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

                                   FORM 10-KSB
            MARK ONE:
            [X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
                 THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
                     FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996

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

                         COMMISSION FILE NUMBER 0-11453

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

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

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

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

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

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g)OF THE ACT:
                          Common Stock, $.10 Par Value
                                (Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by  Section  13 or 15 (d ) of the  Securities  Exchange  Act of 1934
during the preceding 12 months (or for such shorter  period that the  registrant
was  required  to file such  reports),  and (2) has been  subject to such filing
requirements for the past 90 days. YES [X] NO [ ]

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

State the aggregate market value of the voting stock held by  non-affiliates  of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold or the  average  bid and asked  prices of such
stock, as of a specified date within 60 days prior to the date of filing.
          Aggregate Market Value at March 20, 1997: $27,669,778

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 20, 1997
     --------------------                      ----------------
Common Stock, $.10 par value                      4,024,695
                       DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the Registrant's definitive proxy material for the 1997
annual meeting of  shareholders  are  incorporated by reference into Part III of
the Form 10-KSB.
============================================================================

<PAGE>

                     AMERICAN PHYSICIANS SERVICE GROUP, INC.

                          ANNUAL REPORT ON FORM 10-KSB

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996

                                     PART I

ITEM 1.       DESCRIPTION OF BUSINESS

General

         American  Physicians  Service Group, Inc. (the "Company"),  through its
subsidiaries, provides financial services that include management of malpractice
insurance  companies and brokerage and investment  services to  individuals  and
institutions.  The Company has an affiliate  which designs and markets  software
packages  to medical  clinics,  physician-hospital  organizations,  and  medical
schools.  The Company also owns space in the office building which serves as its
headquarters. Through its real estate subsidiary it leases space that is surplus
to its needs.

         The Company  owns  3,064,000  shares of common  stock of Prime  Medical
Services,  Inc. ("Prime Medical"),  representing at March 15, 1997 approximately
16% of the  outstanding  shares of common stock of Prime  Medical.  Two of Prime
Medical's eight  directors are members of the Company's board of directors.  The
Company  records its  pro-rata  share of Prime  Medical's  results on the equity
basis.  Prime  Medical is the largest  operator of  lithotripters  in the United
States,  currently  servicing over 400 hospitals in 32 states.  Lithotripsy is a
non-invasive  method of treating  kidney stones  through the use of shock waves.
The common stock of Prime Medical is traded on the NASDAQ  National Market under
the symbol "PMSI." Prime Medical is a Delaware  corporation which is required to
file annual,  quarterly and other reports and documents  with the Securities and
Exchange  Commission,  which reports and documents  contain  financial and other
information  regarding Prime Medical.  The summary  information  regarding Prime
Medical  contained  herein is  qualified  in its  entirety by  reference to such
reports and documents. Such reports and documents may be examined and copies may
be obtained from the offices of the Securities and Exchange  Commission.  Two of
the Company's five directors are members of Prime Medical's board of directors.

         On October 31,  1996,  the Company  invested  $3,300,000  in the common
stock of Exsorbet Industries, Inc. ("Exsorbet") (NASDAQ:EXSO) with a put option.
Exsorbet is a diversified  environmental  and  technical  services  company.  On
November  26,  1996,  the  Company  exercised  its  put in  exchange  for a note
receivable  from Exsorbet.  The note is secured by the shares which were subject
to the put  plus all of the  stock  and  substantially  all of the  assets  of a
wholly-owned  subsidiary of Exsorbet.  According to documents which Exsorbet has
filed  with  the  Securities  and  Exchange  Commission,  Exsorbet  has  limited
liquidity, which would currently not allow payment of the Company's note, and is
considering  various  options  to  secure  such  funding,  including  a  private
placement of debt or equity.

                                        1

<PAGE>




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

         The Company had previously published Spanish language buying guides of
U. S. businesses for distribution in Mexico.  This business segment had been
unprofitable for the Company.  In 1995 substantially all of the assets of this
business were sold.  There was no material financial impact on the Company.

Financial Services

         The Company's  financial  services consist of management  services to a
medical  malpractice  insurance  company  by APS  Insurance  Services,  Inc.,  a
wholly-owned subsidiary of the Company ("Insurance Services"), and brokerage and
investment  services to individuals and institutions  performed by APS Financial
Corporation, a wholly-owned subsidiary of the Company ("APS Financial").

         Management of Medical Malpractice Insurance Company

         Insurance Services,  through its wholly-owned subsidiary APS Facilities
Management,  Inc. ("FMI"), provides management services to a medical malpractice
insurance  company,  which is a  reciprocal  insurance  exchange.  A  reciprocal
insurance  exchange  is an  organization  which  sells  insurance  only  to  its
subscribers,  who  pay,  in  addition  to their  annual  insurance  premiums,  a
contribution to the exchange's  surplus.  Such exchanges  generally have no paid
employees but instead enter into a contract with an  "attorney-in-fact,"  a firm
that provides all management and  administrative  services for the exchange.  As
the attorney-in-fact  for American Physicians  Insurance Exchange ("APIE"),  FMI
receives  a  percentage  of the  earned  premiums  of APIE.  The amount of these
premiums  can be adversely  affected by  competition.  Substantial  underwriting
losses,  which might result in a curtailment or cessation of operations by APIE,
would also  adversely  affect  FMI's  revenue.  To limit  possible  underwriting
losses,  APIE  currently  reinsures  its risk in excess of $250,000  per medical
incident.  APIE offers medical  professional  liability insurance for doctors in
Texas and  Arkansas.  FMI's  assets are not subject to any  insurance  claims by
policyholders of APIE.

         FMI  organized  APIE and has  been  its  exclusive  manager  since  its
inception  in 1975.  The  management  agreement  between FMI and APIE  basically
provides for full  management  by FMI of the affairs of APIE under the direction
of APIE's doctor Board of Directors. Subject to the direction of this Board, FMI
sells and  issues  policies,  investigates,  settles  and  defends  claims,  and
otherwise manages APIE's affairs.  In consideration for performing its services,
FMI receives a percentage fee based on APIE's earned premiums (before payment of
reinsurance  premiums).  FMI pays all salaries and personnel  related  expenses,
rent and office operations costs, data processing costs and many

                                        2

<PAGE>



other  operating  expenses of APIE.  APIE is responsible  for the payment of all
claims,  claims expenses,  peer review  expenses,  directors' fees and expenses,
legal,  actuarial and auditing  expenses,  its taxes and certain other  specific
expenses. Under the agreement, FMI's authority to act as manager of the exchange
is automatically  renewed each year unless a majority of the subscribers to APIE
terminates this agreement by reason of an adjudication that FMI has been grossly
negligent,  has acted in bad faith or with  fraudulent  intent or has  committed
willful misfeasance in its management activities.

         During   1996,   1995  and  1994   approximately   45%,  26%  and  29%,
respectively,   of  the  Company's  revenues  from  continuing   operations  and
substantially all of FMI's revenues were received pursuant to the agreement with
APIE  discussed  above.  Termination  of the  agreement  with APIE  would have a
material adverse effect on the Company.

         APIE is a reciprocal  insurance  exchange  authorized to do business in
the  states  of  Texas  and  Arkansas.   APIE  specializes  in  writing  medical
professional  liability  insurance  for health  care  providers.  The  insurance
written in Texas is primarily through purchasing groups,  which insurance is not
subject  to  certain  rate and  policy  form  regulations  issued  by the  Texas
Department of Insurance. Applicants for insurance coverage are reviewed based on
the nature of their  practices,  prior  claims  records  and other  underwriting
criteria.  APIE is the third largest medical  professional  liability  insurance
company  in the  State  of  Texas  and is one of the  largest  in the  State  of
Arkansas. APIE is the only 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 actually made during the period covered by
the policy.  "Occurrence"  policies  insure  physicians  against claims based on
occurrences  during the policy  period  regardless of when the claim is actually
made.  APIE  offers only a "claims  made"  policy but  provides  for an extended
reporting  option upon  termination.  APIE  reinsures  100% of all  coverage per
medical incident between  $250,000 and $1,000,000,  primarily  through Lloyds of
London and certain other domestic and international insurance companies.

         The  following  table  presents  selected  financial and other data for
APIE.  APIE has a contract to pay management  fees to FMI based on APIE's earned
premiums before reinsurance. The fee percentage is 13.5% with the provision that
any  profits  of APIE  will be  shared  equally  with  FMI so long as the  total
reimbursement  (fees and  profit  sharing)  do not exceed a cap based on premium
levels.  No profit  sharing fee was received in 1993. In 1996,  1995,  1994, and
1992, management fees attributable to profit sharing were $1,191,000,  $700,000,
$1,107,000, and $1,678,000, respectively.


                                        3

<PAGE>

<TABLE>
<CAPTION>


                             Year Ended December 31,
                                1992                1993                1994                 1995                1996
                               ------              ------              ------               ------              -----
(thousands, except for
number of insureds)

<S>                              <C>        <C>      <C>        <C>      <C>        <C>       <C>        <C>      <C>         <C>
Earned premiums before
  reinsurance premiums......     $27,934             $29,205             $30,261              $30,857             $28,754
Total assets................      96,343              94,019              98,302              101,251              90,193
Total surplus...............       8,209               9,196               9,315                9,402              10,017
Management fees to FMI......       5,397    (1)        3,790    (2)        4,703    (4)         5,010    (6)        5,281     (7)
Number of  insureds.........       5,154               3,575    (3)        3,216    (5)         3,226               3,019
----------------
</TABLE>


  (1)      Gross fee of $5,450 less tax refund of $53 attributable to APIE's
             association with FMI.

  (2)      Gross fee of $3,942 less tax refund of $152 attributable to APIE's
             association with FMI.

  (3)        The decrease in the number of insureds  primarily resulted from the
             expiration  in 1993 of  APIE's  contract  with  the  University  of
             Arkansas Medical School.

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

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

  (6)      Includes $676 in fees from other carriers directly related to APIE's
             controlled business.

  (7)      Includes $860 in fees from other carriers directly related to APIE's
             controlled business.

         Brokerage and Investment Services

         APS Financial, a fully licensed  broker/dealer,  provides brokerage and
investment  services to  individual  and  institutional  clients.  APS Financial
provides complete portfolio  accounting,  analysis,  and management services, to
insurance companies, banks, and public funds.

         APS  Financial's  employees  have  extensive  investment  expertise and
knowledge.  APS Financial is a member of the National  Association of Securities
Dealers,  Inc. ("NASD") and the Securities Investor Protection  Corporation and,
in addition, is licensed in 44 states.

