
 Retained earnings                               18,705            17,160
                                                 ------            ------

    Total shareholders' equity                   24,602            23,104
                                                 ------           -------

Commitments and contingencies
    (notes 5, 7, 8, 10, 11, 12)
 Total liabilities and shareholders' equity     $32,914            30,737
                                                =======            ======


See accompanying notes to consolidated financial statements.


                                       A-6

<PAGE>


            AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)
<TABLE>
<CAPTION>


                                                                                  Twelve Months Ended
                                                                                      December 31,
                                                                          -------------------------------------- 
                                                                          1998           1997              1996
                                                                          ----           ----              ----

<S>                                                                  <C>               <C>              <C>    
Cash flows from operating activities:
  Cash received from customers                                       $ 16,017           13,080           11,123
  Cash paid to suppliers and employees                                (14,390)          (9,247)         (11,064)
  Change in trading account securities                                    (86)             250              315
  Change in receivable from clearing broker                              (447)            (177)             501
  Interest paid                                                           (59)           (  21)            ( 54)
  Income taxes paid                                                      (439)           ( 772)           ( 611)
  Interest, dividends and other investment proceeds                       234              219              459
                                                                       -------        --------          -------
    Net cash provided by operating activities                             830            3,332              669
                                                                       -------        --------          -------

Cash flows from investing activities:
  Proceeds from the sale of property and 
    equipment                                                              13               55               --
  Payments for purchase of property and
    equipment                                                            (206)           ( 312)           ( 144)
  Net decrease in marketable securities                                    --                5            2,045
  Proceeds from equity owners in investment                               259               --               --
  Investment in preferred stock                                        (2,073)          (5,292)            (244)
  Proceeds from sale of insurance exchange                                 --            1,000               --
  Proceeds from sale of 20& of Insurance Services                          --            2,000               --
  Funds loaned to others                                               (3,020)           ( 834)          (3,442)
  Collection of notes receivable                                        2,085              109               --
  Discontinued operations                                                 502               --               --
  Other                                                                    --              (82)              -- 
                                                                        -------         --------         ------
     Net cash used in investing activities                             (2,440)         ( 3,351)          (1,785)
                                                                       -------         --------          ------
                                                           


Cash flows from financing activities:
  Repayment of long-term obligations                                       --            ( 542)          (  163)
  Proceeds from long-term obligations                                       8               --               --
  Purchase/retire treasury stock                                         (147)           ( 337)          (  453)
  Exercise of stock options                                                75              316              704
  Distributions to minority interest                                     (300)              --               --
                                                                      -------          -------           ------
    Net cash used in financing activities                                (364)            (563)              88
                                                                       -------         -------           ------

Net change in cash and cash equivalents                                (1,974)           ( 582)          (1,028)

Cash and cash equivalents at beginning of period                        5,188            5,770            6,798
                                                                        -----            -----           ------
Cash and cash equivalents at end of period                              3,214            5,188            5,770
                                                                        =====          =======           ======


</TABLE>

See accompanying notes to consolidated financial statements.

                                       A-7

<PAGE>
            AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
(In thousands)
<TABLE>
<CAPTION>
                                                                                Twelve Months Ended
                                                                                   December 31,
                                                                      ---------------------------------------
                                                                      1998             1997             1996
                                                                      ----             ----             ----
<S>                                                                <C>               <C>              <C>    
Reconciliation of net earnings to net cash from 
 operating activities:

 Net earnings                                                      $ 1,545            2,538            1,924
Adjustments to reconcile net earnings to
  net cash from operating activities:
Depreciation and amortization                                          618              436              324
(Earnings)/loss from discontinued operations                          (502)             200               --
Loss on disposal of discontinued operations                             --            1,209               --
Minority interest in consolidated earnings                             178              175               --
Undistributed earnings of affiliate                                 (1,457)          (2,014)          (1,411)
Provision for bad debts                                                361               --               --
Gain on sale of fixed assets                                            (1)              --               --
Gain on sale or disposition of assets                                   --           (2,032)              --
(Gain) loss on sale of securities                                       --               41              (82)
Change in federal income tax payable                                    66              876             (584)
Provision for deferred taxes                                           373               56              925
Change in trading securities                                           (86)             250              315
Change in receivable from clearing broker                             (447)             177              501
Change in management fees and other receivable                        (153)             (26)              17
Change in prepaids and other current assets                            169             (191)              24
Change in long term assets                                              52               --              265
Change in trade payable                                                  9               90               53
Change in accrued expenses and other liabilities                       105            1,547           (1,602)
                                                                   -------           ------           ------

  Net cash from operating activities                               $   830            3,332              669
                                                                   =======           ======           ======
</TABLE>

Summary of non-cash transactions:

During 1998,  non-qualified employee stock options were exercised which resulted
in  a  reduction  of  income  tax  payable  and  a  corresponding   addition  to
paid-in-capital of $25.


During 1997,  non-qualified employee stock options were exercised which resulted
in  a  reduction  of  income  tax  payable  and  a  corresponding   addition  to
paid-in-capital of $194.

During 1996,  non-qualified employee stock options were exercised which resulted
in a reduction  of income tax payable  and a  corresponding  addition to paid-in
capital of $624.                                  



See accompanying notes to consolidated financial statements

                                      A-8
<PAGE>

            AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
                 Consolidated Statements of Shareholders' Equity
                     For the years ended December 31, 1998,
                                  1997 and 1996


(In thousands, except share data)
<TABLE>
<CAPTION>

                                                              Additional     Unrealized                     Total
                                          Common Stock           Paid-in       Holding     Retained     Shareholders'
                                   Shares          Amount        Capital        Gains      Earnings        Equity
                                   --------------  ---------  -------------  ------------- -----------  -------------- 
<S>                                 <C>              <C>          <C>              <C>      <C>              <C>            
Balance January 1, 1996             3,663,871        $366        4,530              --      12,698           17,594      
Net earnings                               --          --           --              --       1,924            1,924        
Unrealized loss on securities
    available for sale, net of tax         --          --           --             (11)         --              (11)          
Shares issued (Note 11)               450,000          45          659              --          --              704          
Shares repurchased & 
   cancelled                          (64,676)         (6)        (447)             --          --             (453)         

Income tax benefit of non-
  qualified option exercises               --          --          624              --          --              624   
                                    ----------    ---------  -------------   ------------ -----------  -------------- 
Balance December 31, 1996           4,049,195         405        5,366             (11)     14,622           20,382      

Net earnings                               --          --           --              --       2,538            2,538       
Unrealized gain on securities
   available for sale, net of tax          --          --           --              11          --               11          
Shares issued (Note 11)               164,666          16          300              --          --              316          
Shares repurchased &
   cancelled                          (53,000)         (5)        (332)             --          --             (337)         
Income tax benefit of non-
   qualified option exercises              --          --          194              --          --              194         
                                   --------------  ---------  -------------  ------------- -----------  -------------- 
Balance December 31, 1997           4,160,861         416        5,528              --      17,160           23,104       

Net earnings                               --          --           --              --       1,545            1,545      
Shares issued (Note 11)                25,833           3           72              --          --               75         
Shares repurchased &
   cancelled                          (26,611)         (3)        (144)             --          --             (147)         
Income tax benefit of non-
  qualified option exercises               --          --           25              --          --               25
                                   --------------  ---------- -------------  ------------- -----------  -------------- 
Balance December 31, 1998           4,160,083        $416        5,481              --      18,705           24,602       
                                   ==============  ========== =============  ============= ===========  ============== 
</TABLE>

See accompanying notes to consolidated financial statements.

