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

                                    FORM 10-K
            MARK ONE:
            [X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
                 THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
                    FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

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

                         COMMISSION FILE NUMBER 0-11453

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

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

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

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

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

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

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

State the aggregate market value of the voting stock held by  non-affiliates  of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold or the  average  bid and asked  prices of such
stock, as of a specified date within 60 days prior to the date of filing.
          Aggregate Market Value at March 18, 1998: $30,121,524

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 18, 1998
     --------------------                      ----------------
Common Stock, $.10 par value                      4,154,693
                       DOCUMENTS INCORPORATED BY REFERENCE
Selected  portions of the  Registrant's  definitive  proxy material for the 1997
annual meeting of  shareholders  are  incorporated by reference into Part III of
the Form 10-K. In addition,  Item14(a) of Prime Medical Services,  Inc.'s Annual
Report on Form 10-K for the year ended  December  31,  1997 is  incorporated  by
reference.
============================================================================
<PAGE>
                     AMERICAN PHYSICIANS SERVICE GROUP, INC.

                           ANNUAL REPORT ON FORM 10-K

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

                                     PART I

ITEM 1.           BUSINESS

General

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

         The Company  owns  3,064,000  shares of common  stock of Prime  Medical
Services,  Inc. ("Prime Medical"),  representing at March 15, 1998 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  five member board of
directors.  The Company records its pro-rata share of Prime Medical's results on
the equity basis. Prime Medical is the largest provider of lithotripsy  services
in the United States, currently servicing over 450 hospitals and surgery centers
in 34 states.  Lithotripsy  is a non-invasive  method of treating  kidney stones
through the use of shock waves.  The common stock of Prime  Medical is traded on
the NASDAQ  National Market under the symbol "PMSI." Prime Medical is a Delaware
corporation  which is required to file annual,  quarterly  and other reports and
documents with the Securities and Exchange Commission (the "SEC"), which reports
and documents contain  financial and other information  regarding Prime Medical.
The summary information regarding Prime Medical contained herein is qualified in
its  entirety by  reference  to such  reports and  documents.  Such  reports and
documents  may be examined  and copies may be  obtained  from the offices of the
SEC.

         On October 1, 1997, the Company formed APS Practice  Management,  Inc.,
later  renamed  Syntera  HealthCare  Corporation  ("Syntera")  with  an  initial
ownership of 85%.  Syntera  specializes  in the management of OB/GYN and related
medical practices.  In a typical  transaction,  Syntera acquires the non-medical
assets of a physician's practice, signs a long-term management contract with the
physician  to  provide  the  majority  of the  non-medical  requirements  of the
practice,  such  as  non-professional   personnel,  office  space,  billing  and
collection,  and other  day-to-day  non-medical  operating  functions.  In turn,
Syntera is paid a variable  management fee that rewards the efficient  operation
and the expansion of the practice. Medical services are not provided by Syntera.
The Company  expects its  ownership  interest in Syntera  (currently  74%) to be
reduced  to a  minority  level as  Syntera  exchanges  its stock  for  assets of
additional physician practices. Due

                                        1

<PAGE>



to the short time frame  anticipated for this change in ownership to occur,  the
Company has accounted for its ownership in Syntera on the equity basis in 1997.

         On October 31,  1996,  the Company  invested  $3,300,000  in the common
stock of Consolidated  Eco-Systems,  Inc. (formerly Exsorbet  Industries,  Inc.)
("Con-Eco")   (NASDAQ:EXSO)  with  a  put  option.   Con-Eco  is  a  diversified
environmental and technical services company.  On November 26, 1996, the Company
exercised its put in exchange for a promissory note from Con-Eco. The promissory
note was  secured  by the shares  which were  subject to the put plus all of the
stock and  substantially  all of the  assets  of a  wholly-owned  subsidiary  of
Con-Eco and the guarantees of all operating subsidiaries of Con-Eco. The Company
renegotiated  the debt with Con-Eco in November,  1997. In  connection  with the
renegotiation, the Company extended the debt for two years and refinanced unpaid
accrued interest, resulting in a new promissory note for $3,788,000. No interest
income  has  been  recognized  by  the  Company.   Con-Eco  provided  additional
collateral to the Company in the form of stock of two  additional  subsidiaries,
and a second lien on all assets of one of these subsidiaries. Payments under the
new note were  scheduled  to begin on January 1, but were  delayed  until March,
1998 with the  Company's  consent.  The March 1998  payment  has been  received;
however,  is anticipated that Con-Eco will be required to sell certain assets in
order to meet its obligations to the Company.  The Company has declared  Con-Eco
in default for  failure to comply  with  certain  non-payment  obligations,  but
believes its collateral  position is sufficient to allow  ultimate  repayment of
the debt.

         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 affiliates Prime Medical and Syntera).

         The Company,  through its wholly owned  subsidiary,  APS Systems,  Inc.
("APS Systems"),  had previously  developed  software and marketed it to medical
clinics and medical schools.  This business segment became unprofitable in 1996.
A joint  venture  with a  software  developer  was formed in 1996 with a plan to
develop new products,  but was  discontinued in 1997 when it was determined that
the high cost of developing competitive products precluded an adequate return on
investment.  Subsequently, the Company ceased marketing the software and reduced
the scope of APS Systems'  operations  to a level  adequate to service  existing
clients through the terms of their  contracts.  The Company has assumed that all
clients will have migrated to other software products by the end of 1999 and has
reflected the expected  financial impact of  discontinuing  this segment on that
date in the current financial statements.

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


                                        2

<PAGE>

FINANCIAL SERVICES

         The Company's  financial  services  consist of  management  services to
medical malpractice insurance companies by APS Insurance Services,  Inc., an 80%
owned  subsidiary  of the Company  ("Insurance  Services"),  and  brokerage  and
investment  services  primarily to institutional  and high net worth individuals
performed by APS Financial Corporation, a wholly-owned subsidiary of the Company
("APS Financial").

         MANAGEMENT SERVICES TO MEDICAL MALPRACTICE INSURANCE COMPANIES

         Insurance   Services,   through  its   wholly-owned   subsidiaries  APS
Facilities  Management,  Inc. ("FMI") and American Physicians  Insurance Agency,
Inc. ("Agency"),  provides management services to medical malpractice  insurance
companies.  The primary insurance company client,  American Physicians Insurance
Exchange ("APIE") 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",  that provides all management
and administrative  services for the exchange. As the attorney-in-fact for APIE,
FMI receives a percentage  of the earned  premiums of APIE, as well as a portion
of APIE's  profit.  The amount of these  premiums can be  adversely  affected by
competition.   Substantial   underwriting   losses,  which  might  result  in  a
curtailment  or cessation of operations  by APIE,  would also  adversely  affect
FMI's revenue. To limit possible  underwriting  losses, APIE currently reinsures
its risk in excess  of  $250,000  per  medical  incident.  APIE  offers  medical
professional liability insurance for doctors in Texas and Arkansas. FMI's assets
are not subject to any insurance claims by policyholders of APIE.

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

         During   1997,   1996  and  1995   approximately   48%,  57%  and  35%,
respectively,   of  the  Company's  revenues  from  continuing  operations,  and
substantially all of Insurance Services'

                                        3

<PAGE>

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.