         Retail  commissions  are charged on both exchange and  over-the-counter
("OTC") transactions generally in accordance with a schedule which APS Financial
has formulated in accordance with NASD  guidelines.  When OTC  transactions  are
executed  by APS  Financial  as a dealer,  APS  Financial  receives,  in lieu of
commission, mark-ups or mark-downs.

         Every  registered  broker-dealer  doing  business  with the  public  is
subject to stringent rules with respect to net capital requirements  promulgated
by the Securities and Exchange  Commission.  These rules,  which are designed to
measure the financial soundness and liquidity of broker-dealers, specify minimum
net  capital  requirements.  Since  the  Company  is  not  itself  a  registered
broker-dealer,  it is not subject to these  rules.  However,  APS  Financial  is
subject to these rules. Compliance with applicable net capital rules could limit
operations of APS Financial such as trading activities that

                                        4

<PAGE>



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 December 31, 1996,  APS Financial  was in compliance  with all net
capital requirements.

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

Computer Systems and Software Sales

         In 1994, 1995 and the first six months of 1996, APS Systems, Inc. ("APS
Systems") sold computer systems and self-designed  software designed for sale to
large,  multi-physician  medical clinics,  medical schools,  Physician  Hospital
Organizations  (PHOs) and other  physician  networks.  The Company also provided
facilities  management  of the  total  data  processing  requirements  for those
clinics, schools and networks.

         Effective July 1, 1996, the Company entered into a software development
agreement with  International  Software  Solutions,  Inc.  ("ISSI").  Under this
agreement,  ISSI received newly issued shares of APS Systems, Inc. common stock,
which  diluted the  ownership  of the Company to 49%.  APS Systems  subsequently
changed its name to Syntera Technologies,  Inc. ("Syntera").  ISSI is engaged in
software  consulting/contract  programming  and  brings  new  technology  to the
venture.  Syntera will continue to focus on practice management software for the
medical industry which integrates patient registration,  appointment scheduling,
chart tracking,  billing,  insurance  processing and alternative delivery system
(HMO, PPO) tracking.  Since July 1, 1996 and continuing through 1997,  Syntera's
energies are largely being devoted to  re-development.  APS Systems' 15 years of
practice  management  knowledge and ISSI's technology base are being utilized to
replace all of Syntera's  products with ones that meet the needs of the changing
healthcare  marketplace.  Syntera's  shareholders expect to invest approximately
$3,000,000  in new  capital in the joint  development,  including  approximately
$1,000,000 by the Company.

         Operations of Syntera are  consolidated  with the Company  through June
30, 1996.  Following  that date,  the Company  recorded  its  pro-rata  share of
Syntera's results on the equity basis.

Real Estate

         APS Realty,  Inc.,  a  wholly-owned  subsidiary  of the  Company  ("APS
Realty"),  owns condominium space in an office project located in Austin, Texas.
It leases  approximately 57% of this space to the Company,  its subsidiaries and
Prime Medical. The remainder is leased to unaffiliated parties.



                                        5

<PAGE>



Competition

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

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

         The   computer-based   management   systems  business  is  also  highly
competitive.  Syntera  competes in this business  with numerous  large and small
competitors.  Many of these firms also have substantially greater resources than
the Company.  The primary  competitive  factors in this business  include price,
system reliability and maintainability, applications software features, delivery
times and commitment to service and support.

Regulation

         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.

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

                                        6

<PAGE>




         The  regulations to which APS Financial is subject cover all aspects of
the  securities  business,   including  sales  methods,  trade  practices  among
broker-dealers, uses and safekeeping of customers' funds and securities, capital
structure of  securities  firms,  record-keeping  and the conduct of  directors,
officers and employees. Additional legislation,  changes in rules promulgated by
the SEC and by self-regulatory  organizations,  or changes in the interpretation
or  enforcement  of existing laws and rules,  may directly  affect the method of
operation  and  profitability  of  APS  Financial.   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  Securities  Investor
Protection  Corporation  ("SIPC").  When the SIPC  fund  falls  below a  certain
minimum amount (as it did in 1994 and 1995),  members are required to pay annual
assessments  in  varying  amounts  not to  exceed  .5% of their  adjusted  gross
revenues to restore the fund. This assessment  amounted to approximately  $7,300
in 1995 and  $4,600 in 1994.  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.

Employees

         At  March  1,  1997,  the  Company  employed,  on a  full  time  basis,
approximately  90  persons,  including  50 by  Insurance  Services,  28  by  APS
Financial,  and 12 directly by the  Company.  Syntera  Technologies  employed 28
persons.  The Company  considers its employee  relations to be good. None of the
Company's  employees  is  represented  by a  labor  union  and the  Company  has
experienced no work stoppages.

ITEM 2.           PROPERTIES

         APS Realty owns  approximately  53,000 square feet of condominium space
in an office  project.  The  Company,  its  subsidiaries  and Prime  Medical use
approximately  30,000  square  feet of this space as their  principal  executive
offices,  and APS  Realty  leases  the  remainder  to  third  parties.  The area
available for lease to third parties was 100% occupied as of March 25, 1997.

ITEM 3.           LEGAL PROCEEDINGS

         The Company is involved in various  claims and legal  actions that have
arisen in the  ordinary  course  of  business.  The  Company  believes  that the
liability  provision in its  financial  statements  is  sufficient  to cover any
unfavorable  outcome  related  to  lawsuits  in  which  it is  currently  named.
Management  believes that  liabilities,  if any, arising from these actions will
not have a significant adverse effect on the financial condition of the Company.
However, due to the uncertain nature of

                                        7

<PAGE>



legal  proceedings,  the actual  outcome of these  lawsuits  may differ from the
liability provision recorded in the Company's financial statements.

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

         None.

                                     PART II

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

         The following table represents the high and low prices of the Company's
Common  Stock  in the  over-the-counter  market  as  reported  by  the  National
Association of Securities  Dealers,  Inc.,  Automated  Quotations System for the
periods  indicated.  At  March  1,  1997,  the  Company  had  approximately  500
shareholders of record.

                                        1996                    1995
                                --------------------    --------------------
                                   High         Low         High       Low

         First Quarter           $10 1/8       $5 1/4      $2 7/8      $2 3/8
         Second Quarter           12 7/8        8           3 7/16      2 11/16
         Third Quarter            10            5 7/8       4 1/2       3
         Fourth Quarter            7 3/8        5 5/8       9 7/8       4

The Company has no present  intention of paying any cash dividends on its Common
Stock in the  foreseeable  future.  It is the  present  policy  of the  Board of
Directors to retain all earnings to provide funds for the growth of the Company.
The declaration and payment of dividends in the future will be determined by the
Board of  Directors  based upon the  Company's  earnings,  financial  condition,
capital  requirements  and such other factors as the Board of Directors may deem
relevant.

ITEM 6.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                  CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY

Forward-Looking Statements

The  statements  contained  in this  Report on Form  10-KSB  that are not purely
historical are forward- looking  statements within the meaning of Section 27A of
the  Securities  Act of 1933 and Section 21E of the  Securities  Exchange Act of
1934,  including  statements  regarding  the  Company's   expectations,   hopes,
intentions or strategies  regarding the future. All  forward-looking  statements
included in this document are based on  information  available to the Company on
the date  hereof,  and the  Company  assumes  no  obligation  to update any such
forward-looking  statements.  It is important to note that the Company's  actual
results could differ materially from those in such forward-looking statements.

                                        8

<PAGE>



The reader  should  consult the  Company's  reports on Forms  10-QSB and filings
under the Securities Act of 1993, for factors that could cause actual results to
differ materially from those presented.

The forward-looking statements included herein are based on current expectations
that  involve  numerous  risks and  uncertainties.  Assumptions  relating to the
foregoing  involve  judgements  with  respect  to,  among other  things,  future
economic,  competitive and market conditions and future business decisions,  all
of which are difficult or impossible to predict accurately and many of which are
beyond the  control of the  Company.  Although  the  Company  believes  that the
assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could be inaccurate and,  therefore,  there can be no assurance that
the  forward-looking  statements  included  in this Form 10-KSB will prove to be
accurate.

Results of Operations

1996 Compared to 1995
---------------------
Revenues from continuing  operations decreased 43% in 1996 compared to 1995. Net
income  decreased  5% and fully  diluted  earnings per share  decreased  8%. The
reasons for these changes are described below.

Financial Services

         Financial  services  revenues  declined  36% in 1996  compared to 1995.
Insurance management operations were up by 5% as a result of a higher contingent
fee,  which was based on  improved  profits at the  managed  insurance  company.
Broker dealer revenues  declined 61%.  Approximately 60% of the decline was from
not being able to replace the sales of a key broker who left at the beginning of
1996.  The balance of the decline was primarily  attributed  to higher  interest
rates, which reduced activity in the bond market.

         Financial  services  expenses  declined  33%  from  1995.  The  decline
reflects lower activity at the broker/dealer  where lower commissions,  payroll,
legal and office  operations  expenses  combined  for a 51% decline  compared to
1995.  Insurance  management  expenses  increased 7%,  primarily in the areas of
employment taxes and benefits and state taxes.

         Results  in  this  segment  can  vary  from  year  to  year.  Insurance
management has a provision in its contract  whereby it receives a portion of the
managed  insurance  company's  profits.  In the seven years under the  contract,
profit-sharing has ranged from zero to 13% of the segment's revenues. The broker
dealer,  primarily a provider of fixed income securities,  is subject to general
market conditions as well as interest rates and is in an industry  characterized
competition  for top producing  brokers.  The  broker/dealer  continually  seeks
quality  brokers and is opening an office in another city in an effort to expand
its  recruiting  and sales base.  While it expects  positive  results from these
actions,  there is no assurance  that it will be  successful in returning to the
1995 level of performance.


                                        9

<PAGE>



Computer Systems/Software

         Revenues  declined 66% compared to 1995.  Approximately one half of the
decline was a result of the July 1, 1996 software  development  agreement  which
reduced the  Company's  ownership to 49%.  With the change to less than majority
ownership, the Company's interest in the segment was accounted for on the equity
basis and,  consequently,  no revenues were recorded. The balance of the decline
resulted from no new contracts being secured in 1996.

         Expenses in 1996 decreased by 62% compared to 1995.  Approximately  one
half of the decline  was,  again,  the result of the  dilution of the  company's
interest  on July 1,  1996 and  subsequent  adoption  of the  equity  method  of
accounting,  wherein no expenses are recorded on the minority  owners  financial
statements.  The balance of the  decrease  was in costs of hardware and software
and in payroll and benefits, all of which reflect the lower sales.