                                       A-9
<PAGE>

            AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 1998, 1997 and 1996


(1)      Summary of Significant Accounting Policies

(a)      General

         American  Physicians  Service  Group,  Inc.  through its  subsidiaries,
         provides financial services that include brokerage and asset management
         services to individuals and institutions,  and insurance  services that
         consist of management services for malpractice insurance companies. The
         financial   services   business  has  clients   nationally.   Insurance
         management is a service  provided  primarily in Texas, but is available
         to clients  nationally.  American  Physicians  Service Group, Inc. also
         owns space in the office  building  which  serves as its  headquarters.
         Through its real estate  subsidiary  it leases space that is surplus to
         its  needs.   During  the  three  years   presented  in  the  financial
         statements,  financial  services  generated  47% of total  revenues and
         insurance services generated 45%.

         American  Physicians  Services Group,  Inc. has two  affiliates;  Prime
         Medical Services, Inc., of which it owns approximately 18%, and Syntera
         HealthCare  Corporation,  of which  it owns  approximately  62%.  Prime
         Medical is the country's largest provider of lithotripsy  (non-invasive
         kidney stone fracturing)  services and Syntera is a physician  practice
         management  company.  The Company also has a preferred stock investment
         in a company which develops and operates Alzheimer's care facilities.

(b)      Estimates

         The  preparation of financial  statements in conformity  with generally
         accepted  accounting  principles  requires management to make estimates
         and  assumptions  that  affect  the  reported  amounts  of  assets  and
         liabilities and disclosure of contingent  assets and liabilities at the
         date of the financial  statements and the reported  amounts of revenues
         and expenses during the reporting  period.  Actual results could differ
         from those estimates.

(c)      Principles of Consolidation

         The consolidated  financial statements include the accounts of American
         Physicians  Service Group,  Inc. and of subsidiary  companies more than
         50% owned ("Company"), except for its investment in Syntera. Syntera is
         accounted  for using  the  equity  method,  as the  operating  plan for
         Syntera  will result in the Company  diluting  its  ownership  to a non
         controlling  position as additional  physician  practices are acquired.
         Investments  in affiliated  companies  and other  entities in which the
         Company's investment is less than 50% of the common


                                      A-10
<PAGE>

            AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 1998, 1997 and 1996


(1)      Summary of Significant Accounting Policies, continued

         shares outstanding and where the Company exerts  significant  influence
         are accounted for by the equity method.

         All  significant  intercompany  transactions  and  balances  have  been
         eliminated from the accompanying consolidated financial statements.

(d)      Revenue Recognition

         Investment  services  revenues  related to securities  transactions are
         recognized on a trade date basis.

         Insurance  services  revenues related to management fees are recognized
         monthly as a percentage of the earned premiums of the managed  company.
         The profit  sharing  component of these fees is  recognized  when it is
         reasonably certain that the managed company will have an annual profit,
         generally in the fourth quarter of each year.

         Real estate rental  income is  recognized  monthly over the term of the
         lease.  Costs of leasehold  improvements  are capitalized and amortized
         monthly over the term of the lease.

                  Investment  revenues are recognized as accrued on highly rated
                  investments and as received on lesser grades.

(e)      Marketable Securities

         The Company's  investments in debt and equity securities are classified
         in three categories and accounted for as follows:

                  Classification                    Accounting
                  --------------                    ------------------------
                  Held to maturity                  Amortized cost

                  Trading securities                Fair value, unrealized gains
                                                    and losses included in
                                                    earnings

                  Available                         for  sale   Fair   value,
                                                    unrealized    gains   and
                                                    losses    excluded   from
                                                    earnings  and reported as
                                                    a separate  component  of
                                                    stockholders' equity, net
                                                    of   applicable    income
                                                    taxes


                                      A-11
<PAGE>


            AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 1998, 1997 and 1996



(1)      Summary of Significant Accounting Policies, continued

         The Company has included its marketable  securities,  held as inventory
         at its broker/dealer, in the trading securities category.

(f)      Property and Equipment

         Property and equipment  are stated at cost.  Property and equipment and
         rental property are depreciated using the straight-line method over the
         estimated useful lives of the respective assets (3 to 40 years).

(g)      Long-Lived Assets

         Long-lived  assets  are  reviewed  for  impairment  whenever  events or
         changes in  circumstances  indicate that the carrying amount may not be
         recoverable.  If the sum of the expected future undiscounted cash flows
         is less than the carrying  amount of the asset, a loss is recognized if
         there is a difference  between the fair value and carrying value of the
         asset.

         (h)      Income Taxes

         Deferred tax assets and  liabilities  are recognized for the future tax
         consequences   attributable   to  differences   between  the  financial
         statement carrying amounts of existing assets and liabilities and their
         respective tax bases and operating  loss and tax credit  carryforwards.
         Deferred  tax assets and  liabilities  are measured  using  enacted tax
         rates  expected to apply to taxable  income in the years in which those
         temporary  differences  are expected to be  recovered  or settled.  The
         effect on deferred tax assets and  liabilities of a change in tax rates
         is recognized in income in the period that includes the enactment date.

(i)      Earnings Per Share

         Basic  earnings  per  share  is based on the  weighted  average  shares
         outstanding  without any diluted effects  considered.  Diluted earnings
         per share  reflect  dilution  from all  contingently  issuable  shares,
         including options.

(j)      Cash and Cash Equivalents

         Cash and cash  equivalents  include cash and highly liquid  investments
         with an original maturity of 90 days or less.


