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                                  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, 2004

      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
incorporation or organization)        (I.R.S.  employer Identification No.)

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:

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

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

                                (Title of Class)

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

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of 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 an accelerated filer
   (as defined in Exchange Act Rule 12b-2) Yes __ No   X
                                                      ---
         State the aggregate market value of the voting stock held by
non-affiliates of the registrant. The aggregate market value shall be computed
by reference to the price at which the stock was sold or the average bid and
asked prices of such stock, as of the last business day of the registrant's most
recently completed second fiscal quarter.

              Aggregate Market Value at June 30, 2004: $19,396,226

     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 10, 2005
     -------------------                                ----------------
  Common Stock, $.10 par value                             2,478,667

                       Documents Incorporated By Reference
    Selected portions of the Registrant's definitive proxy material for the
    2005 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 2.     Properties                                                   10

   Item 3.     Legal Proceedings                                            10

   Item 4.     Submission of Matters to a Vote of Security Holders          10

   PART II
   Item 5.       Market for Registrant's Common Equity, Related Stockholder
                    Matters and Issuer Purchases of Equity Securities       10

   Item 6.     Selected Financial Data                                      12

   Item 7.     Management's Discussion and Analysis of Financial Condition
                     and Results of Operations                              13

   Item 7A. Quantitative and Qualitative Disclosures about Market Risk      24

   Item 8.     Financial Statements and Supplementary Data                  25

   Item 9.    Changes in and Disagreements with Accountants on Accounting
                    and Financial Disclosure                                25

   Item 9A. Controls and Procedures                                         25

   Item 9B. Other Information                                               25

   PART III
   Item 10.  Directors and Executive Officers of the Registrant             26

   Item 11.  Executive Compensation                                         26

   Item 12.  Security Ownership of Certain Beneficial Owners and
                     Management and Related Stockholder Matters             26

   Item 13.  Certain Relationships and Related Transactions                 26

   Item 14.  Principal Accountant Fees and Services                         26

   PART IV
   Item 15.  Exhibits and Financial Statement Schedules                     26
         SIGNATURES                                                         29
         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)


                                       2
<PAGE>

                     AMERICAN PHYSICIANS SERVICE GROUP, INC.

                           ANNUAL REPORT ON FORM 10-K

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004



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 soon as reasonably  practicable
after  such  material  is  electronically  filed  with,  or  furnished  to,  the
Securities and Exchange Commission ("SEC").

     Financial information about our industry segments is disclosed in Note 16
to our accompanying Consolidated Financial Statements in Appendix A.

OUR FINANCIAL SERVICES

     Through our subsidiaries,  APS Financial Corporation, or APS Financial, 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%, 64% and 59% of our total
revenues in 2004, 2003 and 2002, 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, banks, and public funds. APS Financial has its
main office in Austin, Texas with branch offices in Houston, Texas and Redmond,
Washington.

     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, the Securities Investor Protection Corporation, or SIPC,
the Securities Industry Association,  and, in addition, is licensed in 44 states
and Washington D.C.

     Every registered broker/dealer doing business with the public is subject to
stringent rules with respect to net capital requirements promulgated by the

                                       3
<PAGE>

Securities and Exchange  Commission,  or SEC. These rules, which are designed to
measure the financial soundness and liquidity of broker/dealers, specify minimum
net capital  requirements.  Because we (as opposed to APS  Financial)  are not a
registered  broker/dealer,  we are not  subject  to these  rules.  However,  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 its present levels of business. At February 28, 2005, 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.

     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.

OUR INSURANCE SERVICES

     APS Insurance  Services,  Inc., or Insurance  Services,  is a  wholly-owned
subsidiary  of ours.  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 medical malpractice
insurance companies. Our revenues from this segment contributed 48%, 36% and 41%
of our total revenues in 2004, 2003 and 2002, respectively.

     Substantially  all of our revenue from this segment was attributable to FMI
providing  management  services to American Physicians  Insurance  Exchange,  or
APIE,  a  reciprocal   insurance   exchange,   wholly-owned  by  its  subscriber
physicians.  A  reciprocal  insurance  exchange  is an  organization  that sells
insurance  only to its  subscribers,  who  pay,  in  addition  to  their  annual
insurance premiums,  a contribution to the exchange's  surplus.  These exchanges
generally  have no paid  employees  but  instead  enter into a contract  with an
"attorney-in-fact"  that provides all management and administrative services for
the exchange. As the attorney-in-fact for APIE, FMI receives a percentage of the
earned premiums of APIE, as well as a portion of APIE's  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.

     APIE was organized in 1975,  and FMI has been its  exclusive  manager since
its inception.  The management  agreement between FMI and APIE provides for full
management by FMI of the affairs of APIE under the direction of APIE's physician
board of directors. Subject to the direction of this board, FMI sells and issues
policies, investigates, settles and defends claims, and otherwise manages APIE's
affairs. In consideration for performing its services, FMI receives a percentage
fee based on APIE's earned premiums (before payment of reinsurance premiums), as
well as a portion of APIE's  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

                                       4
<PAGE>

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 health care
providers.  It 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.  APIE is the  only  professional  liability
insurance  company  based  in  Texas  that  is  wholly-owned  by its  subscriber
physicians.

     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.  APIE reinsures 100%
of all Texas and Arkansas  coverage per medical  incident  between  $250,000 and
$1,000,000,  primarily  through  certain  domestic and  international  insurance
companies.

     The 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% with the provision that any profits of APIE
will be shared  equally with FMI so long as the total  payment  (fees and profit
sharing) does not exceed a cap based on premium  levels.  In 2004,  2003,  2002,
2001 and 2000,  management fees  attributable to profit sharing were $1,929,000,
$722,000,  $0, $0 and $0,  respectively.  While APIE was  profitable in 2001 and
2002  there  was no  profit  sharing  with FMI due to the  management  agreement
requiring that prior year losses be applied  against future pretax income.  Only
after prior year  losses are  completely  offset can FMI then share  equally the
profits at APIE.

     The following table presents selected financial and other data for APIE:


<TABLE>
<CAPTION>

                                                                        Years Ended December 31,
                                                       2004            2003           2002           2001            2000
                                                       ----            ----           ----           ----            ----
                                                           (Unaudited, in thousand, except for number of insureds)

<S>                                                   <C>             <C>            <C>            <C>             <C>
Earned premiums before reinsurance premiums           $64,296         $51,904        $46,078        $35,866         $29,057
Total assets                                          131,152         102,728         80,721         64,557          66,348
Total surplus                                          21,238          15,783         12,985         11,475          10,014
Management fees (including profit sharing)
 and commissions (1)                                   10,604           7,789          6,221          5,084           4,002
Number of insureds                                      3,623           3,073          3,181          3,101           3,178

</TABLE>

          (1)     This amount includes management fees and commissions paid to
                  FMI and Agency in addition to commissions of $1, $513, $3,103,
                  $2,886 and $1,898 in 2004, 2003, 2002, 2001 and 2000,
                  respectively, paid to other carriers directly related to
                  APIE's controlled business.

OUR OTHER INVESTMENTS

     At December 31, 2004, we owned less than 2% of the outstanding common stock
of  HealthTronics,  Inc, or HealthTronics  (successor by merger to Prime Medical
Services,  Inc.),  having  reduced  our  ownership  from  15%  with  the sale of
1,591,000 shares during 2002. Prior to that sale we recorded our pro-rata share


                                       5
<PAGE>

of HealthTronics' earnings using the equity method of accounting. As a result of
our   reduced   ownership,   we  now   account   for   our   investment   as  an
available-for-sale  equity  security,  with changes in market value, net of tax,
reflected in shareholders'  equity as "accumulated other comprehensive  income."
HealthTronics  is the  largest  provider of  lithotripsy  services in the United
States,  currently servicing  approximately 830 hospitals and surgery centers in
47 states.  Lithotripsy  is a  non-invasive  method of  treating  kidney  stones
through the use of shock waves.  HealthTronics is also an international supplier
of  specialty   vehicles  for  the   transport  of  high   technology   medical,
broadcast/communications  and homeland security equipment. At December 31, 2004,
our  investments  in  HealthTronics  securities  include  common stock and fixed
income  securities  with an aggregate fair market value of $6,844,000 and a cost
basis of  approximately  $2,788,000.  A  material  decline  in the value of this
investment could have a material  adverse effect on our financial  condition and
results of operations.

     The common stock of  HealthTronics  is quoted on the NASDAQ National Market
under the symbol "HTRN".  HealthTronics is a Georgia corporation and is required
to file annual,  quarterly  and other  reports and  documents  with the SEC. The
summary  information  in  the  accompanying  consolidated  financial  statements
regarding  HealthTronics  is  qualified  in its  entirety by  reference  to such
reports and documents. Such reports and documents may be examined and copies may
be obtained from the SEC.

     On  June  4,  2003  we  purchased  from  Financial  Industries  Corporation
("FIC")(OTC:  FNIN.PK) and 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  represent an  approximate 4% ownership in FIC. The
aggregate  purchase price was  approximately  $5,647,000,  which was all sourced
from our cash reserves. The shares purchased from FIC and the foundation are not
registered,  but are subject to a registration  rights agreement requiring FIC's
best efforts to register them within one year of the  transaction.  Due to FIC's
delay in filing its 2003 Form 10-K and its March 31,  2004,  June 30, 2004 Forms
10-Q,  it has not been able to register  these shares and was delisted  from the
NASDAQ  exchange in July 2004.  Subsequently,  FIC was  delinquent in filing its
September 30, 2004 Form 10-Q.

     By September  30,  2004,  the value of our  investment  in FIC had declined
significantly.  On October 12, 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.  Consequently, we recorded a pretax charge to earnings of
$2,374,000 in the third quarter 2004.  The charge  reduced our cost basis in FIC
from $5,647,000,  or $14.67 per share, to $3,273,000,  or $8.50 per share, which
is equal to the quoted  market  price of FIC shares on September  30,  2004.  By
December 31, 2004, the value of our investment in FIC had declined  further.  On
December 31,  2004,  we  determined  that this decline in market price should be
considered "other than temporary".  Consequently, we recorded a pretax charge to
earnings of $193,000 in the fourth  quarter  2004.  The charge  reduced our cost
basis in FIC from  $3,273,000,  or $8.50 per share, to $3,080,000,  or $8.00 per
share,  which is equal to the quoted  market price of FIC shares on December 31,
2004.

     As discussed  in our Forms 10-Q dated June 30 and  September  30, 2004,  we
believe the  decline in the market  price of FIC has been  brought  about by its
failure to file its 2003 Form 10-K and its subsequent de-listing from the NASDAQ
Stock  Market.  We had  expected  FIC to bring its  filings  current  and pursue
restoring its exchange listing but these events have not yet occurred.  While we
currently  continue  to have  the  ability  and the  intent  to hold  the  stock
indefinitely,  we concluded that the additional  uncertainty created by the late
filings together with the lack of current  financial  information  dictated that
the  decline  should be viewed as other than  temporary.  We will  continue  the
policy during 2005 of monitoring and evaluating the situation at FIC and further
determining  if changes in fair market value of the  investment are temporary or
"other than temporary".

     As part of our initial  acquisition of FIC common stock, we were granted an
option to purchase an additional  323,000 shares of FIC's common stock at $16.42
per share. There is a significant  revenue-related  performance requirement that
must be met before this option is exercisable. We have assigned no value to this
option.


                                       6
<PAGE>

     FIC is a Texas  corporation  and is required to file annual,  quarterly and
other  reports and  documents  with the SEC.  (The  summary  information  in the
accompanying consolidated financial statements regarding FIC is qualified in its
entirety  by  reference  to  such  reports  and  documents.)  Such  reports  and
documents, prior to December 31, 2003, may be obtained from the SEC.


DISCONTINUED OPERATIONS

     Effective  November 1, 2002, we completed the sale of APS Consulting to its
management as we determined the division's  operations  were not consistent with
our long-term  strategic plan. We sold all of our APS Consulting shares for a de
minimus  amount of cash plus a $250,000  seven-year  term note at the prime rate
plus 3%.  Our  existing  contract,  which was  entered  into on October 1, 2002,
states that we will provide  administrative  support  services to APS Consulting
for a period of  approximately  seven years remains in effect.  Our fees that we
will provide  under this  contract are  dependent  on APS  Consulting's  pre-tax
earnings but may not be less than  $200,000 or more than  $518,000 over the life
of the agreement. Because we were dependent upon the future successful operation
of the division to collect our  proceeds  from the disposal and because we had a
security  interest in the assets of the  division,  we had retained a sufficient
risk of loss to preclude us from  recognizing  the divestiture of APS Consulting
under  the  guidance  of  FASB  Interpretation  No 46.  Accordingly,  we did not
recognize the  divestiture of APS  Consulting  and continued to consolidate  the
division as an entity in which we have a variable  interest that will absorb the
majority of the entity's operating losses if they occurred.

     Effective  November 1, 2003,  APS Consulting was able to obtain third party
financing  and repay their note  payable to us in exchange  for our  agreeing to
discount the note by $35,000.  We provided no guarantees or credit  enhancements
in connection with APS Consulting  securing this financing.  Accordingly,  we no
longer have a risk of loss related to these  operations and have  recognized the
transaction  as a  divestiture.  As a  result,  we ceased  consolidation  of APS
Consulting financial statements effective November 1, 2003. In addition, we were
able to recognize a gain of $27,000, net of tax, and administrative support fees
totaling $47,000 in 2004 and $98,000 in 2003.


COMPETITION

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

     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 the
other major carriers. Great focus has been given to the area of underwriting and
the selection of our insured  physicians.  With the  successful  passing of tort
reform in late 2003,  there is an increased  likelihood of additional  companies
re-entering  the Texas market.  APIE  anticipates  maintaining  its market share
through  a  combination  of  unique  and  tailored  coverages,  and a  continued
commitment to claims, risk management and underwriting services.



                                       7
<PAGE>

REGULATION

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

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

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

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

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
contained  in  Note  16 of our  consolidated  financial  statements,  which  are
included in this Annual Report on Form 10-K.

EMPLOYEES

     At March 1, 2005,  we  employed,  on a full time basis,  approximately  109
persons,  including  56 by Insurance  Services,  44 by APS  Financial  and Asset
Management, and 9 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.



                                       8
<PAGE>

Executive Officers

     As of March 15, 2005, our executive officers were as follows:

Name                      Age       Position
------                    ---       --------

Kenneth S. Shifrin        55        Chairman of the Board, President and
                                      Chief Executive Officer

William H. Hayes          57        Senior Vice President -Finance, Secretary,
                                      and Chief Financial Officer

Maury L. Magids           40        Senior Vice President - Insurance

Thomas R. Solimine        46        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).