         Syntera  entered a  redevelopment  phase at mid year.  The new majority
owner brings added  technical  knowledge  and the entire  software line is being
redesigned.  With new software,  Syntera  expects to broaden its marketing focus
and  increase  its sales.  Being able to carry out its plans  within its capital
constraints and marketing the new product successfully remain uncertainties.

Real Estate

         Revenue  increased  7% over 1995.  The increase  reflects  rising lease
rates in Austin, Texas.

         The 2% increase in real estate expenses reflects overall inflation from
1995 to 1996.

Investment and Other

         The decline in investment and other income was primarily in the "other"
category,   where  1995  results  included  a  favorable   settlement  of  prior
litigation. No similar benefit was received in 1996.

         On October 31,  1996,  the Company  invested  $3,300,000  in the common
stock of Exsorbet Industries,  Inc. with a put option. On November 26, 1996, the
Company  exercised its put in exchange for a note receivable from Exsorbet.  The
note is  secured by the  shares  which  were  subject to the put plus all of the
stock and  substantially  all of the  assets  of a  wholly-owned  subsidiary  of
Exsorbet. According to documents which Exsorbet has filed with the Securities 
and Exchange Commission, Exsorbet has limited liquidity, which would currently
not allow payment of the Company's note, and is considering various options to 
secure such funding, including a private placement of debt or equity.

General and Administrative Expenses

         The 93% decline in  expenses  was  primarily a result of timing  rather
than fundamental  changes in operations.  1995's expenses included a contingency
provision  established  to guarantee a future yield on an account (see Note 9 to
the financial  statements).  In 1996,  this  contingency  provision was adjusted
downward as a result of the account's actual  performance.  Approximately 72% of
the

                                       10

<PAGE>



change  between  1996  and  1995  resulted  from  this  contingency   provision.
Additionally,  the successful  collection of certain accounts receivable in 1996
caused the reversal in 1996 of an allowance for doubtful  accounts,  established
in 1995, and accounts for approximately 16% of the change between 1996 and 1995.
Approximately  9% of the decrease in 1996 expenses was from lower payroll costs.
Costs were lower due to reduced performance-based incentives, which are based on
the Company's pretax income and market price.

         Interest expense  declined 57% primarily due to reduced  inventories at
the broker/dealer and the resultant reduction in margin borrowing.

Affiliates

         Earnings from affiliates  decreased 6% compared to 1995.  Prime Medical
grew  dramatically in 1996, but costs  associated with  acquisitions and a stock
offering  reduced  the  impact  of the  growth  in 1996.  Primes's  issuance  of
additional  shares in 1996 reduced the Company's  ownership from 21% to 16%. The
Company,  through  its status as Prime's  largest  shareholder  and  through its
representation  on Prime's  board,  continues to have  significant  influence at
Prime and accounts for its investment using the equity method.

1995 Compared to 1994
---------------------
         Revenues from  continuing  operations in 1995 increased 16% compared to
1994. In 1995,  net income  increased  61% and fully diluted  earnings per share
increased  40%  compared to 1994.  The reasons for these  changes are  described
below.

Financial Services

         Financial services revenues were up 20% in 1995 over 1994. The increase
occurred at the broker/dealer,  where falling interest rates attracted more bond
buyers.  The broker/dealer also recorded an inventory profit in 1995 compared to
an equivalent loss in 1994.

         Expenses  increased  9% in 1995  over  1994.  The  increase  was at the
broker/dealer, where increased sales resulted in increased sales commissions.

Computer Systems/Software

         Revenues  declined 12% compared to 1994. The decrease reflects being in
a later stage of the contracts  where lower,  but higher  margin,  revenues from
software  and  installation  were being  recognized,  as opposed to the hardware
revenue being recognized in 1994. All contracts were  substantially  complete at
the end of 1995, compared to a backlog of approximately $1 million at the end of
1994. A lack of new contracts in 1995 reduced the backlog.

         Expenses  in  1995  decreased  by 14% in 1995  compared  to  1994.  The
significant  decrease was in hardware cost of sales,  due to the lower volume of
hardware delivered in 1995. Costs of travel

                                       11

<PAGE>



and legal were also reduced in 1995.  Partially offsetting these reductions was
a 20% increase in personnel-related expenses.

Real Estate

         Revenue  increased 14% over 1994.  The increase  reflects  rising lease
rates in Austin, Texas.

         Expenses of the real estate  segment  increased  13%  compared to 1994.
Utility and property tax rate increases  along with  depreciation  on additional
buildouts were the primary factors in the increase.

Investment and Other

         Approximately  90% of the  increase  over  1994  was  the  result  of a
favorable settlement of prior litigation. The remainder of the increase resulted
primarily from higher investable balances in 1995.

General and Administrative Expenses

         Approximately  67% of the  increase in 1995  resulted  from  increasing
allowances for certain litigation and business related  contingencies (see notes
to consolidated financial statements, Note 9). Performance-based incentive plans
increased  in 1995 as a result  of the  Company's  improved  income  and  market
capitalization  and accounted for  approximately  14% of the increase over 1994.
The  reversal  in 1994 of  certain  allowances  for  litigation,  which had been
settled in 1994, also caused expenses to be lower in 1994 compared to 1995.

         Interest Expense decreased 18% due to lower rates on floating rate debt
and to lower debt outstanding.

Affiliates

         Earnings  from the Company's  investment in Prime Medical  increased by
59% compared to 1994.  Acquisition of additional lithotripsy operations improved
Prime's profitability in 1995. Prime continues to seek growth through additional
acquisitions.

Inflation

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




                                       12

<PAGE>



Liquidity and Capital Resources

         Net working  capital was $8,305,000 and $7,466,000 at December 31, 1996
and 1995, respectively.  The increase in working capital is primarily the result
of income from operations, and from certain contracts/legal  contingencies being
resolved for amounts less than had been accrued.  Historically,  the Company has
maintained a strong working capital position and, using that base, has been able
to satisfy  its  operational  and  capital  expenditure  requirements  with cash
generated  from its operating and  investing  activities.  These same sources of
funds  have  also  allowed  the  Company  to  pursue  investment  and  expansion
opportunities  consistent  with its growth plans.  The ability of the Company to
borrow against its investment in the common stock of Prime Medical (market value
$33,326,000 at December 31, 1996) gives it significant additional liquidity.

         Capital  expenditures  for  equipment  were  $123,000,   $419,000,  and
$99,000, in 1996, 1995 and 1994, respectively. In addition, the Company improved
or  purchased  office  space in 1996,  1995 and 1994 for  $21,000,  $64,000  and
$86,000,  respectively.  The Company expects capital  expenditures in 1997 to be
within the range of the prior three years.

         Under the software  development  agreement at Syntera,  the Company has
committed  approximately  $1,000,000  of new  capital.  At  December  31,  1996,
approximately $120,000 of this commitment had been met and the balance is due in
1997, providing that the development proceeds as planned.

         The  sale  of an  apartment  investment  in  1994  for  $811,000  was a
significant non-recurring item affecting cash flows.

         Management  believes that its present cash position together with funds
generated  from  operations  and from the  ability to borrow  against its equity
position in affiliates will provide sufficient resources to meet all present and
reasonably foreseeable future capital needs.



                                       13

<PAGE>



ITEM 7.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The  information  required  by this item is  contained  in  Appendix  A
attached hereto.
<TABLE>
<CAPTION>

                             SELECTED FINANCIAL DATA
(In thousands, except per share data)
                                                                   For the Year Ended or At December 31,
                                                     1996           1995          1994          1993          1992
                                                     ----          ------        --------      --------      ------

Selected Income Statement Data:

  <S>                                                <C>           <C>            <C>           <C>          <C>
  Revenues                                           $11,646       20,490         17,737        16,720       17,015


  Earnings from continuing operations before
  income taxes and accounting changes                  2,969        3,483          2,218         1,784          544


  Net earnings                                       $ 1,924        2,024          1,254         1,086          445

  Per Share Amounts - Fully Diluted:

  Net earnings                                          $.45          .49            .35           .30          .11


  Fully Diluted Weighted Average
  Shares Outstanding                                   4,321        4,163          3,614         3,622        3,926


  Selected Balance Sheet Data:

  Total assets                                        24,468       23,740         19,918        18,326       18,024


  Long-term obligations                                   --          574            878         1,215        1,639

  Total liabilities                                    4,086        6,146          4,927         4,562        5,488

  Total equity                                        20,382       17,594         14,491        13,688       12,459

  Book value per share                                 $5.03         4.80           4.47          4.15         3.85

</TABLE>


     Financial  information  and schedules  relating to Prime Medical  Services,
Inc. are  contained in Item 14(a) of the Annual Report on Form 10-K for the year
ended  December 31, 1996 of Prime Medical  Services,  Inc.,  which Item 14(a) is
incorporated herein by reference.

ITEM 8.           CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                  ACCOUNTING AND FINANCIAL DISCLOSURE

     None.

                                       14

<PAGE>



                                    PART III

ITEM 9.           DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information  required by this item is contained in the definitive proxy
material of the Company to be filed in connection  with its 1997 annual  meeting
of shareholders,  except for the information regarding executive officers of the
Company  which  is  presented  below.  The  information  required  by this  item
contained in such definitive proxy material is incorporated herein by reference.

     As of March 1, 1997, the executive officers of the Company are as follows:

Name                        Age                       Position
----------                  ---             -------------------------------
Kenneth S. Shifrin          47              Chairman of the Board, President and
                                                Chief Executive Officer

Duane K. Boyd, Jr.          52              Senior Vice President - Insurance

William H. Hayes            49              Senior Vice President - Finance and
                                                Secretary

Thomas R. Solimine          38              Controller

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

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

         Mr. Boyd has been Senior Vice President - Insurance since July 1991 and
has also been President and Chief Operating  Officer of FMI since July 1991. Mr.
Boyd is a Certified  Public  Accountant and was with KPMG Peat Marwick from 1974
to June 1991. He was a partner  specializing in the insurance  industry prior to
joining the Company.

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


                                       15

<PAGE>



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

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

ITEM 10.          EXECUTIVE COMPENSATION

         The  information  required by this item is contained in the  definitive
proxy  statement of the Company to be filed in  connection  with its 1997 annual
meeting of shareholders, which information is incorporated herein by reference.

ITEM 11.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                  MANAGEMENT

         The  information  required by this item is contained in the  definitive
proxy  statement of the Company to be filed in  connection  with its 1997 annual
meeting of shareholders, which information is incorporated herein by reference.