                                      A-12
<PAGE>

            AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 1998, 1997 and 1996



(1)      Summary of Significant Accounting Policies, continued

(k)      Notes Receivable

         Notes  receivable  are recorded at cost,  less  allowances for doubtful
         accounts  when  deemed  necessary.   Management,   considering  current
         information and events  regarding the borrowers  ability to repay their
         obligations,  considers a note to be impaired  when it is probable that
         the Company will be unable to collect all amounts due  according to the
         contractual  terms of the note agreement.  When a loan is considered to
         be  impaired,  the amount of the  impairment  is measured  based on the
         present  value of expected  future cash flows  discounted at the note's
         effective  interest  rate.   Impairment  losses  are  included  in  the
         allowance for doubtful  accounts  through a charge to bad debt expense.
         The present  value of the impaired loan will change with the passage of
         time and may  change  because  of  revised  estimates  of cash flows or
         timing of cash flows.  Such value changes shall be reported as bad debt
         expense in the same manner in which impairment initially was recognized
         or as a  reduction  in the  amount of bad debt  expense  that  would be
         reported.

(l)      Stock-Based Compensation

         The Company has adopted the disclosure-only  provisions of Statement of
         Financial  Accounting  Standards No. 123,  Accounting  for  Stock-Based
         Compensation ("Statement 123"), but applies Accounting Principles Board
         Opinion No. 25, Accounting for Stock Issued to Employees, in accounting
         for its stock option plans.

(m)      Reclassification

         Certain  reclassifications  have  been  made to  amounts  presented  in
         previous years to be consistent with the 1998 presentation.

(n)      Other Comprehensive Income

          For the three years ended December 31, 1998, the Company has not had
          any significant other comprehensive income 



                                      A-13
<PAGE>

            AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 1998, 1997 and 1996


(2)      Management Fees and Other Receivables

         Management fees and other receivables consist of the following:

                                                            December 31,
                                                      1998               1997
                                                    --------            -------
         Management fees receivable                 $501,000              3,000
         Trade accounts receivable                   173,000            200,000
         Less:  allowance for doubtful accounts
                                                      (8,000)           (25,000)
         Accrued interest receivable                  21,000             10,000
         Other receivables                           281,000            627,000
                                                     -------            -------
                                                    $968,000            815,000
                                                    ========            =======


         The Company earns  management fees by providing for the full management
         of American Physicians  Insurance Exchange ("APIE") under the direction
         of APIE's doctor Board of  Directors.  Subject to the direction of this
         Board, FMI sells and issues policies, investigates, settles and defends
         claims,   and  otherwise  manages  APIE's  affairs.   The  Company  has
         previously managed other insurance companies.

         The  Company  earned  management  fees  and  other  related  income  of
         $5,655,000,    $6,287,000   and   $5,942,000   and   received   expense
         reimbursements of $1,420,000, $664,000 and $346,000 for the years ended
         December  31,  1998,  1997 and  1996,  respectively,  related  to these
         agreements.


                                      A-14
<PAGE>

            AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 1998, 1997 and 1996

(3)      Notes Receivable

         Notes receivable consist of the following:
<TABLE>
<CAPTION>

                                                                                                 December 31,
                                                                                           1998               1997
<S>                                                                                        <C>               <C>    
Reagan Publishing Company
This  unsecured  note had an original  rate of 7% and a maturity of December 31,
1997.  During 1997, the terms were renegotiated with a payment schedule based on
the sales volume of the borrower,  with certain annual minimums, and interest at
the prime rate. The borrower  defaulted in 1998 and the Company is in litigation
to
collect amounts owed.                                                                       $156,000          176,000
Consolidated Eco-Systems, Inc.
This note is secured  by  1,200,000  shares of  Consolidated  Eco-Systems,  Inc.
common  stock and stock and  certain  assets of Con-Eco  subsidiaries.  The note
bears  interest  at 15%.  The Company  declared  the note in default in 1998 and
entered into a  Restructuring  Agreement in March 1999.  Under the agreement the
Company obtained additional  collateral and agreed to refinance the note on more
favorable  terms in the future,  provided  that  certain  minimum  payments  are
received.
                                                                                           3,709,000        3,788,000
Uncommon Care, Inc.
Term Note: This note was secured by land located in Fort Bend County, Texas. The
note carried a 10% interest rate and was paid in full on January 31, 1998.
Revolving Line of Credit:  This note is secured by substantially all of the assets                --          300,000
of Uncommon Care and is subordinated to bank loans for various real estate
purchases.  The note is interest only at 10%, payable quarterly.  Any outstanding
principal is due June 30, 2005.                                                              745,000               --
Syntera HealthCare Corporation
This unsecured revolving line of credit bears interest at 10%.  Payments are
interest only, paid quarterly through November 1, 2001, at which time the
outstanding principal balance is due.                                                        580,000               --
Employees
Four employees have loans from the Company as employment inducements.  The notes
are non-interest bearing and are being forgiven and amortized monthly over three to
four year periods.  The notes are due and payable should the employees terminate
employment.                                                                                  437,000          528,000
                                                                                             -------          -------
                                                                                           5,627,000        4,792,000
Less allowance for doubtful accounts                                                     (1,144,000)        (653,000)
                                                                                         -----------        ---------
                                                                                           4,483,000        4,139,000
Less current portion                                                                         196,000         1,157,00
                                                                                          ----------        ---------
Long term portion                                                                         $4,287,000        2,982,000
                                                                                          ==========        =========
</TABLE>


                                      A-15
<PAGE>

            AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 1998, 1997 and 1996



(3)      Notes Receivable, continued

         The Company's  note  receivable  from  Consolidated  Eco-Systems,  Inc.
         (formerly  Exsorbet  Industries,  Inc.)  ("Con-Eco")  (NASDAQ:EXSO),  a
         diversified  environmental and technical services company, is in excess
         of 10% of  stockholder's  equity at December 31, 1998 and  represents a
         concentration of credit risk. No interest income has been recognized by
         the Company.

         Following  a  renegotiation  of the  debt  in  November  1997,  Con-Eco
         defaulted on the note. Con-Eco's stock was delisted during 1998 and has
         negligible value. The Company considers the loan to be impaired and has
         recorded the loan as follows:

                                                  December 31,
                                       1998                           1997
                                       ----                           ----
Recorded loan amount                 $3,709,000                    3,788,000
Less allowance for impairment           880,000                      488,000
                                     ----------                    ---------
                                     $2,829,000                    3,300,000
                                     ==========                    =========


         A reconciliation of the allowance for impairment follows:

                                               Year Ended December 31,
                                            1998                        1997
                                         -------                   ----------
Balance at beginning of the period       653,000                           --
Additions charged to operations         (100,000)                     (76,000)
Deductions charged to allowance          591,000                      729,000
                                         -------                   ----------   
Balance at end of period              $1,144,000                      653,000
                                      ==========                   ========== 


(4)      Fair Value of Financial Instruments

         Statements  of Financial  Accounting  Standards  No. 107,  "Disclosures
         About Fair Value of Financial  Instruments"  (Statement 107),  requires
         that the  Company  disclose  estimated  fair  values for its  financial
         instruments as of December 31, 1998 and 1997.

