================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K





|X| Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
    of 1934 for the fiscal year ended December 31, 2006

|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
    Act of 1934
                         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 Identification No.)
 incorporation or organization)

1301 Capital of Texas Highway, Suite C-300, Austin Texas           78746
     (Address of principal executive offices)                    (Zip Code)

       Registrant's telephone number, including area code: (512) 328-0888
           Securities registered pursuant to Section 12(b) of the Act:

        Title of each class                     Name of each exchange
               None                              on which registered
                                                 -------------------
                                                        None

         Securities registered pursuant to Section 12(g) of the Act:
                       Common Stock, $0.10 par value
                              (Title of Class)


Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.                      Yes |_| No|X|

Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act              Yes |_| No |X|

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 registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.                                                                 |_|

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer |_|    Accelerated filer |_|    Non-accelerated filer|X|

Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Act).                                      Yes |_| No |X|

State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
the last business day of the registrant's most recently completed second fiscal
quarter.
              Aggregate Market Value at June 30, 2006: $31,614,017

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 1, 2007
    -------------------                                   -------------
Common Stock, $.10 par value                                 2,815,445

                       Documents Incorporated By Reference
Selected portions of the Registrant's definitive proxy material for the 2006
annual meeting of shareholders are incorporated by reference into Part III of
the Form 10-K.


<PAGE>


                                TABLE OF CONTENTS



                                                                           PAGE
PART I
Item 1.      Business                                                        3
Item 1A      Risk Factors                                                    8
Item 2       Properties                                                     15
Item 3       Legal Proceedi                                                 15
Item 4       Submission of Matters to a Vote of Security Holders            15

PART II
Item 5        Market for Registrant's Common Equity and Related
              Stockholder Matters                                           15
Item 6        Selected Financial Data                                       18
Item 7        Management's Discussion and Analysis of Financial Condition
              and Results of Operations                                     19
Item 7A       Quantitative and Qualitative Disclosures about Market Risk    31
Item 8        Financial Statements and Supplementary Data                   32
Item 9        Changes in and Disagreements with Accountants on Accounting
              and Financial Disclosure                                      32
Item 9A       Controls and Procedures                                       32
Item 9B       Other Information                                             33

PART III
Item 10       Directors and Executive Officers of the Registrant            33
Item 11       Executive Compensation                                        33
Item 12       Security Ownership of Certain Beneficial Owners and
              Management and Related Stockholder Matters                    33
Item 13       Certain Relationships and Related Transactions                33
Item 14       Principal Accountant Fees and Services                        33

PART IV
Item 15       Exhibits and Financial Statement Schedules                    34
SIGNATURES                                                                  36
EXHIBIT INDEX                                                              A-1
EX-21.1       (Subsidiaries of the Registrant)
EX-23.1       (Consents of Experts and Counsel)
EX-31.1       (Certification of Chief Executive Officer)
EX-31.2       (Certification of Chief Financial Officer)
EX-32.1       (Certification of Chief Executive Officer)
EX-32.2       (Certification of Chief Financial Officer)

<PAGE>



                     AMERICAN PHYSICIANS SERVICE GROUP, INC.

                           ANNUAL REPORT ON FORM 10-K

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006

References in this report to "we", "us", "our", and the "Company" mean American
Physicians Service Group, Inc.

                                     PART I

ITEM 1.  BUSINESS

General

     We, through our subsidiaries, provide services that include brokerage and
investment services to individuals and institutions, and management and agency
services to malpractice insurance companies.

     We were organized in October 1974 under the laws of the State of Texas. Our
principal executive office is at 1301 Capital of Texas Highway, Suite C-300,
Austin, Texas 78746, and our telephone number is (512) 328-0888. Our website is
www.amph.com. We make available free of charge on our website our Annual Report
on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and
any amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act,
as soon as reasonably practicable after such material is electronically filed
with, or furnished to, the Securities and Exchange Commission, or the SEC.

     Financial information about our industry segments is disclosed in Note 16
to our accompanying consolidated financial statements in Appendix A hereof.

OUR INSURANCE SERVICES

     APS Insurance Services, Inc., or Insurance Services, is our wholly-owned
subsidiary. Prior to October 1, 2003, we owned 80% of Insurance Services. On
October 1, 2003, we acquired the remaining 20% minority interest in Insurance
Services for approximately $2.0 million in cash (see Note 14 to our consolidated
financial statements included herein). Insurance Services, through its
wholly-owned subsidiaries APS Facilities Management, Inc., dba APMC Insurance
Services, Inc., or FMI, and American Physicians Insurance Agency, Inc., or
Agency, provides management and agency services to American Physicians Insurance
Exchange, or APIE, a reciprocal insurance exchange. Our revenues from this
segment contributed 48%, 46% and 48% of our total revenues in 2006, 2005 and
2004, respectively.

     Substantially all of our revenue from the insurance services segment was
attributable to FMI providing management services to APIE. A reciprocal
insurance exchange is an organization that sells insurance only to its
subscribers, who may pay, in addition to their annual insurance premiums, a
contribution to the exchange's surplus. These exchanges generally have the need
for few, if any paid employees and, 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 profits. 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 and, accordingly,
our 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 physicians in Texas and Arkansas. FMI's
assets are not subject to any insurance claims by policyholders of APIE. FMI has
been APIE's exclusive manager since APIE's inception in 1975. The management
agreement between FMI and APIE provides for full management by FMI of the


                                       3
<PAGE>

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 day to
day operations. As described below, in consideration for performing its
services, FMI receives a management fee based on APIE's earned premiums (before
payment of reinsurance premiums), as well as a portion of APIE's profits. FMI
pays salaries and personnel related expenses, rent and office operations costs,
information technology 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, outside agent commissions 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. Termination
of FMI's management agreement with APIE would have a material adverse effect on
us.

     APIE is authorized to do business in the States of Texas and Arkansas, and
specializes in writing medical professional liability insurance for physician
groups, individual physicians and other healthcare providers. APIE currently
insures approximately 4,700 physicians, dentists and other healthcare providers,
the vast majority of which are in Texas. APIE writes insurance in Texas
primarily through purchasing groups and is not subject to certain rate and
policy form regulations issued by the Texas Department of Insurance. It reviews
applicants for insurance coverage 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.

     On June 5, 2006 we announced plans for a strategic merger with APIE. Both
our and APIE's boards of directors voted to approve the transaction subject to
approval by the Texas Department of Insurance, necessary filings with the SEC
and the approval of our shareholders and subscriber-policyholders of APIE. The
original purchase price was $33 million, comprised of approximately 1.7 million
shares of APS common stock to be issued to the policyholders of APIE and the
conversion of approximately $10.4 million of APIE obligations into mandatorily
redeemable APS preferred stock. On August 24, 2006, we announced that we agreed
to an increase in the purchase price of APIE, which was also approved by APIE.
The revised purchase price is $39 million; comprised of approximately 2.0
million shares of APS common stock issued to the policyholders of APIE and the
conversion of approximately $10.4 million of APIE obligations into mandatorily
redeemable APS preferred stock. The preferred stock has a 3% annual dividend and
must be redeemed at the rate of not less than $1 million per year until December
31, 2016 at which time it must have been fully redeemed. At a special meeting of
shareholders held March 22, 2007, the shareholders of APS approved the issuance
of common and preferred shares of APS for the acquisition of APIE. APIE
subscribers also approved the transaction on the same day. The acquisition is
set to close effective April 1, 2007. As the acquirer, we will account for this
transaction consistent with the Statement of Financial Standards No. 141,
"Business Combinations", whereby direct costs of the business combination are
capitalized and become part of the total purchase price.

     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 that 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 they are
reported. APIE offers only a "claims made" policy in Texas and Arkansas, but
provides for an extended reporting option upon termination of the policy. APIE
reinsures 100% of all Texas and Arkansas coverage risk between $250,000 and
$1,000,000 per medical incident, primarily through certain domestic and
international insurance companies.

     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
management fee percentage is 13.5% of earned premiums. In addition, any pretax
profits of APIE will be shared equally with FMI (profit sharing) so long as the
total amount does not exceed 3% of earned premiums. Only after prior year net
losses are completely offset can FMI then share equally the profits at APIE. The
management agreement with FMI will be terminated upon closing of the merger.


                                       4
<PAGE>

     The following table presents selected financial and other data for APIE:
<TABLE>
<CAPTION>

                                                                                Years Ended December 31,

                                                           2006               2005                2004                  2003
                                                         -------             ------             -------               -------
<S>                                                    <C>                  <C>                <C>                   <C>
Total revenue                                          $  77,331            $  64,866          $  69,313             $  56,148
Earned premiums subject to management fees             $  65,180            $  64,135          $  64,416             $  51,816
Total assets                                           $ 176,586            $ 145,128          $ 131,152             $ 102,728
Members' equity                                        $ 206,318            $ 174,833          $ 145,728             $ 123,520
Management fees (including commissions) (1)            $   8,971            $   9,031          $   8,675             $   7,067
Profit sharing                                         $   1,994            $   2,007          $   1,929             $     722
Number of insureds                                     $   4,712            $   3,919          $   3,623             $   3,073

</TABLE>

(1) This amount includes management fees and commissions paid to FMI and Agency
    in addition to commissions of $0, $0, $0 and $513 in 2006, 2005, 2004 and
    2003, respectively, paid to other carriers directly related to APIE's
    controlled business.

OUR FINANCIAL SERVICES

      Through our subsidiaries, APS Financial Corporation, or APS Financial, APS
Capital Corporation, or APS Capital, and APS Asset Management, Inc., or Asset
Management, we provide investment and investment advisory services to
institutions and individuals throughout the United States. Our revenues from
this segment were 52%, 54% and 52% of our total revenues in 2006, 2005 and 2004,
respectively.

      APS Financial is a fully licensed broker/dealer that 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 and banks. Although these other services
account for only a small portion of the revenues of APS Financial, they can be
instrumental in maintaining the business of some clients. APS Financial has its
main office in Austin, Texas.

      APS Financial charges commissions on both exchange and over-the-counter,
or OTC, transactions in accordance with industry practice. When APS Financial
executes OTC transactions as a dealer, it receives, in lieu of commissions,
markups or markdowns.

      APS Financial is a member of the National Association of Securities
Dealers, Inc., or NASD, and the Securities Investor Protection Corporation, or
SIPC, and, in addition, is licensed in 44 states and the District of Columbia.

      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. As a
registered broker/dealer, APS Financial is subject to these rules. Compliance
with applicable net capital requirements could limit APS Financial's operations,
such as limiting or prohibiting 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 our present levels of business. At December 31, 2006,
APS Financial was in compliance with all applicable net capital requirements.

      APS Financial clears its transactions through Southwest Securities, Inc.,
or 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 that Southwest conducts for APS
Financial.


                                       5
<PAGE>

      APS Capital was established in 2005 and is dedicated to the clearing and
settlement of trades involving syndicated bank loans, trade claims and
distressed private loan portfolios. This company seeks to develop business with
clients who trade in the high-yield bond market. In addition to marketing to
professional hedge funds and institutional clientele, we also may receive
referral leads from our affiliate companies.

      Asset Management, a registered investment adviser under the Investment
Advisers Act of 1940, was formed and registered with the SEC in 1998. We formed
Asset Management 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.

COMPETITION

      Insurance Services. Substantially all of our revenue from this segment was
attributable to FMI providing management services to APIE. Because FMI's
management fee is based on the combined earned premiums and profit of APIE, our
revenue can be adversely affected by APIE's competition. While there is no
direct competition with respect to providing management services to APIE, APIE
does compete with several insurance carriers, including Medical Protective
Insurance Company, Texas Medical Liability Trust, ProAssurance, The Doctors
Company and the Texas Medical Liability Insurance Underwriting Association
(JUA). These companies are considered APIE's competitors because they are the
companies to whom policyholders who cancel their policies with APIE typically
move. APIE competes with these companies on a variety of factors including
price, customer service, expertise in claims handling, policy coverage, risk
management services and financial strength. In premiums written and asset size,
Medical Protective Insurance Company, Texas Medical Liability Trust,
ProAssurance and The Doctors Company are significantly larger than APIE. With
the successful passing of tort reform legislation in late 2003, additional
companies have re-entered the Texas market, resulting in increased competition.

      Financial Services. APS Financial, APS Capital and Asset Management are
engaged in a highly competitive business. Their competitors include, with
respect to one or more aspects of their 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 us. In many
instances APS Financial, APS Capital and Asset Management compete directly with
these organizations. In addition, there is competition for investment funds from
the real estate, insurance, banking and thrift industries.

REGULATION

      INSURANCE SERVICES. FMI has received certificates of authority from the
Texas and Arkansas insurance departments, licensing it on behalf of the
subscribers of APIE. APIE, as a reciprocal insurance exchange, 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 our officers, directors, affiliates and subsidiaries. In
the case of APIE, these regulations apply to FMI, the attorney-in-fact. Premium
rates, advertising, solicitation of insurance, types of insurance issued and
general corporate activity are also subject to regulation by the insurance
departments of the States of Texas and Arkansas.

      FINANCIAL SERVICES. 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.


                                       6
<PAGE>

      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 and, accordingly, us. The SEC,
self-regulatory organizations and state securities commissions may conduct
administrative proceedings that can result in censure, fine, suspension or
expulsion of APS Financial and/or our 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.

      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 0.5% of their adjusted gross revenues to restore
the fund. 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.

REVENUES AND INDUSTRY SEGMENTS

      The information required by Regulation S-K Items 101(b) and 101(d) related
to financial information about segments and financial information about sales is
contained in Note 16 of our accompanying audited consolidated financial
statements included in Appendix A of this Form 10-K.

EMPLOYEES

      As of December 31, 2006, we employed, on a full time basis, approximately
107 persons, including 61 by Insurance Services, 38 by APS Financial and APS
Capital, and 8 directly by us. We consider our employee relations to be good.
None of our employees are represented by a labor union and we have experienced
no work stoppages.
Executive Officers

     As of March 1, 2007, our executive officers were as follows:

  Name                          Age         Position
--------------                 -----       ----------------------
Kenneth S. Shifrin               57         Chairman of the Board, President and
                                            Chief Executive Officer

William H. Hayes                 59         Senior  Vice  President  - Finance,
                                            Secretary, and Chief Financial
                                            Officer

Maury L. Magids                  42         Senior Vice President - Insurance

Thomas R. Solimine               48         Controller


     Our officers serve until the next annual meeting of our directors and until
their successors are elected and qualified (or until their earlier death,
resignation or removal).

                                       7
<PAGE>

     Mr. Shifrin has been our Chairman of the Board since March 1990. He has
been our President and Chief Executive Officer since March 1989 and he was
President and Chief Operating Officer from June 1987 to February 1989. He has
been a director since February 1987. From February 1985 until June 1987, Mr.
Shifrin served as our Senior Vice President - Finance and Treasurer. Mr. Shifrin
also has been a director of Financial Industries Corporation since June 2003 and
was Chairman of the Board of Prime Medical Services, Inc. from October 1989
until November 2004. With the merger of Prime Medical and HealthTronics, Inc.,
or Healthtronics, Mr. Shifrin became Vice-chairman of the Board of HealthTronics
in November 2004. In 2006, Mr. Shifrin resigned his vice-chairmanship but
remains a member of the Board of Directors of HealthTronics. Mr. Shifrin is a
member of the World Presidents Organization.

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

     Mr. Magids has been our Senior Vice President - Insurance Services since
June 2001 and has been President and Chief Operating Officer of FMI since
November 1998. Mr. Magids joined us in October 1996. Mr. Magids is a Certified
Public Accountant and was with Arthur Andersen LLP from August 1986 until
September 1996, most recently as Director of Business Development.

     Mr. Solimine has been our 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 our Manager of Accounting.

     There are no family relationships, as defined, among any of our executive
officers, and there is no arrangement or understanding between any of our
executive officers and any other person pursuant to which he or she was selected
as an officer. Each of our executive officers was elected by our board of
directors to hold office until the next annual election of officers and until
his or her successor is elected and qualified or until his or her earlier death,
resignation or removal. Our board of directors elects our officers in
conjunction with each annual meeting of our shareholders.

AVAILABLE INFORMATION

     We file annual, quarterly and current reports, proxy statements, and other
documents with the SEC under the Exchange Act. You may read and copy any
materials that we file with the SEC at the SEC's public reference room at 450
Fifth Street, NW, Washington, DC 20549. The public may obtain information on the
operation of the public reference room by calling the SEC at 1-800-SEC-0330.
Also, the SEC maintains a website that contains these SEC filings. You can
obtain these filings at the SEC's website at http://www.sec.gov.

     We also make available free of charge on or through our website
(http://www.amph.com) our Annual Report on Form 10-K, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those
reports filed or furnished pursuant to Section 13(a) of the Exchange Act as soon
as reasonably practicable after we electronically file such material with, or
furnish it to, the SEC.

ITEM 1A. RISK FACTORS

     An investment in our common stock involves certain risks. Below are the
most significant factors that make an investment in us speculative or risky. You
should consider carefully these risks together with all of the other information
included in this Form 10-K and the documents that we have incorporated by
reference.

                                       8
<PAGE>

     APPROXIMATELY ONE-HALF OF OUR REVENUE FROM CONTINUING OPERATIONS IS
ATTRIBUTABLE TO OUR MANAGEMENT AGREEMENT WITH APIE, PURSUANT TO WHICH WE RECEIVE
FEES BASED ON APIE'S SUCCESS AND ARE REQUIRED TO PROVIDE CERTAIN SERVICES AT OUR
COST.

     Substantially all of our revenue from the insurance services segment,
representing 48% of total revenue in 2006, was attributable to FMI providing
management services to APIE. 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
profits. Accordingly, any reduction in premiums written by APIE or profit
recorded by APIE would have a proportional negative effect on our revenues and
net income. 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 and, accordingly, our revenue. The loss or reduction of these
management fees could have a material adverse effect on our business, financial
condition and results of operations.

     Pursuant to our management agreement with APIE, FMI is required to perform
a number of sales, underwriting and management and administrative services at
the direction of the Board of APIE associated with the issuance of insurance
policies for APIE to earn FMI's management fee, regardless of the cost to FMI of
providing those services. We could lose money or be less profitable if our cost
of providing those services increases significantly.

     OUR SUBSIDIARIES OPERATE IN HIGHLY COMPETITIVE BUSINESSES AGAINST
COMPETITORS WITH GREATER FINANCIAL, MARKETING, TECHNOLOGICAL, PERSONNEL AND
OTHER RESOURCES.

     The industries in which we operate are highly competitive. Many of our
competitors possess greater financial, marketing, technological and other
resources. There can be no assurance that we will be able to continue to compete
successfully.

     APS Financial, Asset Management and APS Capital are engaged in a highly
competitive business. Their competitors include, with respect to one or more
aspects of their 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. In many instances APS Financial is
competing directly with these organizations. In addition, there is competition
for investment funds from the real estate, insurance, banking and thrift
industries.

     As stated above, substantially all of our revenue from the insurance
services segment was attributable to FMI providing management services to APIE.
Because FMI's management fee is based on the earned premiums of APIE and APIE's
profits, our revenue can be adversely affected by APIE's competition. APIE
competes with several insurance carriers, including Medical Protective Insurance
Company, Texas Medical Liability Trust, ProAssurance, The Doctors Company,
Advocate MD and the Texas Medical Liability Insurance Underwriting Association
(JUA), which is the state-sponsored insurer of last resort. APIE does not have
the capacity to write the volume of business equal to that of some of the other
major carriers. With the successful passing of tort reform in late 2003,
additional companies have re-entered the Texas market, resulting in further
increases in competition.

     AS A HOLDING COMPANY, OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS ARE
DEPENDENT ON OUR SUBSIDIARIES.

     We are principally a holding company with assets consisting primarily of
cash and investment securities. Consequently, our ability to pay our operating
expenses and to service our indebtedness is dependent upon the earnings of our
subsidiaries and our ability to receive funds from such subsidiaries through
loans, dividends or otherwise. The subsidiaries are legally distinct entities
and have no obligation, contingent or otherwise, to make funds available to us
for such obligations. In addition, our subsidiaries' ability to make such
payments is subject to applicable state laws, and claims of our subsidiaries'
creditors will generally have priority as to the assets of such subsidiaries.
Accordingly, there can be no assurance that our subsidiaries will be able to pay
funds to us or that such funds, if any, received by us will be sufficient to
enable us to meet our obligations.

                                       9
<PAGE>

     OUR FINANCIAL SERVICES BUSINESS IS SUBJECT TO EXTENSIVE GOVERNMENT
REGULATION.

     The securities industry is subject to extensive governmental supervision,
regulation and control by the SEC, state securities commissions and
self-regulatory organizations, which may conduct administrative proceedings that
can result in censure, fine, suspension or expulsion of APS Financial or any of
its officers or employees. The NASD regulates our financial services business'
marketing activities. The NASD can impose certain penalties for violations of
its advertising regulations, including censures or fines, suspension of all
advertising, the issuance of cease-and-desist orders or the suspension or
expulsion of a broker-dealer or any of its officers or employees.

     Our ability to comply with all applicable laws and rules is largely
dependent on our establishment and maintenance of a system to ensure compliance
with these laws and rules, as well as our ability to attract and retain
qualified compliance personnel. We could be subject to disciplinary or other
actions due to claimed noncompliance in the future, which could have a material
adverse effect on our business, financial condition and operating results.

     There can be no assurance that the federal or state governments or
self-regulatory organizations having jurisdiction over our insurance and
securities brokerage businesses will not adopt regulations or take other
actions, such as the failure to renew or the revocation of required licenses and
certifications, that would have a material adverse effect on our business,
financial condition and results of operations. In addition, our operations and
profitability may be affected by additional legislation, changes in rules
promulgated by the SEC, NASD, the Board of Governors of the Federal Reserve
System, the various stock exchanges and other self-regulatory organizations, and
state securities commissions or changes in the interpretation or enforcement of
existing laws or rules.