ITEM 12.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The  information  required by this item is contained in the  definitive
proxy  statement of the Company to be filed in  connection  with its 1997 annual
meeting of shareholders, which information is incorporated herein by reference.

ITEM 13.          EXHIBITS AND REPORTS ON FORM 8-K

         (a)      Exhibits (1)

                   3.1   Restated Articles of Incorporation of the Company, as
                          amended.(6)

                   3.2   Amended and Restated Bylaws of the Company.(6)

                   4.1   Specimen of Common Stock Certificate.(2)

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

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

                                       16

<PAGE>




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

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

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

             *10.6    1995 Non-Employee Directors Stock Option Plan of American
                        Physicians Service Group, Inc.(11)

             *10.7    Form of Non-Employee Directors Stock Option Agreement.(9)

             *10.8    1995 Incentive and Non-Qualified Stock Option Plan of
                        American Physicians Service Group, Inc.(9)

             *10.9    Form of Stock Option Agreement (ISO).(9)

             *10.10   Form of Stock Option Agreement (Non-Qualified).(9)

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

              10.12     Rights  Agreement  dated  August 16,  1989  between  the
                        Company and Texas  American  Bridge Bank N.A., as rights
                        agent,  and letter to the  Company  stockholders,  dated
                        August 16, 1989.(5)

              10.13   Stock  Purchase  Agreement  dated  October  11,  1989
                        between  the  Company  and  Texas   American   Energy
                        Corporation   ("TAE"),   Standstill  Agreement  dated
                        October 11,  1989 among the  Company,  TAE,  Shamrock
                        Associates and Paul O. Koether,  and Agreement  dated
                        October 11, 1989 among the Company, Prime Medical and
                        Shamrock Associates.(3)

             *10.14   Profit Sharing Plan or Trust, effective December 1, 1984,
                        of the Company.(4)

              10.15     Loan Agreement  dated April 7, 1992,  among the Company,
                        APS Realty and NationsBank of Texas, N.A.(7)

              10.16     Promissory  Note dated  April 7, 1992,  executed  by APS
                        Realty in the principal amount of $1,000,000  payable to
                        NationsBank of Texas, N.A.(7)

              10.17   Stock Purchase Agreement dated September 30, 1996 between
                        the Company and Exsorbet Industries, Inc.(10)


                                       17

<PAGE>


               10.18    Stock Put Agreement dated September 30, 1996 between the
                         Company and Exsorbet Industries, Inc.(10)

               10.19    Shareholder Rights Agreement dated September 30, 1996
                         between the Company and Exsorbet Industries, Inc.(10)

               10.20     Warrant  dated  September 30, 1996 for shares of common
                         stock  issued to the  Company by  Exsorbet  Industries,
                         Inc.(10)

               10.21     Contingent  Warrant  Agreement dated September 30, 1996
                         for  shares of common  stock  issued to the  Company by
                         Exsorbet Industries, Inc.(10)

               10.22     Option  Agreements  dated September 30, 1996 for shares
                         of  Exsorbet  common  stock  issued to the  Company  by
                         officers and directors of Exsorbet Industries, Inc.(10)

               10.23    Agreement dated September 30, 1996 with Exsorbet
                         Industries, Inc. related to options issued by officers
                         and directors of Exsorbet.(10)

               10.24     Guaranty  Agreements  dated  September 30, 1996 between
                         the Company and  subsidiaries  of Exsorbet  Industries,
                         Inc.
                         (10)

               10.25    Promissory Note dated November 26, 1996 executed by
                         Exsorbet Industries, Inc. and payable to the Company in
                         the amount of $3,300,000.(10)

               11.1     Computation of per share earnings (included in Appendix
                         A).(10)

               21.1     List of subsidiaries of the Company.(10)

               23.1     Independent Auditors Consent of KPMG Peat Marwick, LLP.
                         (10)

               27.1     Financial Data Schedule (EDGAR filing).
----------------

      (*)     Executive Compensation plans and arrangements.

      (1) The exhibits  listed will be  furnished  to any  security  holder upon
written  request for such exhibit to W. H. Hayes,  American  Physicians  Service
Group, Inc., 1301 Capital of Texas Highway,  Suite C-300, Austin, Texas 78746. A
reproduction  fee of $.20 per page  will be  charged  for  documents  requested.
Copies  of all  public  filings  are  also  available  from  the SEC by  calling
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.

                                       18

<PAGE>


      (3) Filed as an Exhibit to the  Current  Report on Form 8-K of the Company
dated October 20, 1989 and incorporated herein by reference.

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

      (5) Filed as an Exhibit to the  Current  Report on Form 8-K of the Company
dated September 5, 1989 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, 1990 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, 1992 and incorporated herein by reference.

      (8) Filed as an Exhibit to the Annual Report on Form 10-KSB of the Company
for the year ended December 31, 1994 and incorporated herein by reference.

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

      (10)    Filed herewith.

(b)   Reports on Form 8-K.

              No current  report on Form 8-k was filed by the Company during the
fourth quarter of 1996.









                                       19

<PAGE>



                                   SIGNATURES

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


                                        By: /s/ Kenneth S. Shifrin
                                           Kenneth S. Shifrin, Chairman of the
                                             Board and Chief Executive Officer

                                        Date:  March 26, 1997

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

By: /s/ Kenneth S. Shifrin
    ---------------------- 
     Kenneth S. Shifrin
     Chairman of the Board and
     Chief Executive Officer
     (Principal Executive Officer)

Date:    March 26, 1997


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

Date:    March 26, 1997


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

Date:    March 26, 1997


                                       20

<PAGE>



By: /s/ Richard J. Clark
    -------------------- 
     Richard J. Clark, Director

Date:    March 26, 1997



By: /s/ Jack Murphy
    --------------- 
     Jack Murphy, Director

Date:    March 26, 1997



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

Date:    March 26, 1997



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

Date:    March 26, 1997



                                       21

<PAGE>



                                   SIGNATURES

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

                                        AMERICAN PHYSICIANS SERVICE GROUP, INC.



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

                                        Date:  March 26, 1997

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

Date:    March 26, 1997


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

Date:    March 26, 1997





                                       22

<PAGE>


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

Date:    March 26, 1997



By:
    ------------------------- 
     Richard J. Clark, Director

Date:    March 26, 1997



By:
    ------------------------- 
     Jack Murphy, Director

Date:    March 26, 1997




By:
    ------------------------- 
     Robert L. Myer, Director

Date:    March 26, 1997




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

Date:    March 26, 1996











                                       23

<PAGE>


                                   APPENDIX A



                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                          Page

Independent Auditors' Report                                               A-2

Financial Statements

 Consolidated Statements of Earnings for the years                         A-3 
 ended December 31, 1996, 1995 and 1994.

 Consolidated Balance Sheets at December 31, 1996                          A-5
 and December 31, 1995.

 Consolidated Statements of Cash Flows for the years                       A-7 
 ended December 31, 1996, 1995 and 1994.

 Consolidated Statements of Shareholders' Equity                           A-9 
 at December 31, 1996, 1995 and 1994.

 Notes to Consolidated Financial Statements.                               A-10




                                       A-1

<PAGE>


                          Independent Auditors' Report




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

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

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial position of American Physicians
Service  Group,  Inc. and  subsidiaries  at December 31, 1996 and 1995,  and the
results  of their  operations  and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles.



Austin, Texas
February 28, 1997




                                       A-2
<PAGE>




                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
                       CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share data)
<TABLE>
<CAPTION>
                                                                                         Year Ended
                                                                                         December 31,
                                                                            1996           1995               1994
                                                                           -----          -----              -----
<S>                                                                      <C>              <C>               <C>                     
Revenues:
  Financial services (Note 3)                                            $ 8,863          13,762            11,451
  Computer systems/software (Note 14)                                      1,590           4,738             5,404
  Real estate (Note 6)                                                       717             668               586
  Investments and other (Note 2)                                             476           1,322               296
                                                                          ------          ------            ------
    Total revenues                                                        11,646          20,490            17,737

Expenses:
  Financial services                                                       7,736          11,582            10,626
  Computer systems/software                                                1,627           4,262             4,970
  Real estate                                                                521             510               452
  General and administrative                                                 150           2,037               255
  Interest                                                                    54             124               151
                                                                          ------          ------            ------
    Total expenses                                                        10,088          18,515            16,454

  Operating income                                                         1,558           1,975             1,283

  Equity in earnings of
    unconsolidated affiliates (Note 14)                                    1,411           1,508               950


  Minority interest in consolidated
    earnings                                                                  --              --            (   15)
                                                                          ------          ------            ------

  Earnings from continuing operations before                               2,969           3,483             2,218
    income taxes

  Income tax expense (Note 10)                                             1,045           1,108               798
                                                                          ------          ------            ------      

  Earnings from continuing operations                                      1,924           2,375             1,420
                                                                          ------          ------            ------

Loss from discontinued operations net of income
   tax benefit of $-0-, $181 and $86 in 1996, 1995
   and 1994, respectively                                                    --           (  351)           (  166)
                                                                          ------          ------            ------

    Net earnings                                                         $ 1,924           2,024             1,254
                                                                          ======          ======            ======

</TABLE>


See accompanying notes to consolidated financial statements.

                                       A-3

<PAGE>


                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
                       CONSOLIDATED STATEMENTS OF EARNINGS

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


                                                                            1996           1995            1994
                                                                           -----          -----           -----
  <S>                                                                     <C>             <C>             <C>    
  Earnings per common share:

  Primary:
    Earnings from continuing operations                                   $ 0.45           0.62            0.40

    Discontinued operations                                                  --           (0.09)          (0.05)
                                                                           -----          -----           -----

       Net earnings                                                       $ 0.45           0.53            0.35
                                                                           =====          =====           =====

  Fully diluted:
    Earnings from continuing operations                                   $ 0.45           0.57            0.40

    Discontinued operations                                                   --          (0.08)          (0.05)
                                                                           -----          -----           -----

    Net earnings                                                          $ 0.45           0.49            0.35
                                                                           =====          =====           =====


  Primary weighted average shares
    outstanding                                                            4,269          3,843           3,537
                                                                           =====          =====           =====

  Fully diluted weighted average
    shares outstanding                                                     4,321          4,163           3,614
                                                                           =====          =====           =====


  See accompanying notes to consolidated financial statements.