         During 1997,  FPIC  Insurance  Group,  Inc.  ("FPIC"),  purchased a 20%
interest in  Insurance  Services  from the  Company.  In  conjunction  with that
purchase,   FPIC's  subsidiary,   Florida  Physicians  Insurance  Company,  Inc.
("Florida  Physicians"),  entered into  agreements with Agency and APIE granting
Agency the  exclusive  right to market  Florida  Physician's  policies in Texas.
Agency has sales,  marketing,  underwriting  and claims  handling  authority for
Florida Physicians in Texas and receives commissions for such services.  Florida
Physicians  also entered into a  reinsurance  agreement  with APIE in which APIE
reinsures  substantially all of Florida  Physicians' risk in Texas under medical
professional  liability  policies  issued or renewed by  Florida  Physicians  on
behalf of Texas health care providers after March 27, 1997. The Company has also
granted  FPIC an option,  exercisable  at any time during  1999,  to purchase an
additional 35% interest in Insurance  Services from the Company at a price based
on the average net earnings of Insurance Services for 1997 and 1998.

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

         Florida  Physicians  is one of the  larger  physician  insurers  in the
country, insuring over 5,000 physicians nationwide.  Florida Physicians is rated
A- (Excellent) by AM Best.

         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 and Florida Physicians offer only a "claims made" policy in Texas and
Arkansas,  but provide for an extended  reporting option upon termination.  APIE
and Florida  Physicians  reinsure  100% of all Texas and  Arkansas  coverage per
medical  incident  between  $250,000 and $1,000,000,  primarily  through certain
domestic and international insurance companies.

         The  following  table  presents  selected  financial and other data for
APIE. The management agreement with FMI obligates APIE to pay management fees to
FMI based on APIE's earned premiums before payment of reinsurance premiums.  The
fee  percentage  is 13.5% with the  provision  that any  profits of APIE will be
shared equally with FMI so long as the total

                                        4

<PAGE>

reimbursement  (fees and  profit  sharing)  do not exceed a cap based on premium
levels.  No profit  sharing fee was received in 1993. In 1997,  1996,  1995, and
1994,   management  fees   attributable  to  profit  sharing  were   $1,961,000,
$1,191,000, $700,000, and $1,107,000, respectively.
<TABLE>
<CAPTION>


                                                 Years Ended December 31,
                                  1997           1996              1995                 1994              1993
                                 ------         ------            ------                ----             -----
(thousands, except for
number of insureds)
<S>                              <C>      <C>    <C>      <C>      <C>      <C>         <C>       <C>    <C>       <C>
Earned premiums before
  reinsurance premiums......     $25,899         $28,754           $30,857              $30,261          $29,205
Total assets................      81,594          90,193           101,251               98,302           94,019
Total surplus...............      11,854          10,017             9,402                9,315            9,196
Management fees and
  commissions to FMI and
  Agency ...................       5,854  (4)      5,281  (4)        5,010  (4)           4,703   (2)      3,790   (1)
Number of  insureds.........       2,629  (3)      3,019             3,226                3,216   (3)      3,575

----------------
</TABLE>


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

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

         (3)      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.

         (4)      Includes  commissions of $1,214,  $860 and $676 in 1997,  1996
                  and 1995,  respectively,  from  Florida  Physicians  and 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  primarily to  institutional  and high net worth individual
clients.  APS Financial also 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"), the Securities Investor Protection Corporation ("SIPC"),
the Securities Industry Association, and, in addition, is licensed in 44 states.

         Commissions are charged on both exchange and  over-the-counter  ("OTC")
transactions   generally  in  accordance  with  industry   practice.   When  OTC
transactions are executed by APS Financial as a dealer, APS Financial  receives,
in lieu of commissions, 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 SEC. These rules, which are designed

                                        5

<PAGE>



to measure the  financial  soundness and  liquidity of  broker-dealers,  specify
minimum net capital  requirements.  Since the Company is not itself a registered
broker-dealer,  it is not subject to these  rules.  However,  APS  Financial  is
subject to these rules.  Compliance  with  applicable  net capital  requirements
could limit operations of APS Financial such as trading  activities that require
the use of significant  amounts of capital.  A significant  operating loss or an
extraordinary  charge against net capital could adversely  affect the ability of
APS  Financial  to expand or even  maintain its present  levels of business.  At
December  31,  1997,  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
Southwest  a fee  based on the  number  and type of  transactions  performed  by
Southwest.

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.
APS  Realty  leases  approximately  58%  of  this  space  to  the  Company,  its
subsidiaries and Prime Medical. The remainder is leased to unaffiliated parties.

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.


                                        6

<PAGE>



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 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.

         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 SIPC.  When the SIPC
fund  falls  below a certain  minimum  amount (as it did in 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.  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,  1998,  the  Company  employed,  on a  full  time  basis,
approximately  128  persons,  including  52 by  Insurance  Services,  45 by  APS
Financial,  18 by APS  Systems  and 13  directly  by the  Company.  The  Company
considers its employee relations to be good. None of the Company's  employees is
represented by a labor union and the Company has experienced no work stoppages.

                                        7

<PAGE>



ITEM 2.           PROPERTIES

         APS Realty owns  approximately  53,000 square feet of condominium space
in an office project in Austin,  Texas. The Company,  its subsidiaries and Prime
Medical use  approximately  31,000 square feet of this space as their  principal
executive  offices,  and APS Realty leases the remainder to third  parties.  The
area  available  for lease to third  parties is fully  occupied  as of March 20,
1998.

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 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

         The Company's  annual  meeting was held June 19, 1997.  The sole agenda
item was the election of directors. Results of the election follow:

Nominee                     For         Against     Abstain      Broker Non-Vote

Richard Clark            3,598,632       22,000        --               --
Jack Murphy              3,599,631       22,001        --               --
Robert L. Myer           3,598,632       22,000        --               --
William A. Searles       3,598,632       22,000        --               --
Kenneth S. Shifrin       3,598,632       22,000        --               --


                                     PART II

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

         The following table represents the high and low prices of the Company's
common  stock  in the  over-the-counter  market  as  reported  by  the  National
Association of Securities Dealers,  Inc.,  Automated Quotations System for years
ended   December  31,  1997  and  1996.  On  March  1,  1998,  the  Company  had
approximately 500 holders of record of its common stock.



                                        8

<PAGE>

                                               1997                1996
                                        -----------------   ------------------
                                        High        Low      High         Low

         First Quarter                $7 5/8       $6 3/8    $10 1/8     $5 1/4
         Second Quarter                6 7/8        4 3/4     12 7/8      8
         Third Quarter                 8 7/8        5 7/8     10          5 7/8
         Fourth Quarter                8            6          7 3/8      5 5/8

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

ITEM 6.           SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>

                                              SELECTED FINANCIAL DATA
(In thousands, except per share data)
                                                                                 For the Year Ended or At December 31,
                                                     1997         1996             1995         1994       1993
                                                     ----         ----            ------      --------    -----
Selected income statement data:

  <S>                                                <C>           <C>            <C>         <C>            <C>
  Revenues                                           $13,065       10,437         16,124      12,333         12,541

  Earnings from continuing operations before
  income taxes, minority interests and accounting
  changes                                            $ 5,984        3,006          3,007       1,784          1,471


  Net earnings                                       $ 2,538        1,924          2,024       1,254          1,086

  Per share amounts - diluted:

  Net earnings                                       $  .59           .46            .53         .36            .31

  Diluted weighted average
  shares outstanding                                   4,241        4,219          3,798       3,488          3,549

  Selected balance sheet data:

  Total assets                                       $29,401       24,468         23,740      19,918         18,326

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

  Total liabilities                                  $ 6,122        4,086          6,146       4,927          4,562

  Minority interests                                 $   175           --             --          --             76

  Total equity                                       $23,104       20,382         17,594      14,991         13,688

  Book value per share                                $ 5.59         5.03           4.80        4.47           4.15
</TABLE>


                                        9

<PAGE>




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

FORWARD-LOOKING STATEMENTS

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

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

RESULTS OF OPERATIONS

1997 COMPARED TO 1996

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

Financial Services

     Financial  services  revenues  increased  30% in  1997  compared  to  1996.
Insurance management operations were up by 6% as a result of a higher contingent
fee,  which was based on  improved  profits at the  managed  insurance  company.
Broker dealer revenues increased 73%.