     WE ARE RELIANT ON KEY EXECUTIVES, KEY PERSONNEL AND KEY ACCOUNTS.

     We believe that our success depends on the efforts and abilities of a
relatively small group of executive personnel. The loss of services of one or
more of these key executives could have a material adverse effect on our
business. We do not maintain key man life insurance on any of our key
executives. We have entered into an employment agreement with Kenneth S.
Shifrin, our Chairman of the Board and Chief Executive Officer that expires on
August 1, 2010. We also have employment agreements with William H. Hayes, our
Chief Financial Officer, Maury Magids, President of our insurance services
subsidiary, and George S. Conwill, President of our investment services
subsidiary. All of the latter three contracts expire in 2008. Additionally,
although we have been fortunate in retaining our key salespersons for many
years, a loss of one or more key salespersons and/or a loss of one or more key
accounts is possible and could have a material adverse effect upon earnings. In
particular, commissions revenues from a single customer of our broker/dealer
subsidiary, APS Financial, represented 44% of total revenues of the subsidiary.
The loss of this customer could have a material adverse impact on the operating
results of the company.

     WE ARE EXPOSED TO INTEREST RATE AND INVESTMENT RISK.

     Changes in interest rates could have an impact at our broker/dealer
subsidiary, APS Financial. The general level of interest rates may trend higher
or lower in 2007, and this move may impact our level of business in different
fixed-income sectors. If a generally improving economy is the impetus behind
higher rates, then while our investment grade business may drop off, our
high-yield business might improve with improving credit conditions. A volatile
interest rate environment in 2007 could also impact our business as this type of
market condition can lead to investor uncertainty and their corresponding
willingness to commit funds.

     As we currently have no debt and do not anticipate the need to take on any
debt in 2007, interest rate changes will have no impact on our financial
position as it pertains to interest expense.

     As of December 31, 2006, our recorded basis in debt and equity securities
was approximately $21 million. A material other than temporary decline in the

                                       10
<PAGE>

value of any of these investments could have a material adverse effect on our
financial condition and results of operations. A decline in the value of equity
securities, evidenced by lower prices traded for the common stock of these
companies, might occur for several reasons, including poor financial
performance, obsolescence of the service or product provided or any other news
deemed to be negative by the investing public. A decline in the value of debt
securities might occur for the same reasons above as well as due to an increase
in interest rates.

     The value of the fixed income securities is also subject to interest rate
risk. As market interest rates decrease, the portfolio value increases with the
opposite holding true in rising interest rate environments.

     Equity securities are subject to equity price risk, which is defined as the
potential for loss in market value due to a decline in equity prices. The value
of common stock equity investments is dependent upon the general conditions in
the securities markets and the business and financial performance of the
individual companies in the portfolio. Values are typically based on future
economic prospects as perceived by investors in the equity markets.

     FAILURE OF THIRD-PARTY VENDORS TO PROVIDE CRITICAL SERVICES COULD HARM OUR
BUSINESS.

     We rely on a number of third parties to assist in the processing of our
transactions, including online and internet service providers, back office
processing organizations, and market makers. While we have selected these
third-party vendors carefully, we do not control their actions. Any problems
caused by these third parties, including as a result of their not providing us
their services for any reason or their performing their services poorly, could
have a material adverse effect on our business, financial condition and
operating results.

     WE ARE SUBJECT TO MARKET FORCES BEYOND OUR CONTROL WHICH COULD IMPACT US
MORE SEVERELY THAN OUR COMPETITORS.

     Our securities brokerage business, like other securities firms, is directly
affected by economic and political conditions, broad trends in business and
finance and changes in volume and price levels of securities transactions. In
recent years, the U.S. securities markets have experienced significant
volatility. If our trading volume decreases, our revenues decline. Also, when
trading volume is low, our profitability is adversely affected because our
overhead remains relatively fixed, despite lower compensation costs associated
with commission revenues. Severe market fluctuations in the future could have a
material adverse effect on our business, financial condition and operating
results. Although we have diversified our product and service revenue streams,
some of our competitors with more diverse product and service offerings might
withstand such a downturn in the securities industry better than we would.

     OUR CUSTOMERS MAY DEFAULT ON THEIR MARGIN ACCOUNTS, EFFECTIVELY PASSING
THEIR LOSSES ON TO US.

     Our securities brokerage customers sometimes purchase securities on margin
through our Capital organization; therefore we are subject to risks inherent in
extending credit. This risk is especially great when the market is rapidly
declining. In such a decline, the value of the collateral securing the margin
loans could fall below the amount of a customer's indebtedness. Specific
regulatory guidelines mandate the amount that can be loaned against various
security types. APS Financial rigorously adheres to these guidelines and in a
number of instances exceeds those requirements. Independent of our review, our
corresponding Capital organization independently maintains a credit review of
our customer accounts. If customers fail to honor their commitments, the Capital
organization would sell the securities held as collateral. If the value of the
collateral were insufficient to repay the loan, a loss would occur, which we may
be required to fund. Any such losses could have a material adverse effect on our
business, financial condition and operating results.

     APS FINANCIAL MUST MAINTAIN CERTAIN NET CAPITAL REQUIREMENTS THAT COULD
SLOW OUR EXPANSION PLANS OR PREVENT PAYMENTS OF DIVIDENDS.

     The SEC, NASD and various other regulatory agencies have stringent rules
with respect to the maintenance of specific levels of net capital by securities
broker-dealers. Net capital is the net worth of a broker or dealer (assets minus


                                       11
<PAGE>

liabilities), less deductions for certain types of assets. If a firm fails to
maintain the required net capital, it may be subject to suspension or revocation
of registration by the SEC and suspension or expulsion by the NASD, and could
ultimately lead to the firm's liquidation. If such net capital rules are changed
or expanded, or if there is an unusually large charge against net capital,
operations that require the intensive use of capital would be limited. Such
operations may include trading activities and the financing of customer account
balances. Also, our ability to pay dividends, repay debt and redeem or purchase
shares of our outstanding stock could be severely restricted. 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, which could have a material adverse effect on our business,
financial condition and operating results.

     OUR TRADING SYSTEMS MAY FAIL, RESULTING IN SERVICE INTERRUPTIONS.

     Our securities brokerage business receives and processes trade orders
through internal trading software and touch-tone telephones and depends heavily
on the integrity of the electronic systems supporting this type of trading.
Heavy stress placed on our systems during peak trading times could cause our
systems to operate too slowly or fail. If our systems or any other systems in
the trading process slow down significantly or fail even for a short time, our
customers would suffer delays in trading, potentially causing substantial losses
and possibly subjecting us to claims for such losses or to litigation claiming
fraud or negligence. During a systems failure, we may be able to take orders by
telephone; however, only associates with securities broker's licenses can accept
telephone orders, and an adequate number of associates may not be available to
take customer calls in the event of a systems failure. In addition, a hardware
or software failure, power or telecommunications interruption or natural
disaster could cause a system failure. Any systems failure that interrupts our
operations could have a material adverse effect on our business, financial
condition and operating results.

     OUR REVENUES AND OPERATING PERFORMANCE MAY FLUCTUATE WITH INSURANCE
BUSINESS CYCLES.

     Growth in premiums written in the medical professional liability industry
have fluctuated significantly over the past 10 years as a result of, among other
factors, changing premium rates. The cyclical pattern of such fluctuation has
been generally consistent with similar patterns for the broader property and
casualty insurance industry, due in part to the participation in the medical
professional liability industry of insurers and reinsurers which also
participate in many other lines of property and casualty insurance and
reinsurance. Historically, the financial performance of the property and
casualty insurance industry has tended to fluctuate in cyclical patterns
characterized by periods of greater competition in pricing and underwriting
terms and conditions, a soft insurance market, followed by period of capital
shortage, lesser competition and increasing premium rates, a hard insurance
market.

     For the past two years the professional liability industry has faced a soft
insurance market that has generally resulted in lower premium rates. We cannot
predict whether, or the extent to which, the recent decrease in premium rates
will continue.

     CHANGES IN THE HEALTH CARE INDUSTRY COULD HAVE A MATERIAL IMPACT ON OUR
INSURANCE OPERATIONS.

     After the merger, our insurance operations will derive substantially all of
its medical professional liability insurance premiums from physicians and other
individual healthcare providers, physician groups and smaller healthcare
facilities. Significant attention has recently been focused on reforming the
healthcare industry at both the federal and state levels. In recent years, a
number of factors related to the emergence of managed care have negatively
impacted or threatened to impact the practice of medicine and economic
independence of medical professionals. Medical professionals have found it more
difficult to conduct a traditional fee-for-service practice and many have been
driven to join or contractually affiliate with provider-supported organizations.
Such change and consolidation may result in the elimination of, or a significant
decrease in, the role of the physician in the medical professional liability
insurance purchasing decision and could reduce APIE's, and after the merger our,
medical professional liability premiums as groups of insurance purchasers may be
able to retain more risk.


                                       12
<PAGE>

     BECAUSE OUR BOARD OF DIRECTORS MUST BALANCE FIDUCIARY OBLIGATIONS TO APIE
AND TO OUR SHAREHOLDERS, OUR BOARD OF DIRECTORS MAY MAKE DECISIONS THAT ARE NOT
SOLELY IN THE INTERESTS OF OUR SHAREHOLDERS.

     As attorney-in-fact, FMI is contractually required to provide management
and administrative services to APIE. In such capacity, FMI also has a fiduciary
duty to the policyholders of APIE to protect their interests. Likewise, we have
a fiduciary duty to our shareholders. Certain issues arise that may create
conflicts of interest between these fiduciary duties. Among such potential
conflicts of interest are:

o   Management must devote attention to the business interests of both APIE and
    us;

o   APIE may enter into other transactions and contractual relationships with us
    and our subsidiaries; and

o   State regulators could challenge the reasonableness of the transactions
    between us and APIE because of potential or actual conflicts of interest.

     As a consequence, our board of directors may make decisions or take actions
that are not solely in the interests of our shareholders, although we believe
that decisions that strengthen APIE could have a long-term positive effect on
us. If, for example, there should be a need to strengthen the surplus of APIE,
our board of directors may decide to reduce the management fee rate and/or that
a capital contribution should be made by us to APIE in the form of a surplus
note or some other form. Under such circumstances, we may be required to provide
such capital to APIE at a lower rate of return than would be available with
other investments or at no return at all. Payments of interest and repayment of
principal on a surplus note are subject to prior approval of the Texas
Department of Insurance, which may not approve such payments. We may also find
it necessary to fund additional surplus for APIE by issuing additional shares of
our capital stock, resulting in dilution of existing shareholders' interest.

     IF MARKET CONDITIONS CAUSE REINSURANCE TO BE MORE COSTLY OR UNAVAILABLE FOR
APIE, OUR MANAGEMENT FEE MAY BE REDUCED.

     As part of APIE's overall risk management strategy, it currently purchases
reinsurance for amounts of risk from $250,000 up to $1,000,000. If APIE is
unable to maintain its current reinsurance coverage or to obtain other
reinsurance coverage in adequate amounts and at favorable rates, or if APIE is
unable to renew its expiring reinsurance coverage or to obtain new reinsurance
coverage, APIE may be adversely affected by losses or have to reduce the amount
of risk it underwrites, in either case reducing our management fee.

     ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS, OUR SHAREHOLDER RIGHTS
PLAN AND TEXAS LAW COULD PREVENT OR DELAY A CHANGE IN CONTROL.

      Certain anti-takeover provisions applicable to our governance could
prevent or delay an acquisition of our business at a premium price or at all.
Some of these provisions are contained in our articles of incorporation as well
as in a shareholder rights plan adopted by the Company. Others are contained in
the Texas statutory law governing corporations. These provisions may have the
effect of delaying, making more difficult or preventing a change in control or
acquisition of the Company by means of a tender offer, a proxy contest or
otherwise. These provisions are expected to discourage certain types of coercive
takeover practices and inadequate takeover bids and to encourage persons seeking
to acquire control of the Company first to negotiate with us.

      Our articles of incorporation provide that we may not engage in certain
business combinations with a corporation, subsidiary of a corporation, person,
or other entity which is the beneficial owner, directly or indirectly, of twenty
percent or more of our outstanding voting shares unless either certain
requirements are first satisfied or the transaction is approved by the
affirmative vote of no less than two-thirds of the shares of our common stock
present in person or by proxy as a meeting where at least 80% of our common
shares are represented (in person or by proxy).


                                       13
<PAGE>

      Under our shareholder rights plan, each outstanding share of common stock
has attached to it one purchase right. Each purchase right entitles its holder
to purchase from the Company a unit consisting of one one-thousandth of a share
of Series A junior participating preferred stock at a price subject to
adjustment. This could prevent or delay a change in control of the Company.

      Articles 13.01 through 13.08 of the Texas Business Corporations Act
provide that a Texas corporation may not engage in certain business
combinations, including mergers, consolidations, and asset sales, with a person,
or an affiliate or associate of such person, who is an "affiliated shareholder"
(generally defined as the holder of twenty percent or more of the corporation's
voting shares) for a period of three years from the date such person became an
affiliated shareholder unless (i) the business combination or purchase or
acquisition of shares made by the affiliate shareholder was approved by the
board of directors of the corporation before the affiliated shareholder became
an affiliated shareholder; or (ii) the business combination was approved by the
affirmative vote of the holders of at least 66 2/3% of the outstanding voting
shares of the corporation not beneficially owned by the affiliated shareholder,
at a meeting of shareholders called for that purpose (and not by written
consent), not less than six months after the affiliated shareholder became an
affiliated shareholder. Neither our articles of incorporation nor our bylaws
contain any provision expressly providing that we will not be subject to the
Texas anti-takeover statute. The Texas anti-takeover statute may have the effect
of inhibiting a non-negotiated merger or other business combination involving
the Company, even if such event(s) would be beneficial to our shareholders.

     OUR MANAGEMENT SHAREHOLDERS HAVE SIGNIFICANT CONTROL OF THE COMPANY AND THE
ABILITY TO INFLUENCE THE APPROVAL OF MATTERS FOR WHICH SHAREHOLDER VOTING IS
INVOLVED.

      Our executive officers and directors and their affiliates beneficially own
approximately 33% of the Company's outstanding common stock, assuming full
conversion of all options exercisable within 60 days of March 31, 2007, that
they may beneficially own. As a result, our management is able to influence and
possibly control the election of our board of directors and the outcome of other
corporate actions requiring shareholder approval.

     THE PASSAGE OF TORT REFORM AND THE SUBSEQUENT REVIEW OF SUCH LAWS BY THE
COURTS COULD HAVE A MATERIAL IMPACT ON OUR INSURANCE OPERATIONS.

      As stated above, substantially all of our revenue from the insurance
services segment was attributable to FMI providing management services to APIE.
Because FMI's management fee is based on the earned premiums of APIE and APIE's
profits, our revenue can be adversely affected by the impact of tort reforms on
APIE's business.

      Tort reforms generally restrict the ability of a plaintiff to recover
damages by imposing one or more limitations, including, among other limitations,
eliminating certain claims that may be heard in a court, limiting the amount or
types of damages, changing statutes of limitation or the period of time to make
a claim, and/or limiting venue or court selection. Texas enacted legislation in
2003 specifically directed at medical malpractice liability insurance reform.
Among the more significant aspects of the legislation were caps on non-economic
damages and caps on non-economic damages against a single institution and
against all health-care institutions combined.

      While the effects of tort reform would appear to be generally beneficial
to APIE's business, there can be no assurance that such reforms will be
effective or ultimately upheld by the courts in the various states. Further, if
tort reforms are effective, the business of providing professional and other
liability insurance may become more attractive, thereby causing an increase in
competition for APIE and reducing our management fee or insurance services
revenues. In addition, there can be no assurance that the benefits of tort
reform will not be accompanied by regulatory actions by state insurance
authorities that may be detrimental to APIE such as expanded coverage
requirements and premium rate limitations or rollbacks. Also, the tort reform
legislation, and the caps on non-economic damages, could change as a result of
challenges in the courts or by future legislation.


                                       14
<PAGE>

ITEM 2.  PROPERTIES

     We lease approximately 23,000 square feet of office space from
HealthTronics in an office project at 1301 Capital of Texas Hwy., Suite C-300,
Austin, Texas as our principal executive offices.

     We also lease approximately 1,200 square feet of office space for our
insurance services subsidiary at 5401 North Central Expressway, Suite 316, LB
#B4, Dallas, Texas.

ITEM 3.  LEGAL PROCEEDINGS

     We are involved in various claims and legal actions that have arisen in the
ordinary course of our business. We believe that any liabilities arising from
these actions will not have a material adverse effect on our financial condition
or results of operations.

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

     No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.

                                     PART II

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

     Our common stock is currently listed on the NASDAQ Small Cap Market under
the symbol "AMPH." The following table sets forth the range of the quarterly
high and low bid prices for the last two fiscal years.

                                 2006                            2005

                          ---------------------        ------------------------
                            High        Low                High         Low
                            ----        ----               ----         ----
First Quarter              $13.86      $12.15              $13.24      $10.01

Second Quarter             $16.25      $13.51              $13.80       $9.25

Third Quarter              $18.73      $12.82              $13.30      $11.50

Fourth Quarter             $17.50      $14.37              $13.25      $11.37


     There were approximately 199 holders of record of our common stock on March
1, 2007.

     In 2006, 2005 and 2004, we declared cash dividends of $0.30, $0.25 and
$0.20, respectively, per share of common stock amounting to total cash outlays
of approximately $820,000, $671,000 and $518,000, respectively. Prior to 2004,
we had never declared or paid any cash dividends on our common stock. Our policy
has been to retain our earnings to finance growth and development. The
declaration and payment of any future dividends on our common stock would be at
the sole discretion of our Board of Directors, subject to our financial
condition, capital requirements, future prospects and other factors deemed
relevant.


                                       15
<PAGE>


Performance Graph

     The graph below compares, assuming $100 was invested on December 31, 2001
and assuming the reinvestment of any dividends, our cumulative total shareholder
return with the total shareholder returns of all NASDAQ stocks (the "NASDAQ
Total") and of all stocks (the "Peer Index") contained in the NASDAQ Financial
and Insurance indexes, with each index being given equal weight.

     The following is a table representation of the performance graph.


                        NASDAQ Total         Peer Index      APS Group
                        ----------          -----------      -----------
        12/29/01          100.00               100.00          100.00
        12/31/02           69.13               102.19          114.84
        12/31/03          103.36               133.99          285.67
        12/31/04          112.49               158.49          286.22
        12/31/05          114.88               167.51          344.59
        12-30/06          126.22               191.44          452.70



     The following table represents securities authorized for issuance under
equity compensation plans, as described in Notes 12 and 13 to the consolidated
financial statements included in Appendix A of this Form 10-K.



<TABLE>
<CAPTION>
                                Equity Compensation Plan Information
------------------------------------------------------------------------------------------------------------------------------------

Plan Category           Number of securities to be           Weighted-average exercise            Number of securities remaining
                        issued upon exercise of                price of outstanding             available for future  issuance under
                         outstanding options,                   options, warrants                  equity compensation plans.
                         warrants and rights.                      and rights.                   Excluding securities reflected in
                                                                                                           column (a)
------------------------------------------------------------------------------------------------------------------------------------
                                 (a)                                    (b)                                   (c)
------------------------------------------------------------------------------------------------------------------------------------
<S>                            <C>                                     <C>                                  <C>
Equity Compensation
plans approved by              536,000                                 $9.96                                243,000
security holders                                                       Note 1                               Note 2
------------------------------------------------------------------------------------------------------------------------------------
Equity compensation
plans not approved by
security holders                none                                   none                                   none
------------------------------------------------------------------------------------------------------------------------------------
Total                          536,000                                 $9.96                                243,000
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>



     Note 1: Average price is for the 467,000 shares under the Stock Option Plan
     only, as 69,000 shares in the Deferred Compensation Plan are outright
     grants. Deferred shares are reflected in the financial statements at the
     grant date.

     Note 2: Shares remaining in the Stock Option Plan is 162,000; shares
     remaining in the Deferred Stock Plan is 81,000.


                                       16
<PAGE>

     The following table represents stock repurchases during the fourth quarter
     of 2006:


<TABLE>
<CAPTION>

                                                                                              (d)    Maximum
                                                                                                    Number of
                                                                                                   Shares (or
                                                                                                   Approximate
                                                                                                   Dollar Value)
                                                                          (c) Total Number        of Shares that
                                                                                of Shares           May Yet be
                                                                            Purchased as Part     Purchased Under
Period                         (a) Total Number        (b) Average             of Publicly          the Plans or
                                    of shares           Price Paid           Annonuced Plans         Programs
                                   Purchased (1)         per Share             or Programs
-------                             ---------            ----------           ------------         --------------

<S>                                 <C>                  <C>                     <C>                  <C>
Oct. 1, 2006-Oct. 31, 2006          3,087                $ 15.75                 3,087                $ 1,731,000
Nov. 1, 2006-Nov. 30, 2006          2,500                $ 15.63                 2,500                $ 1,692,000
Dec. 1, 2006-Dec. 31, 2006          3,885                $ 15.93                 3,885                $ 1,630,000

</TABLE>

(1)      Of the total shares purchased, 9,472 were purchased in open market
         transactions and none were purchased in private transactions. Our
         original $2,000,000 share repurchase program was announced August 17,
         2004 and was increased in $2,000,000 increments on December 12, 2005
         and on June 30, 2006.










                                       17

<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

     The following selected financial data should be read in conjunction with
our consolidated financial statements and notes thereto included in Appendix A
of this Form 10-K and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in Item 7 hereof.

     The data in the following chart may not be comparable as data stated for
the year 2006 were impacted by the implementation of FAS 123 (R) while the data
in years prior to 2006 were not.