     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 of ours 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,
Mr. Shifrin became Vice-chairman of the Board of HealthTronics in November 2004.
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 Securities  Exchange Act of 1934 (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


                                       9
<PAGE>

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 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 office space for our  financial  services  subsidiary at 1011
Hwy 6 South,  Suite 120,  Houston,  Texas,  and 7981 168th Ave, N.E.  Suite 108,
Redmond, Washington.

     We also lease 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, RELATED STOCKHOLDER MATTERS AND
          ISSUER PURCHASES OF EQUITY SECURITIES

     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 three fiscal years.


                                           2004                    2003
                                      --------------          --------------
                                      High        Low         High       Low
                                      ----       ----         ----      ----

First Quarter                        $14.08      $8.31        $4.29     $3.51

Second Quarter                       $14.92      $8.51        $5.49     $3.58

Third Quarter                        $10.24      $8.50        $5.67     $4.51

Fourth Quarter                       $10.49      $9.51        $10.77    $5.10


                                       10
<PAGE>

     There were approximately 250 holders of record of our common stock on March
1, 2005.

     In 2004,  we  declared a cash  dividend  of $.20 per share of common  stock
amounting to a total cash outlay of  approximately  $518,000.  Prior to 2004, we
have never declared or paid any cash  dividends on our common stock.  Our policy
has been to retain our earnings to finance growth and development, and therefore
do not  anticipate  paying  any  cash  dividends  on  our  common  stock  in the
foreseeable  future.  The declaration and payment of any dividends on the 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.

     The following  table  represents  securities  authorized for issuance under
equity compensation plans, as described in Note 12 to the consolidated financial
statements at December 31, 2004, included herein.


                                        Equity Compensation Plan Information
<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------

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 refelcted in
                                                                                                           column (a)
------------------------------------------------------------------------------------------------------------------------------------
                                 (a)                                    (b)                                   (c)
------------------------------------------------------------------------------------------------------------------------------------
<S>                            <C>                                     <C>                                  <C>
Equity Compensation
plans approved by              721,000                                 $6.04                                149,000
security holders
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Equity compensation
plans not approved by
security holders                none                                   none                                   none
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Total                         721,000                                  $6.04                                149,000
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>



      The following table represents stock repurchases during the fourth quarter
of 2004:

<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, 2004-Oct. 31, 2004              4                $ 10.00                     4                $1,959,000
Nov. 1, 2004-Nov. 30, 2004          7,900                $  9.86                 7,900                $1,883,000
Dec. 1, 2004-Dec. 31, 2004         14,899                $ 10.20                14,899                $1,733,000

</TABLE>


(1)      Of the total shares purchased 10,799 were purchased in open market
         transactions and 12,004 were purchased in private transactions. Our
         share repurchase program was announced August 17, 2004 and authorizes
         the purchase of up to $2 million of common stock.


                                       11
<PAGE>


ITEM 6.  SELECTED FINANCIAL DATA

       The following selected financial data should be read in conjunction with
our Consolidated Financial Statements and Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained in Item 7 of this Annual Report.

<TABLE>
<CAPTION>


                                                   2004              2003               2002              2001             2000
                                                -------------    --------------     --------------     ------------     ------------
Selected Income Statement Data:

<S>                                               <C>               <C>                <C>              <C>              <C>
  Revenues                                        $ 32,021          $ 30,449           $ 23,077         $ 20,036         $ 15,370

  Income from continuing operations
    before interest, income taxes,
    minority interests and equity in
    loss of unconsolidated affiliates                3,097             4,090              5,554              851           (5,198)

  Income from continuing operations                  2,152             2,772              3,156           (1,568)          (5,451)

  Net income                                       $ 2,152           $ 2,799            $ 3,411           $ (578)        $ (4,774)


Per Share Amounts:

  Basic: Income from continuing
    operations                                      $ 0.85            $ 1.26             $ 1.42          $ (0.85)         $ (2.19)

  Net income                                          0.85              1.27               1.53            (0.25)           (1.92)

  Diluted: Income from continuing
    operations                                        0.76              1.13               1.35            (0.85)           (2.19)

  Net income                                        $ 0.76            $ 1.14             $ 1.45          $ (0.25)         $ (1.92)

  Diluted weighted average shares
    outstanding                                      2,838             2,449              2,345            2,343            2,490

  Cash dividends                                   $  0.20                --                 --               --               --


Selected Balance Sheet Data:

  Total assets                                    $ 30,443          $ 25,638           $ 24,981         $ 21,660         $ 24,796

  Long-term obligations                              1,133             1,576              2,665            4,489            6,783

  Total liabilities                                $ 6,229           $ 6,532            $ 7,455          $ 8,869         $ 11,433

  Minority interests                                     1                 -                384              124              111

  Total equity                                    $ 24,213          $ 19,106           $ 17,142         $ 12,667         $ 13,252

</TABLE>


                                       12
<PAGE>


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  Securities  Exchange Act of 1934,  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.  In
addition  to any risks and  uncertainties  specifically  identified  in the text
surrounding the  forward-looking  statements,  you should consult our reports on
Forms  10-Q and our  other  filings  under  the  Securities  Act of 1933 and the
Securities Exchange Act of 1934, for factors that could cause our actual results
to differ materially from those presented.

     The  forward-looking  statements  included herein are necessarily  based on
various  assumptions  and estimates and are inherently  subject to various risks
and  uncertainties,  including risks and uncertainties  relating to the possible
invalidity of the underlying  assumptions and estimates and possible  changes or
developments  in  social,  economic,   business,  industry,  market,  legal  and
regulatory circumstances and conditions and actions taken or omitted to be taken
by  third  parties,  including  customers,   suppliers,  business  partners  and
competitors and  legislative,  judicial and other  governmental  authorities and
officials.  Assumptions relating to the foregoing involve 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 (1)  financial  services,  including  brokerage  and  investment
services to individuals and institutions,  and (2) insurance services, including
management and agency services to medical malpractice insurance companies.

     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, banks and public funds. We recognize commissions revenue,
         and the related compensation expense, on a trade date basis.

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

     INSURANCE SERVICES. Through Insurance Services we provide management and
agency services to medical malpractice insurance companies through the following
subsidiary:

o        FMI.  FMI  provides  management  and  administrative  services  to
         APIE, a regional  insurance  exchange  that sells  medical professional
         liability  insurance  only  to its  physician  subscribers,  who  pay
         annual  insurance  premiums  and  surplus contributions  to APIE. APIE
         is governed by a physician  board of  directors.  Pursuant  to a
         management  agreement  and the direction of this board, FMI manages and


                                       13

<PAGE>

         operates APIE,  including  performing  policy  issuance,  claims
         investigation  and settlement, and all other management and operational
         functions.  As a management  fee, FMI receives a percentage of APIE's
         earned  premiums and a portion of APIE's  profit,  subject to a cap
         based on premium  levels.  We  recognize  revenues for the  management
         fee portion  based on a  percentage  of earned  premium on a monthly
         basis,  and we  recognize  revenues  for the management fee portion
         based on profit sharing when it is reasonably  certain the managed
         company will have an annual profit, generally in the fourth quarter.
         FMI's assets are not subject to APIE policyholder claims.

     In addition,  as of December 31, 2004,  we have the  following  significant
investments  accounted  for  as  available-for-sale   securities:   (1)  we  own
approximately  555,000  shares  of  HealthTronics  common  stock,   representing
approximately  2% of its outstanding  common stock, (2) we own 385,000 shares of
Financial  Industries   Corporation,   representing   approximately  4%  of  its
outstanding   common  stock.  Our  policy  is  to  account  for  investments  as
available-for-sale securities. This 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. Temporary
changes in fair value are recognized as unrealized gains or losses excluded from
earnings and reported as a separate  component of stockholder's  equity,  net of
income taxes.  Should a decline in an investment be deemed other than temporary,
as was the case with our investment in FIC during the third and fourth  quarters
of 2004,  pretax  charges to  earnings  will be taken in the period in which the
impairment is considered to be other than temporary.

     We also  invested  approximately  $4,903,000  from surplus cash in low risk
governmental and corporate fixed income securities. 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.  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.

     Our financial  services  revenues are composed  primarily of commissions on
securities trades. Revenues related to securities transactions are recognized on
a trade date basis.

     Our insurance  services  revenues are primarily  related to management fees
based on the earned premiums of the managed company and include a profit sharing
component,  as  defined in the  management  agreement,  related  to the  managed
company's annual earnings. Management fees are recorded, based upon the terms of
the management  agreement,  in the period the related premiums are earned by the
managed company.  The managed company recognizes premiums as earned ratably over
the terms of the related policy. The profit sharing component is recognized when


                                       14
<PAGE>

it is reasonably  certain the managed  company will have an annual profit,  and,
typically, has been recognized during the fourth quarter.

     When  necessary,  we record an  allowance  for doubtful  accounts  based on
specifically  identified  amounts  that we believe to be  uncollectible.  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 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.

     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 we would be able to realize our  deferred tax assets in
the future in excess of its 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 we 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.

     In 2002 we accounted for APS Consulting as a variable interest entity under
the guidance of FIN 46 "Consolidation of Variable Interest Entities". We had not
recognized the  divestiture  of APS Consulting and continued to consolidate  the
division as an entity in which we had a variable  interest that would absorb the
majority of the entity's  operating losses should they have occurred.  Effective
November 1, 2003, APS Consulting  paid off the negotiated  remainder of the note
due us, allowing us to cease accounting for them as a variable  interest entity.
Consequently,  we have reclassified the 2002 income statement and balance sheets
to reflect the  disposition of APS Consulting as a  discontinued  operation.

     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.

RESULTS OF OPERATIONS

OVERVIEW AND BUSINESS OUTLOOK

     In 2004,  we saw  substantial  improvement  in  operating  income  from our
insurance services segment compared to 2003. While revenues and operating income
were down in our  financial  services  segment  in 2004  compared  to 2003,  its
financial results still proved to be the second best in its history.  As we look
forward to 2005,  there are both  opportunities  and  impediments  to  continued
growth.

     APS  Financial,  the  broker/dealer  division  of  our  financial  services
segment,  recorded a solid  year in 2004 but fell  short of the  record  year it
enjoyed in both revenues and net profit in 2003. The market for investment grade
fixed income  securities was  negatively  impacted by low treasury rates while a
rich high yield market led to low spreads for  non-investment  grade securities,
leading to lower demand for both products.  Improving upon 2004 will depend upon
a  combination  of more  favorable  bond market  conditions as well as continued
minimal loss of personnel and growth of clients. Non-variable operating expenses
will  certainly  be  higher  in 2005 as a result  of  Sarbanes-Oxley  compliance
requirements   despite  the  recent  SEC  deferral  of  SOX  404  reporting  for
non-accelerated filers until December 2006.


                                       15
<PAGE>

     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 for many
years,  a loss of one or more key  individuals  and/or a loss of one or more key
accounts is possible and could have a material 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.

     APS Insurance  Services  enjoyed a record year in 2004 in both revenues and
operating  income.  Total  surplus at APIE grew  almost 28% in 2004  compared to
2003. If APIE's surplus  continues to grow,  this would continue to increase the
financial  strength of the company and its  capacity to write new  business  and
therefore  increase the amount of profit in which we would be able to share. For
2005, we expect non-variable  operating expenses to remain consistent,  with the
exception  of  professional  fees,  which  will be much  higher  as a result  of
Sarbanes-Oxley compliance requirements.

     The  insurance  segment is greatly  affected  by the  profitability  of the
medical malpractice  insurance company that we manage.  Significant increases in
claims  brought  against  our  insured  doctors  would  negatively   affect  the
profitability of APIE, and consequently,  the amount of profit, if any, we would
be able to share in.  This  risk has been  reduced  by  lowering  the  limits of
liability on the physicians  APIE insures  coupled with providing  policies that
cap our  overall  exposure.  Further,  there was  passage of tort and  insurance
reform in the State of Texas in 2003. The new  legislation  capped  non-economic
damages and placed restrictions on mass litigation.  As a result of tort reform,
competitors  have begun to re-enter  the State of Texas,  which could  result in
pressure  to lower  rates or a  reduction  in the number of  insurance  policies
written by APIE.

2004 COMPARED TO 2003

     Revenues from  operations  increased  $1,572,000 (5%) compared to 2003. Our
operating  income  increased  $1,381,000 (35%) to $5,344,000 in 2004 compared to
$3,963,000 in 2003. Our net earnings decreased $647,000 (23%) in 2004 to a total
of  $2,152,000  compared to net  earnings  of  $2,799,000  in 2003.  Our diluted
earnings  per share  decreased to $0.76 in 2004  compared to $1.14 in 2003.  The
reasons for these changes are described below.

FINANCIAL SERVICES

     Our financial services revenues decreased $2,918,000 (15%) in 2004 compared
to 2003. Although commission revenues in 2004 were the second highest in APS
Financial's twenty-three year history, they were down compared to 2003, which
saw record commission revenues at APS Financial. Our broker/dealer derives most
of its revenue from trading in the fixed income market, both in investment and
non-investment grade securities. Revenue from both grade securities was lower.
Investment grade markets are typically linked to treasury rates, which continued
to trade in 2004 at a historically low yield levels. Customers have been
cautious on committing funds, particularly to longer maturing instruments, thus
negatively impacting trading revenues. Also, in 2004 the U.S. high yield markets
were almost universally considered over-valued, trading at historically low
spreads to treasuries. Again, this contributed to a reluctance of our customers
to commit funds, and contributed to lower revenues.

     Our financial services expense decreased  $2,046,000 (12%) in 2004 compared
to 2003. The primary reason for the current year decrease is a $1,714,000  (15%)
decrease in commission expense resulting from the decrease in commission revenue
at APS Financial mentioned above. In addition, net profits before management


                                       16
<PAGE>

incentive  costs  decreased at APS Financial by $1,284,000  (29%) resulting in a
$530,000  (33%)   decrease  in  the  current  year  formula   driven   incentive
compensation  costs.  Partially  offsetting  these  decreases was an increase in
payroll costs of $108,000 (8%) in 2004 resulting from normal annual merit raises
as well as the hiring of two new full-time  positions.  In addition,  there were
relatively minor current year increases in employee benefits,  professional fees
and information services.