</TABLE>


                                       A-4

<PAGE>


                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
                           CONSOLIDATED BALANCE SHEETS


(In thousands, except share data)


                                                              December 31,
                                                          1996              1995
                                                         -----             -----

ASSETS

Current assets:
     Cash and cash equivalents                         $ 5,770             6,798
     Marketable securities (Note 2)                         29             2,004
     Trading account securities                            699             1,014
     Management fees and other receivables (Note 3)        512             1,748
     Income tax receivable                                 650                --
     Notes receivable - current (Note 4)                 3,447               223
     Receivable from clearing broker                       279               780
     Net deferred tax asset (Note 10)                       --               159
     Prepaid expenses and other                            239               312
                                                        ------            ------
          Total current assets                          11,625            13,038


Notes receivable, less current portion (Note 4)            179                83
Property and equipment, net (Note 6)                     1,781             2,129
Investment in affiliates (Note 14)                       9,657             7,412
Other assets                                             1,226             1,078
                                                        ------            ------
          Total assets                                 $24,468            23,740
                                                       =======           =======




See accompanying notes to consolidated financial statements.

                                       A-5

<PAGE>


                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
                           CONSOLIDATED BALANCE SHEETS


(In thousands, except share data)


 
                                                                December 31,
                                                            1996            1995
                                                           -----           -----

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
   Current portion of long term obligations (Note 8)     $  542              299
   Accounts payable - trade                                 382              353
   Accrued compensation                                     252              861
   Accrued expenses and other liabilities (Note 7)        2,144            3,501
   Income taxes payable                                      --              558
                                                          -----            -----
       Total current liabilities                          3,320            5,572


Net deferred income tax liability                           766               --
Long-term obligations (Note 8)                               --              574
                                                          -----            -----
       Total liabilities                                  4,086            6,146


Shareholders' equity:
   Preferred stock, $1.00 par value, 1,000,000
     shares authorized                                      --                --
   Common stock, $0.10 par value, 20,000,000 shares
     authorized; 4,049,195 issued at 12/31/96
     and 3,663,871 at 12/31/95                              405              366
   Additional paid-in capital                             5,366            4,530
   Unrealized holding losses                           (     11)              --
   Retained earnings                                     14,622           12,698
                                                        -------          -------
       Total shareholders' equity                        20,382           17,594

Commitments and contingencies
   (notes 6, 8, 9, 11, 12 and 14)
       Total liabilities and shareholders' equity       $24,468           23,740
                                                        =======          =======


See accompanying notes to consolidated financial statements.


                                       A-6

<PAGE>


                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
                      Consolidated Statements of Cash Flows

(In thousands)
<TABLE>
<CAPTION>


                                                                                     Year Ended
                                                                                     December 31,
                                                                           1996             1995              1994
                                                                        -------          -------           -------                  
<S>                                                                    <C>              <C>               <C>
Cash flows from operating activities:
  Cash received from customers                                         $ 11,123           21,068            16,138
  Cash paid to suppliers and employees                                 ( 11,064)         (17,860)          (15,740)
  Change in trading account securities                                      315         (    353)              475
  Change in receivable from clearing broker                                 501         (    289)         (    308)
  Interest paid                                                        (     54)        (    124)         (    151)
  Income taxes paid                                                    (    611)        (    494)         (     15)
  Interest, dividends and other investment
    proceeds                                                                459            1,322               456
                                                                         -------         -------           -------
     Net cash provided by operating activities                              669            3,270               855

Cash flows from investing activities:
  Payments for purchase of property and
    equipment                                                          (    144)        (    483)         (    185)
  Net decrease (increase) in marketable
    securities                                                            2,045         (    530)          ( 1,183)
  Investment in affiliate                                              (    244)              --                --
  Proceeds from sale of fixed assets                                         --               47                76
  Funds loaned to others                                                ( 3,442)              --                --
  Proceeds from the sale of discontinued operation                           --               67                --
  Collection of notes receivable                                             --            1,119             1,863
    Net cash provided by (used in) investing                             -------         -------           -------                  
      activities                                                        ( 1,785)             220               571

Cash flows from financing activities:
  Repayment of long-term obligations                                   (    163)        (    332)         (    613)
  Decrease in minority interest                                              --               --          (     91)
  Acquisition of treasury stock                                        (    453)        (    125)               --
  Exercise of stock options                                                 704              499                --
                                                                         -------         -------           -------         
     Net cash provided by (used in) financing activities                     88               42          (    704)

Net change in cash and cash equivalents                                 ( 1,028)           3,532               722

Cash and cash equivalents at beginning of period                          6,798            3,266             2,544
                                                                          -----            -----             -----
Cash and cash equivalents at end of period                                5,770            6,798             3,266
                                                                          =====            =====             =====

</TABLE>

See accompanying notes to consolidated financial statements.


                                       A-7

<PAGE>


                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
                Consolidated Statements of Cash Flows, continued
(In thousands)
<TABLE>
<CAPTION>
                                                                                     Year Ended
                                                                                     December 31,
                              
                                                                           1996             1995              1994
                                                                          ------          ------            ------
<S>                                                                     <C>               <C>              <C>
Reconciliation of net earnings to net cash from operating activities:
 Net earnings                                                           $ 1,923             2,024            1,254
Adjustments to reconcile net earnings to
  net cash from operating activities:
Depreciation and amortization                                               324               399              323
Minority interest in consolidated earnings                                   --                --               15
Undistributed earnings of affiliate                                     ( 1,411)          ( 1,508)         (   950)
Recognition of long-term capital loss carryback                              --                --               88
Loss (gain) on sale or disposition of assets                                 --           (    72)              31
Gain on sales of securities                                             (    81)          (    50)         (    33)
Change in federal income tax payable                                    (   584)              301              129
Provision for deferred income tax                                           925                27              480
Change in trading securities                                                315           (   353)             475
Loss on permanent impairment of debt securities                              --                --              160
Change in receivable from clearing broker                                   501           (   289)         (   308)
Change in management fees and other receivable                               17             1,183          ( 1,301)
Change in prepaids and other current assets                                  24               493          (   358)
Change in long-term assets                                                  265                --               --
Change in trade payable                                                      53           (   456)              11
Change in accrued expenses and other liabilities                        ( 1,602)            1,571              839
                                                                         -------          -------          -------
  Net cash from operating activities                                    $   669             3,270              855
                                                                         =======          =======          =======
</TABLE>

Summary of non-cash transactions:

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

During the third  quarter,  1995, the investment in the Company by the Company's
affiliate,  Prime  Medical  Services,  Inc.,  became  immaterial.  Consequently,
Reciprocal  Stockholdings  fell  to  zero  while  the  Company's  investment  in
affiliate increased by $543.

The Company acquired $294,000 in treasury stock by exchanging  $294,000 in Prime
Medical Services, Inc. Common stock during 1995.

In 1995,  the  Company  sold APS  Communications  in a non-cash  transaction  as
follows:

         Note received                                                   $  183
                                                                          =====

         Fixed assets sold                                                 ( 48)
         Deferred income                                                   (135)
                                                                          -----
                                                                         $ (183)
                                                                          =====

See accompanying notes to consolidated financial statements.


                                       A-8

<PAGE>


                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
                    Consolidated Statements of Shareholders'
                  Equity For the years ended December 31, 1996,
                                  1995 and 1994


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

                                                              Additional     Unrealized                                    Total
                                          Common Stock           paid-in       holding     Retained        Reciprocal  shareholders'
                                   Shares          Amount        capital        gains      earnings     stockholdings     equity
                                   --------------  ---------  -------------  ------------- -----------  -------------- -------------
<S>                                 <C>              <C>          <C>              <C>      <C>               <C>           <C>    
Balance January 1, 1994             3,471,689          347        4,468             --       9,420            (  547)       13,688
Net earnings                               --          --           --              --       1,254                 --        1,254
Unrealized gains on securities
    available for sale                     --          --           --              44          --                 --           44
Shares repurchased & cancelled             (5)         --           --              --          --                 --           --
Contributed capital                        --          --            1              --          --                 --            1
Pro rata portion of Company
   common stock held by
   affiliate (Note 14)                     --          --           --              --          --                  4             4
                                   --------------  ---------  -------------  ------------- -----------  -------------- -------------
Balance December 31, 1994           3,471,684        $347        4,469              44      10,674              ( 543)       14,991
Net earnings                               --          --           --              --       2,024                 --         2,024
Unrealized loss on securities
   available for sale                      --          --           --             (44)         --                 --           (44)
Shares issued (Note 12)               314,333          31          468              --          --                 --           499
Shares repurchased &
cancelled (Note 14)                  (122,146)        (12)        (407)             --          --                 --          (419)
Pro rata portion of Company
    common stock held by
    affiliate (Note 14)                    --          --           --              --          --                543           543
                                   --------------  ---------  -------------  ------------- -----------  -------------- -------------
Balance December 31, 1995           3,663,871         366        4,530              --      12,698                 --        17,594

Net earnings                               --          --           --              --       1,924                 --         1,924
Unrealized loss on securities
   available for sale, net of tax          --          --           --             (11)         --                 --           (11)
Shares issued (Note 12)               450,000          45          659              --          --                 --           704
Shares repurchased &
cancelled                          (   64,676)       (  6)        (447)             --          --                 --          (453)
Income tax benefit of
   non-qualified option
    exercises                              --          --          624              --          --                 --           624
                                   --------------  ---------- -------------  ------------- -----------  -------------- -------------
Balance December 31, 1996           4,049,195         405        5,366             (11)     14,622                 --        20,382
                                   ==============  ========== =============  ============= ===========  ============== =============
</TABLE>

See accompanying notes to consolidated financial statements.

                                       A-9

<PAGE>






                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
                   Notes To Consolidated Financial Statements
                        December 31, 1996, 1995 and 1994

(1)      Summary of Significant Accounting Policies

         (a)      General

                  American   Physicians   Service   Group,   Inc.   through  its
                  subsidiaries,   provides   financial   services  that  include
                  management of  malpractice  insurance  companies and brokerage
                  and  investment  services  to  individuals  and  institutions.
                  Computer  systems and software  packages for medical  clinics,
                  medical schools,  physician  hospital  organizations and other
                  physician networks are provided by an affiliate. The brokerage
                  and computer  businesses  have clients  nationally.  Insurance
                  management is a service  provided  primarily in Texas,  but is
                  available to clients  nationally.  American Physicians Service
                  Group,  Inc.  also owns  space in the  office  building  which
                  serves as its headquarters. Through its real estate subsidiary
                  it leases space that is surplus to its needs. During the three
                  years  presented  in  the  financial   statements,   financial
                  services and computer systems generated  approximately 68% and
                  24%, respectively, of total revenues.