                                       10

<PAGE>

Approximately  71% of the increase was attributable to expanding the sales force
with the opening of an additional  office location.  The balance of the increase
was  primarily a result of lower  interest  rates  creating more activity in the
bond market.

     Financial  services expenses increased 12% from 1996. The increase reflects
increased sales and expanded  office  operations at the  broker/dealer  with the
resultant higher commissions and payroll expense.  Better control of legal costs
and a lower  allocation of corporate  overhead  partially  offset the increases.
Insurance  mangement  expenses  decreased  9%,  again in the  areas of legal and
professional fees and allocated corporate overhead.

     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  eight  years  under  the   contract,
profit-sharing has ranged from zero to 16% 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
by competition for top producing  brokers.  The broker/dealer  continually seeks
quality  brokers and has opened an office in another city in an effort to expand
its recruiting and sales base.

REAL ESTATE

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

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

INVESTMENT AND OTHER

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

     On October 31, 1996, the Company invested $3,300,000 in the common stock of
Con-Eco with a put option.  On November 26, 1996, the Company  exercised its put
in exchange for a note receivable  from Con-Eco.  The Company  renegotiated  the
debt with Con-Eco in November 1997. In connection  with the  renegotiation,  the
Company extended the debt for two years and refinanced  unpaid accrued interest,
resulting in a new promissory note for  $3,788,000.  No interest income has been
recognized by the Company.  Payments  under the new note were scheduled to begin
on January 1, but were delayed until March 1998 with the Company's consent.  The
March 1998 payment has been received;  however,  it is anticipated  that Con-Eco
will be required to sell certain assets in order to meet its  obligations to the
Company.  The Company has declared Con-Eco in default for failure to comply with
certain  non-payment  obligations,  but  believes  its  collateral  position  is
sufficient to allow ultimate repayment of the debt.

                      General and Administrative Expenses

     The 800% increase in expenses was a result of changes in accounting
estimates rather than fundamental changes in

                                       11

<PAGE>

operations.  1996's expenses  reflected  favorable  adjustments to a contingency
provision related to a guarantee, as well as favorable adjustments to allowances
for doubtful accounts, a result of collecting the accounts.  No such adjustments
were required in 1997.

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

AFFILIATES

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

     Prime had issued additional shares in 1996 reducing 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.

1996 COMPARED TO 1995

Revenues from continuing  operations decreased 35% in 1996 compared to 1995. Net
income  decreased 5% and diluted  earnings per share  decreased 13%. The reasons
for these changes are described below.

FINANCIAL SERVICES

     Financial  services  revenues  declined  35%  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 32% 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.

REAL ESTATE

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

                                       12

<PAGE>


     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.

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.  In 1996, this
contingency  provision was adjusted downward as a result of the account's actual
performance. Approximately 72% of the 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 56% 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.  Prime Medical's  issuance of
additional shares in 1996 reduced the Company's ownership from 21% to 16%.

LIQUIDITY AND CAPITAL RESOURCES

     Net working  capital was $3,360,000 and $8,305,000 at December 31, 1997 and
1996, respectively.  The decrease in working capital resulted from current notes
receivable  being  moved to long  term,  as a result  of  amended  terms,  and a
significant  increase in accrued  liabilities  related to the estimated disposal
cost of the computer software segment.  Equally significant,  the Company's $4.6
million  investment  in Syntera  was funded  from  working  capital  and current
operations.  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.

                                       13

<PAGE>


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

     Capital expenditures for equipment were $312,000, $123,000 and $419,000, in
1997,  1996,  and 1995,  respectively.  In  addition,  the  Company  improved or
purchased  office space in 1996 and 1995 for $21,000 and $64,000,  respectively.
The Company expects  capital  expenditures in 1998 to be within the range of the
prior three years.

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

INFLATION

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

YEAR 2000 COMPLIANCE

     The Company is aware of the issues  associated with the programming code in
existing  computer systems as the year 2000 approaches.  The "year 2000 problem"
is pervasive and complex as virtually every computer  operation will be affected
in some way by the  rollover  of the two digit  year  value to 00.  The issue is
whether computer systems will properly recognize data sensitive information when
the  year  changes  to  2000.  Systems  that  do  not  properly  recognize  such
information could generate erroneous data or cause a system to fail. The Company
anticipates  that necessary  actions to be year 2000 compliant will be performed
internally  in the ordinary  course of business at a cost not expected to exceed
$100,000. However, significant uncertainty exists concerning the potential costs
and effects  associated with any year 2000 compliance.  Any year 2000 compliance
problem of either the Company or its  vendors,  third party  payors or customers
could have a  material  adverse  effect on the  Company's  business,  results of
operations,

                                       14

<PAGE>



financial condition and prospects.
ITEM 7.(a)        Quantitative and Qualitative Disclosures about Market Risk.

                  Not required for 1997.

ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

     Financial  information  and schedules  relating to Prime Medical  Services,
Inc. are  contained in Item 14(a) of the Annual Report on Form 10-K for the year
ended  December 31, 1997 of Prime Medical  Services,  Inc.,  which Item 14(a) is
incorporated herein by reference.

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

     None.

                                    PART III

ITEM 10.          DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information  required by this item is contained in the definitive proxy
material of the Company to be filed in connection  with its 1998 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, 1998, the executive officers of the Company are as follows:

Name                      Age                       Position

Kenneth S. Shifrin        48                Chairman of the Board, President and
                                               Chief Executive Officer

Duane K. Boyd, Jr.        53                Senior Vice President - Insurance

William H. Hayes          50                Senior Vice President - Finance and
                                               Secretary

Thomas R. Solimine        39                Controller

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

                                       15

<PAGE>

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

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

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

ITEM 11.          EXECUTIVE COMPENSATION

         The  information  required by this item is contained in the  definitive
proxy  statement of the Company to be filed in  connection  with its 1998 annual
meeting of shareholders, which information is incorporated herein by reference.

ITEM 12.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                  MANAGEMENT

         The  information  required by this item is contained in the  definitive
proxy  statement of the Company to be filed in  connection  with its 1998 annual
meeting of shareholders, which information is incorporated herein by reference.

ITEM 13.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

                                       16

<PAGE>


         The  information  required by this item is contained in the  definitive
proxy  statement of the Company to be filed in  connection  with its 1998 annual
meeting of shareholders, which information is incorporated herein by reference.

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

         (a)      1.       Financial Statements

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

                  2.       Financial Statement Schedules

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

         (b)      Reports on Form 8-K

                  None.