INSURANCE SERVICES

     Our insurance services revenues from our premium-based insurance management
segment, APS Insurance Services,  increased $4,490,000 (41%) in 2004 compared to
2003.  One of the primary  reasons for the current year growth is an increase of
$1,207,000  (167%) in  profits  shared  with  APIE.  The total  amount of profit
sharing  recognized in 2004 was $1,929,000,  all of which was recognized  during
the fourth quarter of 2004,  after profit sharing goals were attained.  In 2003,
we recognized  all of that year's total of $722,000 in profit sharing during the
fourth  quarter as well.  As the  certainty  of profits at APIE  cannot be fully
known until an  end-of-year  actuarial  analysis by  independent  actuaries,  we
cannot predict what, if any, profits will be available to us until this analysis
is  complete.  Another  main  reason  for the growth in  revenues  in 2004 was a
$1,607,000  (23%) increase in management  fees resulting from greater  insurance
premium  volumes.  Earned  premium  increased at APIE by 24% in 2004 compared to
2003 primarily as a result of new business and strong  retention of our existing
business in the current year.  Lastly,  commission  income increased  $1,435,000
(47%) in 2004 compared to 2003,  resulting  from  approximately  $15,040,000  in
additional written premium in the current year. As noted below, commissions paid
to third party independent agents increased by an equivalent  amount,  resulting
in no impact on net income.

     Insurance  services  expenses  at  our  insurance   management   subsidiary
increased  $1,976,000  (23%) in 2004 compared to 2003. The current year increase
is primarily due to the $1,435,000  (47%) increase in commissions  paid to third
party independent  agents. In addition,  payroll expense increased $208,000 (8%)
and formula driven incentive  compensation  expense increased  $206,000 (39%) in
2004 compared to 2003.  Payroll expense was up in the current year due primarily
to normal  annual merit raises in addition to  personnel  additions  made in the
latter  half of 2003 that  were  expensed  the  entire  year in 2004.  Among the
additions  was a  high-level  management  position  to  help  meet  our  growing
financial  reporting  requirements.  The  increase in formula  driven  incentive
compensation  cost was the result of an increase in segment  operating  profits.
Excluding incentive compensation costs, pre-tax profits at our insurance segment
rose $2,679,000 (95%). Lastly, depreciation and amortization costs were $102,000
(74%) higher in 2004 compared to 2003 as a result of amortizing the  non-compete
agreement that was created upon the  repurchase of the 20% minority  interest in
October,  2003 for a full year compared to only three months in 2003.  Partially
offsetting  these increases was a $176,000 (79%) decrease in advertising in 2004
compared to 2003, a result of re-branding  efforts of the business  performed in
2003.

GENERAL AND ADMINISTRATIVE EXPENSES

     General  and  administrative  expenses  increased  $309,000  (23%)  in 2004
compared  to 2003.  The  current  year  increase  was  primarily  due to  higher
incentive  compensation  expense  which was  $126,000  (19%)  greater in 2004 on
substantially  higher operating  income in the current year. Other  professional
fees were $40,000  (136%) higher in 2004  primarily as a result of fees incurred
in connection with Sarbanes-Oxley internal control procedures.  Also, director's
fees increased  $59,000 (64%) as a result of a higher fee structure  implemented
in 2004 as well as an increased number of board and committee  meetings compared
to 2003.  Partially  offsetting  these increases was a decrease in legal fees of
$29,000  (32%) in 2004,  the result of  non-recurring  fees  incurred in 2003 in
connection with our investment in Financial Industries Corporation, or FIC.




                                       17
<PAGE>

GAIN ON SALE OF ASSETS

     Gain on sale of assets  primarily  represents  the  recognition of deferred
income.  Approximately  $760,000 of the $5,100,000  deferred gain on the sale of
real estate to Prime  Medical (its name prior to the merger with  HealthTronics,
Inc.)  in  2001  was due to our  ownership  interest  in  Prime  Medical  and is
recognized  upon the  reduction of our  ownership  percentage  in Prime  Medical
through the sale of its stock. In 2004, we recognized approximately $56,000 from
the sale of a higher number of shares of Prime Medical common stock versus 2003,
when a gain of $8,000 was recorded.

GAIN ON SALE OF INVESTMENTS

     Gain on the sale of investment increased $118,000 (93%) in 2004 compared to
2003  as  a  result   of  gains   from  the  sale  of  a   greater   number   of
available-for-sale equity securities sold in the current year.

LOSS FROM IMPAIRMENT OF INVESTMENT

     The current  year loss was due to a  write-down  of our  investment  in FIC
common stock.  During 2004 in accordance  with SFAS 115, we determined  that the
decline in market  value of FIC common  stock was other  than  temporary  and we
recorded pretax charges to earnings totaling  $2,567,000.  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 is equal to the  quoted  market  price of FIC  shares on
December  31,  2004.  We believe the decline in the market price of FIC has been
brought  about by its  failure  to file its 2003  Form  10-K and its  subsequent
de-listing  from the  NASDAQ  Stock  Market.  We had  expected  FIC to bring its
filings current and pursue  restoring its exchange listing but these events have
not yet occurred. While we currently continue to have the ability and the intent
to  hold  the  stock  indefinitely,   we  have  concluded  that  the  additional
uncertainty  created  by the late  filings  together  with  the lack of  current
financial  information  dictates that the decline should be viewed as other than
temporary.

AFFILIATES EARNINGS (LOSS)

     Our equity in the  earnings of Prime  Medical (its name prior to the merger
with  HealthTronics,  Inc.)  was zero in 2004 as well as in 2003 as we no longer
account  for our  investment  in  Prime  Medical  using  the  equity  method  of
accounting,  as was the  case in the  first  quarter  of 2002  when we  recorded
$186,000 in equity earnings.  As of March 19, 2002, we ceased accounting for our
investment in Prime Medical using the equity method of accounting because (1) on
January 1, 2002,  Kenneth S.  Shifrin,  our Chairman and CEO,  stepped down from
day-to-day  operations as Executive Chairman of the Board of Prime Medical,  but
continued to serve as  non-executive  Chairman.  Mr. Shifrin further reduced his
responsibilities on Prime's Board to Vice-Chairman in 2004; and (2) from January
to March 19,  2002,  we sold  1,570,000  shares of Prime  Medical  common  stock
reducing our ownership percentage in 2002 to approximately 5%.

     Our equity in earnings of Uncommon Care was zero in 2004,  $260,000 in 2003
and a loss of $230,000 in 2002.  Because our total  investment  and  advances to
Uncommon Care has been reduced to zero, we suspended recording equity losses, as
required  under the equity  method.  In 2002,  we  advanced  them  $230,000  and
recorded a loss for the full amount of the  advance.  In 2003,  after  informing
Uncommon Care's management that we would make no further  advances,  we recorded
equity in  earnings  of  unconsolidated  affiliates  in the  amount of  $260,000
related to cash received from  Uncommon  Care. We expect no further  receipts of
cash from Uncommon Care and consequently  expect to record no additional  income
in the future.

INTEREST INCOME

     Our  interest  income  increased  $61,000  (20%) in 2004  compared  to 2003
primarily as a result of a higher balance of interest-bearing securities held in
2004.  At  December  31,  2004 we had a balance of  $4,903,000  in fixed  income
securities versus a balance of $897,000 at December 31, 2003.


                                       18
<PAGE>

OTHER INCOME (LOSS)

     Our other  income  increased  $53,000  in 2004 as a result of a  write-down
taken in 2003 totaling $120,000 on an equity  investment.  Partially  offsetting
this was a decrease of $51,000 in administrative  fee income from Eco-Systems in
2004 resulting from their decreased earnings.

MINORITY INTERESTS

     Minority  interests  represents the combination of two outside interests in
our subsidiaries:  a twenty percent interest in Insurance Services owned by FPIC
Insurance  Group,  Inc. and a three percent  interest in APS Asset Management or
APSAM,  a  subsidiary  within  our  financial  services  segment,  owned  by key
individuals  within APS Asset Management.  Minority  interests  decreased in the
current year due to the  repurchase  of the 20%  minority  interest in Insurance
Services from the minority  interest  holder,  FPIC Insurance  Group,  effective
October  1,  2003.  Consequently,  only nine  months of  minority  interest  was
recorded in 2003 compared to a full year in 2002. During 2004, minority interest
was recorded only at APSAM and amounted to just $1,000.

DISCONTINUED OPERATIONS

     Effective November 1, 2003 APS Consulting paid off the negotiated remaining
amount of the note  payable to us. Even  though we had sold this  segment to APS
Consulting's  management  exactly one year earlier,  we continued to consolidate
their revenues,  expenses and balance sheet items because we were dependent upon
future  successful  operations  of the division to collect our proceeds from the
disposal and we did not transfer risk of loss to  discontinue  reporting them on
our  consolidated  financial  statements.  With  the  payoff  of  the  note,  we
recognized  the  divesture  and now  report  APS  Consulting  as a  discontinued
operation.  Accordingly,  2002 has been  reclassified  to  remove  revenues  and
expenses from our consolidated statements of operations and after-tax results of
this former division are now recorded as income from discontinued  operations in
2002.  For 2003,  only the after-tax gain on disposal of the segment is recorded
as earnings from APS Consulting. There was no effect in 2004.

CASH FLOWS

     For the year  ended  December  31,  2004 our cash  provided  by  operations
increased  $852,000  (19%)  compared  to 2003 as a  result  of the  increase  in
operating  income at our  insurance  services  segment.  Cash used in  investing
activities  increased  $1,127,000  (35%) in 2004 compared to 2003 as a result of
proceeds  from the sale of  available-for-sale  equity  securities  during 2003,
which were much greater than those received in 2004.  Cash provided by financing
activities  decreased  $1,339,000  (153%) in 2004 as a result  of fewer  options
exercised  compared to 2003, a greater number of treasury stock shares purchased
during 2004 and cash dividends paid in 2004.

2003 COMPARED TO 2002

     Revenues from operations  increased  $7,372,000 (32%) compared to 2002. Our
net income from continuing  operations decreased $384,000 (12%) to $2,772,000 in
2003 from $3,156,000 in 2002. Our net earnings  decreased $612,000 (18%) in 2003
to a total of $2,799,000  compared to net earnings of  $3,411,000  in 2002.  Our
diluted earnings per share decreased to $1.14 in 2003 compared to $1.45 in 2002.
The reasons for these changes are described below.

FINANCIAL SERVICES

     Our financial services revenues increased $6,000,000 (44%) in 2003 compared
to 2002.  The increase was due to strong  commission  revenues at APS Financial.
APS  Financial  derives  most of its revenue  from  trading in the fixed  income
market,  both in investment grade and  non-investment  grade  securities.  While
revenue from investment grade transactions  increased,  revenue derived from the
high yield market was particularly strong, as that sector performed particularly
well throughout  2003, as evidenced by various high yield indices rising as much


                                       19
<PAGE>

as 29%  compared  to 2002.  Also,  we  continued  to have very low  turnover  in
personnel,  which gives us a better  probability  of  maintaining  our  customer
accounts.

     Our financial services expense increased  $4,708,000 (40%) in 2003 compared
to 2002. The primary  reason for the 2003 year  increases is a $3,808,000  (50%)
increase in commission expense resulting from the increase in commission revenue
at APS Financial  mentioned  above. In addition,  net profits before  management
incentive  costs  increased at APS Financial by $2,053,000  (79%) resulting in a
$762,000 (88%) increase in the current year formula driven management  incentive
costs.  Payroll related benefit costs were up $144,000 (25%) in 2003 as a result
of a 27% increase in health insurance costs as well as higher payroll taxes as a
result of much higher earnings by  commissioned  brokers.  Partially  offsetting
these increases were relatively  minor current year decreases in ticket charges,
information services, depreciation and advertising costs.

INSURANCE SERVICES

     Our insurance services revenues from our premium-based insurance management
segment, APS Insurance Services,  increased $1,372,000 (15%) in 2003 compared to
2002.  The primary  reason for the 2003 increase was that we  recognized  profit
sharing  with APIE in 2003 for the first time since  1999.  The total  amount of
profit  sharing  recognized  in 2003 was $722,000,  all of which was  recognized
during the fourth quarter of 2003, after profit sharing goals were attained.  As
the  certainty  of profits at APIE cannot be fully  known  until an  end-of-year
actuarial  analysis by  independent  actuaries,  we cannot predict what, if any,
profits  will be  available  to us until  this  analysis  is  complete.  Further
contributing  to the 2003 increase in revenues was a $644,000  (10%) increase in
management fees resulting from greater insurance  premium volumes.  The increase
in 2003 premiums was primarily the result of rate increases  throughout 2002 and
2003.

     Insurance  services  expenses  at  the  insurance   management   subsidiary
increased  $976,000  (13%) in 2003  compared  to 2002.  The  2003  increase  was
primarily due to a $309,000 (13%) increase in payroll  expense,  a 201,000 (37%)
increase in overhead  allocation  charged by the holding  company,  APS Group, a
$81,000 (15%) increase in management incentive expense, a $73,000 (32%) increase
in employee  benefits,  and a $130,000 (143%) increase in advertising.  The 2003
increase  in  payroll  was due  primarily  to the result of an  industry  salary
analysis  conducted in the latter half of 2002,  which  resulted in wages within
certain  departments  increasing  to  competitive  levels  in  order  to  retain
personnel.  In addition,  two high-level management positions were added in 2003
to expand our  business  development  and to meet  growing  financial  reporting
requirements.  The increase in  management  incentive  cost was the result of an
increase  in  segment  operating  profits.  As was the case with our  investment
services segment, employee benefit costs rose in the current year as a result of
an increase in health insurance costs. Lastly,  advertising costs were higher in
2003 as a result of re-branding efforts of the business.

GENERAL AND ADMINISTRATIVE EXPENSES

     General and administrative expenses decreased $83,000 (6%) in 2003 compared
to 2002.  The primary  reason for the current year decrease was a $201,000 (37%)
decrease in overhead  allocated to APS Insurance  Services.  In addition,  other
professional  fees was  $48,000  lower in 2003 as outside  consulting  fees were
incurred  in 2002 to  ascertain  the  value of a certain  investment.  Partially
offsetting  these decreases was a $37,000 (6%) increase in management  incentive
expense  resulting from  substantially  higher  operating  income in the current
year.  Legal fees were  $143,000  higher in 2003  primarily  as a result of fees
incurred in connection with our investment in FIC. Insurance expense was $45,000
(90%) higher in 2003 on increased  directors' and officers'  liability insurance
premiums.  Audit fees were  $37,000  (40%) higher in 2003 as a result of new SEC
and accounting regulations implemented during the year.


                                       20
<PAGE>

GAIN ON SALE OF ASSETS

     Gain on sale of assets  primarily  represents  the  recognition of deferred
income.  Approximately  $760,000 of the $5,100,000  deferred gain on the sale of
real estate to Prime  Medical (its title prior to the merger) in 2001 was due to
our ownership  interest in Prime Medical and is recognized upon the reduction of
our ownership  percentage  in  HealthTronics  through the sale of its stock.  In
2002, as a result of selling  1,570,000 shares of Prime Medical common stock, we
recognized a  proportionate  percentage of the deferred gain, or about $515,000.
During 2003, we sold 24,000 shares of Prime Medical  common stock and recognized
a gain of $8,000.