<TABLE>
<CAPTION>


                                                      2006             2005              2004             2003             2002
                                                 ---------------   --------------   ---------------   --------------   -------------
Selected Income Statement Data:

<S>                                                 <C>              <C>               <C>              <C>              <C>
  Revenues                                          $ 32,360         $ 33,973          $ 32,021         $ 30,449         $23,077

  Income from continuing operations
    before interest, income taxes,
    minority interests and equity in
    loss of unconsolidated affiliates                  4,094            7,812             3,097            4,090           5,554

  Income from continuing operations                    3,194            5,460             2,152            2,772           3,156

  Net income                                         $ 3,194          $ 5,460           $ 2,152          $ 2,799         $ 3,411


Per Share Amounts:

  Basic: Income from continuing operations            $ 1.15           $ 2.03            $ 0.85           $ 1.26          $ 1.42

  Net income                                            1.15             2.03              0.85             1.27            1.53

  Diluted: Income from continuing operations            1.09             1.86              0.76             1.13            1.35

  Net income                                          $ 1.09           $ 1.86            $ 0.76           $ 1.14          $ 1.45

  Diluted weighted average shares
    outstanding                                        2,933            2,931             2,838            2,449           2,345

  Cash Dividends                                      $ 0.30           $ 0.25            $ 0.20                -               -


Selected Balance Sheet Data:

  Total assets                                      $ 36,276         $ 33,505          $ 30,443         $ 25,638         $24,981

  Working capital                                     19,980           15,880            10,673            8,537           5,799

  Long-term obligations                                    -                -             1,133            1,576           2,665

  Total liabilities                                  $ 6,687          $ 5,783           $ 6,229          $ 6,532         $ 7,455

  Minority interests                                      21               15                 1                -             384

  Total equity                                      $ 29,568         $ 27,707          $ 24,213         $ 19,106         $17,142


</TABLE>


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

FORWARD-LOOKING STATEMENTS

     Our statements contained in this report 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 Exchange Act, including statements regarding
our expectations, hopes, intentions or strategies regarding the future. You
should not place undue reliance on forward-looking statements. All
forward-looking statements included in this report are based on information
available to us on the date hereof, and we assume no obligation to update any
such forward-looking statements. It is important to note that our actual results
could differ materially from those in the forward-looking statements.

     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 judgments 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 our control. Any of these assumptions
could be inaccurate and, therefore, there can be no assurance that the
forward-looking statements included in this report will prove to be accurate.

GENERAL

      We provide insurance services, including management services to APIE, and
financial services, including brokerage and investment services to individuals
and institutions.

      INSURANCE SERVICES. We provide management services to APIE through our
subsidiary, FMI. FMI provides management and administrative services to APIE, a
reciprocal insurance exchange that provides medical professional liability
insurance. APIE is governed by a board of directors consisting of, as of
December 31, 2006, eight physicians and one non-physician. Pursuant to a
management agreement and the direction of this board, FMI manages and operates
APIE, including performing policy issuance, claims investigation and settlement,
and all other management and operational functions. FMI pays certain salaries
and personnel related expenses, rent and office operations costs and information
technology costs, as provided in the management agreement. APIE is responsible
for the payment of all claims, claims expenses, peer review expenses, directors'
fees and expenses, legal, actuarial and auditing expenses, our taxes, outside
agent commissions and certain other specific expenses. 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 management fee percentage
is 13.5% of earned premium. In addition, any pre tax profits of APIE will be
shared equally with FMI (profit sharing) so long as the total amount of profit
sharing does not exceed 3% of earned premiums. FMI only provides these
management services to APIE. Our revenues from this segment were 48%, 46% and
48% of our total revenues in 2006, 2005 and 2004, respectively. We recognize
revenues for the management fee portion based on a percentage of earned premiums
on a monthly basis. We recognize revenues for the management fee portion based
on profit sharing in the fourth quarter, when it is certain that APIE will have
an annual profit. FMI's assets are not subject to APIE policyholder claims.


                                       19
<PAGE>

      FINANCIAL SERVICES. We provide investment and investment advisory services
      to institutions and individuals  throughout the United States through the
      following subsidiaries:

      o   APS Financial. APS Financial is a fully licensed broker/dealer that
          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 and banks. We recognize commission's revenue, and the
          related compensation expense, on a trade date basis.

      o   APS Capital. APS Capital facilitates the clearing and settlement of
          trades involving syndicated bank loans, trade claims and distressed
          private loan portfolios. Trade claims are private debt instruments
          representing a pre-petition claim on a debtor's estate. We recognize
          commission revenue, and the related compensation expense, when the
          transaction is complete and fully funded.

       o  Asset Management. Asset Management manages fixed income and equity
          assets for institutional and o individual clients on a fee basis. We
          recognize fee revenues monthly based on the amount of funds under
          management.


      OTHER INVESTMENTS. In addition, as of December 31, 2006, we own 385,000
shares of FIC, representing approximately 4% of their outstanding common stock.
Our policy is to account for investments as available-for-sale securities which
requires that we assess fluctuations in fair value and determine whether these
fluctuations are temporary or "other than temporary" as defined in Statements of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities, as amended. Temporary changes in fair
value are recognized as unrealized gains or losses excluded from earnings and
reported in equity as a component of accumulated other comprehensive income, net
of income taxes. Should a decline in an investment be deemed other than
temporary, as was the case with our investment with FIC in 2004, 2005 and 2006,
pre-tax charges to earnings will be taken in the period in which the impairment
is considered to be other than temporary.

      As of December 31, 2006, we also had investments totaling $16,636,000 in
investment-grade governmental and corporate fixed income securities, which are
accounted for as available for sale. These securities are carried at fair value
with unrealized gains and losses, net of taxes, reported in equity as a
component of accumulated other comprehensive income. As above, we would
recognize an impairment charge to earnings in the event a decline in fair value
below the cost basis of one of these investments is determined to be other than
temporary.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

      The preparation of our consolidated financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses. On an on-going basis, we evaluate our
estimates, including those related to impairment of assets; bad debts; income
taxes; and contingencies and litigation. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

      We believe the following critical accounting policies and estimates affect
our more significant judgments and estimates used in the preparation of our
consolidated financial statements.


                                       20
<PAGE>

      ASSET IMPAIRMENT

      We periodically review the carrying value of our assets to determine if
events and circumstances exist indicating that assets might be impaired. If
facts and circumstances support this possibility of impairment, our management
will prepare undiscounted and discounted cash flow projections, which require
judgments that are both subjective and complex. Management may also obtain
independent valuations.

      REVENUE RECOGNITION

      Our insurance service revenues related to management fees are recognized
monthly at 13.5% of the earned premiums of the managed company. We also share
equally any profit of the managed company, to a maximum of 3% of the earned
insurance premiums. Any past losses of the managed company are carried forward
and applied against earnings before any profits are shared. We recognize
revenues for the management fee portion based on profit sharing in the fourth
quarter, when it is certain the managed company will have an annual profit.

      Our financial services revenues are composed primarily of commissions on
securities trades and clearing of trade claims and asset management fees.
Revenues related to securities transactions are recognized on a trade date
basis. Revenues from the clearing and settlement of trades involving syndicated
bank loans, trade claims and distressed private loan portfolios are recognized
when the transaction is complete and fully funded. Asset management fees are
recognized as a percentage of assets under management during the period based
upon the terms of agreements with the applicable customers.

      ALLOWANCES

      When necessary, we record an allowance for doubtful accounts based on
specifically identified amounts that we believe to be uncollectible. Management
analyzes historical collection trends and changes in its customers' payment
patterns, customer concentration and credit worthiness when evaluating its
allowance for doubtful accounts.

      If our actual collections experience changes, revisions to our allowance
may be required. We have a limited number of customers with individually large
amounts due at any given balance sheet date. Any unanticipated change in one of
those customers' credit standing or rating could have a material affect on our
results of operations in the period in which such changes or events occur. After
all attempts to collect a receivable have failed, the receivable is written off
against the allowance.

      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.

      When necessary, we record a valuation allowance to reduce our deferred tax
assets to the amount that is more likely than not to be realized. While we have
considered future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for the valuation allowance, in the event we
were to determine that it would be able to realize our deferred tax assets in
the future in excess of our net recorded amount, an adjustment to the deferred
tax asset would increase income in the period the determination was made.
Likewise, should we determine that it would not be able to realize all or part
of our net deferred tax asset in the future, an adjustment to the deferred tax
asset would be charged to income in the period the determination was made.

       We account for our equity and fixed income securities as available for
sale. In the event a decline in fair value of an investment occurs, management
may be required to determine if the decline in market value is other than
temporary. Management's assessments as to the nature of a decline in fair value
are based on the quoted market prices at the end of a period, the length of time
an investment's fair value has been in decline and our ability and intent to
hold the investment. If the fair value is less than the carrying value and the
decline is determined to be other than temporary, an appropriate write-down is
recorded against earnings.


                                       21
<PAGE>

      STOCK-BASED COMPENSATION

     In December  2004, the FASB issued a revision  ("SFAS No.  123(R)") to SFAS
No. 123,  Accounting for Stock-Based  Compensation ("SFAS No. 123"), and we were
required to adopt SFAS No. 123(R) in the first quarter of 2006.  SFAS No. 123(R)
supersedes  Accounting  Principles  Board Opinion No. 25,  "Accounting for Stock
Issued to Employees"  ("APB No. 25") and related  interpretations,  and requires
that all stock-based compensation, including options, be expensed at fair value,
as of the grant date, over the vesting period.  Companies are required to use an
option pricing model (e.g.: Black-Scholes or Binomial) to determine compensation
expense,  consistent  with the model  previously  used in the  already  required
disclosures of SFAS No. 148, Accounting for Stock-Based  Compensation-Transition
and Disclosure.

      For the year ended December 31, 2006 we calculated stock-based
compensation using the intrinsic value method. We estimate the fair value of
stock option awards on the date of grant utilizing a modified Black-Scholes
option pricing model. The Black-Scholes option valuation model was developed for
use in estimating the fair value of short-term traded options that have no
vesting restrictions and are fully transferable. However, certain assumptions
used in the Black-Scholes model, such as expected term, can be adjusted to
incorporate the unique characteristics of our stock option awards. Option
valuation models require the input of somewhat subjective assumptions including
expected stock price volatility and expected term. We believe it is unlikely
that materially different estimates for the assumptions used in estimating the
fair value of stock option granted would be made based on conditions suggested
by actual historical experience and other data available at the time estimates
were made. Restricted stock awards are valued at the price of our common stock
on the date of grant. The adoption of SFAS No. 123(R) has not had a material
effect on our financial position, operations or cash flows.

      At December 31, 2006, we have a stock-based compensation plan, which is
described more fully in Note 13 to our accompanying consolidated financial
statements included herein. Prior to January 1, 2006, we accounted for this plan
under the recognition and measurement principles of APB No. 25, under which
stock-based employee compensation cost was not reflected in net income, as all
options granted under this plan had an exercise price equal to the market value
of the underlying common stock on the date of grant. In accordance with SFAS No.
123, as amended by SFAS No. 148, we provided footnote disclosure of the pro
forma stock-based compensation cost, net loss and net loss per share for the
years prior to adopting SFAS No. 123 (R), as if the fair-value based method of
expense recognition and measurement prescribed by SFAS No. 123 had been applied
to all employee options.

      As a result of adopting SFAS No. 123(R) on January 1, 2006, our pre-tax
income for the year ended December 31, 2006 is $225,000 less than it would have
been if we had continued to account for stock-based compensation under APB No.
25. Basic and diluted net income per share would be unchanged if we had not
adopted SFAS No. 123(R). The adoption of SFAS No. 123(R) had no effect on our
cash flows in the year ended December 31, 2006, as stock option expense is a
non-cash charge.

RESULTS OF OPERATIONS

      Overview and Business Outlook Insurance Services revenues for the year
ended December 31, 2006 were level with revenues recorded for the same period in
2005, a year which enjoyed record revenues. Total member's equity at APIE has
grown approximately 57% in 2006 after growing approximately 78% in 2005.
Insurance Services revenues are dependent on APIE and if APIE's surplus
continues to grow, this would continue to increase the financial strength of the
company and our capacity to write new business and therefore increase the amount
of profit in which we would be able to share. Insurance Services operating
expenses increased over 2005, primarily as a result of anticipated new personnel
hires required to support estimated growth in new business and the retention of
existing business. Professional fees will be higher in future periods as a
result of the decision by the SEC to require micro-cap companies to comply with
Section 404 of the Sarbanes-Oxley Act of 2002. Effective as of May 30, 2006, our
board of directors approved a merger with APIE. Subsequent to the merger, it is
anticipated that the Insurance Services management fee revenues derived from the
attorney-in-fact contract with APIE would no longer exist, being replaced by the
revenues and expenses of APIE, and revenues from earned premiums and investment
income from APIE as well as results from operations would be reported. For the



                                       22
<PAGE>

years ended December 31, 2006 and 2005 the management fee revenues reported by
Insurance Services was $10,964,000 and $11,045,000, respectively. For the years
ended December 31, 2006 and 2005, the total revenues reported by APIE were
$77,331,000 and $69,866,000, respectively. Total expenses reported by APIE were
$52,909,000 and $56,647,000 for the years ended December 31, 2006 and 2005,
respectively.

      Our insurance segment is greatly affected by the profitability of APIE
which we manage through FMI. Significant increases in the frequency and/or
severity of claims brought against APIE's insured doctors would negatively
affect the profitability of APIE, and consequently, the amount of profit, if
any, in which we would be able to share. This risk has been reduced as a result
of physicians renewing at lower limits of coverage. Prior to tort reform
legislation in 2003, the Texas market place experienced rate increases as a
result of unfavorable claims trending. As rates continued to increase,
physicians sought lower limits of coverage in order to lower their cost of
coverage. The shift to lower limits resulted in lower premiums being by paid to
APIE by physician-policyholders. However, the lower premiums paid as a result of
this shift were offset by rate increases of approximately 39%, 13% and 1% in
2002, 2003 and 2004, respectively. As a result of increased competition and
improved loss ratios, rates have declined 9% and 18% for 2005 and 2006,
respectively. In addition, policyholder headcount increased from 2,992 at
January 1, 2002 to 4,712 at December 31, 2006, further offsetting this shift to
lower policy limits. Total gross premiums and maintenance fees written were
$74,833,000 and $79,301,000 for the years ended December 31, 2006 and 2005,
respectively. Further, tort and insurance reform passed in the State of Texas in
2003 capped non-economic damages and placed restrictions on mass litigation. As
a result of tort reform, competitors have re-entered the State of Texas, which
has resulted in increased competition and lowering of rates.

      APS Financial, the broker/dealer division of our financial services
segment, saw growth in our investment banking division in 2006 compared to 2005
while commission revenues from security trading in 2006 lagged behind those
recorded in 2005. APS Capital, which represents a new revenue stream, was formed
in 2005. APS Capital earns commissions on the trading and clearing of
non-security transactions in bank debt and trade claims. The investment banking
department was established in 2005 and ramped up in 2006 with the hiring of a
dedicated investment banker and staff who were successful in closing several
private placement transactions. Commission revenues from both investment and
non-investment grade trading were down in 2006 as a result of soft market
conditions as well as a partial shift in investment funds of our customer base
away from the bond market and towards the higher-yielding revenue streams
mentioned above. As a result of difficult market conditions for the trading of
investment grade securities, APS Financial consolidated trading into its main
office in Austin, Texas and closed its Houston office in the third quarter of
2006. Though the Houston office generated commission revenues of approximately
$1.2 million during the first nine months of 2006 and $2.6 million for all of
2005, it had become unprofitable during the past twelve months.

      For commission revenue generation, bullish, unstable markets provide us
with the most opportunity. Conversely, stable, bearish markets pose the greatest
difficulty in generating income. Uncertainty in world, political and economic
events can also be an obstacle to revenue generation. Investors may take a
wait-and-see attitude should uncertainty exist.

      Although we have been fortunate in retaining our key salespersons, a loss
of one or more key individuals and/or a loss of one or more key accounts is
possible and could have an adverse effect upon earnings.

      The nature of the broker/dealer business and the current litigious legal
environment in which we operate means that there is always the possibility of
one or more lawsuits being brought against us. Claims against broker/dealers
generally rise in periods of down markets and the more prolonged a downturn,
generally the greater risk of litigation.


                                       23
<PAGE>

      2006 COMPARED TO 2005

      Revenues from operations decreased $1,613,000 (5%) in the year ended
December 31, 2006 compared to 2005. Our operating income decreased $991,000
(20%) in 2006 compared to 2005. Our net income decreased $2,266,000 (42%) in
2006 compared to 2005. Lastly, our diluted net income per share decreased $0.77
(41%) in 2006 compared to 2005. The reasons for these changes are described
below.

      INSURANCE SERVICES. Total revenues from our insurance services segment
increased $41,000 (0%) for the year ended December 31, 2006 compared to 2005.
The current year increase in revenues is mainly attributable to higher pass
through commissions which increased by $270,000 (6%) in 2006 as commission rates
and premiums written through agents for new business at APIE remained higher in
2006. Third party agents were paid higher effective commission rates as a result
of their writing more new business and in order to increase market share. As
noted in the following paragraph, commissions paid to third party independent
agents increased by an equivalent amount, resulting in no impact on net income.
Partially offsetting this increase was a decrease in management fee revenue of
$67,000 (1%), the result of lower earned premiums at APIE, our managed medical
malpractice insurance company, due to rate decreases implemented in the latter
part of 2005. This has resulted in lower written premium of $4.5 million for the
year ended December 31, 2006 as compared to 2005. While planned rate decreases
have lowered written premium, policyholder retention remains strong at greater
than 90% for APIE. In addition, risk management fees decreased $95,000 (47%) for
the year ended December 31, 2006 compared to 2005 as a result of fewer renewals
requiring these services and the discontinuation of a high risk management
program at the end of 2005. This decrease in risk management fees is the result
of two key factors: (1) fees are lower due to an improved claims environment
following tort reform legislation enacted in 2003, resulting in fewer new
business and renewal accounts being placed into the risk management program and
thus being required to pay for these services; and (2) risk management services
continue to be performed, but due to increased competition we have occasionally
provided these services at no charge.

      Insurance services expenses increased $1,000,000 (10%) for the year ended
December 31, 2006 compared to 2005. Payroll expense increased $291,000 (9%) in
2006 compared to 2005 due in part to merit increases, the addition of new
managerial positions, additional staff positions for business development and
physician services departments and expensing stock options as required by
FAS123(R). Options expense totaled $144,000 in 2006, the first year that we
expensed stock options. Professional fees increased $165,000 (65%) in 2006
compared to 2005 due primarily to consulting costs incurred in the analysis of
new policy and claims software. Pass through commissions expense increased
$270,000 (6%) in 2006 compared to 2005 due to the above-mentioned increase in
commissions paid to third party independent agents. Lastly, advertising expense
increased $65,000 (72%) in 2006 compared to 2005 due to consulting costs
associated with increased marketing efforts.

         FINANCIAL SERVICES. Our financial services revenues decreased
$1,654,000 (9%) in 2006 compared to 2005. This decrease was primarily due to
lower revenue derived from commissions earned at our broker/dealer, APS
Financial. Commission income, mostly generated from transactions in the
investment grade and non-investment grade fixed income market, were down
$5,400,000 (33%) in 2006 compared to 2005. Going into 2006, the Federal Reserve
had raised short-term rates 17 times for a total of 425 basis points since mid
2004, and then held rates steady throughout 2006. The resulting flat to inverted
yield curve, in conjunction with lack of volatility throughout the year,
resulted in generally less customer activity and trading volumes in investment
grade bonds. As a result of these depressed trading conditions, APS Financial
shut down its Houston branch office in the third quarter of 2006 and
consolidated its trading and sales activities in its Austin office. Regarding
its non-investment grade trading, APS Financial has also realized lower trading
volumes in the high yield market, due to narrow interest rate spreads. The
narrow spreads resulted from a corporate market experiencing historically low
default rates and lower volatility. Offsetting somewhat the lower level of
securities trading revenues were revenues earned from our investment banking and
distressed debt/trade claim trading operations, which contributed an aggregate
increase of $3,800,000 (201%) in 2006 compared to 2005.


                                       24
<PAGE>

      Financial services expenses decreased $1,117,000 (7%) in 2006 compared to
2005. Reflecting the above-mentioned lower commission revenue, commission
expense, which includes commissions from secondary market trading, as well as
placement fees for investment banking and referral fees for bank debt trading,
were down $1,512,000 (14%) in 2006 compared to 2005. Partially offsetting this
decrease in 2006 expenses was an increase in payroll which was up $195,000 (11%)
in 2006 due largely to the hiring of additional personnel in the investment
banking and bank debt trading areas as the firm continued to ramp up these
business efforts. Also adding to the payroll variance was an increase in the sum
total of performance related forgivable loans granted to a high-producing broker
and which are expensed upon his continued employment with us. In addition,
options expense totaled $36,000 in 2006, the first year that we expensed stock
options.

      GENERAL AND ADMINISTRATIVE EXPENSE. Our general and administrative
expenses decreased $609,000 (22%) in 2006 compared to 2005. The current year
decrease is primarily due to lower incentive compensation expense. Incentive
compensation, a formula driven expense calculated in part on net earnings,
decreased $442,000 (42%) due to much lower investment gains in 2006 compared to
2005. In addition, salaries expense was $84,000 (11%) lower in 2006 as a result
of a severance payment in 2005 to a former employee who has since been retained
as a tax consultant. Legal and professional fees declined in 2006 by $128,000
(46%) as costs associated with internal controls disclosures and procedures
under the Sarbanes-Oxley Act of 2002, or SOX 404, compliance were minimal in
2006 compared to 2005 when we were ramping up our compliance efforts. With the
uncertainty as to what, if any, relief was to be granted to non-accelerated
filers like us, we slowed our expenditures in an attempt to control SOX 404
compliance costs. In particular, we did not retain the outside SOX 404
consultants we employed during 2005 and have concentrated instead on internal
compliance efforts. Our SOX compliance costs in 2007 can be expected to increase
over 2006 as we will hire a director of internal audit to complete the task.
Partially offsetting these decreases was stock option expense of $45,000 in
2006, the first year that such expenses were charged.