         (b)      Estimates

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

         (c)      Principles of Consolidation

                  The consolidated  financial statements include the accounts of
                  American  Physicians  Service  Group,  Inc. and of  subsidiary
                  companies  more than 50%  owned  ("Company").  Investments  in
                  affiliated companies and other entities in which the Company's
                  investment   is  for  less  than  50%  of  the  common  shares
                  outstanding   and  where  the   Company   exerts   significant
                  influence, are accounted for by the equity method.

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

         (d)      Revenue Recognition

                  Financial  services  revenues  related to management  fees are
                  recognized  monthly as a percentage of the earned  premiums of
                  the managed company. The profit sharing component

                                      A-10

<PAGE>


                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
              Notes to Consolidated Financial Statements, Continued

(1)      Summary of Significant Accounting Policies, continued

                  of these fees is recognized when it is reasonably certain that
                  the managed company will have an annual profit.  Revenues 
                  related to securities transactions are recognized on a trade 
                  date basis.

                  Revenue  from  software  product  sales is  recognized  on the
                  percentage of completion  method.  Revenue from hardware sales
                  is recognized when the hardware is delivered.  Maintenance and
                  service  contracts  related to software  products are deferred
                  and  recognized  over the term of the contract  (generally one
                  year) using the straight-line method.

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

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

         (e)      Broker, Dealer and Securities Transactions

                  Securities  transactions  are  recorded  in the  accounts on a
                  trade date basis.

         (f)      Marketable Securities

                  The Company's investments in debt and equity securities are to
                  be  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

                  The Company has  included  its  marketable  securities  in the
                  available for sale category.

         (g)      Property and Equipment

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

                                      A-11

<PAGE>


                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
              Notes to Consolidated Financial Statements, Continued

(1)      Summary of Significant Accounting Policies, continued

         (h)      Long-Lived Assets

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

         (i)      Income Taxes

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

         (j)      Earnings Per Share

                  Earnings  per share have been  computed  based on the weighted
                  average  number  of  shares   outstanding   and  common  share
                  equivalents.

         (k)      Cash and Cash Equivalents

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

         (l)      Post Retirement/Post Employment Benefits

                  The Company's employee benefits do not extend beyond an 
                  employee's active employment.Consequently, no accrual for 
                  future benefits as prescribed in Statement of Financial
                  Accounting Standards No. 106 and No. 112 has been recorded.

         (m)      Derivative Financial Instruments

                  The  Company  has  not  made  use  of   derivative   financial
                  instruments as defined in the Financial  Accounting  Standards
                  Board  Statement of Financial  Accounting  Standards  No. 119,
                  Disclosure  about  Derivative  Financial  Instruments and Fair
                  Value of Financial Instruments.


                                      A-12

<PAGE>


                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
              Notes to Consolidated Financial Statements, Continued

(1)      Summary of Significant Accounting Policies, continued

         (n)      Notes Receivable

                  Notes  receivable  are recorded at cost,  less  allowances for
                  doubtful   accounts   when   deemed   necessary.   Management,
                  considering  current  information  and  events  regarding  the
                  borrowers ability to repay their obligations, considers a note
                  to be impaired  when it is probable  that the Company  will be
                  unable to collect all amounts due according to the contractual
                  terms of the note  agreement.  When a loan is considered to be
                  impaired,  the amount of the  impairment is measured  based on
                  the present value of expected future cash flows  discounted at
                  the note's  effective  interest  rate.  Impairment  losses are
                  included in the  allowance  for  doubtful  accounts  through a
                  charge to bad debt expense.  Cash  receipts on impaired  notes
                  receivable are applied to reduce the principal  amount of such
                  notes  until  the  principal   has  been   recovered  and  are
                  recognized as interest income, thereafter.

         (o)      Stock-Based Compensation

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

         (p)      Reclassification

                  Certain  reclassifications have been made to amounts presented
                  in previous years to be consistent with the 1996 presentation.

(2)      Marketable Securities

                  The Company holds various marketable  securities as short-term
                  investments.  At December 31, 1996 and 1995,  these marketable
                  securities consisted of:

                                                               December 31,
                                                          1996             1995
                                                         -----            -----
         
         Equity securities, at cost                    $45,000               --
         Debt securities, at cost                      $    --       $2,004,000
         Less: adjustment to fair value               ($16,000)              --
                                                      --------        ---------
         Total marketable securities at
           fair value                                  $29,000       $2,004,000
                                                      ========        =========

                                      A-13

<PAGE>


                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
              Notes to Consolidated Financial Statements, Continued

(2)      Marketable Securities, continued

         At December 31, 1996, there were $16,000 in gross unrealized losses. At
         December 31, 1995 there were no gross unrealized gains or losses.

         Investment income includes the following:

                                          1996             1995            1994
                                         -----            -----           -----
         Interest                    $ 351,000        $ 243,000          68,000
         Realized gains                 81,000           50,000          42,000
         Realized losses                    --               --        ( 10,000)
         Permanent impairment of
           debt securities                  --               --        (160,000)
                                       -------          -------         -------
                                     $ 432,000        $ 293,000        ( 60,000)
                                       =======          =======         =======

         No individual  issuer exceeded 10% of shareholders'  equity at December
         31, 1996 or 1995.

(3)      Management Fees and Other Receivables

         Management fees and other receivables consist of the following:

                                                            December 31,
                                                      1996              1995
                                                     -----             -----
         Management fees receivable              $ 256,000           342,000
         Trade accounts receivable                  16,000         1,034,000
         Less:  allowance for doubtful accounts         --        (  132,000)
         Accrued interest receivable                12,000            45,000
         Other receivables                         228,000           459,000
                                                   -------         ---------
                                                 $ 512,000         1,748,000
                                                   =======         =========   

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

         The  Company  earned  management  fees of  $5,561,000,  $5,288,000  and
         $5,358,000 and received expense  reimbursements  of $346,000,  $355,000
         and  $247,000 for the years ended  December  31,  1996,  1995 and 1994,
         respectively, related to these agreements.




                                      A-14

<PAGE>


                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
              Notes to Consolidated Financial Statements, Continued





(4)      Notes Receivable

         Notes receivable consists of the following:
<TABLE>
<CAPTION>
                                                                                                  December 31,
                                                                                            1996              1995
         <S>                                                                          <C>                  <C>
         Reagan Publishing Company 
            The  unsecured  note bears  interest at 7%.
            Payments of $50,000 plus  interest  are due June 30, 1996,  December
            31, 1996, and June 30, 1997, with the balance due
            December 31, 1997.  The note is in default                                
            at December 31, 1996 and the parties are
            attempting to renegotiate the terms.                                      $  183,000           183,000

         The Billings Clinic
           The note is secured by  computer  equipment  and bears  interest at a
           weighted  average rate of 11.38%.  Monthly  payments of principal and
           interest are due through
           December 1996.                                                                     --           123,000

         Exsorbet Industries, Inc.
           This note is secured by 1,200,000 shares
           of Exsorbet Industries, Inc. common stock
           and certain assets of 7-7, Inc.   The note
           bears interest at 15.75%.  Principal and
           interest are due October 1, 1997.                                          $3,300,000               --

         Employees
           Two employees have loans from the Company as employment  inducements.
           The  notes  are  non-interest  bearing  and are  being  forgiven  and
           amortized monthly over three to four year periods.  The notes are due
           and payable should the employees
           terminate employment.                                                         143,000               --
                                                                                       ---------          -------
                                                                                       3,626,000          306,000
                                        
                                       
         Less current portion                                                          3,447,000          223,000
                                                                                       ---------         --------
         Long term portion                                                            $  179,000           83,000
                                                                                       =========         ========
</TABLE>
                                      A-15

<PAGE>


                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
              Notes to Consolidated Financial Statements, Continued

(4)      Notes Receivable, continued
     
         The Company's note receivable from Exsorbet Industries, Inc. 
         ("Exsorbet") (NASDAQ:EXSO), a diversified environmental and technical
         services company, is in excess of 10% of stockholders' equity at 
         December 31, 1996 and represents a concentration of credit risk. 
         Exsorbet's common stock sales price was $1.68 per share on the basis of
         the average high and low sales price of the stock on March 7, 1997. 
         According to documents which Exsorbet has filed with the Securities and
         Exchange Commission, Exsorbet has limited liquidity which would 
         currently not allow payment of the Company's note and, is considering
         various options to secure such funding including a private placement
         of debt or equity.
         

(5)      Fair Value of Financial Instruments

         Statement of Financial Accounting Standards No. 107, "Disclosures About
         Fair Value of Financial Instruments" (Statement 107), requires that the
         Company disclose estimated fair values for its financial instruments as
         of December 31, 1995 and 1994:
<TABLE>
<CAPTION>

                                                                 1996                              1995
                                                     Carrying           Fair            Carrying           Fair
                                                     Amount            Value            Amount            Value

         <S>                                          <C>               <C>              <C>               <C>  
         Cash and cash equivalents                    5,770             5,770            6,798             6,798
         Marketable Securities and Trading
              Account Securities                        728               728            3,018             3,018
         Management fees and other
              Receivables                               512               512            1,748             1,748
         Notes receivable                             3,626             3,594              306               293
         Receivable from clearing broker                279               279              780               780
         Debt                                           542               542              873               873
         Accounts Payable                               382               382              353               353
</TABLE>

         Fair value estimates,  methods, and assumptions are set forth below for
         the Company's 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.

         Marketable Securities and Trading Account
         -----------------------------------------
         The fair value of  securities  owned is  estimated  based on bid prices
         published in  financial  newspapers  or bid  quotations  received  from
         securities dealers. The carrying values of marketable securities are

                                      A-16

<PAGE>


                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
              Notes to Consolidated Financial Statements, Continued

(5)      Fair Value of Financial Instruments, continued

         adjusted to market since such  securities are in the available for sale
         category. Trading account securities are carried at market value.

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

         Notes Receivable
         ----------------
         The fair value of notes has been determined using discounted cash flows
         based on management's  estimate of current  interest rates for notes of
         similar credit quality.

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

         Debt
         ----
         The fair market value of debt  approximates  carrying value since it is
         primarily floating rate debt based on current market rates.

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

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


                                      A-17

<PAGE>


                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
              Notes to Consolidated Financial Statements, Continued

(6)      Property and Equipment

         Property and equipment consists of the following:
                                                         December 31,
                                                     1996              1995

         Office condominium                    $1,870,000         1,896,000
         Furniture and equipment                2,386,000         3,422,000
                                                ---------         ---------
                                                4,256,000         5,318,000
         Accumulated depreciation and
           amortization                         2,475,000         3,189,000
                                                ---------         ---------
                                               $1,781,000         2,129,000

         The Company owns  approximately  53,000 square feet in the  condominium
         building in which its principal offices are located.  The Company,  its
         subsidiaries and affiliates occupy approximately 30,000 square feet and
         the remainder is leased to third parties.  Rental income  received from
         third parties during the years ended  December 31, 1996,  1995 and 1994
         totaled approximately  $417,000,  $382,000 and $308,000,  respectively.
         Future  minimum  lease  payments to be received  under the terms of the
         office  condominium  leases are as  follows:  1997 -  $351,000;  1998 -
         $326,000; 1999 - $59,000 and none thereafter.