         (c)      Exhibits (1)

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

                          *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.(8)

                                       17

<PAGE>


                  *10.7       Form of Non-Employee Directors Stock Option
                              Agreement.(8)

                  *10.8       1995 Incentive and Non-Qualified Stock Option Plan
                              of American Physicians Service Group, Inc.(8)

                  *10.9       Form of Stock Option Agreement (ISO).(8)

                  *10.10      Form of Stock Option Agreement (Non-Qualified).(8)

                  *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.(9)

                   10.18     Stock Put Agreement dated September 30, 1996
                             between the Company and Exsorbet Industries,
                             Inc.(9)

                   10.19     Shareholder Rights Agreement dated September
                             30, 1996  between  the Company and  Exsorbet
                             Industries, Inc.(9)

                   10.20     Warrant dated September 30, 1996 for shares of
                             common stock issued

                                       18

<PAGE>

                              to the Company by Exsorbet Industries, Inc.(9)

                   10.21     Contingent Warrant Agreement dated September 30,
                             1996 for shares of common  stock  issued
                             to  the  Company  by  Exsorbet   Industries,
                             Inc.(9)

                   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.(9)

                   10.23     Agreement dated September 30, 1996 with Exsorbet
                             Industries, Inc. related to options issued by
                             officers and directors of Exsorbet.(9)

                   10.24     Guaranty Agreements dated September 30, 1996
                             between  the  Company  and  subsidiaries of
                             Exsorbet Industries, Inc.(9)

                   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.(9)

                   10.26     Stock Purchase Agreement dated October 1, 1997
                             between the Company, APS Practice Management, Inc.,
                             Michael Beck, John Hendrick, et al.(10)

                   10.27     Bylaws of APS Practice Management, Inc.(10)

                   10.28     Amended and Restated Articles of Incorporation APS
                             Practice Management, Inc.(10)

                   10.29     APS Practice Management, Inc. Certificate of
                             Designation of Rights and Preferences Series A
                             Serial Founder's Common Stock dated September 30,
                             1997.(10)

                   10.30     Resolutions to organizational matters concerning
                             APS Practice Management, Inc. dated October 1, 1997
                             (10)

                   10.31     Master Refinancing  Agreement dated November 6,
                             1997 between the Company and Consolidated
                             Eco-Systems, Inc.(10)

                   10.32     Promissory Note dated November 6, 1997 executed by
                             Consolidated Eco-Systems, Inc. and payable to the
                             Company in the amount of $3,788,580.(10)

                   10.33     Assignment  and  Security   Agreement  dated
                             November  6, 1997  between  the  Company and
                             Consolidated Eco-Systems, Inc.(10)

                                       19

<PAGE>


                   10.34     Security Agreement dated November 6, 1997 between
                             the Company and Consolidated Eco-Systems, Inc.(10)

                   10.35     Share Exchange  Agreements dated October 31, 1997
                             between the  Company and Devin  Garza,
                             M.D.,  Robert  Casanova,  M.D.  and  Shelley
                             Nielsen, M.D.(10)

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

                   10.37     First Amendment to 1995 Non-Employee Director Stock
                             Option Plan of American Physicians Service Group,
                             Inc. Dated December 10, 1997.(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  Company  is  subject  to the  informational  requirements  of the
Securities Exchange Act of 1934, as amended, and, in accordance therewith, files
reports,  proxy statements and other  information with the Commission.  Reports,
proxy statements and other information filed by the Company can be inspected and
copied at the public  reference  facilities  maintained by the Commission at 450
Fifth Street,  N.W.,  Washington,  D.C. 20549, and at the Commission's  Regional
Offices at Seven World Trade Center,  13th Floor,  New York,  New York 10048 and
CitiCorp  Center,  500  West  Madison  Street,  Suite  1400,  Chicago,  Illinois
60661-2511.  Copies of such  material  can be  obtained  by mail from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington,  D.C.
20549, at prescribed rates. Such reports, proxy statements and other information
concerning  the Company are also  available for inspection at the offices of The
Nasdaq National Market, Reports Section, 1735 K Street, N.W.,  Washington,  D.C.
20006.  The  Commission  maintains a Web site that contains  reports,  proxy and
information  statements and other  information  regarding  registrants that file
electronically with the Commission at  "http://www.sec.gov"  and makes available
the same documents through Disclosure, Inc. at 800-638-8241.

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

                                       20

<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, 1995 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, 1996 and incorporated herein by reference.

      (10) Filed herewith.











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

                                    Date:  March 27, 1998




         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 27, 1998


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

Date:    March 27, 1998


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

                                       22

<PAGE>

Date:    March 27, 1998


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

Date:    March 27, 1998



By: /s/ Jack Murphy
     Jack Murphy, Director

Date:    March 27, 1998



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

Date:    March 27, 1998



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

Date:    March 27, 1998



                                       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, 1997, 1996 and 1995.

   Consolidated Balance Sheets at December 31, 1997                    A-5
   and December 31, 1996.

   Consolidated Statements of Cash Flows for the years                 A-7
   ended December 31, 1997, 1996 and 1995.

   Consolidated Statements of Shareholders' Equity                     A-9
   at December 31, 1997, 1996 and 1995.

   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, 1997 and 1996,  and the
results  of their  operations  and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.



Austin, Texas
March 6, 1998



                                       A-2

<PAGE>

                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
                       CONSOLIDATED STATEMENTS OF EARNINGS

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

                                                                         1997             1996            1995
                                                                         ----             ----            ----
<S>                                                                   <C>               <C>              <C>
Revenues:
  Financial services (Note 3)                                         $12,013            9,244           14,134
  Real estate (Note 6)                                                    704              717              668
  Investments and other (Note 2)                                          348              476            1,322
                                                                     --------          -------          -------
    Total revenues                                                     13,065           10,437           16,124
                                                                      -------          -------          -------


Expenses:
  Financial services                                                    9,118            8,117           11,954
  Real estate                                                             503              521              510
  General and administrative                                            1,352              150            2,037
  Interest                                                                 21               54              124
                                                                       ------           ------          -------
    Total expenses                                                     10,994            8,842           14,625
                                                                       ------           ------          -------

  Operating income                                                      2,071            1,595            1,499


  Equity in earnings of
    unconsolidated affiliates (Note 13)                                 2,014            1,411            1,508

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

  Earnings from continuing operations before
    income taxes and minority interests                                 5,984            3,006            3,007

  Income tax expense (Note 9)                                           2,341            1,058              946

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

  Earnings from continuing operations                                   3,468            1,948            2,061
                                                                       ------           ------           ------

Discontinued operations:
   Loss from  operations of discontinued  segment,
   net of income tax benefit of $48, $13 and $19 in
   1997, 1996 and 1995, respectively                                      (94)             (24)             (37)

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

Net loss from discontinued operations                                    (930)             (24)             (37)
                                                                       -------        ---------         --------

Net earnings                                                           $2,538            1,924            2,024
                                                                       ======          =======          =======

</TABLE>

See accompanying notes to consolidated financial statements.

                                       A-3

<PAGE>


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

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

                                                                       1997             1996            1995
                                                                       ----             ----          ------

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

  Basic:
    Earnings from continuing operations                               $0.84             0.48            0.59

    Discontinued operations                                           (0.22)              --           (0.01)
                                                                     ------            -----           ------

       Net earnings                                                   $0.62             0.48            0.58
                                                                     ======            =====          ======

   Diluted:
    Earnings from continuing operations                               $0.81             0.46            0.54

    Discontinued operations                                           (0.22)              --           (0.01)
                                                                      -----            -----          ------

    Net earnings                                                      $0.59             0.46            0.53
                                                                      =====            =====          ======


  Basic weighted average shares
    outstanding                                                       4,106            4,025           3,480
                                                                      =====            ======         =======


  Diluted weighted average
    shares outstanding                                                4,241            4,219           3,798
                                                                      =====            ======         =======

</TABLE>

  See accompanying notes to consolidated financial statements.



                                       A-4

<PAGE>


                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
                           CONSOLIDATED BALANCE SHEETS


(In thousands, except share data)

                                                          December 31,
                                                     1997              1996


ASSETS

Current assets:
 Cash and cash equivalents                         $5,188             5,770
 Marketable securities (Note 2)                        --                29
 Trading account securities                           449               699
 Management fees and other receivables
   (Note 3)                                           815               512
 Income tax receivable                                 --               650
 Notes receivable - current (Note 4)                1,157             3,447
 Receivable from clearing broker                      543               279
 Prepaid expenses and other                           508               239
                                                    -----            ------
   Total current assets                             8,660            11,625



Notes receivable, less current portion
  (Note 4)                                          2,982               179
Property and equipment, net (Note 6)                1,830             1,781
Investment in affiliates (Note 13)                 15,611             9,657
Other assets                                          318             1,226
                                                   ------            ------
   Total assets                                   $29,401            24,468
                                                   ======            ======





See accompanying notes to consolidated financial statements.