         For financial  instruments  the fair value equals the carrying value as
         presented in the  consolidated  balance sheets.  Fair value  estimates,
         methods,  and  assumptions  are  set  forth  below  for  the  Company's
         financial instruments.


                                      A-16
<PAGE>

            AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 1998, 1997 and 1996



(4)      Fair Value of Financial Instruments, continued

         Cash and Cash Equivalents

         The carrying  amounts for cash and cash  equivalents  approximate  fair
         value  because  they  mature  in less  than 90 days and do not  present
         unanticipated credit concerns.

         Trading Account Securities

         The fair value of  securities  owned is  estimated  based on bid prices
         published in  financial  newspapers  or bid  quotations  received  from
         securities  dealers.  Trading account  securities are carried at market
         value.

         Management Fees and Other Receivables

         The fair value of these receivables approximates the carrying value due
         to their short-term nature and historical collectibility.

         Notes Receivable

         The fair value of notes has been determined using discounted cash flows
         based on management's  estimate of current  interest rates for notes of
         similar credit quality.  On notes determined to be impaired,  the notes
         have been discounted based on the original interest rate of the note.

         Receivable from Clearing Broker

         The carrying  amounts  approximate  fair value because the funds can be
         withdrawn on demand and there is no unanticipated credit concern.

         Preferred Stock Investment

         The fair value has been determined using discounted cash flows based on
         estimates of future earnings.

         Accounts Payable

         The fair value of the payable  approximates  carrying  value due to the
         short-term nature of the obligation.


                                      A-17
<PAGE>

            AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 1998, 1997 and 1996


(4)      Fair Value of Financial Instruments, continued

         Limitations

         Fair value  estimates  are made at a specific  point in time,  based on
         relevant  market   information  and  information  about  the  financial
         instrument.  Fair  value  estimates  are based on  existing  on-and-off
         balance sheet financial  instruments without attempting to estimate the
         value of  anticipated  future  business  and the  value of  assets  and
         liabilities  that  are  not  considered  financial  instruments.  Other
         significant  assets and liabilities  that are not considered  financial
         assets or  liabilities  include the deferred  tax assets,  property and
         equipment, investment in affiliates, other assets, accrued expenses and
         income tax payable. In addition,  the tax ramifications  related to the
         realization of the  unrealized  gains and losses can have a significant
         effect on fair  value  estimates  and have not been  considered  in the
         aforementioned estimates.

(5)      Property and Equipment

         Property and equipment consists of the following:

                                                  December 31,
                                     ------------------------------------------
                                          1998                     1997
                                     -----------------         ----------------
         Office condominium              $1,796,000                1,847,000
         Furniture and equipment          3,173,000                3,758,000
                                          ---------                ---------
                                          4,969,000                5,605,000
         Accumulated depreciation 
          and amortization                3,316,000                3,775,000
                                          ---------                ---------
                                         $1,653,000                1,830,000
                                         ==========                =========

         The Company owns  approximately  53,000 square feet in the  condominium
         building in which its principal offices are located.  The Company,  its
         subsidiaries and affiliates occupy approximately 31,000 square feet and
         the remainder is leased to third parties.  Rental income  received from
         third parties during the years ended  December 31, 1998,  1997 and 1996
         totaled  approximately  $355,000,  $385,000 and $379,000  respectively.
         Future  minimum  lease  payments to be received  under the terms of the
         office  condominium  leases are as  follows:  1999 -  $206,000,  2000 -
         $114,000; 2001 - $92,000; 2002 - $44,000; and 2003 - $33,000.


                                      A-18
<PAGE>
 
            AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 1998, 1997 and 1996


(6)   Accrued Expenses and Other Liabilities



      Accrued expenses and other liabilities consists of the following:



                                                   1998                 1997
                                              -------------       --------------

        APS Systems disposition costs 
         (discontinued operations)
                                               $1,026,000             1,138,000
        Taxes payable - other                     115,000                96,000
        Deferred income                           740,000               280,000
        Health insurance and other claims 
         payable                                       --                59,000
        Contractual/legal claims                1,096,000             1,461,000
        Vacation payable                          134,000               102,000
        Funds held for others                      20,000                58,000
        Other                                     142,000                92,000
                                                  -------                ------
                                               $3,273,000             3,286,000
                                               ==========             =========


(7)      Notes Payable

         The  Company  has  established  a  $10,000,000   line  of  credit  with
         NationsBank  of Texas,  N. A. The Company  will pledge  shares of Prime
         Medical to the bank as funds are advanced  under the line. No funds had
         been advanced at December 31, 1998.  Funds advanced under the agreement
         will bear interest at the prime rate less 1/4 %. The unused  portion of
         the line  carries a 1/4 %  commitment  fee.  All interest is to be paid
         quarterly.  Any  outstanding  principal  is to be paid at  maturity  in
         February 2001.

         In order to receive  advances under the line, the Company must maintain
         certain  levels of liquidity  and net worth.  In  addition,  the market
         value of the  collateral  must  exceed a certain  multiple of the funds
         advanced  under the line and there must be no  occurrence  which  would
         have a material  adverse  effect on the  Company's  ability to meet its
         obligations to the bank.


                                      A-19
<PAGE>

            AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 1998, 1997 and 1996


(8)      Commitments and Contingencies

         The  Company  has  extended  a line of  credit  to  Syntera  HealthCare
         Corporation  to a maximum  amount of  $3,000,000.  The note is interest
         only at 10%, payable  quarterly.  The note matures November 1, 2001, at
         which time all  principal  and  accrued  but unpaid  interest  are due.
         Advances  under  the  line  are  subject  to  Syntera  meeting  certain
         qualifications at the date of each advance request.

         The Company has extended a line of credit to Uncommon  Care,  Inc. to a
         maximum amount of $2,400,000. The note is interest only at 10%, payable
         quarterly.  The note matures June 30, 2005, at which time all principal
         and accrued but unpaid  interest are due.  Advances  under the line are
         subject to Uncommon Care meeting certain  qualifications at the date of
         each advance request.

         The Company has guaranteed the future yield of a customer's  investment
         Portfolio  beginning in January 1995 for up to a five and one-half year
         period.  Management  believes that the Company's  financial  statements
         adequately  provide for any loss that might occur under this agreement;
         however,  as  defined  in  AICPA  Statement  of  Position  94-6,  it is
         reasonably  possible that the  Company's  estimate of loss could change
         over the  remaining  term of the  agreement.  Management  is  unable to
         determine  the  range  of  potential  adjustment  since  it is based on
         securities markets, which are beyond its ability to control.