      GAIN ON SALE OF ASSETS. In 2006, we recognized $422,000 of deferred gain
related to the November 2001 sale and subsequent leaseback of real estate to
Prime Medical (now called HealthTronics, Inc.). Due to our continuing
involvement in the property, we deferred recognizing approximately $2,400,000 of
the approximately $5,100,000 gain and recognized it in earnings, as a reduction
of rent expense, monthly through September 2006. As of September 30, 2006 no
more of these deferred gains remain to be recognized. In addition, 15% of the
gain ($760,000) related to our then 15% ownership in the purchaser, was
deferred. As our ownership percentage in HealthTronics declines through our
sales of HealthTronics common stock, we recognize these gains proportionately to
the reduction of our interest in HealthTronics. In 2006, we recognized
approximately $29,000 of these deferred gains as a result of HealthTronics
common stock sold in the year. As of December 31, 2006, there remained a balance
of approximately $17,000 to be recognized in future periods.

      GAIN ON INVESTMENTS. Gains on investments decreased $2,901,000 (92%) in
2006 compared to 2005 due to the sale of a much larger number of
available-for-sale equity securities in 2005 compared to sales in 2006. Sales of
these securities are down in 2006 as a result of fewer shares held by us and a
decline in their market price. Partially decreasing the 2005 gain was a
write-off of a note that we deemed unlikely to collect. All of the remaining
balance on the note, a total of $160,000, was written off in 2005. In late 2006,
we unexpectedly began receiving payments on the note, totaling $85,000, which
were recorded as a gain from investments.

      LOSS ON IMPAIRMENT OF INVESTMENT. The losses recorded in 2005 represent
write-downs of investments in an equity security and in a bond held for
investment after determining that market declines in the value of these
securities should be considered "other than temporary". The equity investment
referred to is the shares of common stock we own in Financial Industries
Corporation, or FIC. We record pretax charges to earnings should the common
stock price of the security on the last day of each interim or annual period
fall below the adjusted cost basis of our investment in FIC. In 2005, that
charge totaled $136,000, lowering our cost basis in FIC to $7.65 at December 31,
2005. The remainder of the loss taken in 2005 was due to a market decline in a
fixed income security that has since been sold. FIC common stock traded at $7.60
at December 31, 2006 which necessitated taking an additional charge to earnings
in 2006 totaling $19,000. We will continue to monitor and evaluate the situation
at Financial Industries.


                                       25
<PAGE>

      INTEREST INCOME. Our interest income increased $328,000 (56%) in 2006,
compared to 2005. The current year increase was due to higher interest rates as
well as a much higher balance of interest-bearing fixed income securities. At
December 31, 2006 there was a balance in investment securities held of $16.7
million compared to a balance of $13.2 million held at December 31, 2005.

      OTHER INCOME. Our other income decreased $75,000 (60%) in 2006 compared to
2005. The decrease in 2006 is primarily due to inventory losses on securities
held at APS Financial totaling $40,000 in 2006 compared to inventory gains of
$26,000 in 2005.

      CASH FLOWS. Our cash flows provided from operations increased $1,047,000
(56%) in 2006 compared to 2005. The primary cause of the increase in cash from
operating activities in 2006 concerns the timing of our receipt of profit
sharing from APIE for the two comparative periods. In 2005 we received roughly
half of the 2004 profit sharing in December, 2004 and the other half in early
2005 equaling approximately $1,000,000. By contrast, we received all of the 2005
profit sharing in early 2006, totaling approximately $2,000,000. Our cash flows
used in investing activities decreased $674,000 (17%) in 2006 primarily as a
result of lower net funds loaned to others relative to collections received. In
addition, capital expenditures were lower in 2006 as greater software upgrades
were required in 2005. Our cash used in financing activities increased $268,000
(20%) in 2006 primarily as a result of a $674,000 increase in the purchase of
our common stock compared to 2005 as well as a $140,000 increase in dividends
paid. Partially offsetting this was cash provided from excess tax benefits from
stock-based compensation ($604,000).



      2005 COMPARED TO 2004

      Revenues from operations increased $1,952,000 (6%) in 2005 compared to
2004. Our operating income decreased $499,000 (9%) to $4,845,000 compared to
$5,344,000 in 2004. Our net earnings increased $3,308,000 (154%) in 2005 to a
total of $5,460,000 compared to net earnings of $2,152,000 in 2004. Our diluted
earnings per share increased to $1.86 in 2005 compared to $0.76 in 2004. The
reasons for these changes are described below.

      INSURANCE SERVICES. Insurance services revenues increased $198,000 (1%) in
2005 compared to 2004. The primary reason for the 2005 increase was a $364,000
(4%) increase in management fees, the result of greater insurance premium
volumes. Earned premium increased at APIE by 4% in 2005 compared to 2004
primarily as a result of new business, which saw an 8% net increase in the
number of insured professionals, and because of strong retention of our existing
business in 2005. In addition, profit shared with APIE grew $78,000 (4%) to
$2,007,000 in 2005 from $1,929,000 in 2004. Consistent with our revenue
recognition policy, this revenue was not recognized until the fourth quarter of
the year after profit-sharing goals were attained. We cannot accurately predict
what, if any, profit will be available to us until the completion of an
end-of-year actuarial analysis by independent actuaries. Partially offsetting
these increases was an $118,000 (37%) decrease in risk management fee income in
2005 compared to 2004, the result of a lower number of physicians utilizing this
service. This decrease in risk management fees is the result of two key factors.
First, fees are lower due to an improved claims environment following tort
reform legislation enacted in 2003, resulting in fewer new business and renewal
accounts being placed into the risk management program and thus being required
to pay for these services. Second, risk management services continue to be
performed but due to increased competition, we have occasionally provided these
services at no charge. Also, pass through commissions earned by third-party
agents decreased $106,000 (2%) in 2005 to $4,376,000 compared to $4,482,000 in
2004, the result of a 6% decline in written premiums in 2005. Written premiums
are down in 2005 compared to 2004 as a result of lower new business written
during the year along with an average decrease in premium rates of 8.8%. As
noted below, commissions paid to third-party independent agents decreased by an
equivalent amount, resulting in no impact on net earnings.


                                       26
<PAGE>

      Insurance services expenses increased $294,000 (3%) in 2005 compared to
2004. The primary reasons for the 2005 increase were higher payroll and higher
professional fees. Payroll increased $185,000 (6%) in 2005 as a result of normal
merit raises as well as the addition of two new managerial positions.
Professional fees increased $175,000 (253%) in 2005 compared to 2004 primarily
as a result of fees paid in association with Sarbanes-Oxley Act compliance
requirements. In addition, depreciation increased $61,000 (25%) in 2005 compared
to 2004 due to a significant increase in capital purchases made during 2005,
which were necessary to upgrade management information and reporting
capabilities. Partially offsetting these increases was a $106,000 (2%) decrease
in commissions paid to third party independent agents, as noted above.

      FINANCIAL SERVICES. Financial services revenues increased $1,754,000 (11%)
in 2005 compared to 2004. The increase was mostly due to contributions from our
investment banking and bank debt trading businesses, which were up a combined
$1,709,000 from last year. Of this increase, bank debt trading generated
revenues of $1,166,000 in 2005, our first year of operations, with minimal
start-up costs. This increase, combined with commission revenue from secondary
market securities trading, which was up slightly from 2004, made 2005 APS
Financial's second best year in terms of total revenues in our twenty-four year
history. Our broker/dealer business derives most of our revenue from trading in
the secondary fixed income market, both in investment and non-investment grade
securities. Commission revenue from our investment grade market segment was
lower, due to the Federal Reserve raising short-term rates. The short end of the
treasury yield curve, in step with Federal Reserve tightening, traded to higher
yields, while the longer end of the curve hovered near historically low levels,
creating a flat to slightly inverted yield curve in 2005. This created an
investment environment where customers continued to be cautious to commit funds
in 2005, particularly to longer maturing instruments, thus negatively impacting
trading revenues. The decline in our investment grade business was offset by
increased activity in the high-yield markets. In 2005, the U.S. high-yield
markets, which were generally considered rich the previous year, began to
correct with some volatility, increasing our trading revenues from this market
segment.

      Financial services expense increased $1,725,000 (12%) in 2005 compared to
2004. Commission expense, which includes commissions from secondary market
trading, as well as placement fees for investment banking and referral fees for
bank debt trading, was up $1,159,000 (12%) as a result of the above-mentioned
increase in commission revenue. Payroll was up $430,000 (31%) in part due to the
hiring of additional personnel in the investment banking and bank debt trading
areas as the firm ramped up these business efforts, and due to an increase in
performance related forgivable loans. Legal and professional expenses increased
$195,000 (115%) from the previous year, principally due to expenses associated
with our efforts to comply with the provisions of the Sarbanes-Oxley Act of
2002. Partially offsetting these increases was a decrease in incentive
compensation expense of $143,000 (13%) in 2005 compared to 2004 as a result of
higher minimum performance thresholds placed upon management in 2005.

      GENERAL AND ADMINISTRATIVE EXPENSES. General and Administrative expenses
increased $510,000 (23%) in 2005 compared to 2004. The 2005 increase was due
primarily to a $269,000 (34%) increase in incentive compensation expense in 2005
resulting from additional contractual bonuses that will be paid on the greater
gains from the sale of a higher number of shares of HealthTronics common stock
completed in 2005. In addition, salaries expense increased $148,000 (23%) in
2005 partially due to a severance payment to a former officer, Duane Boyd, who
has since been retained as a tax consultant coupled with an addition in salaries
at the executive level in an effort to remain competitive in the marketplace.
Professional fees increased $59,000 (85%) in 2005 compared to 2004 as a result
of fees paid in association with Sarbanes-Oxley Act compliance requirements.
Partially offsetting these increases was a 2005 decrease in legal fees of
$39,000 (64%), the result of lower need for outside legal consulting in 2005 as
well as fees paid in 2004 in association with a Form S-3 filing that were not
applicable in 2005.

      GAIN ON SALE OF ASSETS. Gain on sale of assets primarily represents the
recognition of deferred income. During 2005, we recognized approximately
$513,000 of deferred gain related to the November 2001 sale and subsequent
leaseback of real estate to Prime Medical (their name prior to the merger with
HealthTronics). During 2005, we also recognized $133,000 of the deferred gains
related to our then 15% ownership in HealthTronics. The increase in 2005 is the
result of an increased number of HealthTronics common stock shares sold compared
to 2004.


                                       27
<PAGE>

      GAIN ON INVESTMENTS. Gain on investments increased $2,915,000 (1,190%) in
2005 compared to 2004. The 2005 increase is primarily due to gains on the sale
of a greater number of shares of HealthTronics common stock compared to 2004. In
addition, we recorded income of $225,000 from an investment in a private company
that was sold during 2005 and in which we had a zero basis. Partially offsetting
these gains was a write-off totaling $160,000 from an investment loan that was
given earlier in 2005. Information provided by the third party loan obligor at
the time of the loan was proven to be less than complete and it was determined
in September 2005, after the loan was several months in default, that it is
unlikely that we will recover any of the remaining debt owed it. As such, the
balance of the loan was written off.

      LOSS ON IMPAIRMENT OF INVESTMENTS. The 2005 loss was due to a write-down
of our investment in FIC common stock coupled with an impairment of our
investment in Toys R Us bonds. The loss in 2004 represents an impairment in the
value of our investment in FIC common stock. During 2004, the value of our
investment in FIC had declined significantly. In October 2004, we determined
that this decline in market price should be considered "other than temporary" as
defined in Statements of Financial Accounting Standards (SFAS) No.115,
Accounting for Certain Investments in Debt and Equity Securities , as amended.
Consequently, we recorded pre-tax charges to earnings totaling $2,567,000 in
2004. These charges reduced our cost basis in FIC common stock from $5,647,000,
or $14.67 per share, to $3,080,000, or $8.00 per share which was equal to the
quoted market price of FIC shares on December 31, 2004. During 2005, we took
additional pre-tax charges to earnings totaling $135,000, further reducing our
cost basis in FIC to $2,945,000, or $7.65 per share. While we continue to have
the ability and the intent to hold the stock indefinitely, we concluded that the
additional uncertainty created by FIC's late filings, together with the lack of
our current financial information, dictated that the 2004 and 2005 declines
should be viewed as other than temporary. In July 2005, FIC was able to file
their 2003 Form 10-K but has yet to file any 2004 or 2005 Forms 10-Q or 10-K and
thus continues to be de-listed on the NASDAQ Stock Market.

      In April 2004, we purchased $300,000 of Toys R Us bonds. In March 2005,
Toys R Us announced a plan of merger with another toy company and a planned
leveraged buyout, which precipitated a drop in the price of the bonds. An
independent analysis indicated that the new debt to be issued in connection with
the leveraged buyout will put the existing bonds in a subordinated position.
Since these bonds have a 2018 maturity, we believe that the impairment is "other
than temporary" during our shorter than expected holding period. Consequently,
we recognized a charge against pre-tax earnings of $57,000 using the quoted
price of the bonds as of June 30, 2005. By December 2005, the value of the bonds
had declined further and, based in part upon weak earnings reports, we
determined that an additional impairment charge of $24,000 was necessary using
the quoted price of the bonds as of December 31, 2005. We will continue to
monitor and evaluate the situations at both FIC and Toys R Us and further
determine if changes in fair market value of these investments are temporary or
"other than temporary."

      GAIN ON THE EXTINGUISHMENT OF DEBT. During 2005 and 2004, we recorded
$24,000 and $75,000, respectively, as gains on extinguishment of debt. The 2004
amount represents that amount of liability that was released by participants in
a loan to a former affiliate. Due to poor operating results, the affiliate was
in default and not making scheduled payments under the loan agreement with us in
which the participations had been sold. As a result, the loan participants
released us from any obligations under the participation agreements. In
September 2005, we determined there is a remote possibility that the final
obligation, totaling $24,000, will be required to be paid under the terms of the
participation agreement and as a result, we reversed it and recognized a gain in
the same amount.

      INTEREST INCOME. Our interest income increased $222,000 (61%) in 2005
compared to 2004 primarily as a result of a higher balance of interest-bearing
securities held in 2005 as well as to higher average interest rates. At December
31, 2005, we held a balance of $13,246,000 in fixed income securities versus a
balance of $4,903,000 at December 31, 2004. The increase in 2005 was primarily
attributable to cash received upon the sale of equity securities.


                                       28
<PAGE>

      OTHER INCOME (LOSS). Our other income increased $109,000 (727%) in 2005
compared to 2004. The increase in 2005 was due to net gains in inventory held
briefly at APS Financial in 2005 totaling $26,000 versus net inventory losses of
$30,000 in 2004. In addition, we received $103,000 in administrative fee income
from Eco-Systems in 2005 versus $47,000 in 2004 resulting from their increase in
earnings in 2005.

      MINORITY INTERESTS. For the years 2005 and 2004, minority interests
represents a 3% interest in Asset Management, a subsidiary within our financial
services segment, owned by key individuals within Asset Management. Minority
interests increased in 2005 due to a prior period adjustment resulting from our
acquisition of a former 2% minority interest shareholder.

      CASH FLOWS. Our cash flows provided from operations decreased $3,593,000
(66%) in 2005 compared to 2004 due in part to a timing difference in the receipt
of profit sharing earned for these two years. We received $1,050,000 in 2004
from APIE in profit sharing for the year 2004, while receiving the remainder in
early 2005. By comparison, all of the 2005 profit sharing was received in
January 2006. Whether or not we receive any cash from APIE for profit sharing in
the year it was earned is simply a timing issue. In addition, we paid nearly
$1,500,000 more in federal income taxes in 2005 than in 2004, the result of
taxes owed on much larger gains on investments. These gains in 2005 were the
result of a decision to liquidate our investment in HealthTronics common stock,
resulting in a 74% decrease in the number of shares of common stock owned which
created gains of approximately $3,000,000. Our cash flows used in investing
activities decreased $354,000 (8%) in 2005 as a result of lower capital
expenditures as well as increased net receipt of loans over the amount funded.
Our cash used in financing activities increased $887,000 (192%) in 2005
primarily as a result of a $1,000,000 increase in the purchase of our treasury
stock compared to 2004. Partially offsetting this was a $278,000 increase in
cash received from the exercise of stock options.

LIQUIDITY AND CAPITAL RESOURCES

WORKING CAPITAL

     Our net working capital was $19,247,000 and $15,880,000 at December 31,
2006 and 2005, respectively. The increase in the current year was due primarily
to the purchase of short-term fixed income securities through the sale of
long-term equity securities. In addition, we received $2,911,000 in cash from
operations. Historically, we have maintained a strong working capital position
and, as a result, we have been able to satisfy our operational and capital
expenditure requirements with cash generated from our operating and investing
activities. These same sources of funds have also allowed us to pursue
investment and expansion opportunities consistent with our growth plans.
Although there can be no assurance our operating activities will provide
positive cash flow in 2006, we are optimistic that our working capital
requirements will be met for the foreseeable future for the following reasons:
(1) our current cash position is very strong, with a balance of approximately
$4.2 million comprising 12% of our total assets; (2) our investments in
available-for-sale equity and fixed income securities could provide an
additional $21 million should the need arise; and (3) we renewed a line of
credit in April 2006 that is described below.

LINE OF CREDIT

     In April 2006, we renewed a $3.0 million line of credit that was originally
established in November 2003 with PlainsCapital Bank. The loan calls for
interest payments only to be made on any amount drawn until April 15, 2007, when
the entire amount of the note, principal and interest then remaining unpaid,
shall be due and payable. At December 31, 2006, there were no draws taken
against this line of credit. We are in compliance with the covenants of the loan
agreement, including requirements for a minimum of $5.0 million of unencumbered
liquidity and a minimum 2 to 1 net worth ratio.


                                       29
<PAGE>

CAPITAL EXPENDITURES

     Our capital expenditures for property and equipment were $166,000 and
$307,000 in 2006 and 2005, respectively. We expect capital expenditures in 2007
to be approximately $1,400,000, all of which is expected to be funded through
cash on hand. The expected increase in 2007 is due primarily to the purchase and
implementation of new insurance services information systems technology.
Expenditures capitalized on the merger between us and APIE totaled $733,000 at
December 31, 2006. These capitalized merger costs are grouped in our
consolidated balance sheet as a long-term line item entitled "Other assets".

COMMITMENTS

     There were no participation agreements or purchase commitments at December
31, 2006. We have committed cash outflow related to operating lease arrangements
with terms exceeding one year at December 31, 2006, as follows (in thousands):

                                                Payment Due

Contractual Cash Obligation     2007     2008    2009     2010    2011    Total
--------------------------------------------------------------------------------

Operating Leases                $770     $687    $664     $643    $663    $3,427



MARGIN LOANS

     We extend credit to our customers, which is financed through our clearing
organization, Southwest Securities, Inc. or Southwest, to help facilitate
customer securities transactions. This credit, which earns interest income, is
known as "margin lending." In margin transactions, the client pays a portion of
the purchase price of securities, and we make a loan (financed by our clearing
organization) to the client for the balance, collateralized by the securities
purchased or by other securities owned by the client.

     In permitting clients to purchase on margin, we are subject to the risk of
a market decline, which could reduce the value of our collateral below the
client's indebtedness. Agreements with margin account clients permit our
clearing organization to liquidate our clients' securities with or without prior
notice in the event of an insufficient amount of margin collateral. Despite
those agreements, our clearing organization may be unable to liquidate clients'
securities for various reasons including the fact that the pledged securities
may not be actively traded, there is an undue concentration of certain
securities pledged or a trading halt is issued with regard to pledged
securities. If the value of the collateral were insufficient to repay the margin
loan, a loss would occur, which we may be required to fund. As of December 31,
2006, the total of all customer securities pledges on debit balances held in
margin accounts was approximately $7.9 million while the total value of the
securities within these margin accounts was approximately $20.0 million. We are
also exposed should Southwest be unable to fulfill its obligations for
securities transactions.

     Our ability to make scheduled payments or to fund planned capital
expenditures will depend on our future performance, which, to a certain extent,
is subject to general economic, financial, competitive, legislative, regulatory
and other factors that are beyond our control. There can be no assurance that
our business will generate cash flow from operations or that we will realize
anticipated revenue growth and operating improvements sufficient to make
scheduled payments and fund planned future capital expenditures.

INFLATION

     Our operations are not significantly affected by inflation because we are
not required to make large investments in fixed assets. However, the rate of
inflation will affect certain of our expenses, such as employee compensation and
benefits.


                                       30
<PAGE>

OFF BALANCE SHEET ARRANGEMENTS

     None

IMPACT OF NEW ACCOUNTING STANDARDS

     As more fully described in Note 1 of Notes to consolidated financial
statements we adopted several new accounting standards. For a discussion of the
impact of those new accounting standards upon us, see Note 1 (n).

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

     We have exposure to changes in interest rates and the market values of our
investments but have no material exposure to fluctuations in foreign currency.

INTEREST RATE RISK

     Our exposure to market risk for changes in interest rates relates to both
our investment portfolio and our revenues generated through commissions at our
financial services segment. A one percent change in interest rates on our cash
and fixed income securities balance as of December 31, 2006 totaling
approximately $21 million would result in a change of $210,000 annually in
interest income. All of our marketable fixed income securities are designated as
available-for-sale and, accordingly, are presented at fair value on our balance
sheets. Fixed rate securities may have their fair market value adversely
affected due to a rise in interest rates, and we may suffer losses in principal
if forced to sell securities that have declined in market value due to changes
in interest rates.