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


(In thousands, except share data)


                                                        December 31,
                                                   1997              1996
LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
 Current portion of long term obligations
   (Note 6)                                       $  --               542
 Accounts payable - trade                           614               382
 Payable to clearing broker                         441                --
 Accrued compensation                               446               252
 Accrued expenses and other liabilities
   (Note 7)                                       3,573             2,144
 Income taxes payable                               226                --
                                                  -----            ------
  Total current liabilities                       5,300             3,320

Net deferred income tax liability
   (Note 9)                                         822               766
                                                  -----            ------
  Total liabilities                               6,122             4,086
                                                 ------            ------

Minority interest                                   175                --

Shareholders' equity:
 Preferred stock, $1.00 par value,
   1,000,000 shares authorized                       --                --
 Common stock, $0.10 par value,
   20,000,000 shares authorized; 4,160,861
   issued at 12/31/97 and 4,049,195 at
   12/31/96                                         416               405
 Additional paid-in capital                       5,528             5,366
 Unrealized holding losses                           --            (   11)
 Retained earnings                               17,160            14,622
                                                 ------            ------

    Total shareholders' equity                   23,104            20,382
                                                 ------           -------

Commitments and contingencies
    (notes 6, 8, 10, 11 and 12)
 Total liabilities and shareholders' equity     $29,401            24,468
                                                =======            ======


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,
                                                                          --------------------------------------
                                                                          1997           1996              1995
                                                                          ----           ----              ----

<S>                                                                  <C>               <C>              <C>
Cash flows from operating activities:
  Cash received from customers                                       $ 13,080           11,123           21,068
  Cash paid to suppliers and employees                                 (9,247)         (11,064)         (17,860)
  Change in trading account securities                                    250              315           (  353)
  Change in receivable from clearing broker                              (177)             501           (  289)
  Interest paid                                                           (21)           (  54)          (  124)
  Income taxes paid                                                      (772)           ( 611)          (  494)
  Interest, dividends and other investment proceeds                       219              459            1,322
                                                                       -------        --------          -------
    Net cash provided by operating activities                            3,332             669            3,270
                                                                       -------        --------          -------

Cash flows from investing activities:
  Payments for purchase of property and
    equipment                                                            (312)           ( 144)          (  483)
  Net decrease (increase) in marketable
    securities                                                              5            2,045           (  530)
  Investment in affiliates                                             (5,292)          (  244)              --
  Proceeds from sale of fixed assets                                       55               --               47
  Funds loaned to others                                                 (834)         ( 3,442)              --
  Proceeds from the sale of discontinued operation                         --               --               67
  Collection of notes receivable                                          109               --            1,119
  Proceeds from disolution of entity                                    1,000               --               --
  Proceeds from sale of 20% of subsidiary                               2,000               --               --
  Other                                                                   (82)              --               --
    Net cash provided by (used in) investing                           -------         --------          ------
      activities                                                       (3,351)         ( 1,785)             220
                                                                       -------         --------          ------


Cash flows from financing activities:
  Repayment of long-term obligations                                     (542)          (  163)          (  332)
  Acquisition of treasury stock                                          (337)          (  453)          (  125)
  Proceeds from exercise of stock options                                 316              704              499
                                                                       -------         -------           ------
    Net cash provided by (used in) financing activities                  (563)              88               42
                                                                       -------         -------           ------

Net change in cash and cash equivalents                                  (582)         ( 1,028)           3,532

Cash and cash equivalents at beginning of period                        5,770            6,798            3,266
                                                                        -----            -----           ------
Cash and cash equivalents at end of period                              5,188            5,770            6,798
                                                                        =====          =======           ======


</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,
                                                                      ---------------------------------------
                                                                      1997             1996             1995
                                                                      ----             ----             ----
<S>                                                                <C>               <C>              <C>
Reconciliation of net earnings to net cash from
 operating activities:

 Net earnings                                                      $ 2,538            1,923            2,024
Adjustments to reconcile net earnings to
  net cash from operating activities:
Depreciation and amortization                                          436              324              399
Minority interest in consolidated earnings                             175               --               --
Undistributed earnings of affiliate                                 (2,014)          (1,411)          (1,508)
Gain on sale or disposition of assets                               (2,032)              --              (72)
(Gain) loss on sale of securities                                       41             ( 81)            ( 50)
Change in federal income tax payable                                   876             (584)             301
Provision for deferred income tax                                       56              925               27
Change in trading securities                                           250              315             (353)
Change in receivable from clearing broker                              177              501             (289)
Change in management fees and other receivable                      (   26)              17            1,183
Change in prepaids and other current assets                          ( 191)              24              493
Change in long-term assets                                              --              265               --
Change in trade payable                                                 90               53            ( 456)
Change in accrued expenses and other liabilities                     1,547           (1,602)           1,571
Loss from discontinued operations                                    1,409               --               --
                                                                   -------           ------           ------

  Net cash from operating activities                              $  3,332              669            3,270
                                                                  ========           ======           ======
</TABLE>

Summary of non-cash transactions:

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

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

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, 1997,
                                  1996 and 1995


(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, 1995             3,471,684        $347        4,469              44      10,647               (543)      14,991
Net earnings                               --          --           --              --       2,024                 --        2,024
Unrealized gains on securities
    available for sale, net of tax         --          --           --             (44)         --                 --          (44)
Shares issued (Note 11)               314,333          31          468              --          --                 --          499
Shares repurchased &
   cancelled (Note 13)               (122,146)        (12)        (407)             --          --                 --         (419)

Pro rata portion of Company
   common stock held by
   affiliate (Note 13)                     --          --           --              --          --                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 11)               450,000          45          659              --          --                 --          704
Shares repurchased &
   cancelled                          (64,676)         (6)        (447)             --          --                 --         (453)
Income tax benefit of non-
   qualified option exercises              --          --          624              --          --                 --          624
                                   --------------  ---------  -------------  ------------- -----------  -------------- -------------
Balance December 31, 1996           4,049,195         405        5,366             (11)     14,622                 --       20,382

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

See accompanying notes to consolidated financial statements.

                                       A-9

<PAGE>

                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        December 31, 1997, 1996 and 1995

(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.  The
                  brokerage   business   has   clients   nationally.   Insurance
                  management is a service  provided  primarily in Texas,  but is
                  available to clients  nationally.  American Physicians Service
                  Group,  Inc.  also owns  space in the  office  building  which
                  serves as its headquarters. Through its real estate subsidiary
                  it leases space that is surplus to its needs. During the three
                  years  presented  in  the  financial   statements,   financial
                  services  generated  approximately 89% of total revenues.  The
                  Company entered the physician practice  management business in
                  the  fourth  quarter  of  1997.  Operations  for  1997 are not
                  significant.

         (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 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 of these
                  fees is  recognized  when it is  reasonably  certain  that the
                  managed

                                      A-10

<PAGE>


                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

(1)      Summary of Significant Accounting Policies, continued

                  company  will  have an  annual  profit.  Revenues  related  to
                  securities  transactions are recognized on a trade date basis.
                  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
                  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).

         (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

                                      A-11

<PAGE>


                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

(1)      Summary of Significant Accounting Policies, continued

                  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

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

         (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)      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.




                                      A-12

<PAGE>


                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued



         (m)      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.