         The Company has  guaranteed  a loan in the amount of $85,000 for one of
         its  directors.  The  guarantee is  collateralized  by  securities  the
         Company believes sufficient to cover its potential liability.

         Rent expense  under all operating  leases for the years ended  December
         31, 1998, 1997 and 1996 was $44,000,  $89,000 and $51,000 respectively.
         Future minimum  payments for leases which extend for more than one year
         were $96,000 at December 31, 1998.

         The Company is involved in various  claims and legal  actions that have
         arisen in the ordinary course of business. Management believes that any
         liabilities  arising  from these  actions  will not have a  significant
         adverse effect on the financial condition of the Company.


                                      A-20
<PAGE>

            AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 1998, 1997 and 1996

(9)  Income Taxes

     Income tax expense (benefit) consists of the following:

                                                     Year Ended
                                                    December 31,
                                      ------------------------------------------
                                       1998             1997             1996
                                       ----             ----             ----
     Continuing Operations
     Federal
       Current                       $332,000        1,394,000           47,000
       Deferred                       399,000          777,000          938,000
     State                            132,000          170,000           73,000
     Discontinued Operations          171,000         (479,000)         (13,000)
                                      -------        ---------          ------- 
                                   $1,034,000        1,862,000        1,045,000
                                   ==========        =========        =========


         A reconciliation  of expected income tax expense  (computed by applying
         the United States  statutory  income tax rate of 34% to earnings before
         income  taxes) to total tax  expense in the  accompanying  consolidated
         statements of earnings follows:

                                                     Year Ended
                                                    December 31,
                                    --------------------------------------------
                                      1998             1997             1996
                                      ----             ----             ----
    Expected federal income tax 
      expense
                                    $877,000        1,556,000          972,000
    State taxes                      132,000          170,000           73,000
    Other, net                        25,000          136,000               --
                                    --------        ---------          -------
                                  $1,034,000        1,862,000        1,045,000
                                  ==========        =========        =========


         The tax effect of temporary  differences that gives rise to significant
         portions  of  deferred  tax  assets and  deferred  tax  liabilities  at
         December 31, 1998 and 1997 are presented below:



                                      A-21
<PAGE>

            AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 1998, 1997 and 1996

                                                         Year Ended
                                                         December 31,
                                                    ----------------------------
(9)      Income Taxes, continued
                                                        1998             1997
                                                        ----             ----
     Deferred tax assets:
     Net operating loss carryforwards                $186,000           188,000
     Accrued expenses                                 774,000         1,015,000


     Accounts receivable, principally due to
       allowance for doubtful accounts                 94,000            79,000
     Deferred income                                  378,000           228,000
     Market value allowance                            17,000                --
     Other                                             48,000            71,000
                                                      -------         ---------
     Total gross deferred tax assets                1,497,000         1,581,000
     Less valuation allowance                        (186,000)         (188,000)
                                                    ---------         ---------
     Net deferred tax assets                        1,311,000         1,393,000
                                                    ---------         ---------
     Deferred tax liabilities:
     Investment in Prime Medical Services, Inc. 
      due to use of equity method for books        (2,474,000)       (2,158,000)
     Capitalized expenses, principally due to 
      deductibility for tax purposes                  (32,000)          (57,000)
                                                     --------          --------
     Total gross deferred tax liabilities          (2,506,000)       (2,215,000)
                                                   -----------       -----------
     Net deferred tax liability                   $(1,195,000)         (822,000)
                                                  ===========          =========


         The  valuation  allowance for deferred tax assets as of January 1, 1997
         was $0. The net change in the total  valuation  allowance for the years
         ended December 31, 1998 and 1997 was a (decrease)/increase  of ($2,000)
         and  $188,000,  respectively.  The Company  believes that the valuation
         allowance  at  December  31,  1998 is  necessary  due to  uncertainties
         regarding the use of the net operating loss carryforwards from separate
         return years of a subsidiary acquired in 1997.

         At December 31, 1998,  net operating  loss  carryforwards  available to
         reduce future taxable  income  amounted to  approximately  $548,000 and
         expire from years 2011 to 2012.

         Based upon the level of historical  taxable income and  projections for
         future  taxable  income over the periods  which the deferred tax assets
         are  deductible,  management  believes  it is more  likely than not the
         Company will realize the benefits of these deductible differences,  net
         of the existing valuation allowances at December 31, 1998.


                                      A-22
<PAGE>

            AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 1998, 1997 and 1996


(10)     Employee Benefit Plans

         The Company has an  employee  benefit  plan  qualifying  under  Section
         401(k)  of the  Internal  Revenue  Code  for  all  eligible  employees.
         Employees   become  eligible  upon  meeting  certain  service  and  age
         requirements.  Employees may defer up to 15% (not to exceed  $10,000 in
         1998) of their annual  compensation under the plan. The Company, at its
         discretion,  may  contribute  up to  200%  of the  employees'  deferred
         amount.  For  the  years  ended  December  31,  1998,  1997  and  1996,
         contributions  by  the  Company  aggregated,   $126,000,   $92,000  and
         $104,000, respectively.

(11)     Stock Options

         The  Company  has  adopted,  with  shareholder   approval,   the  "1995
         Non-Employee  Directors Stock Option Plan"  ("Directors  Plan") and the
         "1995  Incentive  and  Non-Qualified  Stock  Option  Plan"  ("Incentive
         Plan").  The Directors  Plan provides for the issuance of up to 200,000
         shares  of  common  stock to  non-employee  directors  who serve on the
         Compensation  Committee.  The  Directors  Plan  is  inactive  and it is
         assumed the remaining  50,000 shares will not be issued.  The Incentive
         Plan, as amended with  shareholder  approval in 1998,  provides for the
         issuance of up to 1,200,000  share of common stock to directors and key
         employees.

         The exercise price for each non-qualified option share is determined by
         the Compensation Committee of the Board of Directors ("the Committee").
         The exercise price of a qualified  incentive  stock option has to be at
         least 100% of the fair market value of such shares on the date of grant
         of the option.  Under the Plans, option grants are limited to a maximum
         of ten-year  terms;  however,  the  Committee  has issued all currently
         outstanding  grants with five-year terms. The Committee also determines
         vesting for each option grant and all outstanding options vest in three
         approximately  equal annual  installments  beginning  one year from the
         date of grant.