     Changes in interest rates could have an impact at our broker/dealer
subsidiary, APS Financial. The general level of interest rates may trend higher
or lower in 2007, and this move may impact our level of business in different
fixed-income sectors. If a generally improving economy is the impetus behind
higher rates, then while our investment grade business may drop off, our
high-yield business might improve with improving credit conditions. A volatile
interest rate environment in 2007 could also impact our business as this type of
market condition can lead to investor uncertainty and their corresponding
willingness to commit funds.

     As we currently have no debt and do not anticipate the need to take on any
debt in 2007, interest rate changes will have no impact on our financial
position as it pertains to interest expense.

INVESTMENT RISK

     As of December 31, 2006, our recorded basis in debt and equity securities
was approximately $21 million. We regularly review the carrying value of our
investments and identify and record losses when events and circumstances
indicate that such declines in the fair value of such assets below our
accounting basis are other than temporary. During 2004, the value of one of our
investments, FIC, had declined significantly. In October 2004, we determined
that this decline in market price should be considered "other than temporary" as
defined in Statements of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities, as amended.
Consequently, we recorded pre-tax charges to earnings totaling $2,567,000 in
2004. These charges reduced our cost basis in FIC from $5,647,000, or $14.67 per
share, to $3,080,000, or $8.00 per share which was equal to the quoted market
price of FIC shares on December 31, 2004. During 2005 and 2006, we took
additional pre-tax charges to earnings totaling $135,000 and $19,000,
respectively, further reducing our cost basis in FIC to $2,926,000, or $7.60 per
share. While we currently continue to have the ability and the intent to hold
the stock indefinitely, we concluded that the additional uncertainty created by
FIC's late filings, together with the lack of its current financial information,
dictated that the 2004 through 2006 declines should be viewed as other than
temporary. In October 2006, FIC was able to file its 2004 Form 10-K and in
January 2007 they filed their 2005 Form 10-K. FIC has still yet to file its 2006
Forms 10-Q and thus continues to be de-listed on the NASDAQ Stock Market.


                                       31
<PAGE>

     The effect on our financial statements as a result of these write-downs was
as follows:

                                              2006          2005         2004
                                              ----          ----         ----
 Reduction in Pre-tax Earnings             $ 19,000      $ 135,000   $ 2,567,000
 Reduction in Other Comprehensive Income   $ 13,000      $  89,000   $ 1,694,000
 Reduction in Deferred Tax Assets          $  6,000      $  46,000   $   873,000


     We will continue to monitor and evaluate the situation at FIC and further
determine if changes in fair market value of the investment are temporary or
"other than temporary."

     We have other corporate equity and fixed income investments but our
exposure to loss in them is much lower than the risk associated with our FIC
investment.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

     None.

ITEM 9A.   CONTROLS AND PROCEDURES

DISCLOSURE CONTROLS AND PROCEDURES

     We maintain controls and other procedures that are designed to ensure that
information required to be disclosed by us in reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms. In response to recent
legislation, we implemented changes to our disclosure controls and procedures,
primarily to formalize and document procedures already in place, and to
establish a disclosure committee consisting of some of our officers and other
management.

     As of the end of the period covered by this report, and under the
supervision and with the participation of our management, including our Chief
Executive Officer (principal executive officer) and Chief Financial Officer
(principal financial officer), we evaluated the effectiveness of our disclosure
controls and procedures (as defined under Rule 13a-15(e) of the Exchange Act).
Based on this evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures are effective.

     We do not expect that our disclosure controls and procedures or our other
internal controls can prevent all error and all fraud or that our evaluation of
these controls and procedures can provide absolute assurance that all control
issues and instances of fraud, if any, have been detected. The benefits of
controls and procedures must be considered relative to their costs, and the
design of any system of controls is based in part upon assumptions about the
likelihood of future events. There can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions.
Over time, controls and procedures may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of these and other inherent limitations in controls and
procedures, misstatements or omissions due to error or fraud may occur and not
be detected.


                                       32
<PAGE>

     During the last fiscal quarter of 2006, we have not made any changes in our
internal controls or in other factors that could have materially affected, or is
reasonably likely to materially affect, internal controls over our financial
reporting.

ITEM 9B. OTHER INFORMATION

     None.

                                    PART III

     Certain information required by Part III is omitted from this Form 10-K
because we will file a definitive Proxy Statement pursuant to Regulation 14A, or
Proxy Statement, not later than 120 days after the end of the fiscal year
covered by this Form 10-K, and certain information to be included therein is
incorporated herein by reference.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information required by this Item is incorporated by reference to the
Proxy Statement under the heading "Directors and Executive Officers of the
Registrant."

ITEM 11. EXECUTIVE COMPENSATION

     The information required by this Item is incorporated by reference to the
Proxy Statement under the heading "Information Regarding Executive Officer
Compensation."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this Item is incorporated by reference to the
Proxy Statement under the heading "Security Ownership of Certain Beneficial
Owners and Management."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by this Item is incorporated by reference to the
Proxy Statement under the heading "Certain Relationships and Related
Transactions."

ITEM 14.          PRINCIPAL ACCOUNTANT FEES AND SERVICES

     The information required by this Item is incorporated by reference to the
Proxy Statement under the heading "Corporate Governance - Committees of the
Board of Directors - The Audit Committee."







                                       33
<PAGE>


                                     PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES


(a) 1.  Consolidated Financial Statements

        The required information is contained in Appendix A attached hereto.

    2.  Financial Statement Schedule (Schedule II)

    3.       Exhibits
    3.1      Merger Agreement and Plan of Merger, dated June 5, 2006, among
             American Physicians Service Group, Inc., APSG ACQCO, Inc., and
             American Physicians Insurance Exchange, as amended. (15)

    3.2      Restated Articles of Incorporation of American Physicians Service
             Group, Inc., as amended (4)

    3.3      Amended and Restated Bylaws of American Physicians Service Group,
             Inc. (17)

    4.1      Specimen of Common Stock Certificate of American Physicians Service
             Group, Inc. (2)

    4.2      Rights Agreement, dated as of August 15, 1999, between American
             Physicians Service Group, Inc. and American Stock Transfer & Trust
             Company, which includes the form of Statement of Resolutions
             setting forth the terms of the Junior Participating Preferred
             Stock, Series A, the form of Rights Certificate as Exhibit B and
             the Summary of Rights to Purchase Preferred Shares as Exhibit C.(8)

 *  10.1     1995 Incentive and Non-Qualified Stock Option Plan of American
             Physicians Service Group, Inc. (5)

 *  10.2     Form of Stock Option Agreement (ISO). (5)
 *  10.3     Form of Stock Option Agreement (Non-Qualified). (5)
    10.4     Management Agreement of Attorney-in-Fact, dated August 13, 1975,
             between FMI and American Physicians Insurance Exchange. (2)

 *  10.5     Profit Sharing Plan and Trust, effective December 1, 1984, of
             American Physicians Service Group, Inc. (3)

 *  10.6     First Amendment to 1995 Incentive and Non-Qualified Stock Option
             Plan of American Physicians Service Group, Inc. Dated December 10,
             1997. (6)

 *  10.7     First Amendment to 1995 Non-Employee Director Stock Option Plan of
             American Physicians Service Group, Inc. Dated December 10, 1997.(6)

 *  10.8     2005 Incentive and Non-Qualified Stock Option Plan. (14)
 *  10.9     Deferred Compensation Master Plan. (14)
    10.10    Agreement dated November 1, 2002 transferring and assigning all
             capital stock of Eco-Systems from American Physicians Service
             Group, Inc. to the purchaser. (11)

 *  10.11    Amended 1995 Incentive and Non-Qualified Stock Option Plan. (11)
    10.12    Executive Employment Agreement between American Physicians Service
             Group, Inc. and Kenneth S. Shifrin. (11)

 *  10.13    Consulting Agreement between American Physicians Service Group,
             Inc. and William A. Searles. (11)

 *  10.14    Executive Employment Agreement between American Physicians Service
             Group, Inc. and William H. Hayes. (11)

 *  10.15    Executive Employment Agreement between American Physicians Service
             Group, Inc. and Maury L. Magids. (17)


                                       34
<PAGE>

    10.16    Stock Purchase Agreement dated October 1, 2003 between American
             Physicians Service Group, Inc. and FPIC Insurance Group, Inc. (12)

    10.17    Revolving Promissory Note dated April 15, 2004 between American
             Physicians Service Group, Inc. and PlainsCapital Bank. (13)

    10.18    Commercial Loan Agreement dated April 15, 2004 between American
             Physicians Service Group, Inc. and PlainsCapital Bank. (13)

    10.19    Managing General Agency Agreement between American Physicians
             Insurance Agency, Inc. and American Physicians Insurance Exchange,
             effective as of May 29, 1996. (16)

    10.20    Management Agreement of Attorney-in-Fact for American Physicians
             Insurance Exchange, effective as of October 1, 1975. (16)

     21.1    List of subsidiaries of American Physicians Service Group, Inc.(17)
     23.1    Independent Registered Public Accountants Consent of BDO Seidman,
             LLP. (17)
     31.1    Certification of Chief Executive Officer Pursuant to Section 302 of
             the Sarbanes-Oxley Act of 2002. (17)
     31.2    Certification of Chief Financial Officer Pursuant to Section 302 of
             the Sarbanes-Oxley Act of 2002. (17)
     32.1    Certification of Chief Executive Officer Pursuant to Section 906 of
             the Sarbanes-Oxley Act of 2002. (17)
     32.2    Certification of Chief Financial Officer Pursuant to Section 906 of
             the Sarbanes-Oxley Act of 2002. (17)

    (*)      Executive Compensation plans and arrangements.




    (1)         The Company is subject to the informational requirements of the
                Exchange Act and, in accordance therewith, files reports, proxy
                statements and other information with the SEC. Reports, proxy
                statements and other information filed by the Company can be
                inspected and copied at the public reference facilities
                maintained by the SEC at 450 Fifth Street, N.W., Washington,
                D.C. 20549, and at the SEC'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 SEC 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 and 1735 K STREET, N.W.,
                WASHINGTON, D.C. 20006. The SEC maintains a Web site that
                contains reports, proxy and information statements and other
                information regarding registrants that file electronically with
                the SEC 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 Annual Report  on Form  10-K of the
                Company for the year ended December 31, 1990 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,  1995 and incorporated
                herein by reference.

    (6)         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.

    (7)         Filed as an  Exhibit  to the  Annual Report on Form  10-K of the
                Company  for the year ended December 31, 1998 and incorporated
                herein by reference.


                                       35
<PAGE>

    (8)         Filed as an Exhibit to the Current Report on Form 8-K of the
                Company dated September 22, 1999 and incorporated  herein by
                reference.

    (9)         Filed as an  Exhibit to the  Annual Report  on Form  10-K of the
                Company  for the year ended  December 31, 1999 and incorporated
                herein by reference.

    (10)        Filed as an  Exhibit  to the Annual  Report on Form  10-K of the
                Company  for the year ended December 31, 2000 and incorporated
                herein by reference.

    (11)        Filed as an  Exhibit to the  Annual Report  on Form  10-K of the
                Company  for the year ended December 31,  2002 and incorporated
                herein by reference.

    (12)        Filed as an  Exhibit to the  Annual  Report  on Form 10-K of the
                Company  for the year ended  December 31, 2003 and incorporated
                herein by reference.

    (13)        Filed as an Exhibit to the Annual Report on Form 10-K of the
                Company for the year ended December 31, 2004.

    (14)        Filed as an Exhibit to the Current Report on Form 8-K of the
                Company dated June 17, 2005.

    (15)        Filed as an Exhibit to the Current  Report on Form 8-K of the
                Company  dated August 25, 2006 and  incorporated  herein by
                reference

    (16)        Filed as an Exhibit to the Registration Statement on Form S-4/A,
                Registration No. 333-137012, of the Company, filed January 26,
                2007 and incorporated herein by reference.
    (17)        Filed herewith.



                                   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 30, 2007

            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 30, 2007


                                       36
<PAGE>



            By:  /s/ W. H. Hayes
                ----------------------
                 W. H. Hayes
                 Senior Vice President - Finance, Secretary
                 and Chief Financial Officer

          Date:  March 30, 2007


            By:  /s/ Thomas R. Solimine
                -------------------------
                 Thomas R. Solimine
                 Controller
                 (Principal Accounting Officer)

          Date:  March 30, 2007


            By:  /s/ Lew N. Little, Jr.
                 ---------------------
                  Lew N. Little, Jr., Director

          Date:  March 30, 2007


            By:  /s/ Jackie Majors
                ------------------------
                 Jackie Majors, Director

          Date:  March 30, 2007


            By:  /s/ William A. Searles
                --------------------------
                 William A. Searles, Director



          Date:  March 30, 2007


            By:   /s/ Cheryl Williams
                ---------------------------
                  Cheryl Williams, Director

          Date:  March 30, 2007


                                       37

<PAGE>




                                   APPENDIX A




                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



                                                                      PAGE


  Report of Independent Registered Public Accounting Firm              A-2

  Consolidated Financial Statements

    Consolidated Statements of Income for the Years                    A-3
    ended December 31, 2006, 2005 and 2004

    Consolidated Balance Sheets as of December 31, 2006                A-5
    and December 31, 2005

    Consolidated Statements of Cash Flows for the Years                A-7
    ended December 31, 2006, 2005 and 2004

    Consolidated Statements of Shareholders' Equity and                A-9
    Comprehensive Income for the Years ended December 31,
    2006, 2005 and 2004

    Notes to Consolidated Financial Statements                        A-11




                                      A-1



             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Stockholders
American Physicians Services Group, Inc.
Austin, Texas

We have audited the accompanying consolidated balance sheets of American
Physicians Services Group, Inc. as of December 31, 2006 and 2005, and the
related consolidated statements of income, stockholders' equity and
comprehensive income (loss), and cash flows for each of the three years in the
period ended December 31, 2006. We have also audited the schedule listed in the
accompanying index. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and schedule are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and schedule, assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statements and schedule 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
Services Group, Inc. at December 31, 2006 and 2005, and the results of its
operations and its cash flows for the each of the three years in the period
ended December 31, 2006, in conformity with accounting principles generally
accepted in the United States of America.

Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.

As discussed in Note 13 to the consolidated financial statements, effective
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
No. 123 (R), Share Based Payment.


BDO Seidman, LLP

Houston, Texas
March 26, 2007



                                      A-2
<PAGE>




                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
                        CONSOLIDATED STATEMENTS OF INCOME


(In thousands)
<TABLE>
<CAPTION>

                                                                              Year Ended December 31,
                                                                      2006               2005                2004
                                                                  ------------      --------------      --------------

<S>                                                                 <C>                 <C>                 <C>
Revenues:
Insurance services                                                  $ 15,555            $ 15,514            $ 15,316
Financial services                                                    16,805              18,459              16,705
                                                                     --------           ---------           ---------
  Total revenues                                                      32,360              33,973              32,021
                                                                     --------           ---------           ---------

Expenses (Income):
Insurance services                                                    11,262              10,262               9,968
Financial services                                                    15,145              16,263              14,538
General and administrative                                             2,128               2,737               2,227
Gain on sale of assets                                                   (29)               (134)                (56)
                                                                     --------           ---------           ---------
  Total expenses, net                                                 28,506              29,128              26,677
                                                                     --------           ---------           ---------

Operating income                                                       3,854               4,845               5,344
Gain on investments (Note 6)                                             259               3,160                 245
Loss on impairment of investments (Note 6)                               (19)               (217)             (2,567)
Gain on extinguishment of debt                                            --                  24                  75
                                                                      --------          ---------           ---------

Income from operations before interest,
income taxes, minority interests and equity in earnings
of unconsolidated affiliates                                           4,094               7,812               3,097

Interest income                                                          915                 587                 365
Other income                                                              49                 124                  15
Interest expense                                                          19                  10                   7
Income tax expense (Note 11)                                           1,839               3,039               1,317
Minority interests                                                         6                  14                   1
                                                                      -------            --------           ---------

    Net income                                                       $ 3,194             $ 5,460             $ 2,152
                                                                     ========            ========           =========

</TABLE>


See accompanying notes to condensed consolidated financial statements.


                                      A-3
<PAGE>


                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
                  CONSOLIDATED STATEMENTS OF INCOME, continued

(In thousands, except per share amounts)


                                            Year Ended December 31,

                                         2006          2005         2004
                                        ------        ------       ------
Net income per common share:

Basic:
   Net income                           $ 1.15        $ 2.03        $ 0.85
                                        ======        ======        ======

Diluted:
   Net income                           $ 1.09        $ 1.86        $ 0.76
                                        ======        ======        ======
Basic weighted average shares
  outstanding                            2,774         2,688         2,545
                                        ======        ======        ======
Diluted weighted average shares
  outstanding                            2,933         2,931         2,838
                                        ======        ======        ======













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

                                      A-4
<PAGE>

                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
                           CONSOLIDATED BALANCE SHEETS


(In thousands)
<TABLE>
<CAPTION>

                                                                                           December 31,
                                                                                   2006                      2005
                                                                               -------------             -------------
ASSETS

Current Assets:
<S>                                                                                 <C>                       <C>
  Cash and cash equivalents                                                         $ 4,242                   $ 6,231
  Cash - restricted (Note 2)                                                          1,880                       449
  Trade receivables, net                                                                  1                        42
  Notes receivable (Note 4)                                                             817                       599
  Management fees and other receivables                                               2,932                     3,192
  Deposit with clearing organization                                                    501                       501
  Investment in available-for-sale fixed income
    securities - current                                                             14,746                     9,662
  Deferred income taxes                                                                 129                       355
  Prepaid expenses and other                                                            686                       632
                                                                                  ----------                 ---------
      Total current assets                                                           25,934                    21,663


Notes receivable, less current portion (Note 4)                                          --                       326
Property and equipment, net (Note 7)                                                    556                       687
Investment in available-for-sale securities:
   Equity                                                                             4,403                     5,017
   Fixed Income                                                                       1,890                     3,584
Deferred income taxes                                                                 1,192                       686
Goodwill                                                                              1,247                     1,247
Other assets                                                                          1,054                       295
                                                                                  ----------                 ---------
Total assets                                                                        $36,276                   $33,505
                                                                                  ==========                 =========


</TABLE>






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

                                      A-5
<PAGE>

                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
                     CONSOLIDATED BALANCE SHEETS, continued



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


                                                                                                   December 31,
                                                                                            2006                   2005
                                                                                        -------------          -------------
LIABILITIES, MINORITY INTEREST AND
SHAREHOLDERS' EQUITY

Current liabilities:
<S>                                                                                          <C>                     <C>
  Accounts payable                                                                           $ 2,228                 $  736
  Accrued incentive compensation                                                               2,279                  2,595
  Accrued expenses and other liabilities (Note 8)                                              1,920                  1,912
  Federal income tax payable                                                                     136                     71
  Deferred gain - current                                                                        124                    469
                                                                                            ---------              ---------
      Total current liabilities                                                                6,687                  5,783
                                                                                            ---------              ---------

      Total liabilities                                                                        6,687                  5,783
                                                                                            ---------              ---------

Minority interests                                                                                21                     15
Commitments and contingencies (Note 10)

Shareholders' Equity:
  Preferred stock, $1.00 par value, 1,000,000
    shares authorized, none issued or outstanding                                                 --                     --
  Common stock, $0.10 par value, shares authorized 20,000,000;
    2,817,746 and 2,784,120 issued and outstanding
    at 12/31/06 and 12/31/05, respectively (Note 18)                                             282                    278
  Additional paid-in capital                                                                   7,944                  8,204
  Retained earnings                                                                           21,111                 18,737
  Accumulated other comprehensive income, net of taxes                                           231                    488
                                                                                            ---------              ---------
      Total shareholders' equity                                                              29,568                 27,707
                                                                                            ---------              ---------

Total liabilities, minority interest and shareholders' equity                                $36,276                $33,505
                                                                                            =========              =========


</TABLE>






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


                                      A-6
<PAGE>


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


     (in thousands)
<TABLE>
<CAPTION>
                                                                                         Year Ended December 31,
                                                                               2006               2005               2004
                                                                            ------------       ------------       ------------
Cash flows from operating activities:
<S>                                                                             <C>                <C>                <C>
     Net Income                                                                 $ 3,194            $ 5,460            $ 2,152
     Adjustments to reconcile net income to cash
        provided by operating activities:
           Depreciation and amortization                                            421                364                304
           Amortization of loans and other                                          330                297                 39
           Common stock awarded                                                     316                159                231
           Minority interest in consolidated subsidiaries                             6                 14                  1
           Gain on sale of assets                                                   (29)              (134)               (56)
           Deferred gain on sale of building                                       (422)              (513)              (488)
           Gain on investments                                                     (259)            (3,160)              (245)
           Impairment of investment                                                  19                217              2,567
           Excess tax benefits from stock-based compensation                         --                708                589
           Deferred income tax                                                     (280)              (577)               744
           Stock options expensed                                                   226                 --                 --
     Changes in operating assets and liabilities:
           Trade receivables                                                         41                (23)              (179)
           Trading account securities                                                --                 --                 67
           Income tax payable                                                        65                (28)             1,602
           Receivable from clearing organization                                     --                159                 --
           Deferred compensation                                                    195                150                 --
           Management fees & other receivables                                      260             (1,377)              (746)
           Prepaid expenses & other assets                                         (952)               (81)               (74)
           Deferred income                                                          106                 --                 --
           Trade payables                                                            61                 21                 66
           Accrued expenses & other liabilities                                    (387)               208             (1,117)
                                                                                --------           --------           --------
              Net cash provided by operating activities                           2,911              1,864              5,457
                                                                                --------           --------           --------