         (n)      Reclassification

                  Certain  reclassifications have been made to amounts presented
                  in previous years to be consistent with the 1997 presentation.

(2)      Marketable Securities

                  The Company holds various marketable  securities as short-term
                  investments.  At December 31, 1997 and 1996,  these marketable
                  securities consisted of:

                                                           December 31,
                                                    1997                1996
                                                  -------             -------
         Equity securities, at cost          $         --              45,000
         Debt securities, at cost                      --                  --
                                                 --------            --------
         Less: adjustment to fair value      $         --            ( 16,000)
                                                 --------            --------

         Total marketable securities at
           fair value                        $         --              29,000
                                                 ========            ========

         At December  31, 1996 there were  $16,000 in gross  unrealized  losses.
         There were no unrealized gains or losses at December 31, 1997 or 1995.

         Investment income includes the following:

                                       1997            1996             1995
                                     ---------      ----------       --------
         Interest                    $ 219,000         367,000        243,000
         Realized gains                     --          81,000         50,000
         Realized losses             (  41,000)             --             --
                                     ---------      ----------       --------
                                     $ 178,000         448,000        293,000
                                     =========        ========       ========



                                      A-13

<PAGE>


                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued



(2)      Marketable Securities, continued

         No individual  issuer exceeded 10% of shareholders'  equity at December
          31, 1997 or 1996.

(3)      Management Fees and Other Receivables

         Management fees and other receivables consist of the following:

                                                          December 31,
                                                       1997            1996
                                                       ----            ----
         Management fees receivable                $  3,000         256,000
         Trade accounts receivable                  200,000          16,000
         Less: allowance for doubtful accounts      (25,000)             --
         Accrued interest receivable                 10,000          12,000
         Other receivables                          627,000         228,000
                                                    -------         -------
                                                   $815,000         512,000
                                                   ========         =======

         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  $6,287,000,  $5,942,000  and
         $5,660,000 and received expense  reimbursements  of $664,000,  $346,000
         and  $355,000 for the years ended  December  31,  1997,  1996 and 1995,
         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:
                                                              December 31,
                                                            1997           1996
                                                           -----          -----
    Reagan Publishing Company
      This  unsecured  note had an  original
      rate of 7% and a maturity of December 31,
      1997. During 1997, the terms were renegotiated
      with a payment schedule based on the sales
      volume of the borrower, with certain annual
      minimums. The note bears interest at the
      prime rate (8.5% at December 31, 1997).             $176,000       183,000


    Consolidated Eco-Systems, Inc.
      This note is secured by 1,200,000 shares
      of Consolidated Eco-Systems, Inc. common
      stock and stock and certain assets of Con-Eco
      subsidiaries.  The note bears interest at 15%.
      Principal payments are monthly through
      October 1, 1999 at which time all remaining
      principal and accrued interest are due.            3,788,000     3,300,000

    Uncommon Care, Inc.
      This note is secured by land located in
      Fort Bend County, Texas.  The note bears
      interest at 10% and is due January 31, 1998.         300,000            --

    Employees
      Four employees have loans from the Company
      as employment inducements.The notes are non-
      interest bearing and are being forgiven and
      amortized monthly over three to four year
      periods. The notes are due and payable should
      the employees terminate employment.                  528,000       143,000
                                                        ----------     ---------
                                                         4,792,000     3,626,000

         Less allowance for doubtful accounts             (653,000)           --
                                                        ----------     ---------
                                                         4,139,000     3,626,000

         Less current portion                            1,157,000     3,447,000
                                                         ---------     ---------
         Long term portion                              $2,982,000       179,000
                                                        ==========    ==========


                                      A-15

<PAGE>


                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

(4) Notes Receivable, continued


The Company's note  receivable from  Consolidated  Eco-Systems,  Inc.  (formerly
Exsorbet   Industries,   Inc.)   ("Con-Eco")   (NASDAQ:EXSO),    a   diversified
environmental  and  technical   services  company,   is  in  excess  of  10%  of
stockholder's  equity at December  31, 1997 and  represents a  concentration  of
credit  risk.  Con-Eco's  common  stock  sales price was $0.115 per share on the
basis of the average  high and low sales  price of the stock on March 17,  1998.
The Company  renegotiated  the debt with Con-Eco in November 1997. In connection
with the  renegotiation,  the Company extended the debt for two years and rolled
all accrued interest into the note, resulting in a total note for $3,788,000. No
interest income has been recognized by the Company.  Con-Eco provided additional
collateral to the Company in the form of stock of two  additional  subsidiaries,
and a second lien on all assets of one of these subsidiaries. Payments under the
new note were scheduled to begin on January 1, but were delayed until March 1998
with the Company's  consent.  It is anticipated that Con-Eco will be required to
sell certain assets in order to meet its  obligations  to the Company.  However,
the Company  believes its collateral  position is more than sufficient to ensure
ultimate repayment of the debt.

(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,
1997 and 1996:

                                          1997                      1996
                                  ---------------------    --------------------
                                   Carrying       Fair      Carrying      Fair
                                    Amount        Value      Amount       Value

Cash and cash equivalents           $5,188        5,188       5,770       5,770
Marketable securities and trading
  account securities                   449          449         728         728
Management fees and other
  receivables                          815          815         512         512
Notes receivable                     4,139        4,119       3,626       3,594
Receivable from clearing broker        543          543         279         279
Debt                                    --           --         542         542
Accounts payable                       614          614         382         382

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




                                      A-16

<PAGE>


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

(5)      Fair Value of Financial Instruments, continued

         Cash and Cash Equivalents

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

         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
         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.




                                      A-17

<PAGE>


                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

(5)      Fair Value of Financial Instruments, continued

         Limitations

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

(6)      Property and Equipment

         Property and equipment consists of the following:
                                                     December 31,
                                                1997              1996
                                                ----              ----

         Office condominium                  $1,847,000         1,870,000
         Furniture and equipment              3,758,000         2,386,000
                                             ----------         ---------
                                              5,605,000         4,256,000
         Accumulated depreciation and
           amortization                       3,775,000         2,475,000
                                             ----------         ---------
                                             $1,830,000         1,781,000

         The Company owns  approximately  53,000 square feet in the  condominium
         building in which its principal offices are located.  The Company,  its
         subsidiaries and affiliates occupy approximately 31,000 square feet and
         the remainder is leased to third parties.  Rental income  received from
         third parties during the years ended  December 31, 1997,  1996 and 1995
         totaled approximately  $385,000,  $379,000 and $348,000,  respectively.
         Future  minimum  lease  payments to be received  under the terms of the
         office  condominium  leases are as  follows:  1998 -  $314,000;  1999 -
         $59,000 and none thereafter.

         At December 31, 1996 the office  building was security for a short term
         note payable in the amount of $542,000 due April 1997 with  interest at
         the prime rate. The note was paid in full in January 1997.



                                      A-18

<PAGE>


                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued






(7) Accrued Expenses and Other Liabilities

    Accrued expenses and other liabilities consists of the following:

                                                         1997              1996
                                                         ----              ----

         APS Systems disposition costs
           (discontinued operations)                $1,138,000               --
         Taxes payable - other                          96,000           74,000
         Commissions payable                           287,000           18,000
         Deferred income                               280,000          339,000
         Health insurance and other claims
           payable                                      59,000           87,000
         Contractual/legal claims                    1,461,000        1,352,000
         Vacation payable                              102,000           77,000
         Funds held for others                          58,000           63,000
         Other                                          92,000          134,000
                                                    ----------       ----------
                                                    $3,573,000        2,144,000

(8)      Commitments and Contingencies

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

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

         Rent expense  under all operating  leases for the years ended  December
         31,   1997,   1996  and  1995  was  $89,000,   $51,000  and   $103,000,
         respectively.  Future minimum payments for leases which extend for more
         than one year were $134,000 at December 31, 1997.