         The Company has adopted the disclosure-only  provisions of Statement of
         Financial  Accounting  Standards No. 123,  Accounting  for  Stock-Based
         Compensation ("Statement 123"), but applies Accounting Principles Board
         Opinion No. 25, Accounting for Stock Issued to Employees, in accounting
         for its  stock  option  plans.  No cost from  stock-based  compensation
         awards was recognized in 1998, 1997 or 1996. If the Company had elected
         to recognize  compensation  cost of options  granted  based on the fair
         value at the grant dates, consistent with Statement 123, net income and
         earnings  per  share  would  have  changed  to the  pro  forma  amounts
         indicated below:


                                      A-23
<PAGE>

            AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
                        NOTES TO CONSOLIDATED FINANCIAL
                  STATEMENTS December 31, 1998, 1997 and 1996

(11)  Stock Options, continued

                                                     Year Ended December 31,
                                             -----------------------------------
                                             1998            1997          1996
                                             ----            ----          ----
    Pro forma net income                   $810,000       1,989,000    1,634,000
    Pro forma earnings per share-basic         0.19            0.48         0.41
                             - diluted         0.16            0.46         0.39
    


    The fair value of the options used to compute the pro forma  amounts is
    estimated  using  the  Black  Scholes  option-pricing  model  with  the
    following assumptions:

                                       1998           1997            1996
                                       ----           ----            ----
        Risk-free interest rate        5.21%          6.16%           6.06%
        Expected holding period        3.90 years     3.90 years      3.75 years
        Expected volatility            .401           .480            .692
        Expected dividend yield         -0-            -0-             -0-


    Statement  123  calls for a  prospective  application  of  compensation
    relating  to the grant of stock  options  and,  consequently  pro-forma
    financial information may not be indicative of future amounts until the
    new rules are applied to all outstanding non-vested awards.

    Presented below is a summary of the stock options held by the Company's
    employees  and  directors  and the related  transactions  for the years
    ended December 31, 1998, 1997 and 1996.  Remaining options  outstanding
    from the Company's previous 1983 plans are included.
<TABLE>
<CAPTION>

                                                            Year Ended December 31,
                                --------------------------------------------------------------------------------
                                          1998                         1997                     1996
                                
                                                Weighted                   Weighted                  Weighted
                                                 Average                    Average                   Average
                                                Exercise                   Exercise                  Exercise
                                   Shares         Price        Shares        Price       Shares        Price
   <S>                             <C>                <C>        <C>            <C>        <C>            <C>    
   Balance at January 1              774,000          $6.60      651,000        $5.64      837,000        $2.18
   Options granted                   597,000           5.92      293,000         9.32      295,000         9.32
   Options exercised                  26,000           2.90      165,000         1.92      450,000         1.56
   Options forfeited/expired              --             --        5,000         7.13       31,000         6.16
   Balance at December 31          1,345,000           6.36      774,000         6.60      651,000         5.64
                                   =========           ====      =======         ====      =======         ====
   Options exercisable               460,000          $6.44      244,000        $5.84      258,000        $2.22
                                     =======          =====      =======        =====      =======        =====
</TABLE>

                                      A-24
<PAGE>

            AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
                        NOTES TO CONSOLIDATED FINANCIAL
                  STATEMENTS December 31, 1998, 1997 and 1996

(11)     Stock Options, continued

         The weighted  average fair value of Company stock  options,  calculated
         using the Black Scholes option pricing model,  granted during the years
         ended  December 31, 1998,  1997 and 1996 is $2.33,  $2.68 and $5.15 per
         option, respectively.

         The following table  summarizes the Company's  options  outstanding and
         exercisable options at December 31, 1998:

<TABLE>
<CAPTION>

                                             Stock Options                      Stock Options Exercisable
                                              Outstanding
                              --------------------------------------------     -----------------------------
                                               Average        Weighted                          Weighted
                                              Remaining        Average                           Average
              Range of                       Contractual      Exercise                          Exercise
          Exercise Prices        Shares          Life           Price             Shares          Price
        <S>                      <C>             <C>               <C>               <C>             <C>          
        $2.25 to $5.00             390,000       3.4 years          $3.65            159,000          $3.12
        $5.01 to $7.75             722,000       3.8 years          $6.65            149,000          $6.95
        $7.76 to $10.50            233,000       2.5 years         $10.00            152,000         $10.05
                                 ---------                                           -------
        Total                    1,345,000                                           460,000
                                 =========                                           =======
</TABLE>


(12)     Discontinued Operations

         The Company,  through its wholly owned  subsidiary,  APS Systems,  Inc.
         ("APS Systems"),  had previously  developed software and marketed it to
         medical  clinics and medical  schools.  This  business  segment  became
         unprofitable  in 1996. A joint  venture with a software  developer  was
         formed  in  1996  with  a  plan  to  develop  new  products,   but  was
         discontinued  in 1997  when it was  determined  that the  high  cost of
         developing   competitive  products  precluded  an  adequate  return  on
         investment. Subsequently, the Company ceased marketing the software and
         reduced the scope of APS  Systems'  operations  to a level  adequate to
         service  existing  clients  through the terms of their  contracts.  The
         Company  originally  assumed  that all clients  would have  migrated to
         other  software  products by the end of 1999 and reflected the expected
         financial impact of discontinuing this segment on that date in the 1997
         financial  statements.  The measurement  date for determining  expected
         losses from the disposal was May 15, 1997.  Termination  of support for
         one  client,  whose  contract  runs until  2002,  may now  extend  past
         December  31,  1999.  Consequently,  the Company has  adjusted its loss
         allowance  and  believes  that  such  allowance  is  adequate  to cover
         potential future obligations.

                                      A-25
<PAGE>

            AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
                        NOTES TO CONSOLIDATED FINANCIAL
                  STATEMENTS December 31, 1998, 1997 and 1996

(12)     Discontinued Operations, continued

         Net  assets/(liabilities)  of the  discontinued  computer  systems  and
         software segment as of December 31, 1998 consisted of the following:

                  Cash and cash investments                              $31,000
                  Trade accounts receivable                              126,000
                  Other receivables                                       14,000
                  Prepaid and other current assets                        13,000
                  Fixed assets, net of depreciation                       22,000
                  Intercompany receivables                             1,118,000
                  Trade accounts payable                                 (3,000)
                  Accrued expenses                                   (1,066,000)
                                                                     -----------
                  Net assets                                            $255,000
                                                                        ========


         Summary  operating  data for the year  ended  December  31,  1998 is as
         follows:

                  Total revenue                                       $2,039,000
                  Cost of sales                                        (310,000)
                  Other operating expenses                           (1,038,000)
                  Allowance for future client support                  (189,000)
                  Income taxes                                         (171,000)
                                                                        --------
                  Net income                                            $331,000
                                                                        ========

(13)     Investments in Affiliates

         On October 12, 1989, the Company  purchased for cash  3,540,000  shares
         (42%) of the  common  stock of Prime  Medical  Services,  Inc.  ("Prime
         Medical"). Members of the Company's Board currently serve as two of the
         seven directors of Prime Medical.  Prime Medical  provides  non-medical
         management  services to lithotripsy  centers.  In conjunction  with the
         acquisition of additional  lithotripsy operations in June 1992, October
         1993, and May 1996, the outstanding  shares of Prime Medical increased.
         These increases,  the sale of Prime Medical shares owned by the Company
         under an option  agreement,  and the repurchase by Prime Medical of its
         own shares, in the aggregate,  have reduced the Company's  ownership to
         18% of the  outstanding  common stock of Prime  Medical.  The Company's
         investment in Prime  Medical is accounted for using the equity  method.
         The 3,064,000  shares of Prime Medical common stock held by the Company
         had an  approximate  market value of  $22,409,000  (carrying  amount of
         $13,089,000)  at December 31, 1998 based on the market closing price of
         $7.3125 per share.