GAIN ON SALE OF INVESTMENTS

     Gain on the sale of investments decreased $2,728,000 (96%) in 2003 compared
to 2002.  The 2003 decline was due to the sale of  significantly  less shares of
Prime Medical  common stock in 2003 compared to 2002. In 2002, we recorded gains
on the sales of 1,570,000  shares compared to 24,000 shares sold in 2003.  Gains
resulting  from sales of Prime Medical  common stock were $64,000 and $2,855,000
in 2003 and 2002,  respectively.  As a result of these sales, as of December 31,
2003, we owned  approximately  728,000  shares of Prime Medical  amounting to an
ownership  percentage  of  approximately  4%. In  addition  to the sale of Prime
Medical  shares  we sold a number  of fixed  income  securities  in 2003,  which
resulted in gains comprising the majority of the remaining income reported.

AFFILIATES EARNINGS (LOSS)

     Our  equity  in the  earnings  of Prime  Medical  was zero in 2003 as we no
longer  accounted for our investment in Prime Medical using the equity method of
accounting,  as was the  case in the  first  quarter  of 2002  when we  recorded
$186,000 in equity earnings.  As of March 19, 2002, we ceased accounting for our
investment in Prime Medical using the equity method of accounting because (1) on
January 1, 2002,  Kenneth S.  Shifrin,  our Chairman and CEO,  stepped down from
day-to-day  operations as Executive Chairman of the Board of Prime Medical,  but
continued to serve as non-executive  Chairman; and (2) from January to March 19,
2002,  we  sold  1,570,000  shares  of  Prime  Medical  reducing  our  ownership
percentage to approximately 5%.

     Our equity in  earnings  of  Uncommon  Care  increased  to $260,000 in 2003
compared  to a loss of  $230,000  in 2002.  Because  our  total  investment  and
advances to Uncommon Care has been reduced to zero we suspended recording equity
losses,  as required under the equity method. In 2002, we advanced them $230,000
and recorded a loss for the full amount of the advance. In 2003, after informing
Uncommon Care's management that we would make no further  advances,  we recorded
equity in  earnings  of  unconsolidated  affiliates  in the  amount of  $260,000
related to cash received from  Uncommon  Care. We expect no further  receipts of
cash from Uncommon Care and consequently  expect to record no additional  income
in the future.

INTEREST INCOME

     Our  interest  income  decreased  $68,000  (18%) in 2003  compared  to 2002
primarily as a result of a higher balance of interest-bearing securities held in
2002. In June 2003, we liquidated approximately $4.0 million in interest-bearing
securities in order to secure the funds  required to invest in 385,000 shares of
FIC common stock.

OTHER LOSS

     Our other loss  decreased  $120,000  (76%) in 2003  compared  to 2002.  The
primary  reason  for the  current  year  decrease  in loss  was  the  result  of
management  fees  received in 2003 from our former  consulting  division,  which
totaled $98,000.



                                       21
<PAGE>

MINORITY INTERESTS

     Minority  interests  represents the combination of two outside interests in
our subsidiaries:  a twenty percent interest in Insurance Services owned by FPIC
Insurance Group,  Inc. and a three percent interest in APS Asset  Management,  a
subsidiary  within our  financial  services  segment,  owned by key  individuals
within APS Asset Management.  Minority  interests  decreased in the current year
due to the  repurchase of the 20% minority  interest in Insurance  Services from
the minority interest holder,  FPIC Insurance Group,  effective October 1, 2003.
Consequently,  only nine  months  of  minority  interest  was  recorded  in 2003
compared to a full year in 2002.

DISCONTINUED OPERATIONS

     Effective November 1, 2003 APS Consulting paid off the negotiated remaining
amount of the note  payable to us. Even  though we had sold this  segment to APS
Consulting's  management  exactly one year earlier,  we continued to consolidate
their revenues,  expenses and balance sheet items because we were dependent upon
future  successful  operations  of the division to collect our proceeds from the
disposal and we did not transfer risk of loss to  discontinue  reporting them on
our consolidated financial statements. With the payoff of the note we recognized
the  divesture  and now  report  APS  Consulting  as a  discontinued  operation.
Accordingly, 2002 has been reclassified to remove revenues and expenses from our
consolidated  statements  of  operations  and  after-tax  results of this former
division are now recorded as income from  discontinued  operations in 2002.  For
2003, only the after-tax gain on disposal of the segment is recorded as earnings
from APS Consulting.

LIQUIDITY AND CAPITAL RESOURCES

WORKING CAPITAL

     Our net working capital was $10,673,000 and $8,537,000 at December 31, 2004
and 2003,  respectively.  The increase in the current year was due  primarily to
cash received from operations.  Partially  offsetting these increases to working
capital in 2004 was an increase of  $296,000 in accrued  commissions  payable at
our  broker/dealer  subsidiary  resulting  from increased  commission  earned in
December  2004 compared to December  2003.  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 2005, 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
$9.7  million  comprising  32% of our  total  assets;  (2)  our  investments  in
available-for-sale   equity  and  fixed  income   securities  could  provide  an
additional  $14.3  million  should the need arise;  and (3) we renewed a line of
credit in April 2004 that is described below.

LINE OF CREDIT

     During  April  2004,  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, 2005,
when the  entire  amount of the note,  principal  and  interest  then  remaining
unpaid,  shall be due and payable.  At December  31,  2004,  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.

CAPITAL EXPENDITURES

     Our capital expenditures for equipment were $421,000 and $223,000 in 2004
and 2003, respectively. Our capital expenditures were higher in 2004 due to
purchases necessary to upgrade our reporting software at our insurance services


                                       22
<PAGE>

subsidiary.  At December 31, 2004, our reporting  software upgrade is considered
to be "in progress" with  anticipated  implementation  in phases during 2005 and
2006. As the assets purchased during 2004 have not been placed in service,  they
are appropriately not being depreciated.  We expect capital expenditures in 2005
to be approximately $495,000,  including another $250,000 in improvements to our
business intelligence reporting software. Our 2005 capital expenditure budget is
expected to be funded through cash on hand.

Commitments

     There were no participation agreements or purchase commitments at December
31, 2004. We have committed cash outflow related to operating lease arrangements
with a term exceeding one year at December 31, 2004 as follows (in thousands):

                                                Payment Due
Contractual Cash Obligations    2005    2006    2007    2008    2009    Total
                                ----    ----    ----    ----    ----    -----
Operating Leases                $845    $551    $32     $19     $5      $1,452


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,
2004,  the total of all customer  securities  pledges on debit  balances held in
margin  accounts was  approximately  $10.5  million while the total value of the
securities within these margin accounts was approximately  $80.1 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,  having
no manufacturing  operations,  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.


                                       23
<PAGE>

IMPACT OF NEW ACCOUNTING STANDARDS

     As more  fully  described  in Note 1 of  Notes  to  Consolidated  Financial
Statements,  on July 1, 2005,  we are required to adopt  several new  accounting
standards. For a discussion of the impact of those new accounting standards upon
us, see Note 1 (n).

ITEM 7A.       QUANITATIVE 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.  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 2005,  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 2005 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 2005,  interest  rate  changes  will  have no  impact  on our  financial
position as it pertains to interest expense.

INVESTMENT RISK

     As of December 31, 2004, our recorded  basis in debt and equity  securities
was approximately  $14.3 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. On October 12, 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.  Consequently,  we recorded a
pretax charge to earnings of $2,374,000 in the third quarter of 2004. The charge
reduced  our  cost  basis  in FIC from  $5,647,000,  or  $14.67  per  share,  to
$3,273,000, or $8.50 per share which was equal to the quoted market price of FIC
shares on September  30, 2004. We believe the decline in the market price of FIC
has been  brought  about by its  failure  to file  its  2003  Form  10-K and its
subsequent de-listing from the NASDAQ Stock Market. We had expected FIC to bring
its filings current and pursue  restoring its exchange  listing by September 30,
2004.   As  of  February  28,  2005  these  events  have  still  not   occurred.
Consequently,  we have determined that we will continue to write this investment
down to  period-end  fair market  value until such time as FIC brings its public
filings current. Accordingly,  during the fourth quarter of 2004, we recorded as
additional pretax charge to earnings of $193,000 which further reduced our basis
in FIC to $3,080,000,  or $8.00 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 the late filings  together  with the lack of
current financial  information  dictated that these declines should be viewed as
other than  temporary.  The effect on our  financial  statements  as a result of
these  write-downs  was  to  reduce  pre-tax  income  by  $2,567,000,   decrease
unrealized  holding  losses  in Other  Comprehensive  Income by  $1,694,000  and
decrease  deferred tax assets by $873,000.  We will continue to closely  monitor
FIC's situation.


                                       24
<PAGE>

     We  also  have  an  investment   of  555,000   shares  of  common  sock  of
HealthTronics,  Inc.  Although  we have  an  unrealized  gain  of  approximately
$3,149,000 as of December 31, 2004,  this  investment can also be at risk should
market or economic  conditions change for the worse or should adverse situations
occur at  HealthTronics,  such as a major  product line becoming  obsolete.  The
remainder of our corporate  equity and fixed income  investments  share the same
risks as HealthTronics but our exposure is much lower.

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

     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 Securities Exchange Act of 1934, as amended,  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 the design and
operation of these disclosure controls and procedures. 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.

     Subsequent to the date of our evaluation  described above, we have not made
any significant  changes in our internal controls or in other factors that could
significantly affect these controls.


ITEM 9B.     OTHER INFORMATION

     None.


                                       25
<PAGE>

                                    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."


                                     PART IV

ITEM 15.     EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) 1. Consolidated Financial Statements

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

    2. Financial Statement Schedule (Schedule II)

(b) Exhibits (1)

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

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

  4.1  Specimen of Common Stock Certificate. (2)

  4.2  Rights Agreement, dated as of August 15, 2000, 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. (10)

                                       26
<PAGE>


 *10.1   1995 Incentive and Non-Qualified Stock Option Plan of American
         Physicians Service Group, Inc. (6)

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

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

  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 the
         Company. (3)

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

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

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

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

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

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


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

  10.13  Convertible Promissory Note dated April 27, 1999 between  the Company
         and Uncommon Care, Inc. (10)

  10.14  Replacement Convertible Promissory Note dated September 30, 1999
         between the Company and Uncommon Care, Inc. (10)

  10.15  Liquidity Promissory Note dated September 30, 1999 between the Company
         and Uncommon Care, Inc. (10)

  10.16  Replacement Liquidity Note dated October 15, 1999 between the Company
         and Uncommon Care, Inc. (10)

  10.17  $1.25 million Promissory Note dated June 1, 2000 between the Company
         and Uncommon Care, Inc. (11)

  10.18  $1.20 million Promissory Note dated June 1, 2000 between the Company
         and Uncommon Care, Inc. (11)

  10.19  Agreement dated November 22, 2002 transferring and assigning all
         capital stock of Eco-Systems from the Company to the purchaser. (13)

 *10.20  Amended 1995 Incentive and Non-Qualified Stock Option Plan (13)

  10.21  Executive Employment Agreement between the Company and Kenneth S.
         Shifrin. (13)

 *10.22  Consulting Agreement between the Company and William A. Searles. (13)

 *10.23  Executive Employment Agreement between the Company and William H.
         Hayes. (13)

                                       27
<PAGE>


  10.24   Stock Purchase Agreement dated October 31, 2003 between the Company
          and FPIC Insurance Group, Inc. (13)

  10.25   Revolving Promissory Note dated April 15, 2004 between the Company and
          PlainsCapital Bank. (14)

  10.26   Commercial Loan Agreement dated April 15, 2004 between the Company and
          PlainsCapital Bank. (14)

  21.1    List of subsidiaries of the Company. (14)

  23.1    Independent Auditors Consent of BDO Seidman, LLP. (14)

  31.1    Certification of Chief Executive Officer Pursuant to Section 302 of
          the Sarbanes-Oxley Act of 2002. (14)

  31.2    Certification of Chief Financial Officer Pursuant to Section 302 of
          the Sarbanes-Oxley Act of 2002. (14)

  32.1    Certification of Chief Executive Officer Pursuant to Section 906 of
          the Sarbanes-Oxley Act of 2002. (14)

  32.2   Certification of Chief Financial Officer Pursuant to Section 906 of the
         Sarbanes-Oxley   Act  of  2002.  (14)

(*) Executive Compensation plans and arrangements.

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

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

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

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

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

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

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

                                       28
<PAGE>


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

(9)  Filed 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.

(10) 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.

(11) 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.

(12) 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.

(13) 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.

(14) 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 29, 2005

         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 29, 2005


                                       29
<PAGE>


By: /s/ W. H. Hayes
   ------------------------------------------------------

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

Date:    March 29, 2005



By: /s/ Thomas R. Solimine
   ------------------------------------------------------

     Thomas R. Solimine
     Controller
     (Principal Accounting Officer)

Date:    March 29, 2005



By: /s/ Jackie Majors

      Jackie Majors, Director

Date:    March 29, 2005



By: /s/ Robert L. Myer
   ----------------------------------------------------------

     Robert L. Myer, Director

Date:    March 29, 2005



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

     William A. Searles, Director

Date:    March 29, 2005



By: /s/ Cheryl Williams

     Cheryl Williams, Director

Date:    March 29, 2005


                                       30
<PAGE>

                                  APPENDIX A




                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS





                                                                          Page



Report of Independent Registered Public Accounting Firm                     A-2

Consolidated Financial Statements

   Consolidated Statements of Operations for the Years
   ended December 31, 2004, 2003 and 2002                                   A-3

   Consolidated Balance Sheets as of December 31, 2004
   and December 31, 2003                                                    A-5

   Consolidated Statements of Cash Flows for the Years
   ended December 31, 2004, 2003 and 2002                                   A-7

   Consolidated Statements of Shareholders' Equity and Comprehensive
   Income (Loss) for the Years ended December 31, 2004, 2003 and 2002       A-8

   Notes to Consolidated Financial Statements                               A-9




                                      A-1

<PAGE>





             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,  2004 and 2003,  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, 2004. We have also audited the schedule listed in Item
15. These financial  statements and the 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.  According,  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
presentation  of the  financial  statements  and  schedule.  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,  2004 and 2003,  and the results of its
operations  and its cash  flows  for the each of the three  years in the  period
ended  December 31, 2004, in conformity  with  accounting  principles  generally
accepted in the United  States of America.  Also,  in our  opinion,  the related
financial  statement  schedule,   when  considered  in  relation  to  the  basic
consolidated  financial  statements taken as a whole,  presents  fairly,  in all
material respects, the information set forth herein.