Cash flows from investing activities:
     Capital expenditures                                                          (166)              (307)              (421)
     Proceeds from the sale of available-for-sale equity
        and fixed income securities                                              11,669              8,503              1,116
     Purchase of available-for-sale equity securities                           (14,563)           (11,688)            (4,405)
     Funds loaned to others                                                        (264)              (810)              (620)
     Collection of notes receivable                                                  42                346                 20
                                                                                --------           --------           --------
              Net cash used in  investing activities                             (3,282)            (3,956)            (4,310)
                                                                                --------           --------           --------

Cash flows from financing activities:
     Exercise of stock options                                                      986              1,036                758
     Purchase and cancellation of treasury stock                                 (2,388)            (1,715)              (703)
     Excess tax benefits from stock-based compensation                              604                 --                 --
     Dividends paid                                                                (820)              (671)              (518)
                                                                                --------           --------           --------
              Net cash used in financing activities                              (1,618)            (1,350)              (463)
                                                                                --------           --------           --------

Net change in cash and cash equivalents                                          (1,989)            (3,442)               684

Cash and cash equivalents at beginning of period                                  6,231              9,673              8,989
                                                                                --------           --------           --------
Cash and cash equivalents at end of period                                      $ 4,242            $ 6,231            $ 9,673
                                                                                ========           ========           ========
</TABLE>

                                      A-7
<PAGE>



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



              (in thousands)
<TABLE>
<CAPTION>
                                                                                    December 31,
                                                               2006                      2005                 2004
                                                           --------------          -----------------       ------------
Supplemental information:
<S>                                                              <C>                        <C>                 <C>
              Cash paid for taxes, net of refunds                $ 1,168                    $ 2,606             $ (523)
              Cash paid for interest                                  19                         10                  7



</TABLE>






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

                                      A-8
<PAGE>

                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)

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

                                                                                          Accumulated
                                                Additional                                   Other                        Total
                                      Common      Paid-In    Retained   Comprehensive    Comprehensive     Treasury   Shareholders'
                                       Stock      Capital    Earnings       Income       Income (loss)      Stock        Equity
                                    ------------------------------------------------------------------------------------------------

<S>                                    <C>        <C>         <C>       <C>                 <C>             <C>         <C>
Balance December 31, 2003              $245       $6,918      $12,314   $ --                ($371)          $ --        $19,106
Comprehensive income:
Net income                              --          --         2,152    2,152                 --              --          2,152
Other comprehensive income,
  net of tax:
Unrealized gain on securities,
   net of reclassification
   adjustment (Note 21)                 --          --          --      2,452                2,452            --          2,452
Comprehensive income                    --          --          --      4,604                 --              --           --
Treasury stock purchases                --          --          --      --                    --            (703)         (703)
Retired treasury stock                  (7)        (696)        --      --                    --             703           --
Stock options exercised                 25          733         --      --                    --              --           758
Tax benefit from exercise
of stock options                        --          589         --      --                    --              --           589
Dividend paid (per share - $0.20)       --          --         (518)    --                    --              --          (518)
Deferred stock grants                    2          229         --      --                    --              --           231
Forgiveness of Uncommon Care Debt       --          146         --      --                    --              --           146

                                    ------------------------------------------------------------------------------------------------
Balance December 31, 2004              $265       $7,919      $13,948   $ --                $2,081         $ --          $24,213
                                    ================================================================================================

Other comprehensive income,
  net of tax:                           --          --         5,460        5,460             --              --          5,460
Unrealized gain on securities,
   net of reclassification
   adjustment (Note 21)                 --          --          --      (1,593)             (1,593)           --         (1,593)
Comprehensive income                    --          --          --          3,867             --              --           --
Treasury stock purchases                --          --          --            --              --           (1,715)       (1,715)
Stock options exercised                 25         1,011        --            --              --              --          1,036
Tax benefit from exercise
of stock options                        --          708         --            --              --              --           708
Dividend paid (per share - $0.25)       --          --         (671)          --              --              --          (671)
Cancelled treasury stock               (14)       (1,701)       --                            --            1,715          --
Forgiveness of Uncommon Care debt       --         (40)         --            --              --              --          (40)
Deferred stock grants                    1          158         --            --              --              --           159
Deferred Compensation                    1          149         --            --              --              --           150
                                    ------------------------------------------------------------------------------------------------
Balance December 31, 2005              $278       $8,204      $18,737   --                   $488        --              $27,707
                                    ================================================================================================
</TABLE>


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


                                      A-9
<PAGE>

                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)


(In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                                           Accumulated
                                                 Additional                                   Other                        Total
                                       Common      Paid-In    Retained   Comprehensive    Comprehensive     Treasury   Shareholders'
                                       Stock       Capital    Earnings       Income       Income (loss)      Stock        Equity
                                    ------------------------------------------------------------------------------------------------
<S>                                     <C>        <C>        <C>           <C>               <C>            <C>          <C>
Balance December 31, 2005               $278       $8,204     $18,737       $ --              $488           $ --         $27,707
                                    ------------------------------------------------------------------------------------------------
Comprehensive income:
Net income                               --          --         3,194        3,194             --              --          3,194
Other comprehensive income,
  net of tax:
Unrealized gain on securities,           --          --          --          (257)            (257)            --          (257)
   net of reclassification               --          --          --          2,937             --              --           --
   adjustment (Note 21)                  --          --          --            --              --           (2,388)       (2,388)
Stock options expensed                   --          226         --            --              --              --           226
Stock options exercised                  18          968         --            --              --              --           986
Tax benefit from exercise
of stock options                         --          604         --            --              --              --           604
Dividend paid (per share - $0.30)        --          --         (820)          --              --              --          (820)
Cancelled treasury stock                (16)       (2,372)       --            --              --            2,388          --
Deferred stock grants                     2          314         --            --              --              --           316
                                    ------------------------------------------------------------------------------------------------
Balance December 31, 2006               $282       $7,944     $21,111          --             $231             --         $29,568
                                    ================================================================================================


</TABLE>






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


                                      A-10

<PAGE>



                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2006, 2005 and 2004

(1)      Summary of Significant Accounting Policies

         (a)      General

         We, through our subsidiaries, provide financial services that include
         brokerage and asset management services to individuals and
         institutions, and insurance services that consist of management
         services for a medical malpractice insurance company. The financial
         services business has clients nationally. Insurance management is a
         service provided primarily in Texas, but is available to clients
         nationally. During the three years presented in the consolidated
         financial statements, financial services generated 52%, 54% and 52% of
         total revenues and insurance services generated 48%, 46% and 48% in
         2006, 2005 and 2004, respectively.

         (b)      Management's Estimates and Assumptions

         The preparation of financial statements in conformity with accounting
         principles generally accepted in the United States of America 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 consolidated 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 our accounts and the
         accounts of our subsidiary companies more than 50% owned. Investments
         in affiliated companies and other entities, in which our investment is
         less than 50% of the common shares outstanding and where we exert
         significant influence over operating and financial policies, are
         accounted for using the equity method. Investments in other entities in
         which our investment is less than 20%, and in which we do not have the
         ability to exercise significant influence over operating and financial
         policies, are accounted for using the cost method. In the event that we
         retain sufficient risk of loss in a disposed subsidiary to preclude us
         from recognizing the transaction as a divestiture, we would continue to
         consolidate the subsidiary as an entity in which we have a variable
         interest under the guidance of Financial Accounting Standards Board
         Interpretation No. 46 Revised, Consolidation of Variable Interest
         Entities, or FIN 46R.

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

         (d)      Revenue Recognition

         Our investment services revenues related to securities transactions are
         recognized on a trade date basis. Asset management revenues are
         recognized monthly based on the amount of funds under management.

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


                                      A-11
<PAGE>


(1)      Summary of Significant Accounting Policies, continued

         (e)      Marketable Securities

         Our 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 in
                                      equity as a component of accumulated
                                      other comprehensive income, net of
                                      applicable income taxes. Realized gains
                                      and losses are included in earnings.



         We have included our marketable securities, held as inventory at our
         broker/dealer, in the trading securities category. We have included
         investments in marketable securities not held as inventory at our
         broker/dealer in the available-for-sale securities category.

         We account for our equity and fixed income securities as
         available-for-sale. In the event a decline in fair value of an
         investment occurs, management may be required to determine if the
         decline in market value is other than temporary. Management's
         assessments as to the nature of a decline in fair value are based on
         the quoted market prices at the end of a period, the length of time an
         investment's fair value has been in decline and our ability and intent
         to hold the investment. If the fair value is less than the carrying
         value and the decline is determined to be other than temporary, an
         appropriate write-down is recorded against earnings.

         (f)      Property and Equipment

         Property and equipment is stated at cost net of accumulated
         depreciation and amortization. Property and equipment is depreciated
         using the straight-line method over the estimated useful lives of the
         respective assets (3 to 5 years). Leasehold improvements are amortized
         using the straight-line method over the life of the lease or their
         expected useful life, whichever is shorter.

         (g)      Long-Lived Assets

         Long-lived assets, principally property and equipment, are reviewed for
         impairment annually at year-end or whenever events or changes in
         circumstances indicate that the carrying amount may not be recoverable.


                                      A-12
<PAGE>


(1)      Summary of Significant Accounting Policies, continued

         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.
         Current management analysis indicates that there is no impairment of
         long-lived assets.

         Investments are evaluated for impairment in the event of a material
         change in the underlying business. Such evaluation takes into
         consideration our intent and time frame to hold or to dispose of the
         investment and takes into consideration available information,
         including recent transactions in the stock, expected changes in the
         operations or cash flows of the investee, or a combination of these and
         other factors. Management's evaluation of our investments resulted in
         impairment charges in 2006, 2005 and 2004, as described in Note 6 to
         these consolidated financial statements.

         (h)      Goodwill and Other Intangible Assets

         Goodwill represents the excess of cost over the fair value of net
         assets acquired. We account for goodwill and other intangible assets
         according to the Statement of Financial Accounting Standards ("SFAS")
         No. 142, "Goodwill and Other Intangible Assets", which addresses
         financial accounting and reporting matters for acquired goodwill and
         other intangible assets. Under the provision of SFAS No. 142, goodwill
         is not amortized, but is evaluated annually for impairment or more
         frequently if circumstances indicate that impairment may exist. The
         goodwill valuation is largely influenced by projected future cash flows
         and, therefore, is significantly impacted by estimates and judgments.

         We amortize other identifiable intangible assets on a straight-line
         basis over the periods expected to be benefited. The components of
         these other intangible assets, recorded in Other Assets in the
         accompanying consolidated balance sheets, consist primarily of a
         non-compete agreement.

         (i)      Allowance for Doubtful Accounts

         When applicable, we record an allowance for doubtful accounts based on
         specifically identified amounts that we believe to be uncollectible.
         Management analyzes historical collection trends and changes in its
         customers' payment patterns, customer concentration and credit
         worthiness when evaluating its allowance for doubtful accounts. If our
         actual collections experience changes, revisions to our allowance may
         be required. We have a limited number of customers with individually
         large amounts due at any given balance sheet date. Any unanticipated
         change in one of those customers' credit standing or rating could have
         a material affect on our results of operations in the period in which
         such changes or events occur. After all attempts to collect a
         receivable have failed, the receivable is written off against the
         allowance.

         (j)      Income Taxes

         Income taxes are accounted for under the asset and liability method.
         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

                                      A-13
<PAGE>

(1)      Summary of Significant Accounting Policies, continued

         the period that includes the enactment date. A valuation allowance is
         provided for deferred tax assets to the extent realization is not
         judged to be more likely than not.

         (k)      Cash and Cash Equivalents

         Cash and cash equivalents include cash and highly liquid investments
         with a maturity date at purchase of 90 days or less. We deposit our
         cash and cash equivalents with high credit quality institutions.
         Periodically such balances may exceed applicable FDIC insurance limits.
         Management has assessed the financial condition of these institutions
         and believes the possibility of credit loss is minimal.

         (l)      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
         we will be unable to collect all amounts due according to the
         contractual terms of the note agreement. When a loan receivable 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 are reported as bad
         debt expense in the same manner in which impairment initially was
         recognized. No interest income is accrued on impaired loans. Cash
         receipts on impaired loans are recorded as reductions of the principal
         amount.

         (m)      Stock-Based Compensation

         At December 31, 2006, we have stock-based employee compensation plans,
         which are described more fully in Notes 12 and 13. On January 1, 2006
         we adopted SFAS No. 123(R), Share-Based Payment, a revision of the
         earlier SFAS 123, Accounting for Stock-Based Compensation. SFAS 123 (R)
         had concluded that services received from employees in exchange for
         stock-based compensation results in a cost to the employer that must be
         recognized in the financial statements at fair value. For the year
         ended December 31, 2006 we calculated stock-based compensation using
         the intrinsic value method. We estimate the fair value of stock option
         awards on the date of grant utilizing a modified Black-Scholes option
         pricing model. The Black-Scholes option valuation model was developed
         for use in estimating the fair value of short-term traded options that
         have no vesting restrictions and are fully transferable. However,
         certain assumptions used in the Black-Scholes model, such as expected
         term, can be adjusted to incorporate the unique characteristics of our
         stock option awards. Option valuation models require the input of t
         somewhat subjective assumptions including expected stock price
         volatility and expected term. We believe it is unlikely that materially
         different estimates for the assumptions used in estimating the fair
         value of stock option granted would be made based on conditions
         suggested by actual historical experience and other data available at
         the time estimates were made. Restricted stock awards are valued at the
         price of our common stock on the date of grant. We have elected the
         modified prospective transition method as permitted by SFAS No, 123(R)
         and accordingly prior periods have not been restated to reflect the
         impact of SFAS No. 123(R). SFAS No. 123(R) requires that stock-based
         compensation be recorded for all new and unvested stock options
         expected to vest as the requisite service is rendered beginning January
         1, 2006. Stock-based

                                      A-14
<PAGE>

(1)      Summary of Significant Accounting Policies, continued

         compensation expense for awards granted on or before December 31, 2005,
         but unvested as of that date, is based on the grant date fair value as
         determined under the pro forma provisions of SFAS No. 123.

         Prior to the adoption of SFAS No. 123(R) on January 1, 2006, we
         accounted for stock options under the disclosure-only provision of SFAS
         No. 123, but applied APB Option No. 25, "Accounting for Stock Issued to
         Employees", in accounting for our stock option plans. No compensation
         expense was recognized for the years ended December 31, 2005 and 2004
         under the provisions of APB No. 25. If we had elected to recognize
         compensation expense for options granted based on their fair values at
         the grant dates, consistent with Statement 123, net income and earnings
         per share would have changed to the pro forma amounts indicated below:

<TABLE>
<CAPTION>

                                                                                            Year Ended December 31
                                                                                        2005               2004
                                                                                        ----               ----
         <S>                                                                         <C>               <C>
         Net income as reported                                                      $ 5,460,000       $ 2,152,000

         Deduct: Total additional stock-based employee compensation
         expense determined under fair value based method for all awards,
         net of related tax effects                                                     (421,000)         (550,000)
                                                                                         -------           -------


                  Pro forma net income                                               $ 5,039,000       $ 1,602,000
                                                                                       =========         =========

         Net income per share

                  Basic - as reported                                                $      2.03       $      0.85
                                                                                            ====              ====
                  Basic - pro forma                                                  $      1.87       $      0.63
                                                                                            ====              ====
                  Diluted - as reported                                              $      1.86       $      0.76
                                                                                            ====              ====
                  Diluted - pro forma                                                $      1.72       $      0.56
                                                                                            ====              ====

</TABLE>



         The stock-based employee compensation expense above was determined
         using the Black Scholes option-pricing model with the following
         assumptions:

                                                 2005                2004
                                              ------------        ------------
Risk-free interest rate                          4.33%               3.03%
Expected holding period                        3.6 years           3.8 years
Expected volatility                              .363                .429
Expected dividend yield                         2.15%                 -0-


         For the year ended December 31, 2006 we recorded compensation cost
         related to stock options of $225,000 and a related reduction in income
         taxes of $77,000. The compensation cost is the total fair value, at
         date of grant, of shares that vested during the year.


                                      A-15
<PAGE>


(1)      Summary of Significant Accounting Policies, continued

         The effect of adopting SFAS No 123(R) on selected reported items is as
         follows:


                                                            2006
                                               -------------------------------
                                                                  Impact of
                                              As Reported        SFAS No. 123R
                                              -----------        -------------
  Income before income taxes                  $ 5,033,000         $ 225,000
  Net income                                    3,194,000           148,000
  Basic earnings per share                           1.15               .05
  Diluted earnings per share                         1.09               .05
  Cash flows used in financing activities     $ 1,618,000         $ 604,000




         (n)      Recently Issued Accounting Pronouncements

         In February, 2006 the Financial Accounting Standards Board issued
         Statement of Financial Accounting Standards, or SFAS, No. 155,
         Accounting for Certain Hybrid Financial Instruments, an amendment of
         FASB Statements No. 133 and 140. SFAS 155 becomes effective for all
         financial instruments acquired or issued after the beginning of an
         entity's first fiscal year that begins after September 15, 2006. This
         Statement permits fair value remeasurement for any hybrid financial
         instrument that contains an embedded derivative that otherwise would
         require bifurcation; clarifies which interest-only strips and
         principal-only strips are not subject to the requirements of Statement
         133; establishes a requirement to evaluate interests in securitized
         financial assets to identify interests that are freestanding
         derivatives or that are hybrid financial instruments that contain an
         embedded derivative requiring bifurcation; clarifies that
         concentrations of credit risk in the form of subordination are not
         embedded derivatives; and amends Statement 140 to eliminate the
         prohibition on a qualifying special-purpose entity from holding a
         derivative financial instrument that pertains to a beneficial interest
         other than another derivative financial instrument. We do not expect
         the adoption of this standard to have a material effect on our
         financial position, results of operations or cash flows.

         In July 2006, the Financial Accounting Standards Board (FASB) issued
         FASB Interpretation No. 48, Accounting for Uncertainty in Income
         Taxes--an interpretation of FASB Statement No. 109 (FIN 48), which
         clarifies the accounting and disclosure for uncertainty in tax
         positions, as defined. FIN 48 seeks to reduce the diversity in practice
         associated with certain aspects of the recognition and measurement
         related to accounting for income taxes. This interpretation is
         effective for fiscal years beginning after December 15, 2006. We have
         not yet determined the impact this interpretation will have on our
         results from operations or financial position.

         In September 2006, the Financial Accounting Standards Board (FASB)
         issued Statement of Financial Accounting Standards, or SFAS No. 157,
         "Accounting for Fair Value Measurements", effective for fiscal years
         beginning after November 15, 2007. This Statement defines fair value,
         establishes a framework for measuring fair value in generally accepted
         accounting principles (GAAP) and expands disclosures about fair value
         measurements.


                                      A-16
<PAGE>


(1)      Summary of Significant Accounting Policies, continued

         Accordingly, this Statement does not require any new fair value
         measurements. However, for some entities, the application of this
         Statement will change current practice. We do not expect the adoption
         of this standard to have a material effect on our financial position,
         results of operations or cash flows.

         (o)      Reclassification

         Certain reclassifications have been made to amounts presented in 2005
         and 2004 to be consistent with the 2006 presentation.

(2)      Cash - Restricted

         Restricted cash represents cash deposits advanced from customers for
         trade claim transactions that do not close by the end of the period. It
         occurs when a customer remits payment for a transaction by check
         instead of via wire transfer. As checks of this size normally take
         several business days to clear, we ask our customers to pay in advance
         for transactions expected to close in the near future. At the time of
         receipt, Cash - Restricted and Accounts Payable are increased for an
         equal amount as no part of this cash is ours until the transaction
         closes.

(3)      Management Fees and Other Receivables

         Management fees and other receivables consist of the following:

                                                      December 31,
                                              2006                   2005

        Management fees receivable        $ 2,672,000            $2 ,723,000
        Accrued interest receivable           197,000                125,000
        Other receivables                      63,000                344,000
                                           ----------             ----------
                                          $ 2,932,000            $3 ,192,000


         We earn management fees by providing management services to American
         Physicians Insurance Exchange ("APIE") under the direction of APIE's
         Board of Directors. APIE is a reciprocal insurance exchange, which is
         wholly-owned by its subscriber physicians. Subject to the direction of
         APIE's Board, and subject to a management services agreement, APS
         Facilities Management, Inc., or FMI, sells and issues medical insurance
         policies, investigates, settles and defends claims, and otherwise
         manages APIE's day to day operations. The management agreement with FMI
         obligates APIE to pay management fees to FMI based on a percentage of
         APIE's earned premiums before payment of reinsurance premiums. In
         addition, the management agreement provides that any profits, as
         defined, of APIE will be shared equally with FMI (profit sharing) so
         long as the total amount does not exceed 3% of earned premiums.
         Management fees attributable to profit sharing were $1,994,000,
         $2,007,000, and $1,929,000 for the years ended December 31, 2006, 2005
         and 2004, respectively. We earned total management fees and other
         related income of


                                      A-18
<PAGE>

(3)      Management Fees and Other Receivables, continued

         $15,555,000, $15,514,000 and $15,316,000, including expense
         reimbursements, principally for our independent agents' commissions, of
         $4,646,000, $4,376,000 and $4,482,000, for the years ended December 31,
         2006, 2005 and 2004, respectively, related to these agreements.