                                      A-26
<PAGE>

            AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
                        NOTES TO CONSOLIDATED FINANCIAL
                  STATEMENTS December 31, 1998, 1997 and 1996

(13)     Investments in Affiliates, continued

         At December 31, 1998 and 1997, the Company's retained earnings included
         undistributed  earnings, net of deferred tax, of Prime Medical totaling
         $5,583,000 and $4,379,000, respectively.

         The  condensed  balance  sheet and  statement of  operations  for Prime
         Medical follows:

     Condensed balance sheet at December 31, 1998 and 1997
                                                  1998                 1997
                                                  ----                 ----
     Current assets                            $70,006,000           47,542,000
     Long-term assets                          171,320,000          178,284,000
                                               -----------          -----------
     Total assets                             $241,326,000          225,826,000
                                              ============          ===========
     Current liabilities                       $28,465,000           37,383,000
     Long-term liabilities                     123,111,000           96,379,000
     Shareholders' equity                       89,750,000           92,064,000
                                                ----------           ----------
     Total liabilities and equity             $241,326,000          225,826,000
                                              ============          ===========
     Condensed statement of operations 
      for the years ended December 31, 1998 
      and 1997
                                                   1998                 1997
                                                   ----                 ----
     Total revenue                            $104,636,000           95,979,000
                                              ============           ==========
     Net income                                $10,794,000           14,856,000
                                               ===========           ==========


         On October 1, 1997, the Company formed Syntera  HealthCare  Corporation
         ("Syntera") with an initial  ownership of 85%.  Syntera  specializes in
         the management of OB/GYN and related  medical  practices.  In a typical
         transaction,  Syntera acquires the non-medical  assets of a physician's
         practice,  signs a long-term  management contract with the physician to
         provide all of the non-medical requirements of the practice,  including
         personnel,  office space, billing and collection,  and other day-to-day
         operating functions. In turn, Syntera is paid a variable management fee
         that rewards the efficient operation and the expansion of the practice.
         The  Company  expects  to reduce  its  ownership  (currently  62%) to a
         minority level as it exchanges  stock for practice  assets.  Due to the
         short time frame anticipated for this change in ownership to occur, the
         Company has accounted for its ownership on the equity basis in 1998 and
         1997.


                                      A-27
<PAGE>

            AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
                        NOTES TO CONSOLIDATED FINANCIAL
                  STATEMENTS December 31, 1998, 1997 and 1996


(13)     Investments in Affiliates, continued

         The condensed  balance  sheet and  statement of operations  for Syntera
         follows:

         Condensed balance sheet at December 31, 1998 and 1997
                                                     1998                1997
                                                     ----                ----
         Current assets                          $2,350,000           4,563,000
         Long-term assets                         5,431,000           1,664,000
                                                  ---------           ---------
         Total assets                            $7,781,000           6,227,000
                                                 ==========           =========
         Current liabilities                       $593,000            $505,000
         Long-term liabilities                      580,000                  --
         Shareholders' equity                     6,608,000           5,722,000
                                                  ---------           ---------
         Total liabilities and equity            $7,781,000           6,227,000
                                                 ==========           =========
         Condensed statement of operations for
         the years ended December 31, 1998 
         and 1997
                                                     1998                1997
                                                     ----                ----
         Total revenue                          $4,640,000             297,000
                                                ==========             =======
         Net loss                                 $537,000             460,000
                                                  ========             =======


(14)     Segment Information

         The Company's  segments are distinct by type of service provided.  Each
         segment has its own management team and separate  financial  reporting.
         The Company's Chief Executive Officer allocates  resources and provides
         overall management based on the segments' financial results.

         The Company's  investment services segment includes brokerage and asset
         management services to individuals and institutions.

         The insurance  services  segment includes  financial  management for an
         insurance  company that provides  professional  liability  insurance to
         doctors.

         Real Estate income is derived from the leasing of office space.

         Corporate  is the parent  company and derives its income from  interest
         and investments.

         Discontinued operations include medical software sales.


                                      A-28
<PAGE>

            AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
                        NOTES TO CONSOLIDATED FINANCIAL
                  STATEMENTS December 31, 1998, 1997 and 1996

(14) Segment Information, continued


                                          1998            1997           1996
                                          ----            ----           ----
Operating Revenues:
 Investment services                  $9,914,000       5,726,000      3,302,000
 Insurance services                    5,655,000       6,287,000      5,942,000
 Real estate                             865,000         867,000        828,000
 Corporate                             1,721,000         982,000      2,376,000
                                       ---------         -------      ---------
                                     $18,155,000      13,862,000     12,448,000
                                     ===========      ==========     ==========
Reconciliation to Consolidated 
 Statement of Earnings:
  Total segment revenues              18,155,000      13,862,000     12,448,000
  Less:   intercompany profits          (152,000)       (163,000)      (111,000)
          intercompany dividends      (1,600,000)       (634,000)    (1,900,000)
                                      ----------       ---------    -----------
        Total Revenues               $16,403,000      13,065,000     10,437.000
                                     ===========      ==========     ==========
Operating Profit (Loss):
 Investment services                    $810,000         372,000       (559,000)
 Insurance services                    1,437,000       2,385,000      1,591,000
 Real estate                             338,000         362,000        258,000
 Corporate                              (189,000)       (389,000)     2,214,000
                                       ---------       ---------      ---------
                                      $2,398,000       2,930,000      3,504,000
                                       =========       =========      =========
Reconciliation to Consolidated 
 Statement of Earnings:
  Total segment operating profits      2,398,000       2,730,000      3,504,000
  Less: intercompany dividends        (1,600,000)       (634,000)    (1,900,000)
        other                                 --         (25,000)       (10,000)
                                      ----------       ----------     ---------
        Operating Income                $798,000       2,091,000      1,595,000