BDO Seidman, LLP

Houston, Texas
March 4, 2005



                                      A-2
<PAGE>
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS


(In thousands, except per share data)
<TABLE>
<CAPTION>
                                                                                          Year Ended December 31,
                                                                                2004               2003               2002
                                                                            -------------      --------------      ------------
Revenues:
<S>                                                                              <C>                 <C>               <C>
Financial services                                                               $16,705             $19,623           $13,623
Insurance services                                                                15,316              10,826             9,454
                                                                            -------------      --------------      ------------
   Total revenues                                                                 32,021              30,449            23,077

Expenses:
Financial services                                                                14,538              16,584            11,876
Insurance services                                                                10,558               8,582             7,606
General and administrative                                                         1,637               1,328             1,411
Gain on sale of assets                                                               (56)                 (8)             (515)
                                                                            -------------      --------------      ------------
   Total expenses                                                                 26,677              26,486            20,378
                                                                            -------------      --------------      ------------

Operating income                                                                   5,344               3,963             2,699
Gain on sale of investments (Note 5)                                                 245                 127             2,855
Loss from impairment of investment (Note 5)                                       (2,567)                 --                --
Gain on extinguishment of debt                                                        75                  --                --
                                                                            -------------      --------------      ------------

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

Interest income                                                                      365                 304               372
Other income (loss)                                                                   15                 (38)             (158)
Interest expense                                                                       7                   7                24
Income tax expense (Note 10)                                                       1,317               1,640             2,283
Minority interests                                                                     1                 197               261
Equity in earnings (loss) of unconsolidated affiliates (Note 15)                      --                 260               (44)
                                                                            -------------      --------------      ------------
 Income from continuing operations                                                  2,152               2,772             3,156

Discontinued operations (Note 13):
Income from discontinued operations, net of income tax
  expense of $132 in 2002                                                             --                  --               255
Gain on disposal of discontinued segment
  net of income tax expense of $14 in 2003                                            --                  27                --
                                                                            -------------      --------------      ------------
    Net income                                                                   $ 2,152             $ 2,799           $ 3,411
                                                                            =============      ==============      ============

</TABLE>

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


                                      A-3
<PAGE>

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


(In thousands, except per share amounts)
<TABLE>
<CAPTION>
                                                                                  Year Ended December 31,
                                                                                        December 31,

                                                                     ----------------        ---------------      ------------
                                                                          2004                    2003                 2002
                                                                     ----------------        ---------------      ------------

Net income per common share:

Basic:
<S>                                                                      <C>                    <C>                 <C>
Income from continuing operations                                        $ 0.85                 $ 1.26              $ 1.42
Discontinued operations                                                      --                   0.01                0.11
                                                                        --------               --------            --------
Net income                                                               $ 0.85                 $ 1.27              $ 1.53
                                                                         =======                =======             =======


Diluted:
Income from continuing operations                                        $ 0.76                 $ 1.13              $ 1.35
Discontinued operations                                                      --                   0.01                0.11
                                                                        --------               --------             -------
Net income                                                               $ 0.76                 $ 1.14              $ 1.45
                                                                         =======                =======             =======

Basic weighted average shares
 outstanding                                                              2,545                  2,207               2,227
                                                                         ======                 ======               =====
Diluted weighted average shares
 outstanding                                                              2,838                  2,449               2,345
                                                                         ======                 ======               =====


</TABLE>


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



                                      A-4
<PAGE>

                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
                          CONSOLIDATED BALANCE SHEETS

(In thousands)
<TABLE>
<CAPTION>
                                                                                                 December 31,
                                                                                         2004                   2003
                                                                                       --------               -------
ASSETS

Current Assets:
<S>                                                                                     <C>                    <C>
  Cash and cash equivalents                                                             $9,673                 $8,989
  Trading account securities                                                                --                     67
  Trade receivables, net                                                                    19                     --
  Management fees and other receivables                                                  1,815                  1,079
  Notes receivable - current (Note 3)                                                      777                     16
  Deposit with clearing organization                                                       660                    500
  Receivable from clearing organization                                                     --                     67
  Investment in available-for-sale fixed
   income securities - current                                                           1,983                     --
  Net deferred income taxes                                                                124                    532
  Income tax receivable                                                                     76                  1,678
  Prepaid expenses and other current assets                                                642                    565
                                                                                     ---------               --------
      Total current assets                                                              15,769                 13,493


   Notes receivable, less current portion                                                  141                    436
   Property and equipment, net (Note 6)                                                    619                    378
   Investment in available-for-sale securities:
     Equity (Note 5)                                                                     9,417                  8,729
     Fixed income                                                                        2,920                    897
   Goodwill                                                                              1,247                  1,257
   Other assets                                                                            330                    448
                                                                                    ----------               --------
Total Assets                                                                           $30,443                $25,638
                                                                                    ==========               ========

</TABLE>


The accompanying notes are an integrated 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,
                                                                                                2004               2003
                                                                                              --------           --------
LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
<S>                                                                                            <C>                <C>
  Accounts payable - trade                                                                       $266               $201
  Payable to clearing broker                                                                       --                 67
  Accrued incentive compensation                                                                2,500              2,716
  Accrued expenses and other liabilities (Note 7)                                               1,842              1,485
  Deferred gain - current                                                                         488                487
                                                                                              -------            -------
      Total current liabilities                                                                 5,096              4,956

Payable under loan participation agreements                                                        24                259
Deferred income tax liability                                                                     482                146
Deferred gain - non-current                                                                       627              1,171
                                                                                              -------            -------
      Total liabilities                                                                         6,229              6,532

Minority interests                                                                                  1                 --

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;
    2,624,372 and 2,454,667 issued and outstanding
    at 12/31/04 and 12/31/03, respectively                                                        265                245
  Additional paid-in capital                                                                    7,919              6,918
  Retained earnings                                                                            13,948             12,314
  Accumulated other comprehensive income (loss), net of taxes                                   2,081               (371)
                                                                                             --------           --------

      Total shareholders' equity                                                               24,213             19,106
                                                                                             --------           --------

Total Liabilities and Shareholders' Equity                                                    $30,443            $25,638
                                                                                             ========           ========

</TABLE>

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



                                      A-6

<PAGE>

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

<TABLE>
<CAPTION>

(In thousands)                                                                           Year Ended December 31
                                                                              2004                 2003                2002
                                                                           ---------            ---------            --------
Cash flows from operating activities
<S>                                                                         <C>                  <C>                <C>
   Net Income                                                               $ 2,152              $ 2,799            $ 3,411

    Adjustments to reconcile net income to cash
      provided by (used in) operating activities:
         Depreciation and amortization                                           304                  206                188
         Extinguishment of debt and other                                         39                  164                164
         Common stock awarded                                                    231                   --                 --
         Minority interest in consolidated earnings                                1                  197                261
         Undistributed (earnings) loss of affiliates                              --                 (260)                44
         Loss (gain) on sale of assets                                           (56)                  19               (515)
         Deferred gain on sale of building                                      (488)                (488)              (488)
         Tax benefit from exercise of stock options                              589                   --                 --
         Impairment of investment                                              2,567                   --                 --
         Gain on sale of investments                                            (245)                (127)            (2,855)
         Provision for bad debt                                                   20                  (58)               200
    Changes in operating assets and liabilities:
         Trade and other receivables                                            (179)                (325)              (170)
         Trading account securities                                               67                   66                 16
         Income tax receivable                                                 1,602                 (996)              (324)
         Deferred income tax                                                     744                2,511               (486)
         Management fees & other receivables                                    (746)                (316)              (279)
         Prepaid expenses & other assets                                         (74)                 207                474
         Deferred income                                                          --                 (122)               (85)
         Trade accounts payable                                                   66                 (138)               227
         Accrued expenses & other liabilities                                 (1,137)               1,266                (85)
                                                                             -------             --------            -------
           Net cash provided by (used in) operating activities                 5,457                4,605               (302)

Cash flows from investing activities:
    Capital expenditures                                                        (421)                (319)              (154)
    Proceeds from the sale of available-for-sale equity
      and fixed income securities                                              1,116                4,118             10,719
    Purchase of available-for-sale equity securities                          (4,405)              (5,697)            (4,683)
    Purchase of minority interest                                                 --               (2,050)                --
    Receipts from (advances to) affiliate                                         --                  175               (230)
    Funds loaned to others                                                      (620)                (155)              (155)
    Collection of notes receivable                                                20                  745                725
                                                                             -------             --------           --------
           Net cash (used in) provided by investing activities                (4,310)              (3,183)             6,222

Cash flows from financing activities:
    Payment of long-term debt                                                     --                   --             (2,275)
    Exercise of stock options                                                    758                1,351                 45
    Purchase and cancellation of treasury stock                                 (703)                (285)              (850)
    Dividends paid                                                              (518)                  --                 --
    Distribution to minority interest                                             --                 (190)                --
                                                                             -------             --------           --------
           Net cash provided by (used in) financing activities                  (463)                 876             (3,080)

Net change in cash and cash equivalents                                        $ 684              $ 2,298            $ 2,840

Cash and cash equivalents at beginning of year                                 8,989                6,691              3,851
                                                                             -------             --------           --------
Cash and cash equivalents at end of year                                     $ 9,673              $ 8,989            $ 6,691
                                                                            ========            =========           ========


</TABLE>


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


                                      A-7
<PAGE>

                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
(In thousands)
<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, 2001              $ 275      $ 5,539     $ 8,310                       $ (39)        $ (1,418)      $ 12,667
Comprehensive income:
    Net income                           --          --         3,411        3,411             --              --          3,411
    Other comprehensive income,
     net of tax:
      Unrealized gain on securities,
       net of reclassification
       adjustment (Note 21)              --          --          --          1,869            1,869            --          1,869
Comprehensive income                     --          --          --          5,280             --              --            --
Treasury stock purchases                 --          --          --            --              --            (850)          (850)
Retired treasury stock                  (62)                   (2,206)         --              --            2,268           --
Stock options exercised                  --          45          --            --              --              --            45
                                    ------------------------------------------------------------------------------------------------
Balance December 31, 2002              $213       $5,584       $9,515        $ --            $1,830          $ --         $17,142
                                    ================================================================================================

Comprehensive income:
    Net income                          --           --         2,799        2,799             --              --          2,799
    Other comprehensive income,
     net of tax:
      Unrealized loss on  securities,
       net of reclassification
       adjustment (Note 21)             --           --          --         (2,201)          (2,201)           --         (2,201)

Comprehensive income                    --           --          --           598              --              --            --
Treasury stock purchases                --           --          --            --              --            (284)          (284)
Retired treasury stock                  (6)         (279)        --            --              --             284            --
Stock options exercised                 38          1,313        --            --              --              --          1,351
Tax benefit from exercise of
stock options                           --           300         --            --              --              --           300
                                    ------------------------------------------------------------------------------------------------
Balance December 31, 2003              $245       $6,918      $12,314        $ --            ($371)          $ --         $19,106
                                    ================================================================================================



</TABLE>


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

                                      A-8
<PAGE>


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

(In thousands)
<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)
Stock awarded                              2           229         --          --               --            --              231
Forgiveness of Uncommon Care Debt          --          146         --          --               --            --              146
                                      ----------------------------------------------------------------------------------------------
Balance December 31, 2004                 $265       $7,919      $13,948     $ --             $2,081        $ --          $24,213
                                      ==============================================================================================


</TABLE>


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

                                      A-9
<PAGE>


                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2004, 2003 and 2002

(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 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 financial statements, financial
         services generated 52%, 64% and 59% of total revenues and insurance
         services generated 48%, 36% and 41% in 2004, 2003 and 2002,
         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 FIN 46R.

         We own 100% of our insurance services segment after repurchasing the
         20% formerly owned by Florida Physicians Insurance Group, Inc.
         ("FPIC"), on September 30, 2003 (see Note 14). Before this date, we
         recorded minority interest to reflect the 20% of its net income or loss
         attributable to the minority shareholder.

         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-10
<PAGE>
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2004, 2003 and 2002

(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 as a
                                       separate component of stockholders'
                                       equity, 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. 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 depreciated 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 whenever events or changes in circumstances indicate that
         the carrying amount may not be recoverable. If the sum of the


                                      A-11
<PAGE>
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2004, 2003 and 2002

(1)      Summary of Significant Accounting Policies, continued

         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.

         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
         no impairment to these investments.

         (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. 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 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 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.



                                      A-12
<PAGE>
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2004, 2003 and 2002

(1)      Summary of Significant Accounting Policies, continued

         (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 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

         We have adopted the disclosure-only provisions of Statement of
         Financial Accounting Standards No. 123, Accounting for Stock-Based
         Compensation ("Statement 123"), but apply Accounting Principles Board
         Opinion No. 25, Accounting for Stock Issued to Employees, in accounting
         for our stock option plans. In 2003 we purchased 15,000 unexpired
         options from a grantee and in 2002 we purchased 89,000 unexpired
         options from four grantees. These purchases in effect modified the
         terms of the options and, accordingly, we recognized $34,000 and
         $156,000 of compensation expense in 2003 and 2002, respectively, as
         required for a modification of terms under FIN 44. No other
         compensation expense from stock-based compensation awards was
         recognized in 2004, 2003 and 2002. 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:



                                      A-13
<PAGE>

                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2004, 2003 and 2002

(1)      Summary of Significant Accounting Policies, continued


<TABLE>
<CAPTION>
                                                                                    Year Ended December 31,
                                                               ---------------------------------------------------------------
                                                                     2004                   2003                    2002
                                                                     ----                   ----                    ----
<S>                                                              <C>                    <C>                     <C>
Net income, as reported                                          $ 2,152,000            $ 2,799,000             $ 3,411,000

Add: Stock-based employee compensation expense
  included in net income, net of tax                                      --                 22,000                 103,000
Deduct: Total stock-based employee compensation
  expense determined  under the fair value based
  method for all awards, net of related tax effects                 (550,000)              (241,000)               (222,000)
                                                                   ---------              ---------               ---------
Pro forma net income                                             $ 1,602,000            $ 2,580,000             $ 3,292,000
                                                                 ===========           ============            ===========

Net income per share
Basic - as reported                                                    $0.85                  $1.27                   $1.53
                                                                       =====                  =====                   =====
Basic - pro forma                                                      $0.63                  $1.17                   $1.48
                                                                       =====                  =====                   =====
Diluted - as reported                                                  $0.76                  $1.14                   $1.45
                                                                       =====                  =====                   =====
Diluted - pro forma                                                    $0.56                  $1.05                   $1.40
                                                                       =====                  =====                   =====
</TABLE>



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


                                    2004            2003            2002
                                    ----            ----            ----
  Risk-free interest rate           3.03%           2.44%           3.40%
  Expected holding period           3.8 years       3.8 years       3.7 years
  Expected volatility               .429            .407            .477
  Expected dividend yield            -0-             -0-             -0-



         (n)      Recently Issued Accounting Pronouncements

         In December 2004, the FASB issued SFAS 153, Exchanges of Nonmonetary
         Assets, an amendment of APB No. 29, Accounting for Nonmonetary
         Transactions. SFAS 153 requires exchanges of productive assets to be
         accounted for at fair value, rather than at carryover basis, unless (1)
         neither the asset received nor the asset surrendered has a fair value
         that is determinable within reasonable limits or (2) the transactions
         lack commercial substance. SFAS 153 is effective for nonmonetary asset
         exchanges occurring in fiscal periods beginning after June 15, 2005.
         The Company does not expect the adoption of this standard to have a
         material effect on its financial position, results of operations or
         cash flows.