         Included in furniture  and equipment at December 31, 1995 are computers
         and  equipment   under  capital   lease  of   approximately   $191,000.
         Accumulated  amortization  on this  equipment  under  capital lease was
         $139,000 at December 31, 1995.

(7)      Accrued Expenses and Other Liabilities

         Accrued expenses and other liabilities consists of the following:
                                                         1996              1995

         Taxes payable - other                      $  74,000           150,000
         Commissions payable                           18,000            38,000
         Deferred income                              339,000           434,000
         Health insurance and other claims
           payable                                     87,000            73,000
         Contractual/legal claims                   1,352,000         2,360,000
         Vacation payable                              77,000           127,000
         Funds held for others                         63,000            51,000
         Interest payable                                  --             5,000
         Other                                        134,000           263,000
                                                    ---------         ---------
                                                   $2,144,000         3,501,000
                                                    =========         =========

                                      A-18

<PAGE>


                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
              Notes to Consolidated Financial Statements, Continued

(8)      Long-term Obligations

         Long-term obligations consist of the following:
                                                           1996            1995
                                                         ------          ------
         Capital leases                                      --         180,000
           Less amounts representing
             interest                                        --        ( 12,000)
         Present value of net
             minimum payments                                --         168,000
         Notes payable secured by office buildings      542,000         642,000
         Other                                               --          63,000
                                                        -------         -------
         Total long-term obligations                    542,000         873,000
           Less current portion                         542,000         299,000
                                                        -------         -------
         Long-term portion                             $     --         574,000
                                                        =======         =======

         Notes  payable  secured by office  buildings  were at the prime rate of
         interest and were payable  monthly,  in installments  of  approximately
         $13,000,  through  April 1997 at which time the balance of $517,000 was
         due. These notes were paid in full January, 1997.

(9)      Commitments and Contingencies

         In conjunction with the software development agreement between ISSI and
         the  Company's   affiliate,   Syntera,  the  Company  is  obligated  to
         contribute  additional  capital.  At December 31, 1996, this commitment
         amounted to  approximately  $880,000,  due in 1997, and contingent upon
         progress under the agreement proceeding as planned.

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

         Rent expense  under all operating  leases for the years ended  December
         31,  1996,   1995  and  1994  was  $51,000,   $103,000  and   $127,000,
         respectively.  Future minimum payments for leases which extend for more
         than one year are not significant at December 31, 1996.

         The Company is involved in various  claims and legal  actions that have
         arisen in the ordinary  course of business.  The Company  believes that
         the liability provision in its financial statements is sufficient

                                      A-19

<PAGE>


                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
              Notes to Consolidated Financial Statements, Continued

(10)     Commitments and Contingencies, continued

         to cover any  unfavorable  outcome  related to  lawsuits in which it is
         currently named. Management believes that liabilities,  if any, arising
         from these  actions will not have a significant  adverse  effect on the
         financial  condition  of the  Company.  However,  due to the  uncertain
         nature of legal  proceedings,  the actual outcome of these lawsuits may
         differ from the liability provision recorded in the Company's financial
         statements.

(10)     Income Taxes

         Income tax expense consists of the following:
                                                     Year Ended
                                                     December 31,
                                         1996             1995              1994
                                        -----            -----             -----
         Federal
              Current              $   47,000          795,000           109,000
              Deferred                925,000           27,000           480,000
         State - current               73,000          105,000           123,000
                                      -------          -------           -------
                                   $1,045,000          927,000           712,000
                                    =========          =======           =======
                                    
         A reconciliation  of expected income tax expense  (computed by applying
         the United States  statutory  income tax rate of 34% to earnings before
         income  taxes)  to  total  income  tax  expense  in  the   accompanying
         consolidated statements of earnings follows:

                                                       Year Ended
                                                       December 31,
                                           1996            1995            1994
                                          -----           -----           -----
         Expected federal income        
           tax expense                $ 972,000       1,003,000         668,000
         State taxes                     73,000         105,000         123,000
         Other, net                          --       ( 181,000)       ( 79,000)
                                      ---------       ---------         --------
                                     $1,045,000         927,000         712,000
                                      =========         =======         =======

         Deferred tax assets are primarily  the result of temporary  differences
         related to  accounting  for reserves for losses,  amounts  expensed for
         financial  purposes  not  deductible  for tax  purposes,  fixed  assets
         (primarily  differences  in methods of  depreciation)  and  investments
         (primarily related to valuation allowances) for tax and book purposes.



                                      A-20

<PAGE>


                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
              Notes to Consolidated Financial Statements, Continued

(10)     Income Tax, continued

         The tax effect of temporary  differences that gives rise to significant
         portions  of  deferred  tax  assets and  deferred  tax  liabilities  at
         December 31, 1996 and 1995 are presented below:

                                                            1996           1995
         Deferred tax assets:                              -----          -----
         Marketable securities write downs not taken
           for tax purposes                           $   13,000         46,000
         Accrued expenses                                676,000        993,000
         Accounts receivable, principally due
           to allowance for doubtful accounts             60,000         77,000
         Deferred income for books not for tax            30,000        129,000
         Other                                            19,000          7,000
                                                         -------       --------
         Total gross deferred tax assets                 798,000      1,252,000

         Deferred tax liabilities:
         Investment in Prime Medical Services, Inc.
           due to use of equity method for books      (1,512,000)    (1,033,000)
         Capitalized expenses, principally due to
           deductibility for tax purposes             (   52,000)    (   60,000)
                                                      ----------      ---------
              Total gross deferred tax liabilities    (1,564,000)    (1,093,000)
                                                      ----------      --------- 
         Net deferred tax asset (liability)           ($ 766,000)       159,000
                                                      ==========        =======

         The Company has not recorded a valuation allowance against the deferred
         tax asset as  management  believes  it is more likely than not that the
         Company  will  fully  realize  the  asset  in the  form of  future  tax
         deductions  since the  temporary  differences  will reverse in the near
         future.  These  deductions  would be  available  to  carryback to prior
         years, if necessary.

(11)     Employee Benefit Plans

         The Company has an  employee  benefit  plan  qualifying  under  Section
         401(k)  of the  Internal  Revenue  Code  for  all  eligible  employees.
         Employees   become  eligible  upon  meeting  certain  service  and  age
         requirements.  Employees  may defer up to 15% (not to exceed  $9,500 in
         1996) of their annual  compensation under the plan. The Company, at its
         discretion,  may  contribute  up to  200%  of the  employees'  deferred
         amount.  For  the  years  ended  December  31,  1996,  1995  and  1994,
         contributions  by  the  Company  aggregated  $104,000,   $100,000,  and
         $105,000, respectively.





                                      A-21

<PAGE>


                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
              Notes to Consolidated Financial Statements, Continued

(12)     Stock Options

         The  Company  has  adopted,  with  shareholder   approval,   the  "1995
         Non-Employee  Directors Stock Option Plan"  ("Directors  Plan") and the
         "1995  Incentive  and  Non-Qualified  Stock  Option  Plan"  ("Incentive
         Plan").  The Directors  Plan provides for the issuance of up to 200,000
         shares  of  common  stock to  non-employee  directors  who serve on the
         Compensation Committee. The Incentive Plan provides for the issuance of
         up to 800,000  shares of common stock to directors  and key  employees.
         Options issued to employees are to be qualified incentive stock options
         and those to directors non-qualified options.

         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 had to be at
         least 100% of the fair market value of such shares on the date of grant
         of the option.  Under the Plans, option grants are limited to a maximum
         of ten year terms,  however,  the  Committee  has issued all  currently
         outstanding  grants with five year terms. The Committee also determines
         vesting for each option grant and all outstanding options vest in three
         equal annual installments beginning one year from the date of grant.

         The Company has adopted the disclosure-only  provisions of Statement of
         Financial  Accounting  Standards No. 123,  Accounting  for  Stock-Based
         Compensation ("Statement 123"), but applies Accounting Principles Board
         Opinion No. 25, Accounting for Stock Issued to Employees, in accounting
         for its  stock  option  plans.  No cost from  stock-based  compensation
         awards was  recognized  in 1996 or 1995.  If the Company had elected to
         recognize  compensation cost of options granted based on the fair value
         at the grant  dates,  consistent  with  Statement  123,  net income and
         earnings  per  share  would  have  changed  to the  pro  forma  amounts
         indicated below:

                                                        Year Ended December 31,
                                                         1996              1995
                                                        -----             -----
            Pro forma net income                   $1,594,000         1,975,000
                              
            Pro forma earnings per share - primary      $0.37              0.51
                             - fully diluted            $0.37              0.47

         The fair value of the options used to compute the pro forma  amounts is
         estimated  using the  Black-  Scholes  option  pricing  model  with the
         following assumptions:
                                                      1996              1995
                                                      ----              ----
             Risk-free interest rate                  6.06%           6.41%
             Expected holding period                  3.75 years      3.75 years
             Expected volatility                       .692            .590
             Expected dividend yield                   -0-              -0-

                                      A-22

<PAGE>


                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
              Notes to Consolidated Financial Statements, Continued

(12)     Stock Options, continued

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

         Presented below is a summary of the stock options held by the Company's
         employees  and  directors  and the related  transactions  for the years
         ended December 31, 1996 and 1995.  Remaining  options  outstanding from
         the Company's previous 1983 plans are included.
<TABLE>
<CAPTION>

                                                                   Year ended December 31
                                                      1996                                       1995
                                               -----------------------                 --------------------------    
                                                              Weighted                                    Weighted
                                                              Average                                     Average
                                                              Exercise                                    Exercise
                                            Shares            Price                     Shares            Price
                                            -------           -------                   -------           -------
         <S>                                <C>              <C>                        <C>               <C>                 
         Balance at January 1               837,000           $2.18                     921,000           $1.57
         Options granted                    295,000            9.32                     235,000            3.82
         Options exercised                  450,000            1.53                     314,000            1.59
         Options forfeited/expired           31,000            6.16                       5,000            2.45
                                            -------            ----                     -------            ----           
         Balance at December 31             651,000            5.64                     837,000            2.18
                                            =======            ====                     =======            ====    
         Options exercisable                258,000           $2.22                     550,000           $1.48
                                            =======            ====                     =======            ====
</TABLE>

         The weighted  average fair value of Company stock  options,  calculated
         using the Black Scholes option pricing model,  granted during the years
         ended  December  31,  1996 and  1995 is $5.15  and  $1.75  per  option,
         respectively.