         The summarized financial information for APIE as of and for the year
         ended December 31, 2006, 2005 and 2004 is as follows:
<TABLE>
<CAPTION>

                                          2006                     2005                     2004
                                       (unaudited)              (unaudited)              (unaudited)
                                      -------------            -------------            --------------
<S>                                    <C>                      <C>                       <C>
Invested assets                        $139,625,000             $113,233,000              $97,874,000
Other assets                             65,765,000               61,600,000               47,854,000
                                       ------------             ------------             ------------
Total Assets                           $205,390,000             $174,833,000             $145,728,000
                                       ============             ============             ============

Liabilities                            $170,494,000             $155,591,000             $133,827,000
Members' equity                          34,896,000               19,242,000               11,901,000
                                       ------------             ------------             ------------
Total liablilities and surplus         $205,390,000             $174,833,000             $145,728,000
                                       ============             ============             ============

Total revenue                           $77,331,000              $69,866,000              $69,313,000
                                       ============             ============             ============
Net income                              $15,929,000              $ 9,031,000              $ 5,815,000
                                       ============             ============             ============

</TABLE>

         Other receivables in 2006 2005 and 2004 are primarily from our
         brokerage and investment advisory services and are principally
         comprised of commissions earned by our brokers for trades in the last
         week of December 2006, 2005 and 2004.

(4)      Notes Receivable

         Notes receivable consist of the following:

<TABLE>
<CAPTION>

                                                                                                              December 31,
                                                                                                         2006             2005
         <S>                                                                                           <C>               <C>
         FEMPARTNERS, INC. (Formerly due from Syntera HealthCare Corporation)
         Originally due September 1, 2004, the note has been amended three times
         since December 2003. Each amendment has extended the note and modified
         the payment terms. The current amendment calls for payments of interest
         plus principal of $10,000, quarterly, through 2007. The note is
         scheduled to be repaid in full in 2007 in three quarterly payments. The
         note contains an acceleration clause in the event that FemPartners
         conducts an initial public offering or other public sale.
                                                                                                       $350,000          $390,000
</TABLE>

                                      A-18
<PAGE>




 (4)     Notes Receivable, continued
<TABLE>
<CAPTION>

         ALIANZA

         <S>                                                                                            <C>                <C>
         Alianza identifies under-payments from insurance companies to medical
         providers and recovers the additional amounts. Alianza is expected to
         make loan payments totaling of $132,000 by May 31, 2007. The remaining
         $185,000 is to be paid from a guaranteed final payment at the
         conclusion of an arbitration hearing to be held no later than August
         31, 2007.                                                                                      317,000            301,000

         EMPLOYEES
         Forgivable loans receivable are periodically made to non-officer
         employees (brokers of APS  Financial), primarily  as  employment
         retention  inducements. Employee  notes receivable at December 31, 2006
         consisted of two notes of $119,000 and $25,000, which are  being
         amortized  as earned monthly through  December  2007  and  June  2007,
         respectively, provided the employees remain with us; and notes totaling
         $14,000 due currently. The total amount amortized is charged to
         salaries expense in the period in which the loan was amortized.

         Forgivable loans receivable at December 31, 2005 consisted of three
         notes of $73,000, $86,000, and $75,000, which are being amortized as
         earned through May 2006, December 2006, and June 2007, respectively,
         provided the employees remain with us; and a note
         for $8,000 due currently.                                                                      158,000           242,000
                                                                                                        -------           -------
                                                                                                        825,000           933,000
         Less current portion and allowance for doubtful accounts of $8,000 and
         $8,000 in 2006 and 2005, respectively.                                                        (825,000)         (607,000)
                                                                                                       ---------         ---------
         Long term portion                                                                                   $0          $326,000
                                                                                                             ==          ========
</TABLE>




(5)      Fair Value of Financial Instruments

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

         Notes Receivable

         The fair value of notes has been determined using discounted cash flows
         based on our management's estimate of current interest rates for notes
         of similar credit quality. The carrying value of notes receivable
         approximates their fair value.

         Management Fees and Other Receivables

         Management fees are billed to APIE who pays in full within two weeks of
         notice. Through the course of our management relationship with APIE
         there has never been any write-offs of balances owed or other
         collection issues. As such, management has determined that there is no
         need for a reserve against the receivable balance. Therefore, the
         carrying value and the fair value of the receivable are the same.


                                      A-19
<PAGE>

(5)      Fair Value of Financial Instruments, continued

         Deposit with Capital Organization

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

         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 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. 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.

(6)      Marketable Securities

         The following table summarizes by major security type the cost, fair
         market value, and unrealized gains and losses of the investments that
         we have classified as available-for-sale:
<TABLE>
<CAPTION>


                                                                  Gross             Gross
                                                               Unrealized        Unrealized            Fair
                                             Cost                 Gains            Losses             Value
                                        ---------------------------------------------------------------------------
        December 31, 2006

<S>                                       <C>                    <C>               <C>             <C>
        Governmental obligations          $ 15,934,000           $  11,000         $ (19,000)      $ 15,926,000
        Corporate obligations                  682,000              28,000                --            710,000
        Equity securities                    4,073,000             330,000                --          4,403,000
                                            ----------             -------           -------         ----------
        Total                             $ 20,689,000           $ 369,000         $ (19,000)      $ 21,039,000
                                            ==========             =======           =======         ==========
        December 31, 2005

        Governmental obligations          $ 12,418,000           $  12,000         $ (60,000)      $ 12,370,000
        Corporate obligations                  888,000               1,000           (13,000)           876,000
        Equity securities                    4,217,000             800,000                --          5,017,000
                                            ----------            --------           -------         -----------
        Total                             $ 17,523,000           $ 813,000         $ (73,000)      $ 18,263,000
                                            ==========            ========           =======         ===========

</TABLE>

         Amounts reflected in the table above include equity securities of
         HealthTronics with a fair value of $348,000 and $1,095,000 at December
         31, 2006 and 2005, respectively. At December 31, 2006 and 2005, amounts
         also include equity securities of Financial Industries Corporation
         ("FIC") with a fair value of $2,926,000 and $3,196,000, respectively.


                                      A-20
<PAGE>

(6)      Marketable Securities, continued

         Maturities of fixed income securities were as follows at December 31,
         2006:

                                                                 Fair
                                          Cost                   Value
                                      ------------            ------------
         Due within one year          $ 14,762,000           $ 14,746,000
         Due after one year              1,854,000              1,890,000
                                       -----------             ----------
         Total                        $ 16,616,000           $ 16,636,000
                                        ==========             ==========

         HealthTronics is the largest provider of lithotripsy (a non-invasive
         method of treating kidney stones) services in the United States and is
         an international supplier of specialty vehicles for the transport of
         high technology medical, broadcast/communications and homeland security
         equipment. Through selling of shares since our initial investment of
         3,540,000 shares in 1989, our holdings of common stock at December 31,
         2006 stood at 52,000 or less than 1% of the common stock outstanding.
         We account for HealthTronics as an available-for-sale equity security
         and record changes in its value, net of tax, in our balance sheet as
         part of "accumulated other comprehensive income."

         Financial Industries Corporation ("FIC") is a holding company primarily
         engaged in the life insurance business through ownership of several
         life insurance companies. In June 2003, we purchased from FIC and the
         Roy F. and Joann Mitte Foundation, 339,879 shares of FIC's common stock
         as an investment. Earlier in 2003 we had purchased 45,121 FIC shares in
         the open market. The 385,000 shares represented an approximate cost of
         $5,647,000, which was all sourced from our cash reserves. During 2004,
         the value of our investment in FIC had declined significantly. In
         October 2004, we determined that this decline in market price was
         "other than temporary" as defined in Statements of Financial Accounting
         Standards (SFAS) No. 115, Accounting for Certain Investments in Debt
         and Equity Securities, as amended. Consequently, we recorded pretax
         charges to earnings totaling $2,567,000 in 2004. These charges reduced
         our cost basis in FIC from $5,647,000, or $14.67 per share, to
         $3,080,000, or $8.00 per share which was equal to the quoted market
         price of FIC shares on December 31, 2004. During 2005 and 2006, we took
         additional pretax charges to earnings totaling $135,000 and $19,000,
         respectively, further reducing our cost basis in FIC to $2,926,000, or
         $7.60 per share. While we currently continue to have the ability and
         the intent to hold the stock indefinitely, we concluded that the
         additional uncertainty created by FIC's late filings, together with the
         lack of its current financial information, dictated that the declines
         should be viewed as other than temporary. Although FIC has now filed
         its 2004 and 2005 Forms10-K it is still delinquent in filing its 2006
         Forms 10-Q and thus continues to be de-listed on the NASDAQ Stock
         Market.

         We will continue to monitor and evaluate the situation at FIC and
         further determine if changes in fair market value of the investment are
         temporary or "other than temporary"

         The following table summarizes our recognized gains and losses on
         investments. Costs on assets sold were determined on the basis of
         specific identification.


                                      A-21
<PAGE>


(6)      Marketable Securities, continued
<TABLE>
<CAPTION>

                                                                     Year ended December 31,
                                                 -------------------------------------------------------------------------
                                                         2006                       2005                      2004
                                                       -------                    -------                   --------
<S>                                                 <C>                         <C>                      <C>
         Proceeds from sales                        $ 11,669,000                $ 8,503,000              $  1,116,000

         Gain on investments, net                        259,000                  3,160,000                   245,000
         Loss on impairment of investments               (19,000)                  (217,000)               (2,567,000)
                                                      ----------                 ----------                 ----------
         Net gains (losses)                            $ 240,000                $ 2,943,000              $ (2,322,000)
                                                      ==========                 ==========                ===========

</TABLE>


(7)      Property and Equipment

         Property and equipment consists of the following:

                                                 December 31,
                                     -------------------------------------
                                         2006                     2005
                                      ----------                ---------
         Equipment                    $ 952,000               $1,289,000
         Furniture                      543,000                  647,000
         Software                       825,000                  783,000
         Leasehold improvements         231,000                  332,000
                                      ---------                ---------
                                      2,551,000                3,051,000
         Accumulated depreciation
          and amortization           (1,995,000)              (2,364,000)
                                      ---------                ---------
                                      $ 556,000                $ 687,000
                                      =========                =========

         Property and equipment are stated at cost. Depreciation and
         amortization expense of $297,000, $239,000 and $181,000 in 2006, 2005
         and 2004, respectively, is computed principally on the straight-line
         method over the estimated useful lives of the assets. The useful lives
         for equipment ranges from three to five years, furniture ranges from
         five to seven years, software is depreciated over three years, and
         leasehold improvements are amortized over the life of the lease or
         their expected useful life, whichever is shorter.

(8)      Accrued Expenses and Other Liabilities

         Accrued expenses and other liabilities consist of the following as of
         December 31:

                                            2006                     2005
                                        -------------            -------------
         Commissions payable            $ 1,239,000              $ 1,258,000
         Taxes payable                      161,000                  219,000
         401(k) plan matching               213,000                  208,000
         Vacation payable                   170,000                  161,000
         Other                              137,000                   66,000
                                          ---------                ---------
                                        $ 1,920,000              $ 1,912,000
                                          =========                =========

                                      A-22
<PAGE>

(9)      Deferred Gain

         In November 2001 we sold all of the remaining 46,000 square feet of
         condominium space we owned in an office project located in Austin,
         Texas to our former affiliate, HealthTronics. In conjunction with the
         sale we leased back approximately 23,000 square feet that housed our
         operations prior to the sale. Gain on the sale amounted to
         approximately $5.1 million, of which $1.9 million was recognized in
         2001 and the balance of gain was deferred. Deferred income of
         approximately $2.4 million related to our continuing involvement in 50%
         of the useable space was recorded and was recognized monthly over the
         five-year lease term that ended in September 2006. Income recognition
         related to this deferral was $422,000 in 2006, $513,000 in 2005 and
         $488,000 in 2004. In addition, 15% of the gain ($0.76 million) related
         to our then

         15% ownership in the purchaser was deferred as we accounted for
         HealthTronics using the equity method of accounting through the year
         ended December 31, 2001. We reduced our investment in HealthTronics and
         subsequently recognized a proportionate percentage of the deferred
         gain, amounting to $30,000, $134,000 and $56,000 in 2006, 2005 and
         2004, respectively. Recognition of the deferred gains were recorded as
         a reduction of rent expense in operating expenses in the accompanying
         consolidated financial statements.

(10)     Commitments and Contingencies

         Rental expenses under all operating leases were $1,416,000, $1,133,000,
         and $1,098,000, for the years ended December 31, 2006, 2005 and 2004,
         respectively. Future minimum payments for leases that extend for more
         than one year through 2011 were $770,000; $687,000; $664,000; $643,000,
         and $662,000 for 2007, 2008, 2009, 2010 and 2011, respectively.

         We are 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 our consolidated financial condition or results of
         operations or cash flows.

(11)     Income Taxes

         Income tax expense consists of the following:
<TABLE>
<CAPTION>
                                                                      Year Ended December 31,
                                                -----------------------------------------------------------------------
                                                        2006                      2005                      2004
                                                     ---------                  --------                 ----------
         <S>                                        <C>                       <C>                       <C>
         Operations:
         Federal
           Current                                  $ 1,186,000               $ 2,577,000               $ 1,049,000
           Tax benefit of stock options                 604,000                   708,000                   589,000
           Deferred                                     (99,000)                 (446,000)                 (505,000)
         State-Current                                  148,000                   200,000                   184,000
                                                     ----------               -----------                ----------
         Total from Operations                      $ 1,839,000               $ 3,039,000               $ 1,317,000
                                                    ===========               ===========               ===========

</TABLE>

         A reconciliation of expected income tax expense computed by applying
         the United States federal statutory income tax rate of 34% to earnings
         from continuing operations before income taxes to tax expense from
         operations in the accompanying consolidated statements of income
         follows:


                                      A-23
<PAGE>

<TABLE>
<CAPTION>

                                                                       Year Ended December 31,
                                                  ---------------------------------------------------------------------
                                                         2006                      2005                     2004
                                                      ---------                 ---------                 ----------
         <S>                                         <C>                       <C>                      <C>
         Expected federal income tax
          expense from operations                    $ 1,712,000               $ 2,889,000              $ 1,179,000
         State taxes                                      98,000                   132,000                  121,000
         Other, net                                       29,000                    18,000                   17,000
                                                       ---------                 ---------                ----------
                                                     $ 1,839,000               $ 3,039,000              $ 1,317,000
                                                       =========                 =========                ==========
         Effective tax rate                                  37%                       36%                      38%


</TABLE>

         The tax effect of temporary differences that gives rise to significant
         portions of deferred tax assets and deferred tax liabilities at
         December 31, 2006 and 2005 are presented below:
<TABLE>
<CAPTION>


                                                                                  Year Ended December 31,
                                                                        -------------------------------------------
                                                                              2006                      2005
                                                                         ------------                ------------
        <S>                                                               <C>                       <C>
        Current deferred tax assets:
          Accrued expenses                                                $ 110,000                 $ 334,000
          Allowance for doubtful accounts                                    19,000                    21,000
                                                                          ---------                  --------
         Total current deferred tax asset                                   129,000                   355,000
                                                                          =========                  ========

        Non-current deferred tax assets (liabilities):
         Write-off of investment in excess of tax loss                      925,000                   946,000
         Deferred compensation and stock options                            380,000                        --
         Sales/Leaseback deferred income                                      6,000                   159,000
         Investment in available-for-sale securities                        (64,000)                 (175,000)
         Market value allowance on investments                             (119,000)                 (251,000)
         Other                                                              198,000                   168,000
         Tax depreciation in excess of book                                (134,000)                 (161,000)
                                                                         ----------                  --------
           Total non-current net deferred tax asset                       1,192,000                   686,000
                                                                         ==========                  =========

Net deferred tax asset                                                   $1,321,000                $1,041,000
                                                                         ==========                 =========

</TABLE>

         In assessing the realizability of deferred tax assets, management
         considers whether it is more likely than not that some portion or all
         of the deferred tax assets will not be realized. The ultimate
         realization of deferred tax assets is dependent upon the generation of
         future taxable income during the periods in which those temporary
         differences become deductible. Management considers the scheduled
         reversal of deferred tax liabilities, projected future taxable income
         and tax planning strategies in making this assessment. Based upon the
         level of historical taxable income and projections for future taxable
         income over the periods that the deferred tax assets are deductible,
         management believes it is more likely than not that we will realize the
         benefits of these deductible differences at December 31, 2006.


                                      A-24
<PAGE>

(12)     Employee Benefit Plans

         We have 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. Employee
         deferrals may not exceed $15,000 in 2006 unless participant is over age
         50, in which case the maximum deferral is $20,000. We may, at our
         discretion, contribute up to 200% of the employees' deferred amount.
         For the years ended December 31, 2006, 2005 and 2004 our contributions
         aggregated $213,000, $208,000 and $170,000, respectively.

         In December 2004, the Board of Directors approved the "American
         Physicians Service Group, Inc. Affiliate Group Deferred Compensation
         Master Plan" ("Deferred Compensation Plan"), a non-qualified
         compensation plan designed to give us more flexibility in compensating
         key employees and directors through ownership of our common stock. The
         adoption of the Deferred Compensation Plan was approved by our
         shareholders at the 2005 Annual Meeting. Under the Deferred
         Compensation Plan we may elect to defer a portion of an employee's
         incentive compensation or director's board compensation in the form of
         a deferred stock grant. Shares become eligible for withdrawal with the
         passage of time and participants may withdraw eligible shares upon
         attaining the age of sixty or upon leaving our service. Plan
         participants may withdraw all shares granted to them ratably over four
         years, provided they have entered into a non-competition agreement with
         us. We plan for this to be an unfunded plan. Shares to be withdrawn
         will be purchased in the open market or issued from the authorized
         shares. In 2006, a total of 13,500 shares were awarded, for which we
         recorded an expense of $215,000. Of the 150,000 shares authorized under
         the Deferred Compensation Plan, 69,000 shares have been granted and
         81,000 shares remain available for grant. Shares granted are included
         in shares outstanding and are a component of basic shares outstanding
         in calculating earnings per share.

(13)     Stock Options

         We have adopted, with shareholder approval, the "2005 Incentive and
         Non-Qualified Stock Option Plan" ("Incentive Plan"). The Incentive Plan
         provides for the issuance of options to purchase up to 350,000 shares
         of common stock to our directors and key employees. A total of 188,000
         of these options have been granted as of December 31, 2006 and 162,000
         are available for grants. Of those granted, 6,000 shares have been
         exercised, 132,000 options are exercisable and 50,000 are not yet
         exercisable. The previous plan, "1995 Incentive and Non-Qualified Stock
         Option Plan", provided for the issuance of 1,600,000 shares of common
         stock to our directors and key employees. All of the approved options
         have been granted as of December 31, 2006, 1,157,000 shares have been
         exercised, 267,000 shares are exercisable, 17,000 are not yet
         exercisable and 159,000 options have been cancelled. Upon the exercise
         of an option we issue the shares from our authorized, but un-issued
         shares.

         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 traditionally has had options vest in
         three approximately equal annual installments beginning one year from
         the date of grant.

         During the year ended December 31, 2006, 180,000 options were exercised
         with an intrinsic value of $1,797,000. We received proceeds of $986,000
         from the exercise of these options and received a federal


                                      A-25
<PAGE>

(13)     Stock Options, continued

         income tax reduction of $604,000. The total fair value of shares
         vesting during the year ended December 31, 2006, was $225,000. As of
         December 31, 2006, there was $189,000 of unrecognized compensation cost
         related to non-vested shares under the Incentive Plan, which is
         expected to be recognized over a weighted-average period of 1.9 years.

         Prior to the adoption of SFAS No. 123(R) on January 1, 2006, we
         accounted for stock options under the disclosure-only provision of SFAS
         No. 123, but applied APB Option No. 25, "Accounting for Stock Issued to
         Employees", in accounting for our stock option plans. No compensation
         expense was recognized for the years ended December 31, 2005 and 2004
         under the provisions of APB No. 25. If we had elected to recognize
         compensation expense for options granted based on their fair values at
         the grant dates, consistent with Statement 123, net income and earnings
         per share would have changed to the pro forma amounts indicated below.
<TABLE>
<CAPTION>


                                                                                             Year Ended December 31
                                                                                        ------------------------------------
                                                                                            2005                  2004
                                                                                            ----                  ----
         <S>                                                                            <C>                   <C>
         Net income as reported                                                         $ 5,460,000           $ 2,152,000


         Deduct: Total additional stock-based employee compensation
         expense determined under fair value based method for all awards,
         net of related tax effects                                                       (421,000)              (550,000)
                                                                                           --------               -------


                  Pro forma net income                                                  $ 5,039,000           $ 1,602,000
                                                                                          =========             =========

         Net income per share

                  Basic - as reported                                                   $      2.03           $      0.85
                                                                                               ====                  ====
                  Basic - pro forma                                                     $      1.87           $      0.63
                                                                                               ====                  ====
                  Diluted - as reported                                                 $      1.86           $      0.76
                                                                                               ====                  ====
                  Diluted - pro forma                                                   $      1.72           $      0.56
                                                                                               ====                  ====

</TABLE>


         The stock-based employee compensation expense above was determined
         using the Black Scholes option-pricing model with the following
         assumptions:

                                                 2005                2004
                                              ------------        ------------
Risk-free interest rate                          4.33%               3.03%
Expected holding period                        3.6 years            3.8 years
Expected volatility                              .363                 .429
Expected dividend yield                         2.15%                 -0-


         For the year ended December 31, 2006 we recorded compensation cost
         related to stock options of $225,000 and a related reduction in income
         taxes of $77,000. The compensation cost is the total fair value, at
         date of grant, of shares that vested during the year.