         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

                                      A-19

<PAGE>


                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued



is sufficient to cover any  unfavorable  outcome related to lawsuits in which it
is currently named.  Management  believes that additional  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.

(9) Income Taxes

    Income tax expense (benefit) consists of the following:

                                                Year Ended
                                               December 31,
                                       1997             1996              1995
                                      -----             -----             ----
    Continuing Operations
         Federal
            Current               $1,394,000           47,000           795,000
            Deferred                 777,000          938,000            46,000
         State                       170,000           73,000           105,000
    Discontinued Operation          (479,000)         (13,000)          (19,000)
                                   ---------         --------          --------
                                  $1,862,000        1,045,000           927,000
                                   =========        =========           =======

         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,
                                          1997            1996             1995
                                         -----           -----            -----
    Expected federal income tax
      expense                       $ 1,556,000         972,000       1,003,000
    State taxes                         170,000          73,000         105,000
    Other, net                          136,000              --        (181,000)
                                     ----------        --------       ---------
                                     $1,862,000       1,045,000         927,000
                                     ==========       =========        ========

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

         The tax effect of temporary  differences that gives rise to significant
         portions  of  deferred  tax  assets and  deferred  tax  liabilities  at
         December 31, 1997 and 1996 are presented below:

                                      A-20

<PAGE>


                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued






(9) Income Taxes, continued
                                                         1997              1996
                                                        -----             -----
    Deferred tax assets:
    Net operating loss carryforwards                $  188,000               --
    Marketable securities write downs
      not taken for tax purposes                            --           13,000


    Accrued expenses                                 1,015,000          676,000
    Accounts receivable, principally due
      to allowance for doubtful accounts                79,000           60,000
    Deferred income                                    228,000           30,000
    Other                                               71,000           19,000
                                                     ---------         --------
    Total gross deferred tax assets                  1,581,000          798,000

    Less valuation allowance                          (188,000)              --
                                                     ---------         --------
    Net deferred tax assets                          1,393,000          798,000
                                                     ---------         --------
    Deferred tax liabilities:
    Investment in Prime Medical Services, Inc.
      due to use of equity method for books         (2,158,000)      (1,512,000)
    Capitalized expenses, principally due to
      deductibility for tax purposes                (   57,000)      (   52,000)
                                                    ----------       ----------
        Total gross deferred tax liabilities       ( 2,215,000)      (1,564,000)
                                                    ----------       ----------
    Net deferred tax liability                     ($  822,000)      (  766,000)
                                                     ==========       ==========

         The  valuation  allowance for deferred tax assets as of January 1, 1997
         was $0. The net change in the total  valuation  allowance for the years
         ended  December  31, 1997 and 1996 was an increase of $188,000  and $0,
         respectively.  The Company  believes  that the  valuation  allowance at
         December 31, 1997 is necessary due to  uncertainties  regarding the use
         of the net operating loss carryforwards from separate return years of a
         subsidiary acquired in 1997.

         At December 31, 1997,  net operating  loss  carryforwards  available to
         reduce future taxable  income  amounted to  approximately  $554,000 and
         expire from years 2011 to 2012.

         Based upon the level of historical  taxable income and  projections for
         future  taxable  income over the periods  which the deferred tax assets
         are deductible, management believes it is more likely

                                      A-21

<PAGE>


                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

         than not the  Company  will  realize the  benefits of these  deductible
         differences,  net of the existing valuation  allowances at December 31,
         1997.

(10)     Employee Benefit Plans

         The Company has an  employee  benefit  plan  qualifying  under  Section
         401(k)  of the  Internal  Revenue  Code  for  all  eligible  employees.
         Employees   become  eligible  upon  meeting  certain  service  and  age
         requirements.  Employees  may defer up to 15% (not to exceed  $9,500 in
         1997) 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,  1997,  1996  and  1995,
         contributions  by  the  Company  aggregated  $92,000,   $104,000,   and
         $100,000, respectively.

(11)     Stock Options

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

         The exercise price for each non-qualified option share is determined by
         the Compensation Committee of the Board of Directors ("the Committee").
         The exercise price of a qualified  incentive  stock option 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 1997, 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,
                                         1997           1996             1995
                                        -----          -----            -----
          Pro forma net income      $1,989,000      1,634,000        1,991,000


                                      A-22

<PAGE>


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

(11) Stock Options, continued

     Pro forma earnings per share - basic      $0.48        0.41          0.57
                                  - diluted    $0.46        0.39          0.52

         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:

                                         1997           1996          1995
                                         ----           ----          ----
           Risk-free interest rate       6.16%          6.06%         6.41%
           Expected holding period       3.90 years     3.75 years    3.75 years
           Expected volatility           .480           .692          .590
           Expected dividend yield         -0-            -0-           -0-

         Statement  123  calls for a  prospective  application  of  compensation
         relating  to the grant of stock  options  and,  consequently  pro-forma
         financial information may not be indicative of future amounts until the
         new rules are applied to all outstanding 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, 1997, 1996 and 1995.  Remaining options  outstanding
         from the Company's previous 1983 plans are included.
<TABLE>
<CAPTION>

                                                   Year ended December 31
                                -----------------------------------------------------------------------------
                                       1997                          1996                        1995
                                ---------------------          -----------------        ---------------------
                                             Weighted                  Weighted                      Weighted
                                             Average                   Average                        Average
                                             Exercise                  Exercise                      Exercise
                                Shares       Price           Shares    Price               Shares       Price

<S>                              <C>         <C>              <C>        <C>              <C>           <C>
Balance at January 1             651,000     $5.64            837,000    $2.18            921,000       $1.57
Options granted                  293,000      9.32            295,000     9.32            235,000        3.82
Options exercised                165,000      1.92            450,000     1.56            314,000        1.59
Options forfeited/expired          5,000      7.13             31,000     6.16              5,000        2.45
                                 -------     -----            -------   ------           --------      ------
Balance at December 31           774,000      6.60            651,000     5.64            837,000        2.18
                                 =======    ======            =======    =====            =======      ------
Options exercisable              244,000    $5.84             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, 1997,  1996 and 1995 is $2.68,  $5.15 and $1.75 per
         option, respectively.




                                      A-23

<PAGE>


                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued


(11) Stock Options, continued

     The following table  summarizes the Company's  options  outstanding and
     exercisable options at December 31, 1997:
<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>
$2.25 to $5.00           185,000        2.2 years          3.09                   142,000           3.01
$5.01 to $7.75           356,000        4.3 years          6.19                    26,000           6.73
$7.76 to $10.50          233,000        3.5 years         10.00                    76,000          10.05
                         -------        ---------         -----                   -------          -----
Total                    774,000                                                  244,000
                         =======                                                  =======
</TABLE>

(12)     Discontinued Operations

         The Company,  through its wholly owned  subsidiary,  APS Systems,  Inc.
         ("APS Systems"),  had previously  developed software and marketed it to
         medical  clinics and medical  schools.  This  business  segment  became
         unprofitable  in 1996. A joint  venture with a software  developer  was
         formed  in  1996  with  a  plan  to  develop  new  products,   but  was
         discontinued  in 1997  when it was  determined  that the  high  cost of
         developing   competitive  products  precluded  an  adequate  return  on
         investment. Subsequently, the Company ceased marketing the software and
         reduced the scope of APS  Systems'  operations  to a level  adequate to
         service  existing  clients  through the terms of their  contracts.  The
         Company  has  assumed  that all  clients  will have  migrated  to other
         software  products by the end of 1999 and has  reflected  the  expected
         financial  impact of  discontinuing  this  segment  on that date in the
         current  financial  statements.  The  measurement  date for determining
         expected losses from the disposal was May 15, 1997.