         In December 2003, the Financial Accounting Standards Board published
         FIN No. 46-R, "Consolidation of Variable Interest Entities (revised
         December 2003)," superseding FIN 46, and exempting certain entities
         from the provisions of FIN 46. Generally, application of FIN 46-R is
         required in financial statements of public entities that have interests
         in structures commonly referred to as special-purpose entities for
         periods ending after December 15, 2003, and for other types of VIEs for
         periods ending after March 15, 2004. We

<PAGE>
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2004, 2003 and 2002

(1)      Summary of Significant Accounting Policies, continued

         currently do not consolidate any variable interest entities therefore
         the adoption of this standard did not have a material effect on our
         financial position, results of operations or cash flows.

         In December 2004, the Financial Accounting Standards Board issued
         Statement of Financial Accounting Standards, or SFAS, No. 123 (revised
         2004), "Share-Based Payment". Statement 123(R) will provide investors
         and other users of financial statements with more complete and neutral
         financial information by requiring that the compensation cost relating
         to share-based payment transactions be recognized in financial
         statements. That cost will be measured based on the fair value of the
         equity or liability instruments used. Statement 123(R) covers a wide
         range of share-based compensation arrangements including share options,
         restricted share plans, performance-based awards, share appreciation
         rights, and employee share purchase plans. Statement 123(R) replaces
         FASB Statement No. 123, Accounting for Stock-Based Compensation, and
         supersedes APB Opinion No. 25, Accounting for Stock Issued to
         Employees. Statement 123, as originally issued in 1995, established as
         preferable a fair-value-based method of accounting for share-based
         payment transactions with employees. However, that Statement permitted
         entities the option of continuing to apply the guidance in Opinion 25,
         as long as the footnotes to financial statements disclosed what net
         income would have been had the preferable fair-value-based method been
         used. Public entities (other than those filing as small business
         issuers) will be required to apply Statement 123(R) as of the first
         interim or annual reporting period that begins after June 15, 2005. We
         are currently evaluating the effect of adoption of SFAS 123(R) will
         have on our overall results of operations and financial position.

         (o)      Reclassification

         Certain reclassifications have been made to amounts presented in 2003
         and 2002 to be consistent with the 2004 presentation.

 (2)     Management Fees and Other Receivables

         Management fees and other receivables consist of the following:

                                                        December 31,
                                                    2004              2003
                                                   -----             -----

        Management fees receivable              $1,661,000         $ 739,000
        Accrued interest receivable                 67,000            22,000
        Other receivables                           87,000           318,000
                                                ----------         ---------
                                                $1,815,000        $1,079,000
                                                ==========        ==========

         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, FMI sells
         and issues medical insurance policies, investigates, settles and
         defends claims, and otherwise manages APIE's affairs. The management
         agreement with FMI obligates APIE to pay management fees to FMI based
         on a percentage of APIE's earned premiums before


                                      A-15
<PAGE>
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2004, 2003 and 2002

         (2)      Management Fees and Other Receivables, continued

         payment of reinsurance premiums. In addition, the management agreement
         provides that any profits, as defined, of APIE will be shared equally
         with FMI so long as the total payment (fees and profit sharing) does
         not exceed a cap based on premium levels. Management fees attributable
         to profit sharing were $1,929,000, $722,000 and $0 for the years ended
         December 31, 2004, 2003 and 2002. We earned total management fees and
         other related income of $15,316,000, $10,826,000 and $9,455,000,
         including expense reimbursements, principally for our independent
         agents' commissions, of $4,482,000, $3,373,000 and $3,368,000 for the
         years ended December 31, 2004, 2003 and 2002, respectively, related to
         these agreements.

         The summarized financial information for APIE as of and for the year
         ended December 31, 2004, 2003 and 2002 is as follows:

<TABLE>
<CAPTION>

                                                           2004                     2003                      2002
                                                           ----                     ----                      ----
                                                        (unaudited)              (unaudited)              (unaudited)
                                                        ------------             ------------             ------------

<S>                                                    <C>                       <C>                      <C>
Invested assets                                        $ 106,958,000             $ 86,547,000             $ 67,293,000
Other assets                                              24,194,000               16,181,000               13,428,000
                                                          -----------              -----------              ----------
Total Assets                                           $ 131,152,000            $ 102,728,000             $ 80,721,000
                                                       ==============           ==============            ============

Current liabilities                                    $ 109,914,000             $ 86,945,000             $ 67,736,000
Surplus                                                   21,238,000               15,783,000               12,985,000
                                                          -----------              -----------              ----------
Total liablilities and surplus                         $ 131,152,000            $ 102,728,000             $ 80,721,000
                                                       ==============           ==============            ============

Total revenue                                           $ 69,099,000             $ 56,009,000             $ 41,078,000
Net income                                               $ 4,296,000              $ 1,299,000              $ 1,503,000

</TABLE>



         Other receivables in 2004 and 2003 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 2004 and 2003.




                                      A-16
<PAGE>
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2004, 2003 and 2002


(3)      Notes Receivable

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

                                                                                                             December 31,
                                                                                                         2004            2003
                                                                                                         ----            ----
         <S>                                                                                           <C>              <C>
         FemPartners, Inc. (Formerly due from Syntera HealthCare Corporation)
         Promissory note, bears interest at 8%. Payments were interest only,
         paid quarterly through November 30, 2001. Quarterly combined principal
         and interest payments began December 1, 2001 and were to continue
         through September 1, 2004, at which time the total outstanding balance
         was due. In December 2003 we agreed to extend the maturity one year
         interest only at 8%. The remaining principal and interest payments are
         due March 1, June 1, and September 1, 2005. The maturity date of this
         note can be accelerated if FemPartners conducts an initial public
         offering or other public sale of its common stock. If such occurs, the
         note shall mature and become due and payable on the 5th business day
         after the date of such initial public offering or other public sale.
                                                                                                       $420,000         $420,000
         Atlast Financial Services, LLC
         Unsecured term note, principal and interest, at 8% payable monthly
         until maturity on October 15, 2005.
                                                                                                        235,000            - 0 -
         Employees
         Loans are periodically made to non-officer employees, primarily as
         employment retention inducements. Employee notes receivable at December
         31, 2004 consisted of two notes of $2,000 and $248,000, which are being
         amortized through October 31, 2005 and June 30, 2006, respectively,
         provided the employees remain with us; a note for $14,000 due
         currently; and two loans totaling $13,000 to a key employee for
         advanced education fees. The latter two notes are forgivable in the
         amount of approximately $13,000 on each January 1st that the employee
         is employed by the Company beginning in 2001 and continuing through
         2005. They are due within 90 days should the employee terminate
         employment.

         Employee notes receivable at December 31, 2003 consisted of a note
         totaling $6,000 which is being amortized through 2004, provided the
         employee remains with us and two loans totaling $26,000 to a key
         employee for advanced education fees. The same terms apply as described
         above.
                                                                                                        277,000            32,000
                                                                                                        -------            ------

                                                                                                        932,000           452,000
         Less current portion and allowance for doubtful accounts of $14,000 and
         $0, in 2004  and 2003, respectively.                                                          (791,000)          (16,000)
                                                                                                       ---------        ----------

         Long term portion                                                                             $141,000          $436,000
                                                                                                       ========          ========
</TABLE>


                                      A-17
<PAGE>
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2004, 2003 and 2002

(4)      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.

         CASH AND CASH EQUIVALENTS

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

         TRADING ACCOUNT SECURITIES

         The trading account securities owned are reported at fair value. In the
         absence of any available market quotation, securities held by us are
         valued at estimated fair value as determined by management.

         AVAILABLE-FOR-SALE SECURITIES

         Available-for-sale securities owned are reported at fair value, based
         upon quoted market prices.

         ACCOUNTS RECEIVABLE

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

         MANAGEMENT FEES AND OTHER RECEIVABLES

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

         NOTES RECEIVABLE

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

         DEPOSIT WITH CLEARING ORGANIZATIOn

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

         ACCOUNTS PAYABLE

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


                                      A-18
<PAGE>
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2004, 2003 and 2002

(4)      Fair Value of Financial Instruments, continued

         LIMITATIONS

         Fair value estimates are made at a specific point in time, based on
         relevant market information and information about the financial
         instrument. Fair value estimates are based on existing 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.

(5)      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
                                                                  Unrealize           Unrealized          Fair
                                              Cost                  Gains              Losses             Value
                                        -----------------------------------------------------------------------------
December 31, 2004

<S>                                        <C>                     <C>                <C>               <C>
Governmental obligations                   $ 3,492,000             $     --           $ (26,000)        $ 3,466,000
Corporate obligations                        1,406,000               51,000             (20,000)          1,437,000
Equity securities                            6,268,000            3,149,000                  --           9,417,000
                                             ----------           ----------           ---------         -----------


Total                                      $11,166,000           $3,200,000           $ (46,000)        $14,320,000
                                           ============          ===========          ==========        ===========

December 31, 2003

Corporate obligations                        $ 884,000             $ 13,000        $          --          $ 897,000
Equity securities                            9,306,000                   --             (577,000)         8,729,000
                                            ----------             --------            ---------          ---------

Total                                      $10,190,000             $ 13,000           $ (577,000)        $9,626,000
                                           ============            =========          ===========        ==========

</TABLE>

       (1) Unrealized losses in 2004 and 2003 were in a loss position for less
than one year.

             Maturities of fixed income securities were as follows at December
31, 2004:


                                      A-19

<PAGE>
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2004, 2003 and 2002

(5)     Marketable Securities, continued

                                                         Fair
                                       Cost              Value
                                    ----------        ----------
        Due within one year         $1,993,000        $1,983,000
        Due after one year           2,905,000         2,920,000
                                     ---------         ---------
        Total                       $4,898,000        $4,903,000
                                    ==========        ==========


         Amounts reflected in the tables above include equity securities of
         HealthTronics with a fair value of $5,900,000 and $3,416,000 and
         corporate obligations of HealthTronics with a fair value of $944,000
         and $897,000 at December 31, 2004 and 2003, respectively. At December
         31, 2004 and 2003, amounts also include equity securities of Financial
         Industries Corporation ("FIC") with a fair value of $3,080,000 and
         $5,313,000, respectively.

         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,
         2004 stood at 555,000, or approximately 2% 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".

         On June 4, 2003 we purchased from Financial Industries Corporation
         ("FIC")(OTC: FNIN.PK) and a 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 represent an approximate
         4% ownership in FIC. The aggregate purchase price was approximately
         $5,647,000, which was all sourced from our cash reserves. The shares
         purchased from FIC and the foundation are not registered, but are
         subject to a registration rights agreement requiring FIC's best efforts
         to register them within one year of the transaction. Due to FIC's delay
         in filing its 2003 Form 10-K and its March 31, 2004, June 30, 2004
         Forms 10-Q, it has not been able to register these shares and was
         delisted from the NASDAQ exchange in July 2004. Subsequently, FIC was
         delinquent in filing its September 30, 2004 Form 10-Q.

         By September 30, 2004, the value of our investment in FIC had declined
         significantly. On October 12, 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. Consequently, we recorded a
         pretax charge to earnings of $2,374,000 in the third quarter 2004. The
         charge reduced our cost basis in FIC from $5,647,000, or $14.67 per
         share, to $3,273,000, or $8.50 per share, which is equal to the quoted
         market price of FIC shares on September 30, 2004. By December 31, 2004,
         the value of our investment in FIC had declined further. On December
         31, 2004, we determined that this decline in market price was "other
         than temporary". Consequently, we recorded a pretax charge to earnings
         of $193,000 in the fourth quarter 2004. The charge reduced our cost
         basis in FIC from $3,273,000, or $8.50 per share, to $3,080,000, or
         $8.00 per share, which is equal to the quoted market price of FIC
         shares on December 31, 2004.


                                      A-20
<PAGE>
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2004, 2003 and 2002

(5)       Marketable Securities, continued

         As discussed in our Forms 10-Q dated June 30 and September 30, 2004, we
         believe the decline in the market price of FIC has been brought about
         by its failure to file its 2003 Form 10-K and its subsequent de-listing
         from the NASDAQ Stock Market. We had expected FIC to bring its filings
         current and pursue restoring its exchange listing but these events have
         not yet occurred. While we currently continue to have the ability and
         the intent to hold the stock indefinitely, we concluded that the
         additional uncertainty created by the late filings together with the
         lack of current financial information dictated that the decline should
         be viewed as other than temporary. We will continue the policy during
         2005 of monitoring and evaluating the situation at FIC and further
         determining 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.

                                                Year ended December 31,
                                2004                 2003               2002
                                ----                 ----               ----
     Proceeds from sales     $1,116,000          $4,080,000         $10,731,000

     Gains                      245,000             197,000           2,855,000
     Losses**                (2,567,000)            (70,000)                 --
                             ----------            --------          ----------
     Net gains (losses)     $(2,322,000)            127,000          $2,855,000
                             ==========            ========          ==========


         ** Note: The loss in 2004 resulted from other than temporary impairment
         charges to income and were not the result of the sale of a security at
         a loss.

(6)      Property and Equipment

         Property and equipment consists of the following:

                                                 December 31,
                                    ------------------------------------------
                                          2004                     2003
                                          ----                     ----
    Equipment                         $ 1,150,000              $ 1,059,000
    Furniture                             628,000                  624,000
    Software                              643,000                  323,000
    Leasehold improvements                332,000                  332,000
                                         --------                 -------
                                      $ 2,753,000              $ 2,338,000

    Accumulated depreciation         $ (2,134,000)            $ (1,960,000)
                                     ============             ============
                                        $ 619,000                $ 378,000
                                       ==========               =========


                                      A-21
<PAGE>
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2004, 2003 and 2002

(6)      Property and Equipment, continued

         Property and equipment are stated at cost. Depreciation expense of
         $181,000, $173,000 and $166,000 in 2004, 2003 and 2002, 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 depreciated over the life of the lease or their expected useful
         life, whichever is shorter.