                                      A-26
<PAGE>

(13)     Stock Options, continued

         The effect of adopting SFAS No 123(R) on selected reported items is as
         follows:

                                                            2006
                                                -------------------------------
                                                                 Impact of
                                                 As Reported     SFAS No 123(R)
                                                ------------     -------------
    Income before income taxes                  $ 5,033,000       $ 225,000
    Net income                                    3,194,000         148,000
    Basic earnings per share                           1.15             .05
    Diluted earnings per share                         1.09             .05
    Cash flows used in financing activities     $ 1,618,000       $ 604,000



Presented below is a summary of the stock options held by our employees and our
directors and the related transactions for the year ended December 31, 2006.
<TABLE>
<CAPTION>

                                                                 Years Ended December 31,
                              -----------------------------     ------------------------------     --------------------------------
                                          2006                               2005                               2004
                              -----------------------------     ------------------------------     --------------------------------
                                                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          573,000              $ 7.92           721,000          $ 6.04            815,000            $ 4.49
Options granted                75,000               14.85           113,000           11.60            146,000              9.93
Options exercised            (180,000)               5.49          (251,000)           4.13           (240,000)             3.16
Options forfeited/expired      (1,000)               9.60           (10,000)           9.10                 --                --
                             ---------            -------          --------          ------            -------             ------
Balance at December 31        467,000              $ 9.96           573,000          $ 7.92            721,000             $ 6.04
                             =========            =======          ========          ======            =======             ======
Options exercisable           399,000              $ 9.32           483,000          $ 7.96            389,000             $ 5.80
                             =========            =======          ========          ======            =======             ======

</TABLE>


                                     Weighted
                                      Average
                                     Remaining
                                    Contractual
                                        Term                    Aggregate
                                        (yrs)                Intrinsic Value(1)
                                      ----------             -----------------
Balance at 12-31-2004                        3.1                $ 3,136,000
                                      ==========                  =========
Exercisable at 12-31-2004                    3.0                $ 1,786,000
                                      ==========                  =========
Balance at 12-31-2005                        3.0                $ 2,510,000
                                      ==========                  =========
Exercisable at 12-31-2005                    3.0                $ 2,960,000
                                      ==========                  =========
Balance at 12-31-2006                        2.8                $ 2,817,000
                                      ==========                  =========
Exercisable at 12-31-2006                    2.6                $ 2,664,000
                                      ==========                  =========


     (1) Based on the $16.00, $12.30 and $10.39 closing price of our stock on
         December 31, 2006, 2005 and 2004, respectively.


                                      A-27
<PAGE>

(13)     Stock Options, continued

         The weighted average grant-date fair value of Company stock options
         granted is $4.06 per option for the year ended December 31, 2006. The
         fair value of the options was calculated using the Black-Scholes-Merton
         option pricing model with the following assumptions:


                                               Year Ended December 31, 2006
                                             ----------------------------------
                                                Range          Weighted Average
                                              ---------        ----------------
       Expected volatility                    33.8%-35.4%           34.5%
       Expected dividend yield                 1.85%-2.11%           1.96%
       Expected option term                      3.7 years           3.7 years
       Risk-free rate of return                4.47%-4.72%           4.59%
       Expected annual forfeiture rate             0-4%              2.53%


         The expected volatility assumptions we used are based on the historical
         volatility of our common stock over the most recent period commensurate
         with the estimated expected life of our stock options, such estimated
         life being based on the historical experience of our stock option
         exercises. The risk-free rate of return is based, at the date of grant,
         on the yield of U.S. Treasury securities maturing within the expected
         life of the option.


(14)     Repurchase of Minority Interest

         On October 1, 2003 we purchased for $2,050,000 cash the 20% interest in
         APS Insurances Services, Inc., which was owned by FPIC Insurance Group,
         Inc. ("FPIC"). We believe the acquisition provided us more control over
         operating decisions and improved our earnings and return on capital
         with minimal risk. As a result of this transaction, we now own a 100%
         interest in APS Insurance Services. Prior to our repurchase of the
         minority interest, we consolidated the assets, liabilities and
         operations of APS Insurance Services and recorded 20% of its after tax
         net income as minority interest. As a part of the purchase agreement we
         maintained an agreement with FPIC that limits them from competing with
         us in Texas through February 2007. The Company has assigned a value of
         $410,000 to this non-compete agreement based on a determination by an
         outside consulting firm. The agreement is being amortized on the
         straight-line method through its expiration in February, 2007.

         The total cost of the acquisition was $2,050,000 and was allocated to
         the 20% interest acquired in APS Insurance Services based on the fair
         values of its net assets on the date of acquisition, in accordance with
         the purchase method of accounting for business combinations.



                                      A-28
<PAGE>

(14)     Repurchase of Minority Interest, continued

         A summary of the purchase price allocation for this transaction is as
         follows:

         Purchase price of 20% interest                        $ 2,050,000
         Basis of recorded minority interest                      (393,000)
         Allocated to non-competition agreement                   (410,000)
                                                                -----------
         Excess of purchase price over
           assets acquired (goodwill)                          $ 1,247,000
                                                                ==========

         Other intangible assets as of December 31, 2006 and 2005, subject to
         amortization expense, contains the following:


<TABLE>
<CAPTION>

                                                                 Gross
                                                                Carrying              Accumulated
                                                                 Amount              Amortization               Net
                                                          --------------------    ------------------     -----------------
For the year ended December 31, 2006
-------------------------------------
<S>                                                            <C>                   <C>                    <C>
Non-compete                                                    $ 410,000             $ 390,000              $ 20,000
Managing general agent license                                   160,000                42,000               118,000
                                                                ---------            ----------            ----------
   Total                                                       $ 570,000             $ 432,000             $ 138,000
                                                                =========            ==========            ===========

For the year ended December 31, 2005                            Amount              Amortization               Net
-------------------------------------                     --------------------    ------------------     -----------------
Non-compete                                                    $ 410,000             $ 270,000             $ 140,000
Managing general agent license                                   160,000                38,000               122,000
                                                               ----------            ----------            ----------
   Total                                                       $ 570,000             $ 308,000             $ 262,000
                                                               ==========            ==========            ===========

</TABLE>

         We assume no residual value and estimate annual amortization expense
         over the remaining life of the non-compete agreement and managing
         general agent license to be as follows:


                                                       Year             Amount
                                                     --------          -------
                Non-compete agreement                  2007            $ 20,000
                Managing general agent license         2007            $  4,000



                                      A-29
<PAGE>

(15)     Investment in Unconsolidated Affiliates

         We recorded $0 and $24,000 in 2006 and 2005, respectively, as gain on
         forgiveness of debt. The 2005 gain represents that amount of liability
         that was released in the respective periods by participants in our loan
         to a former affiliate, net of any interest due them for prior period
         payments made by that affiliate. Due to poor operating results,
         Uncommon Care was in default and not making scheduled payments under
         its loan agreement with us in which the participations had been sold.
         As a result, the loan participants released us from any obligations
         under the participation agreements. The $24,000 recorded in 2005
         represents the final loan obligation to be released. No gains,
         therefore, were recorded in 2006.

(16)     Segment Information

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

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

         Our financial services segment includes brokerage and asset management
         services to individuals and institutions.

         Corporate is the parent company and derives its income from interest,
         investments and dividends paid by the other segments.




                                      A-30
<PAGE>


(16)     Segment Information, continued
<TABLE>
<CAPTION>


                                                                              2006                   2005                   2004
                                                                           ----------             ----------             ----------
Operating Revenues
<S>                                                                       <C>                    <C>                   <C>
Insurance services                                                        $ 15,555,000           $ 15,514,000          $ 15,316,000
Financial services                                                          16,805,000             18,459,000            16,705,000
Intercompany dividends                                                       4,438,000              1,600,000             4,760,000
                                                                           -----------            -----------           -----------
                                                                          $ 36,798,000           $ 35,573,000          $ 36,781,000
                                                                           ===========            ===========           ===========
Reconciliation to Consolidated Statements of Operations:
Total segment revenues                                                      36,798,000             35,573,000            36,781,000
Less: intercompany dividends                                                (4,438,000)            (1,600,000)           (4,760,000)
                                                                            ----------             ----------            ----------
Total Revenues                                                            $ 32,360,000           $ 33,973,000          $ 32,021,000
                                                                            ==========             ==========            ===========
Operating Income (Loss):
Insurance services                                                           4,293,000              5,252,000             5,348,000
Financial services                                                           1,660,000              2,196,000             2,167,000
Other                                                                        2,339,000             (1,003,000)            2,589,000
                                                                             ---------             ----------           -----------
                                                                           $ 8,292,000            $ 6,445,000          $ 10,104,000
                                                                             =========             ==========           ===========
Reconciliation to Consolidated Statements of Operations:
Total segment operating profit                                             $ 8,292,000            $ 6,445,000          $ 10,104,000
Less: intercompany dividends                                                (4,438,000)            (1,600,000)           (4,760,000)
                                                                             ---------              ---------             ----------
Operating income                                                             3,854,000              4,845,000             5,344,000
Gain (loss) on investments, net                                                240,000              2,943,000            (2,322,000)
Gain on extinguishment of debt                                                      --                 24,000                75,000
                                                                             ---------              ---------             ----------
Income from operations before interest,
income taxes, minority interests and equity in gain
and loss of unconsolidated affiliates                                        4,094,000              7,812,000             3,097,000
Interest income                                                                915,000                587,000               365,000
Other income                                                                    49,000                124,000                15,000
Interest expense                                                                19,000                 10,000                 7,000
Income tax expense                                                           1,839,000              3,039,000             1,317,000
Minority interests                                                               6,000                 14,000                 1,000
                                                                             ---------             ----------             ----------
Net income                                                                 $ 3,194,000            $ 5,460,000           $ 2,152,000
                                                                             =========             ==========             ==========

</TABLE>


                                      A-31
<PAGE>


(16)     Segment Information, continued

<TABLE>
<CAPTION>

                                                                           2006                     2005                     2004
                                                                        ----------              -----------              -----------
Identifiable assets:
 Insurance services;
<S>                                                                 <C>                      <C>                     <C>
  Intangible assets                                                 $  1,267,000             $  1,387,000            $  1,507,000
  Other                                                                4,358,000                5,033,000               4,526,000
 Financial services                                                    7,027,000                6,061,000               5,106,000
 Corporate:
  Investment in available for sale securities                         21,039,000               18,263,000              14,320,000
  Other                                                                2,585,000                2,761,000               4,984,000
                                                                      ----------              -----------             -----------
                                                                    $ 36,276,000             $ 33,505,000            $ 30,443,000
                                                                      ==========              ===========             ===========
Capital expenditures:
 Insurance Services                                                 $     84,000             $    187,000            $    362,000
 Financial Services                                                       40,000                   47,000                  10,000
 Corporate                                                                42,000                   73,000                  49,000
                                                                      ----------              -----------             -----------
                                                                    $    166,000             $    307,000            $    421,000
                                                                      ==========              ===========             ===========
Depreciation/amortization expenses:
 Insurance Services                                                 $    325,000             $    274,000            $    217,000
 Financial Services                                                       28,000                   28,000                  27,000
 Corporate                                                                68,000                   62,000                  60,000
                                                                      ----------              -----------             -----------
                                                                    $    421,000             $    364,000            $    304,000
                                                                      ==========              ===========             ===========

</TABLE>


         During the years ended December 31, 2006, 2005 and 2004 a single
         customer represented 48% ($15,555,000), 46% ($15,514,000) and 48%
         ($15,316,000) of our consolidated revenues.

         At December 31, 2006, 2005, and 2004 we had long-term contracts with
         that customer and were therefore not vulnerable to the risk of a
         near-term severe impact from a reasonably possible loss of the revenue.
         However, should that customer default or be unable to satisfy its
         contractual obligations, there would be a material adverse effect on
         our financial condition and results of operations.

         Operating income (loss) 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 equivalents, notes receivable, investments
         in available-for-sale securities, investments in affiliates and
         intangible assets.



                                      A-32
<PAGE>

(17)     Net Income Per Share

         Basic income 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. A reconciliation of income and average shares
         outstanding used in the calculation of basic and diluted earnings per
         share from continuing and discontinued operations follows:

<TABLE>
<CAPTION>

                                                                       For the Year Ended December 31, 2006
                                                            ---------------------------------------------------------
                                                                Income               Shares             Per-Share
                                                              (Numerator)         (Denonminator)          Amount
                                                             --------------        ------------         -----------
<S>                                                          <C>                     <C>                   <C>
Income from operations                                       $ 3,194,000
Basic EPS:
Income available to common stockholders                        3,194,000             2,774,000             $1.15
Effect of dilutive securities                                         --               159,000              ====
                                                               ---------             ---------
Diluted EPS:
Income available to common stockholders                      $ 3,194,000             2,933,000             $1.09
                                                               =========             =========              ====


                                                                       For the Year Ended December 31, 2005
                                                            ----------------------------------------------------------
                                                                 Income               Shares             Per-Share
                                                              (Numerator)         (Denonminator)          Amount
                                                             --------------        ------------         -----------
Income from operations                                       $ 5,460,000
Basic EPS:
Income available to common stockholders                        5,460,000             2,688,000             $2.03
Effect of dilutive securities                                         --               243,000              ====
                                                                --------             ---------
Diluted EPS:
Income available to common stockholders                      $ 5,460,000             2,931,000             $1.86
                                                               =========             =========              ====


                                                                       For the Year Ended December 31, 2004
                                                            -----------------------------------------------------------
                                                                Income               Shares             Per-Share
                                                              (Numerator)         (Denonminator)          Amount
                                                             --------------        ------------         -----------

Income from operations                                       $ 2,152,000
Basic EPS:
Income available to common stockholders                        2,152,000             2,545,000             $0.85
Effect of dilutive securities                                         --               293,000              ====
                                                               ---------             ---------
Diluted EPS:
Income available to common stockholders                      $ 2,152,000             2,838,000             $0.76
                                                               =========             =========              ====

</TABLE>


                                      A-33
<PAGE>


(18)     Shareholders' Equity

         The following table presents changes in shares outstanding for the
period from December 31, 2004 to December 31, 2006:

<TABLE>
<CAPTION>

                                              Common
                                              Shares              Treasury
                                            Outstanding            Stock
                                           -------------        ------------

<S>                                          <C>                  <C>
Balance December 31, 2003                    2,454,667
Options excercised                             240,200                  --
Treasury stock purchases                            --              70,495
Treasury stock retirements                     (70,495)            (70,495)
                                            -----------         -----------
Balance December 31, 2004                    2,624,372                  --
                                            ===========         ===========

Options excercised                             251,000                  --
Deferred compensation                           47,855                  --
Treasury stock purchases                            --              139,107
Treasury stock retirements                    (139,107)            (139,107)
                                            -----------         ------------
Balance December 31, 2005                    2,784,120                  --
                                            ===========         ============

Options excercised                             180,000                  --
Deferred Compensation                           21,108                  --
Treasury stock purchases                            --              167,482
Treasury stock retirements                    (167,482)            (167,482)
                                            -----------         ------------
Balance December 31, 2006                    2,817,746                  --
                                            ===========         ============

</TABLE>


(19) Supplemental Consolidated Quarterly Financial Data (Unaudited)

          Quarter to quarter comparisons of results of operations have been and
          may be materially impacted by bond market conditions and whether or
          not there are profits at the medical malpractice insurance company
          which we manage and whose profits we share. We believe that the
          historical pattern of quarterly sales and income as a percentage of
          the annual total may not be indicative of the pattern in future years.
          The following tables set forth selected quarterly consolidated
          financial information for the years ended December 31, 2006, 2005 and
          2004:


                                      A-34
<PAGE>






(19)   Supplemental Consolidated Quarterly Financial Data (Unaudited), continued
<TABLE>
<CAPTION>

                                                               (In thousands, except per share data)
                                                         First          Second         Third          Fourth
                                                        Quarter        Quarter       Quarter         Quarter
2006                                                  ---------        --------      ---------      ----------
<S>                                                    <C>            <C>            <C>           <C>
Revenues                                               $ 7,233        $ 7,975        $ 6,769       $ 10,383
Net Income                                                 562            598            409          1,625
Basic net income per share:                             $ 0.20         $ 0.22         $ 0.15         $ 0.58
Diluted income  per share:                              $ 0.19         $ 0.21         $ 0.14         $ 0.56


2005
Revenues                                               $ 6,662        $ 7,033        $ 9,182       $ 11,096
Net Income                                                 853          1,367          1,395          1,845
Basic net income per share:                             $ 0.32         $ 0.51         $ 0.52         $ 0.67
Diluted income  per share:                              $ 0.30         $ 0.48         $ 0.48         $ 0.64


2004
Revenues                                               $ 7,290        $ 7,295        $ 7,593        $ 9,843
Net Income                                                 694            689           (834)         1,603
Basic net income per share:                             $ 0.28         $ 0.28        $ (0.32)        $ 0.62
Diluted income  per share:                              $ 0.25         $ 0.25        $ (0.32)        $ 0.58

</TABLE>


          Results for the fourth quarter of 2006, 2005 and 2004 include profit
          sharing with APIE totaling $1,994,000, $2,007,000 and $1,929,000,
          respectively.


(20) Concentration of credit risk

         Marketable securities

         As of December 31, 2006 we owned marketable securities of FIC with a
         combined fair market value of $2,926,000, or approximately 9% of our
         total assets. An event having a material adverse effect on FIC, and
         resulting in a devaluation of their securities, could also have a
         material adverse effect on our results of operations.

         Geographic concentration of insurance services

         Most of the managed insurance company's business is concentrated in
         Texas. Regulatory or judicial actions in that state that affected
         rates, competition or tort law could have a significant impact on the
         insurance company's business. Consequently, our insurance management
         business, which is based on the premiums and profitability of the
         managed company, could be adversely affected.


                                      A-35
<PAGE>

(20) Concentration of credit risk, continued

         Financial market concentration of investment services

         Investment Services derives most of its revenue through commissions
         earned on the trading of fixed-income securities. Should conditions
         reduce the market's demand for fixed-income products, and should
         Investment Services be unable to shift it emphasis to other financial
         products, it could have a material adverse impact on our financial
         condition and results of operations.

(21)     Other Comprehensive Income

         The following chart discloses the reclassification adjustments for
         gains and losses included in net income during the years ended December
         31:
<TABLE>
<CAPTION>

                                                                                  Tax
                                                             Before-Tax        (Expense)         Net-of-Tax
                                                               Amount          or Benefit          Amount
                                                             ----------        ---------         ----------
2006
<S>                                                            <C>            <C>                <C>
Unrealized holding losses
  arising during the period                                    $ (257)        $     87           $  (170)
                                                             ===========       ==========        ==========
Reclassification adjustment for gains
   included in net income                                        (132)              45               (87)
                                                             -----------       ----------        ----------
Net unrealized losses on securities                            $ (389)        $    132           $  (257)
                                                             ===========       ==========        ==========

2005
Unrealized holding gains
  arising during the period                                   $   254         $    (87)          $   167
                                                             ===========       ==========        ==========
Reclassification adjustment for gains
   included in net income                                      (2,667)             907            (1,760)
                                                             -----------       ----------        ----------
Net unrealized losses on securities                           $(2,413)        $    820           $(1,593)
                                                             ===========       ==========        ==========

2004
Unrealized holding gains
  arising during the period                                   $ 1,393         $   (474)          $   919
                                                             ===========       ==========        ==========
Reclassification adjustment for losses
   included in net income                                       2,322             (789)            1,533
                                                             -----------       ----------        ----------
Net unrealized gains on securities                            $ 3,715         $ (1,263)          $ 2,452
                                                             ===========       ==========        ==========
</TABLE>


                                      A-36
<PAGE>


(22)     Plans for a Strategic Merger

         On June 5, 2006 we announced plans for a strategic merger with APIE.
         Both our and APIE's boards of directors voted to approve the
         transaction subject to approval by the Texas Department of Insurance,
         necessary filings with the SEC and the approval of our shareholders and
         subscriber-policyholders of APIE. The original purchase price was $33
         million, comprised of approximately 1.7 million shares of APS common
         stock to be issued to the policyholders of APIE and the conversion of
         approximately $10.4 million of APIE obligations into mandatorily
         redeemable APS preferred stock. On August 24, 2006, we announced that
         we agreed to an increase in the purchase price of APIE, which was also
         approved by APIE. The revised purchase price is $39 million; comprised
         of approximately 2.0 million shares of APS common stock issued to the
         policyholders of a APIE and the conversion of approximately $10.4
         million of APIE obligations into mandatorily redeemable APS preferred
         stock. The preferred stock has a 3% annual dividend and must be
         redeemed at the rate of not less than $1 million per year until
         December 31, 2016 at which time it must have been fully redeemed. At a
         special meeting of shareholders held March 22, 2007, the shareholders
         of APS approved the issuance of common and preferred shares of APS for
         the acquisition of APIE. APIE subscribers also approved the transaction
         on the same day. The acquisition is set to close effective April 1,
         2007. As the acquirer, we will account for this transaction consistent
         with the Statement of Financial Standards No. 141, "Business
         Combinations", whereby direct costs of the business combination are
         capitalized and become part of the total purchase price.

(23)     Line of Credit

         In April 2006, we renewed a $3.0 million line of credit that was
         originally established in November 2003 with PlainsCapital Bank. The
         loan calls for interest payments only to be made on any amount drawn
         until April 15, 2007, when the entire amount of the note, principal and
         interest then remaining unpaid, shall be due and payable. At December
         31, 2006, there were no draws taken against this line of credit. We are
         in compliance with the covenants of the loan agreement, including
         requirements for a minimum of $5.0 million of unencumbered liquidity
         and a minimum 2 to 1 net worth ratio.




                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
            American Physicians Service Group, Inc. and Subsidiaries
                  Years Ended December 31, 2006, 2005 and 2004


(in thousands)
<TABLE>
<CAPTION>

                                         Balance at                                      Balance
                                          Beginning     Costs and                         at End
                                           of Year      Expenses       Deductions        of Year
                                        ------------------------------------------------------------

<S>                                              <C>            <C>             <C>            <C>
Allowance for Doubtful Accounts

     2006                                        $ 19           $  -            $ 11           $  8
                                        ==============  =============  ==============  =============

     2005                                        $ 14           $ 16            $ 11           $ 19
                                        ==============  =============  ==============  =============

     2004                                         $ -           $ 47            $ 33           $ 14
                                        ==============  =============  ==============  =============


</TABLE>


                                      A-37