         The following table  summarizes the Company's  options  outstanding and
         exercisable options at December 31, 1996:
<TABLE>
<CAPTION>
                                                   Stock Options                                     Stock Options
                                                   Outstanding                                        Exercisable
                                            -------------------------------------------           -------------------------
                                                              Average           Weighted                           Weighted
                                                              Remaining         Average                            Average
         Range of                                             Contractual       Exercise                           Exercise
         Exercise Prices                    Shares            Life              Price             Shares           Price
                                            -------           ---------         -----             -------         --------
         <S>                                <C>               <C>               <C>               <C>             <C>               
         $1.38 to $3.50                     336,000           2.4 years         2.46              251,000         2.28
         $3.51 to $7.00                      50,000           3.7 years         5.70                7,000         4.69
         $7.01 to $10.50                    265,000           4.5 years         9.67                   --           --
                                            -------           ---------         ----              -------         ----
         Total                              651,000                                               258,000
                                            =======                                               =======
</TABLE>

                                      A-23

<PAGE>


                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
              Notes to Consolidated Financial Statements, Continued

(13)     Discontinued Operations

         On October 23, 1995 the Company sold substantially all of the assets of
         APS Communications Corporation, a publisher of Spanish language 
         directories of U. S. businesses.  The Company received cash, a note 
         (see note 4) and had certain liabilities assumed by the purchaser. The
         gain on the sale, to be recognized on the installment basis as note 
         payments are received, will not be material to the Company's opera-
         tions.  No gain has been recognized through 1996.  Historical results 
         from the operation are presented in the Consolidated Statements of 
         Earnings as "Loss from discontinued operations".

(14)     Investment in Affiliates

         On October 12, 1989, the Company  purchased for cash  3,540,000  shares
         (42%) of the common stock of Prime  Medical.  Members of the  Company's
         Board  currently  serve as two of the eight directors of Prime Medical.
         Prime Medical provides  non-medical  management services to lithotripsy
         centers. In conjunction with the acquisition of additional  lithotripsy
         operations in June 1992,  October 1993, and May 1996,  the  outstanding
         shares of Prime Medical  increased.  These  increases  plus the sale of
         Prime  Medical  shares owned by the Company  under an option  agreement
         reduced the Company's  ownership to 16% of the outstanding common stock
         of  Prime  Medical.  The  Company's  investment  in  Prime  Medical  is
         accounted  for on the  equity  method.  The  3,064,000  shares of Prime
         Medical  common  stock  held  by the  Company  had a  market  value  of
         $33,326,000  (carrying amount of $8,905,000) at December 31, 1996 based
         on the market closing price of $10.875 per share.

         At December 31, 1996 and 1995, the Company's retained earnings included
         undistributed  earnings, net of deferred tax, of Prime Medical totaling
         $2,821,000 and $1,890,000, respectively.

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

            Condensed balance sheet at December 31, 1996 and 1995
                                                      1996              1995
                                                      ----              ----
            Current assets                      $ 40,073,000        10,938,000
            Long-term assets                     157,680,000        66,627,000
                                                 -----------        ----------
               Total assets                      197,753,000        77,565,000
                                                 ===========        ==========
            
            Current liabilities                   31,555,000        11,055,000
            Long-term liabilities                 89,771,000        23,760,000
            Shareholders' equity                  76,427,000        42,750,000
                                                 -----------        ----------
               Total liabilities and equity     $197,753,000        77,565,000
                                                 ===========        ==========


                                      A-24

<PAGE>


                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
              Notes to Consolidated Financial Statements, Continued

(14)     Investment in Affiliates, continued

              Condensed statement of operations for the years ended
              December 31, 1996 and 1995
                                                       1996              1995
                                                      -----             -----
              Total revenue                    $ 72,404,000        23,195,000
                                                 ==========        ==========
              Net income                       $  8,961,000         7,204,000
                                                 ==========        ==========

         The Company  exchanged  575,000 shares of Prime stock for notes payable
         from Prime amounting to $593,750,  one half in April 1993 and the other
         half in July 1995. The gain  resulting from the difference  between the
         market value of the Prime stock and the Company's carrying basis of the
         stock was not significant. The Company subsequently exchanged the notes
         for 87,000  shares in 1995 and 90,000  shares in 1993 of its own common
         stock (at current  market  value at  exchange  date) which was owned by
         Prime.

         On July 1,  1996,  the  Company  entered  into a  software  development
         agreement with International Software Solutions,  Inc. ("ISSI").  Under
         this agreement,  ISSI received newly issued shares of APS Systems, Inc.
         common  stock,  which  diluted the ownership of the Company to 49%. APS
         Systems  subsequently  changed its name to Syntera  Technologies,  Inc.
         ("Syntera").  Members of Company  management  serve as two of Syntera's
         four board members.  Syntera is currently working to replace or upgrade
         its product  line,  but will  continue to focus on  providing  practice
         management  computer  systems to medical  clinics,  medical schools and
         physician hospital  organizations  (PHOs).  Beginning July 1, 1996, the
         Company  applied the equity method of accounting to its 49% interest in
         Syntera.
         Operations of Syntera had been consolidated prior to that.

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

         Condensed balance sheet at December 31, 1996

         Current assets                                               $1,692,000
         Long-term assets                                                262,000
                                                                       ---------
              Total assets                                            $1,954,000
                                                                       =========

         Current liabilities                                             358,000
         Long-term assets                                                     --
         Shareholders' equity                                          1,596,000
                                                                       ---------
              Total liabilities and equity                            $1,954,000
                                                                       =========



                                      A-25

<PAGE>


                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
              Notes to Consolidated Financial Statements, Continued

(14)     Investment in Affiliates, continued

         Condensed statement of operations for the six months ended December 31,
         1996

         Total revenue                                                $1,421,000
                                                                       =========
         Net Loss                                                     $  155,000
                                                                         =======

(15)     Segment Information

         The Company's financial services segment includes financial  management
         for an insurance  company that provides  insurance  coverage to doctors
         and hospitals, and brokerage and investment services to individuals and
         institutions.

         The computer systems/software segment consists of computer hardware and
         software marketed to university medical schools and to clinics.

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

                                            1996           1995           1994
         Operating Revenues:
          Financial services           $ 8,863,000     13,762,000    11,451,000
          Computer systems/software      1,590,000      4,738,000     5,404,000
          Real estate                      717,000        668,000       586,000
                                        ----------     ----------    ----------
                                       $11,170,000     19,168,000    17,441,000
                                        ==========     ==========    ==========

         Operating Profit (Loss):
          Financial services          $ 1,123,000      2,118,000        731,000
          Computer Systems/Software       (37,000)       476,000        434,000
          Real estate                     147,000         96,000         77,000
                                        ----------     ----------     ---------
                                        1,233,000      2,690,000      1,242,000
                                        ----------     ----------     ---------
         Corporate investment and 
          other income                    476,000      1,322,000        296,000
         Corporate expenses              (150,000)    (2,037,000)     ( 255,000)
         Minority interest                     --             --      (  15,000)

         Equity in earnings of 
          Affiliates                    1,410,000      1,508,000        950,000
                                        ---------      ---------       --------

         Earnings from continuing 
           operations before income 
           taxes                        2,969,000      3,483,000      2,218,000

         Income tax expense             1,045,000      1,108,000        798,000
                                        ---------      ---------      ---------

                                      A-26

<PAGE>


                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
              Notes to Consolidated Financial Statements, Continued

(15)     Segment Information, continued

                                              1996            1995         1994
                                             -----           -----        -----
         Earnings from continuing 
          operations                      1,924,000      2,375,000    1,420,000

         Loss from discontinued 
          operations, net of income 
          tax benefit                            --       (351,000)    (166,000)
                                          ---------      ---------    ---------
         Net earnings                   $ 1,924,000      2,024,000    1,254,000
                                          =========      =========    =========

         Identifiable assets:
          Financial services            $11,667,000     11,816,000   10,161,000
          Computer systems/software              --      1,732,000    1,426,000
          Real estate                     1,476,000      1,578,000    1,640,000
          Corporate                      10,788,000      8,614,000    6,094,000
          Discontinued Operations                --             --      597,000
                                         ----------     ----------   ----------
                                        $23,931,000     23,740,000   19,918,000
                                         ==========     ==========   ==========

         Capital expenditures:
          Financial service             $    88,000        262,000       31,000
          Computer systems/software          18,000         80,000       48,000
          Real estate                        21,000         64,000       86,000
          Corporate                          17,000         73,000       12,000
          Discontinued operations                --          4,000        8,000
                                            -------        -------      -------
                                        $   144,000        483,000      185,000
                                            =======        =======      =======

         Depreciation/amortization 
         expenses:
          Financial services            $   164,000        164,000      106,000
          Computer systems/software          24,000         94,000       48,000
          Real estate                       129,000        126,000      113,000
          Corporate                          13,000          9,000        2,000
          Discontinued operations                --          6,000        8,000
                                            -------        -------      -------
                                        $   330,000        399,000      277,000
                                            =======        =======      =======

         Revenues  attributable to customers  generating greater than 10% of the
          revenues of each segment:
            Financial services
             Company A                          60%            36%           45%
             Company B                          --             10%           --

                                      A-27

<PAGE>


                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
              Notes to Consolidated Financial Statements, Continued

(15)     Segment Information, continued
                                              1996           1995          1994
                                             -----          -----         -----

              Company C                         --             --            12%
              Company D                         --             11%           --
                                              ----           ----          ----
                                                60%            57%           57%
                                              ====           ====          ====
             Computer systems/software
               Company E                        56%            34%           28%
               Company F                        --             13%           11%
               Company G                        --             18%           29%
                                              ----           ----          ----
                                                56%            65%           68%
                                              ====           ====          ====

         At December 31, 1996 the Company had long-term contracts with company A
         and was  therefore  not  vulnerable  to the risk of a near-term  severe
         impact from a  reasonably  possible  loss of the  revenue.  Company E's
         contract  will  expire  in 1998 and will not be  renewed.  The  Company
         expects,  but cannot be  certain,  that its  affiliate  will be able to
         replace  this  revenue  under  its  redevelopment  plan  (see  "General
         Information").

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


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