(7)      Accrued Expenses and Other Liabilities

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

                                             2004                     2003
                                             ----                     ----
         Commissions payable             $ 1,260,000                $ 964,000
         Taxes payable                       205,000                  116,000
         401(k) plan matching                169,000                  121,000
         Vacation payable                    153,000                  158,000
         Other                                55,000                  126,000
                                             -------                 -------
                                         $ 1,842,000              $ 1,485,000
                                         ===========               ==========




(8)      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 is being recognized monthly over
         the five-year lease term through November 2006. Income recognition
         related to this deferral was $488,000 in 2004, 2003 and 2002. 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. During 2004, 2003 and 2002 we reduced our
         investment in HealthTronics and subsequently recognized a proportionate
         percentage of the deferred gain, amounting to $56,000, $8,000 and
         $515,000 in 2004, 2003, and 2002, respectively. Recognition of the
         deferred gain is recorded as a reduction of rent expense in operating
         expenses in the accompanying financial statements.

(9)      Commitments and Contingencies

         Rental expenses under all operating leases were $1,098,000, $997,000
         and $1,077,000, for the years ended December 31, 2004, 2003 and 2002,
         respectively. Future minimum payments for leases that extend for more
         than one year through 2009 were $845,000; $551,000; $32,000; $19,000,
         $5,000 for 2005, 2006, 2007, 2008 and 2009, respectively.


                                      A-22
<PAGE>
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2004, 2003 and 2002

(9)      Commitments and Contingencies, continued

         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.

(10)     Income Taxes

         Income tax expense consists of the following:

<TABLE>
<CAPTION>

                                                                     Year Ended December 31,
                                                        2004                      2003                    2002
                                                        ----                      ----                    ----
<S>                                                     <C>                   <C>                     <C>
Continuing Operations:
Federal
Current                                                 $ 1,049,000            $ (978,000)            $ 2,339,000
Tax benefit of stock options                                589,000                    --                      --
Deferred                                                   (505,000)            2,511,000                (151,000)
State-Current                                               184,000               107,000                  95,000
                                                       ------------          ------------             -----------
Total from Continuing Operations                          1,317,000             1,640,000               2,283,000
Discontinued Operations                                          --                14,000                 132,000
                                                       ------------          ------------             -----------
                                                         $1,317,000            $1,654,000              $2,415,000
                                                       ============          ============             ===========
</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
         continuing operations in the accompanying consolidated statements of
         operations follows:

<TABLE>
<CAPTION>

                                                                            Year Ended December 31,
                                                                  2004                     2003                     2002
                                                                  ----                     ----                     ----
<S>                                                            <C>                      <C>                     <C>
Expected federal income tax expense from
  continuing operations                                        $ 1,179,000              $ 1,500,000             $ 1,849,000
State taxes                                                        121,000                   72,000                  63,000
Goodwill adjustment                                                     --                       --                 214,000
Minority interest                                                       --                   67,000                  89,000
Other, net                                                          17,000                    1,000                  68,000
                                                                   -------                   ------                  ------
                                                               $ 1,317,000              $ 1,640,000             $ 2,283,000
                                                               ===========             ============             ===========

</TABLE>


                                      A-23
<PAGE>
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2004, 2003 and 2002

(10)     Income Taxes, continued

         The tax effect of temporary differences that gives rise to significant
         portions of deferred tax assets and deferred tax liabilities at
         December 31, 2004 and 2003 are presented below:


<TABLE>
<CAPTION>
                                                                                Year Ended December 31,
                                                                        -------------------------------------
                                                                              2004                  2003
                                                                              ----                  ----

Current deferred tax assets (liabilities):
<S>                                                                        <C>                   <C>
   Market value allowance on investments                                   $     --              $ 191,000
   Accrued expenses                                                         113,000                357,000
   Allowance for doubtful accounts                                           11,000                  6,000
   Capitalized expenses, principally due to deductibility
     for tax purposes                                                            --                (22,000)
                                                                          ----------            -----------

       Total current deferred tax asset                                     124,000                532,000
                                                                          ==========            ===========

Non-current deferred tax assets (liabilities):
   Write-off of investment in excess of tax loss                            873,000                     --
   Other investments                                                          8,000                126,000
   Sales/Leaseback deferred income                                          378,000                564,000
   Investment in available-for-sale securities                             (677,000)              (889,000)
   Market value allowance on investments                                 (1,072,000)                    --
   Other                                                                    136,000                 53,000
   Tax depreciation in excess of book                                      (128,000)                    --
                                                                         -----------            -----------
       Total non-current net deferred tax liability                        (482,000)              (146,000)
                                                                         ===========            ===========

Net deferred tax asset (liability)                                       $ (358,000)             $ 386,000
                                                                         ===========            ===========

</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, 2004.



                                      A-24
<PAGE>
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2004, 2003 and 2002

(11)     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 $13,000 in 2004 unless participant is over age
         50, in which case the maximum deferral is $16,000. We may, at our
         discretion, contribute up to 200% of the employees' deferred amount.
         For the years ended December 31, 2004, 2003 and 2002 our contributions
         aggregated $170,000, $176,000 and $135,000, 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.
         Final adoption of the Deferred Compensation Plan is dependent on
         shareholder approval 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. We are currently evaluating the impact of SFAS 123R on our
         deferred compensation plan.

(12)     Stock Options

         We have adopted, with shareholder approval, the "1995 Non-Employee
         Directors Stock Option Plan" ("Directors Plan") and the "1995 Incentive
         and Non-Qualified Stock Option Plan" ("Incentive Plan"). The Directors
         Plan provides for the issuance of up to 200,000 shares of common stock
         to non-employee directors who serve on the Compensation Committee. The
         Directors Plan is inactive and it is assumed the remaining 170,000
         shares will not be granted. The Incentive Plan, as amended with
         shareholder approval in 1998, 2001, and 2002 provides for the issuance
         of up to 1,600,000 shares of common stock to our directors and key
         employees. A total of 1,451,000 of these options have been granted as
         of December 31, 2004, 721,000 of which remain unexercised of which
         389,000 are exercisable.

         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 substantially all outstanding options
         vest in two or three approximately equal annual installments beginning
         one year from the date of grant


                                      A-25
<PAGE>
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2004, 2003 and 2002

(12)     Stock Options, continued

        Presented below is a summary of the stock options held by our employees
        and our directors and the related transactions for the years ended
        December 31, 2004 and 2003.


<TABLE>
<CAPTION>
                                                                Year Ended December 31,
                                 -----------------------------------------------------------------------------------------------
                                            2004                                2003                            2002
                                 ----------------------------       ----------------------------      --------------------------
                                                    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                815,000           $4.49            939,000          $3.51            788,000         $3.45
Options granted                     146,000            9.93            330,000           6.46            305,000          3.72
Options exercised                  (240,000)           3.16           (378,000)          3.57            (13,000)         1.69
Options repurchased                   --                 --            (15,000)          4.29            (89,000)         2.38

Options forfeited/expired             --                 --            (61,000)          5.73            (52,000)         6.26
                                 -----------          -----          ---------          -----            -------         -----
Balance at December 31              721,000           $6.04            815,000          $4.49            939,000         $3.51
                                 ===========          =====          =========          =====            =======         =====
Options exercisable                 389,000           $5.80            289,000          $3.01            500,000         $3.78
                                 ===========          =====          =========          =====            =======         =====

</TABLE>

        The weighted average fair value (the theoretical option value calculated
        using the Black Scholes option pricing model) of Company stock options
        granted is $3.58, $2.20 and $1.46 per option during the years ended
        December 31, 2004, 2003 and 2002, respectively. In this case, as of
        December 31, 2004, the weighted average theoretical option value per
        share of Company stock options ($13.51) less the weighted average
        exercise price of options granted ($9.93) equals the weighted average
        fair value of options granted ($3.58).

         The following table summarizes the Company's options outstanding and
exercisable options at December 31, 2004:


<TABLE>
<CAPTION>
                                 Stock Options Outstanding                  Stock Options Exercisable
                         -------------------------------------------     ----------------------------
                                          Average         Weighted                          Weighted
                                         Remaining         Average                           Average
 Range of                               Contractual       Exercise                          Exercise
Exercise Prices            Shares           Life            Price               Shares        Price
---------------          ---------      -----------      ----------           ---------     ----------
<C>                        <C>          <C>                <C>                 <C>             <C>
$1.69 to $4.50             425,000      2.3 years          $3.61               239,000         $3.33
$4.51 to $10.12            296,000      4.3 years          $9.51               150,000         $9.73
                          --------                                             --------

Total                     721,000                                              389,000
                          ========                                             =======

</TABLE>

(13)     Discontinued Operations


          Effective November 1, 2002, we completed the sale of APS Consulting to
          its management as we determined the division's operations were not
          consistent with our long-term strategic plan. We sold all of our APS
          Consulting shares for a de minimus amount of cash plus a $250,000
          seven-year term note at the prime rate plus 3%. Our existing contract,
          which was entered into October 1, 2002, provides administrative
          support services to APS Consulting for a period of approximately seven
          years, and

                                      A-26
<PAGE>
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2004, 2003 and 2002

(13)     Discontinued Operations, continued


          remained in effect. Fees under this contract are dependent on APS
          Consulting's pre-tax earnings but may not be less than $200,000 or
          more than $518,000 over the life of the agreement. Because we were
          dependent upon the future successful operation of the division to
          collect our proceeds from the disposal and because we had a security
          interest in the assets of the division, we had retained a sufficient
          risk of loss to preclude us from recognizing the divestiture of APS
          Consulting under the guidance of FASB Interpretation No 46.
          Accordingly, we did not recognize the divestiture of APS Consulting
          and continued to consolidate the division as an entity in which we
          have a variable interest that will absorb the majority of the entity's
          operating losses if they occurred.

          Effective November 1, 2003, APS Consulting was able to obtain third
          party financing and repay their note payable to us in exchange for our
          agreeing to discount the note by $35,000. We provided no guarantees or
          credit enhancements in connection with APS Consulting securing this
          financing. Accordingly, we no longer have a risk of loss related to
          these operations and have recognized the transaction as a divestiture.
          As a result, we ceased consolidation of APS Consulting financial
          statements effective November 1, 2003. In addition, we were able to
          recognize a gain of $27,000, net of tax, and administrative support
          fees totaling $84,000 for the period from November 1, 2002 through
          October 31, 2003 that had previously been eliminated as intercompany
          revenues.

          The accompanying financial statements reflect the financial position,
          results of operations and cash flows of APS Consulting as discontinued
          operations.

          A summary of results of operations related to discontinued operations
          for the years ended December 31, 2004, 2003 and 2002 is as follows:

                                        2004            2003            2002
                                        ----            ----            ----
         Consulting Revenue               --              --         $3,296,000
         Consulting Expenses              --              --          2,909,000
                                       -----           -----          ---------
         Net Income                       --              --         $  387,000
                                       =====           =====          =========

(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 will provide us more control
         over operating decisions and will improve 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 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-27
<PAGE>
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2004, 2003 and 2002

(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
                                                               ===========



         The net carrying value of goodwill as of December 31, 2004 is comprised
         of the following


         Balance December 31, 2002
             Additions                          $1,257,000
             Deletions                                  --
                                                 ---------
         Balance December 31, 2003               1,257,000
             Additions                                  --
             Valuation Adjustment                  (10,000)
                                                 ---------
         Balance December 31, 2004              $1,247,000
                                                ==========


         Other intangible assets as of December 31, 2004, subject to
amortization expense, contains the following:

<TABLE>
<CAPTION>
                                                                 Gross Carrying        Accumulated
For the year ended December 31, 2004                                 Amount            Amortization              Net
------------------------------------
                                                                 ------------          ------------         -------------
<S>                                                                 <C>                   <C>                   <C>
Non-compete                                                         $ 410,000             $ 149,000             $ 261,000
Managing general agent license                                        160,000                34,000               126,000
                                                                 ------------          ------------         -------------
   Total                                                              570,000               183,000               387,000
                                                                 ============          ============         =============

For the year ended December 31, 2003
Non-compete                                                         $ 400,000              $ 29,000             $ 371,000
Managing general agent license                                        160,000                30,000               130,000
                                                                 ------------          ------------         -------------
   Total                                                              560,000                59,000               501,000
                                                                 ============          ============         =============

</TABLE>


                                      A-28
<PAGE>
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2004, 2003 and 2002

(14)     Repurchase of Minority Interest, continued



         As of December 31, 2004, the net carrying value of the non-compete
         agreement was $261,000, net of $149,000 accumulated amortization
         recognized since 2003.

         We assume no residual value and estimate annual amortization expense
         over the remaining life of the agreement to be as follows:
                  Year                       Amount
                 -----                     ----------
                  2005                      $120,000

                  2006                       120,000

                  2007                        21,000


         The unaudited pro forma income statement data below show the impact of
         the repurchase as if it had happened prior to the reporting periods:


                                                 2003               2002
                                              -------------      -------------
Revenue:
   As reported                                $ 30,449,000        $ 23,077,000
   Pro forma                                  $ 30,449,000        $ 23,077,000

Net earnings as reported                        $2,799,000          $3,411,000

Add:  Minority Interest attributable
          to APS Insurance Services,
          net of income taxes                    $ 197,000           $ 268,000
                                                ----------           ---------

Pro forma net earnings                         $ 2,996,000         $ 3,679,000
                                              ============         ===========

Earnings per share:
Basic - as reported                                  $1.27               $1.53
                                                    ======               =====
Basic - pro forma                                    $1.36               $1.65
                                                    ======               =====
Diluted - as reported                                $1.14               $1.45
                                                    ======               =====
Diluted - pro forma                                  $1.22               $1.57
                                                    ======               =====



                                      A-29
<PAGE>
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2004, 2003 and 2002

(15)     Investment in Unconsolidated Affiliates


         For the year ended December 31, 2004, 2003 and 2002, respectively, our
         equity in the earnings (loss) of unconsolidated affiliates consisted of
         the following:

                                                 December 31,
                                     ------------------------------------
                                     2004            2003             2002
                                     ----            ----             ----

     Prime Medical Services, Inc.   $  --            $  --          $186,000
     Uncommon Care                     --          260,000          (230,000)
                                     ----          -------           -------
       Earnings (loss)              $  --         $260,000          $(44,000)
                                     ====          =======           =======


         On October 12, 1989, we purchased 3,540,000 shares (42%) of the common
         stock of Prime Medical. In the ensuing years, the sale of stock, stock
         exchanges and stock issuances reduced our ownership and at December 31,
         2004 our holdings stood at 555,000 or approximately 2% of the common
         stock outstanding.