Equity in earnings of affiliates       1,457,000       2,014,000      1,411,000
Gain on sale of interest 
  in subsidiary                               --       1,899,000             --
                                       ---------       ---------      ---------
                                                                         
Earnings from continuing operations 
 before income  taxes and minority 
 interests
                                       2,255,000       5,984,000      3,006,000
Income tax expense                       863,000       2,341,000      1,058,000
Minority interests                      (178,000)       (175,000)            --
                                       ---------       ---------       -------- 
Earnings from continuing 
  operations                           1,214,000       3,468,000      1,948,000
                                       ---------       ---------      ---------
Net profit(loss) from discontinued 
 operations, net of income tax           331,000       (930,000)       (24,000)
                                         -------       ---------       --------

                                      A-29
<PAGE>

            AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
                        NOTES TO CONSOLIDATED FINANCIAL
                  STATEMENTS December 31, 1998, 1997 and 1996


(14)   Segment Information, continued
                                       1998              1997             1996
                                       ----              ----             ----
Net earnings                      $1,545,000         2,538,000        1,924,000
                                  ==========         =========        =========
Identifiable assets:
 Investment Services              $3,752,000         2,346,000        1,618,000
 Insurance Services                1,640,000         2,585,000        1,144,000
 Real Estate                       1,324,000         1,283,000        1,476,000
 Corporate:
  Investment in equity
   method investees               17,064,000        15,606,000        8,905,000
  Other                            8,928,000         8,561,000       12,071,000
 Discontinued Operations             206,000           356,000               --
                                     -------           -------       ----------
                                 $32,914,000        30,737,000       25,214,000
                                  ==========        ==========       ==========
Capital expenditures:
 Investment Services                 $55,000           154,000           33,000
 Insurance Services                   44,000            33,000           55,000
 Real Estate                          58,000                --           21,000
 Corporate                            49,000            26,000           17,000
 Discontinued Operations                  --            99,000           18,000
                                    --------            ------           ------
                                    $206,000           312,000          144,000
                                    ========           =======          =======
Depreciation/amortization 
expenses:
 Investment Services                $279,000           118,000           33,000
 Insurance Services                   90,000            90,000          125,000
 Real Estate                         107,000           110,000          129,000
 Corporate                            78,000            62,000           13,000
 Discontinued Operations              64,000            56,000           24,000
                                      ------            ------           ------
                                    $618,000           436,000          324,000
                                    ========           =======          =======
Revenues  attributable to customers  
generating  greater than 10% of the
consolidated revenues of the Company:
   Insurance services
     Company A                     3,970,000         4,659,000        4,412,000
                                   =========         =========        =========


                                      A-30
<PAGE>

            AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
                        NOTES TO CONSOLIDATED FINANCIAL
                  STATEMENTS December 31, 1998, 1997 and 1996


(14)     Segment Information, continued

         At December 31, 1998 the Company had long-term contracts with company A
         and was  therefore  not  vulnerable  to the risk of a near-term  severe
         impact from a reasonably possible loss of the revenue.

         Operating profit is operating revenues less related expenses and is all
         derived from domestic operations.  Identifiable assets are those assets
         that  are  used in the  operations  of  each  business  segment  (after
         elimination of investments in other segments). Corporate assets consist
         primarily  of  cash  and  cash   investments,   notes   receivable  and
         investments in affiliates and preferred stock.

(15)     Earning Per Share

         Basic  earnings  per  share are based on the  weighted  average  shares
         outstanding without any dilutive effects  considered.  Diluted earnings
         per share  reflects  dilution from all  contingently  issuable  shares,
         including  options and convertible debt. A reconciliation of income and
         average shares outstanding used in the calculation of basic and diluted
         earnings per share from continuing operations follows:



                                            For the Year Ended December 31, 1998
                                          --------------------------------------
                                           Income        Shares       Per-Share
                                         (Numerator)   (Denominator)    Amount
                                          ----------    -----------    --------
 Earnings from continuing 
   operations                             $1,214,000
 Basic EPS
 Income available to common 
   stockholders                            1,214,000     4,163,000         $.29
                                                                           ====
 Effect of Dilutive Securities
 Options                                          --        74,000
 Contingently issuable shares                (76,000)      456,000
                                            --------       -------
 Diluted EPS
 Income available to common 
  stockholders and assumed 
  conversions                             $1,138,000     4,692,000         $.24
                                          ==========     =========         ====


                                      A-31
<PAGE>

            AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
                        NOTES TO CONSOLIDATED FINANCIAL
                  STATEMENTS December 31, 1998, 1997 and 1996


(15)      Earning Per Share, continued


                                       For the Year Ended December 31, 1997
                                   ---------------------------------------------
                                    Income             Shares          Per-Share
                                  (Numerator)        (Denominator)       Amount
                                   ---------          -----------      --------
Earnings from continuing 
  operations                      $3,468,000
Basic EPS
Income available to common 
  stockholders                     3,468,000            4,106,000         $.84
                                                                          ====
Effect of Dilutive Securities
Options                                   --              114,000
Contingently issuable shares         (18,000)              21,000
                                    --------               ------
Diluted EPS
Income available to common 
  stockholders and assumed 
  conversions                     $3,450,000            4,241,000         $.81
                                  ==========            =========         ====


                                      For the Year Ended December 31, 1996
                                  ---------------------------------------------
                                   Income              Shares         Per-Share
                                 (Numerator)        (Denominator)       Amount
                                  ---------          -----------      ---------
Earnings from continuing 
  operations                     $1,948,000
Basic EPS
Income available to common 
  stockholders                    1,948,000            4,025,000         $.48
                                                                         ====
Effect of Dilutive Securities
Options                                  --              194,000
                                 ----------              -------
Diluted EPS
Income available to common
  stockholders                   $1,948,000            4,219,000         $.46
                                 ==========            =========         ====


                                      A-32

<PAGE>

            AMERICAN PHYSICIANS SERVICE GROUP, INC. AND SUBSIDIARIES
                        NOTES TO CONSOLIDATED FINANCIAL
                  STATEMENTS December 31, 1998, 1997 and 1996

(15)     Earning Per Share, continued

         At  December  31, 1998 the  Company's  affiliate,  Syntera,  had issued
         620,000  shares which are  convertible  into  724,000 of the  Company's
         common  shares in the event that the  Syntera  shares are not  publicly
         tradable  after a future date.  Such  conversion  rights are in varying
         amounts beginning in October 1999 and extending through January 2002.

Unexercised  employee  stock  options to purchase  295,000,  295,000 and 244,000
shares of the  Company's  common stock as of December  31, 1998,  1997 and 1996,
respectively,  were not included in the  computations of diluted EPS because the
options'  exercise  prices were  greater  than the average  market  price of the
Company's common stock.


                                      A-33