         In the first quarter of 2002, with the sale of Prime Medical shares
         reducing our ownership to less than 5%, and our chairman and CEO
         reducing his responsibilities on Prime's Board, we discontinued the use
         of the equity method and began to account for our Prime Medical
         investment as an available-for-sale equity security. Prior to
         discontinuing equity method accounting on March 1, 2002 we recorded
         equity in Prime Medical's earnings of $186,000. In connection with the
         sales of Prime Medical (or HealthTronics as of 2004) shares during the
         year, we recognized gains of $245,000 in 2004, $64,000 in 2003 and
         $2,855,000 in 2002. The gains are classified as "Gain on Sale of
         Investments" in the accompanying consolidated financial statements.
         Changes in market value of our HealthTronics shares are included in
         shareholders equity as "accumulated other comprehensive income".


         HealthTronics is an SEC registrant and additional information on the
         company can be found on the SEC's web site at www.sec.gov.

         On January 1, 1998 we invested approximately $2,078,000 in the
         convertible preferred stock of Uncommon Care, Inc. and extended notes
         totaling $4,430,000. Uncommon Care is a developer and operator of
         Alzheimer's care facilities. We accounted for Uncommon Care using the
         equity method.

         Recording our share of Uncommon Care's accumulated losses had reduced
         the carrying value of our investment and our notes to zero by December
         31, 2002. Following Uncommon Care's payment default to its senior
         lender in 2003 we sold our interest for a de minimus amount and wrote
         off the notes.

         Some of our officers and directors participated in the $2,400,000 line
         of credit to Uncommon Care. For financial purposes this participation
         has been treated as a secured borrowing. In the aggregate, these
         officers and directors contributed approximately $259,000 to fund a
         10.8% interest in the loan. They participate in the loan under the same
         terms as the Company.

         During 2004, loan participants whose interests totaled $235,000
         released the Company from all liability under the participation
         agreements. Of the total, $146,000 was related to affiliates of the
         Company and was recorded as an addition to Additional Paid-In Capital.
         The remaining $89,000 was related to non-affiliates and was recorded as
         Other Income.


                                      A-30
<PAGE>
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2004, 2003 and 2002

(15)     Investment in Unconsolidated Affiliates, continued

         During 2003 we decided not to extend any future cash advances to
         Uncommon Care. Consequently, we took into income cash payments
         previously received from Uncommon Care. Total cash receipts recorded as
         equity in earnings of unconsolidated affiliates was $260,000 in 2003.

         During 2002 we expensed the $230,000 that we advanced under the lines
         of credit. As this advance represented a funding of Uncommon Care's
         prior losses, the amount was expensed when advanced and is included in
         the equity in loss related to this affiliate. Repayments on the line of
         credit during 2002 were $85,000 and were recorded as deferred income to
         offset possible future advances.

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

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

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

         Income from the discontinued consulting segment was derived from
         operations in 2002 and from gains on disposal in 2003.




                                      A-31
<PAGE>
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2004, 2003 and 2002

(16)     Segment Information, continued

<TABLE>
<CAPTION>
                                                                          2004                 2003                 2002
                                                                          ----                 ----                 ----
Operating Revenues
<S>                                                                  <C>                  <C>                  <C>
 Financial services                                                  $ 16,705,000         $ 19,623,000         $ 13,623,000
 Insurance services                                                    15,316,000           10,826,000            9,454,000
 Other                                                                  4,760,000            2,567,000            1,024,000
                                                                       ----------           ----------           ----------
                                                                     $ 36,781,000         $ 33,016,000         $ 24,101,000
                                                                     ============        =============         ============

Reconciliation to Consolidated Statements of Operations:
 Total segment revenues                                                 36,781,000           33,016,000           24,101,000
  Less: intercompany dividends                                          (4,760,000)          (2,567,000)          (1,024,000)
                                                                       -----------          -----------          -----------
    Total Revenues                                                    $ 32,021,000         $ 30,449,000         $ 23,077,000
                                                                      ============        =============         ============

Operating Income (Loss):
 Financial services                                                      2,167,000            3,039,000          $ 1,747,000
 Insurance services                                                      4,758,000            2,244,000          $ 1,848,000
 Other                                                                   3,179,000            1,247,000              128,000
                                                                        ----------            ---------           ----------
                                                                      $ 10,104,000          $ 6,530,000          $ 3,723,000
                                                                      ============         ============          ===========

Reconciliation to Consolidated Statements of Operations:
 Total segment operating profit                                       $ 10,104,000          $ 6,530,000          $ 3,723,000
  Less: intercompany dividends                                          (4,760,000)          (2,567,000)          (1,024,000)
                                                                       -----------          -----------          -----------
Operating income                                                         5,344,000            3,963,000            2,699,000
Gain (loss) on investments                                              (2,322,000)             127,000            2,855,000
Gain on extinguishment of debt                                              75,000                   --                   --
                                                                          --------            ---------            ---------

Income from continuing operations before interest, income
 taxes, minority interests and equity in gain and loss of
 unconsolidated affiliates                                               3,097,000            4,090,000            5,554,000
Interest income                                                            365,000              304,000              372,000
Other income                                                                15,000              (38,000)            (158,000)
Interest expense                                                             7,000                7,000               24,000
Income tax expense                                                       1,317,000            1,640,000            2,283,000

Minority interests                                                           1,000              197,000              261,000
Equity in profit (loss) of affiliates                                           --              260,000              (44,000)
                                                                          --------             --------             --------
Income from continuing operations                                        2,152,000            2,772,000            3,156,000

Net income from discontinued operations,
 net of income tax                                                              --                   --              255,000

Gain on disposal of discontinued operations,
 net of income tax                                                              --               27,000                   --
                                                                        ----------           ----------           ----------
Net income                                                             $ 2,152,000          $ 2,799,000          $ 3,411,000
                                                                       ===========          ===========          ===========
</TABLE>



                                      A-32
<PAGE>
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2004, 2003 and 2002

<TABLE>
<CAPTION>

                                                                       2004                    2003                    2002
                                                                        ----                    ----                    ----
IDENTIFIABLE ASSETS:
<S>                                                                 <C>                      <C>                     <C>
 Financial services                                                 $ 5,106,000              $ 4,970,000             $ 3,727,000
 Insurance services:
  Intangible assets                                                   1,507,000                1,627,000                      --
  Other                                                               4,526,000                3,965,000               2,882,000
 Corporate:
  Investment in available for sale securities                        14,320,000                9,626,000              11,284,000
  Other                                                               4,984,000                5,450,000               6,265,000
                                                                     ----------               ----------              ----------
                                                                   $ 30,443,000             $ 25,638,000            $ 24,158,000
                                                                   ============             ============            ============

CAPITAL EXPENDITURES:
 Financial services                                                    $ 10,000                 $ 32,000                $ 24,000
 Insurance Services                                                     362,000                  160,000                  78,000
 Corporate                                                               49,000                   31,000                  37,000
 Discontinued Operations                                                     --                   96,000                  15,000
                                                                        -------                  -------                 -------
                                                                      $ 421,000                $ 319,000               $ 154,000
                                                                     ==========               ==========               =========

DEPRECIATION/AMORTIZATION EXPENSES:
 Financial services                                                    $ 27,000                 $ 31,000                $ 42,000
 Insurance Services                                                     217,000                  110,000                  55,000
 Corporate                                                               60,000                   65,000                  73,000
 Discontinued Operations                                                     --                       --                  18,000
                                                                       --------                 --------                 -------
                                                                      $ 304,000                $ 206,000               $ 188,000
                                                                     ==========               ==========               =========

</TABLE>

         During the years ended December 31, 2004, 2003 and 2002, a single
         customer represented 48% ($15,316,000), 36% ($10,826,000) and 41%
         ($9,454,000) of our consolidated revenues.

         At December 31, 2004, 2003 and 2002 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-33
<PAGE>
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2004, 2003 and 2002

(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, 2004
                                                                     ----------------------------------------
                                                                   Income                Shares           Per-Share
                                                                 (Numerator)          (Denominator)        Amount
                                                                 -----------           -----------       ----------
<S>                                                              <C>                     <C>                <C>
Income from continuing 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
                                                                ============            ==========          =====


                                                                      For the Year Ended December 31, 2003
                                                                     ---------------------------------------
                                                                   Income                Shares          Per-Share
                                                                (Numerator)           (Denominator)        Amount
                                                                 ----------           ------------       ----------
Income from continuing operations                                $ 2,772,000
Discontinued operations, net of tax                                   27,000
Basic EPS:
Income available to common stockholders                            2,799,000             2,207,000          $1.27
                                                                                                            =====
Effect of dilutive securities                                             --               242,000
                                                                ------------            ----------
Diluted EPS:
Income available to common stockholders                          $ 2,799,000             2,449,000          $1.14
                                                                ============            ==========          =====


                                                                      For the Year Ended December 31, 2002
                                                                     --------------------------------------
                                                                    Income               Shares          Per-Share
                                                                  (Numerator)         (Denominator)        Amount
                                                                   ---------           -----------       ----------
Income from continuing operations                                $ 3,156,000
Discontinued operations, net of tax                                  255,000
Basic EPS:
Income available to common stockholders                            3,411,000             2,227,000          $1.53
                                                                                                            =====
Effect of dilutive securities                                             --               118,000
                                                                ------------            ----------
Diluted EPS:
Income available to common stockholders                          $ 3,411,000             2,345,000          $1.45
                                                                ============            ==========          =====
</TABLE>


                                      A-34
<PAGE>
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2004, 2003 and 2002

(17)     Net Income Per Share, continued

         Unexercised employee stock options to purchase 23,250, 191,250 and
         432,000 shares of our common stock for the years ended December 31,
         2004, 2003 and 2002, respectively, were not included in the
         computations of diluted EPS because their effect would be antidilutive.

(18)     Shareholders' Equity

         The following table presents changes in shares outstanding for the
         period from December 31, 2002 to December 31, 2004:

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

Balance December 31, 2001                 2,745,231                386,000
Options excercised                           13,000                     --
Treasury stock purchases                         --                238,388
Treasury stock retirements                 (624,388)              (624,388)
                                       ------------            -----------
Balance December 31, 2002                 2,133,843                     --
                                       ============            ===========

Options excercised                          377,800                     --
Treasury stock purchases                         --                 56,976
Treasury stock retirements                  (56,976)               (56,976)
                                       ------------            -----------
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                     --
                                        ===========            ===========



(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, 2004, 2003 and
          2002:


                                      A-35
<PAGE>
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2004, 2003 and 2002

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

                                                               First           Second         Third          Fourth
                                                              Quarter         Quarter        Quarter         Quarter
                                                              --------        --------       --------       --------
2004
-----
<S>                                                            <C>             <C>           <C>             <C>
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



2003
-----
Revenues                                                       $ 6,591         $ 6,969       $ 9,049         $ 7,840

Income from continuing operations                                  552             684           729             807

Discontinued operations, net of taxes                               --              --            --              27

  Net income                                                       552             684           729             834

Basic net income per share:

  From continuing operations                                    $ 0.26          $ 0.32        $ 0.34          $ 0.34

  Discontinued operations, net of taxes                             --              --            --            0.01

    Net income                                                  $ 0.26          $ 0.32        $ 0.34          $ 0.35

Diluted income  per share:

  From continuing operations                                    $ 0.25          $ 0.30        $ 0.31          $ 0.30

 Discontinued operations, net of taxes                              --              --            --            0.01

    Net income                                                  $ 0.25          $ 0.30        $ 0.31          $ 0.31

</TABLE>

          Results for the fourth quarter of 2004 and 2003 include profit sharing
          with APIE totaling $1,929,000 and $722,000, respectively.

          Certain amounts previously classified as general and administrative
          expenses have been classified as cost of revenues at Insurance
          Services in the consolidated statements of income for the years ended
          2004 and 2003. For the year ended 2004, the amount of
          reclassifications in the quarters is $146,000, $176,000 and $167,000
          for the quarter ended September 30, June 30 and March 31,
          respectively. For the year ended 2003, the amount of reclassifications
          in the quarters is $126,000, $126,000 and $131,000 for the quarter
          ended September 30, June 30 and March 31, respectively.



                                      A-36
<PAGE>
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2004, 2003 and 2002

  (20) Concentration of credit risk

         Marketable securities

         As of December 31, 2004 we owned marketable securities of HealthTronics
         and Financial Industries Corporation with a combined fair market value
         of $9,924,000, or approximately 33% of our total assets. An event
         having a material adverse effect on HealthTronics and/or Financial
         Industries, and resulting in a devaluation of their securities would
         also have a material adverse effect on our financial condition and
         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.

         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.


                                      A-37
<PAGE>
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 2004, 2003 and 2002

(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
                                                                -----------       ------------      ------------
<S>                                                                 <C>             <C>                <C>
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
                                                                   ========       ==========          ========

2003
----
Unrealized holding losses
  arising during the period                                        ($3,246)           $1,104          ($2,142)
Reclassification adjustment for gains
  included in net income                                               (89)               30              (59)
                                                                   ---------        ---------         ---------
Net unrealized losses on securities                                ($3,335)           $1,134          ($2,201)
                                                                   =========        =========         =========

2002
----
Unrealized holding gains
  arising during the period                                         $6,585           ($2,820)           $3,765
Reclassification adjustment for gains
  included in net income                                            (2,873)              977            (1,896)
                                                                   --------        ---------         ---------
Net unrealized gains on securities                                  $3,712           ($1,843)           $1,869
                                                                   ========        =========         =========


</TABLE>


                                      A-38
<PAGE>




                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
            American Physicians Service Group, Inc. and Subsidiaries
                   Years Ended December 31, 2004, 2003 and 2002


<TABLE>
<CAPTION>
(in thousands)
                                         Balance at                                       Balance
                                          Beginning       Costs and                       at End
                                           of Year        Expenses       Deductions       of Year
                                        ------------------------------------------------------------

Allowance for Doubtful Accounts

<S>                                              <C>            <C>             <C>            <C>
     2004                                        $  -           $ 47            $ 33           $ 14
                                        ==============  =============  ==============  =============

     2003                                        $ 64           $ 15            $ 79            $ -
                                        ==============  =============  ==============  =============

     2002                                        $  -           $ 86            $ 22           $ 64
                                        ==============  =============  ==============  =============


</TABLE>