         Net  assets/(liabilities)  of the  discontinued  computer  systems  and
         software segment as of December 31, 1997 consisted of the following:

                    Cash and cash investments                 $  25,000
                    Trade accounts receivable                   174,000
                    Other receivables                             2,000
                    Prepaid and other current assets             61,000
                    Fixed assets, net of depreciation            93,000
                    Intercompany receivables                    769,000
                    Trade accounts payable                       (5,000)
                    Accrued expenses                         (1,195,000)
                                                            -----------
                    Net liabilities                          ($  76,000)
                                                            ===========

                                      A-24

<PAGE>


                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

(12) Discontinued Operations, continued

       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
          operations.  No gain  has been  recognized  through  1997.  Historical
          results  from  the  operation   are  presented  in  the   Consolidated
          Statements of Earnings as "Loss from discontinued operations."

(13) Investment in Affiliates

         On October 12, 1989, the Company  purchased for cash  3,540,000  shares
         (42%) of the  common  stock of Prime  Medical  Services,  Inc.  ("Prime
         Medical"). Members of the Company's Board currently serve as two of the
         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 using the equity  method.
         The 3,064,000  shares of Prime Medical common stock held by the Company
         had an  approximate  market value of  $42,328,000  (carrying  amount of
         $11,266,000)  at December 31, 1997 based on the market closing price of
         $13.8125 per share.

         At December 31, 1997 and 1996, the Company's retained earnings included
         undistributed  earnings, net of deferred tax, of Prime Medical totaling
         $4,379,000 and $2,821,000, respectively.

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

              CONDENSED BALANCE SHEET AT DECEMBER 31, 1997 AND 1996

                                                 1997                1996
                                                 ----                ----

        Current assets                     $ 47,542,000           40,073,000
        Long-term assets                    178,284,000          157,680,000
                                            -----------          -----------
          Total assets                     $225,826,000          197,753,000
                                           ============          ===========

        Current liabilities                $ 37,383,000           31,555,000
        Long-term liabilities                96,379,000           89,771,000
        Shareholders' equity                 92,064,000           76,427,000
                                             ----------          -----------
          Total liabilities and equity     $225,826,000          197,753,000
                                           ============          ===========


                                      A-25

<PAGE>


                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

(13)     Investment in Affiliates, continued

              CONDENSED STATEMENT OF OPERATIONS FOR THE YEARS ENDED
              DECEMBER 31, 1997 AND 1996

                                           1997                    1996
                                           ----                    ----

        Total revenue                $ 95,979,000             72,404,000
                                     ============             ==========
        Net income                   $ 14,856,000              8,961,000
                                     ============             ==========

         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 October 1, 1997, the Company formed Syntera  HealthCare  Corporation
         ("Syntera") with an initial  ownership of 85%.  Syntera  specializes in
         the management of OB/GYN and related  medical  practices.  In a typical
         transaction,  Syntera acquires the non-medical  assets of a physician's
         practice,  signs a long-term  management contract with the physician to
         provide all of the non-medical requirements of the practice,  including
         personnel,  office space, billing and collection,  and other day-to-day
         operating functions. In turn, Syntera is paid a variable management fee
         that rewards the efficient operation and the expansion of the practice.
         The  Company  expects  to reduce  its  ownership  (currently  74%) to a
         minority level as it exchanges  stock for practice  assets.  Due to the
         short time frame anticipated for this change in ownership to occur, the
         Company has accounted for its ownership on the equity basis in 1997.

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

         Condensed balance sheet at December 31, 1997

         Current assets                                               $4,563,000
         Long-term assets                                              1,664,000
                                                                      ----------
              Total assets                                            $6,227,000
                                                                      ==========

         Current liabilities                                           $ 505,000
         Long-term liabilities                                                --
         Shareholders' equity                                          5,722,000
                                                                      ----------
              Total liabilities and equity                            $6,227,000
                                                                      ==========


                                      A-26

<PAGE>


                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued

(13)     Investment in Affiliates, continued

         Condensed statement of operations for the year ended December 31, 1997

         Total revenue                                                 $ 297,000
                                                                       =========
         Net loss                                                      $ 460,000
                                                                       =========

(14)     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.

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


                                          1997            1996            1995
                                          ----            ----            ----
 Operating Revenues:
   Financial services                $12,013,000       9,244,000     14,134,000
   Real estate                           704,000         717,000        668,000
                                      ----------       ---------     ----------
                                     $12,717,000       9,961,000     14,802,000
                                     ===========       =========     ==========

 Operating Profit (Loss):
   Financial services                 $2,877,000       1,122,000      2,118,000
   Real estate                           198,000         147,000         96,000
                                       ---------       ---------    -----------
                                       3,075,000       1,269,000      2,214,000
                                       ---------       ---------    -----------
 Corporate investment and other
   income                                348,000         476,000      1,322,000
 Corporate expenses                   (1,352,000)       (150,000)    (2,037,000)

 Equity in earnings of affiliates      2,014,000       1,411,000      1,508,000

 Gain on sale of interest in
    subsidiary                         1,899,000              --             --
                                       ---------      ----------      ---------

 Earnings from continuing operations
   before income taxes and minority
   interests                           5,984,000       3,006,000      3,007,000

 Income tax expense                    2,341,000       1,058,000        946,000
                                       ---------       ---------      ---------

 Minority interests                     (175,000)             --             --
                                       ---------       ---------      ---------

 Earnings from continuing
   operations                          3,468,000       1,948,000      2,061,000
                                       ---------       ---------      ---------

                                      A-27

<PAGE>


                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued




                                        1997            1996             1995
                                        ----            ----             ----
Net loss from discontinued
  operations, net of income
  tax benefit                        (930,000)         (24,000)        ( 37,000)
                                     --------          -------         --------

Net earnings                      $ 2,538,000        1,924,000        2,024,000
                                  ===========       ==========        =========

Identifiable assets:
  Financial services              $20,984,000       11,667,000       11,816,000
  Real estate                       1,283,000        1,476,000        1,578,000
  Corporate                         6,778,000       11,325,000        8,614,000
  Discontinued Operations             356,000               --        1,732,000
                                   ----------       ----------        ---------
                                  $29,401,000       24,468,000       23,740,000
                                  ===========       ==========       ==========

Capital expenditures:
  Financial service              $   187,000           88,000           262,000
  Real estate                             --           21,000            64,000
  Corporate                           26,000           17,000            73,000
  Discontinued operations             99,000           18,000            84,000
                                    --------          -------           -------
                                 $   312,000          144,000           483,000
                                    ========          =======           =======

Depreciation/amortization
expenses:
  Financial services             $   150,000          164,000           164,000
  Real estate                        110,000          129,000           126,000
  Corporate                           62,000           13,000             9,000
  Discontinued operations             56,000           24,000           100,000
                                     -------          -------           -------
                                 $   378,000          330,000           399,000
                                     =======          =======           =======

Revenues attributable to customers generating greater than 10% of the
  revenues of each segment:

   Financial services
   Company A                             49%              61%               35%
   Company B                             --               --                10%
   Company C                             --               --                11%
                                     ------            -----               ----
                                         49%              61%               57%
                                        ===              ===               ===

         At December 31, 1997 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.

                                      A-28

<PAGE>


                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued



(14)     Segment Information, continued

         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.

(15)     Earnings per Share

         Statement of Financial  Accounting  Standards  No. 128,  "Earnings  per
         Share",   specifies  new   measurement,   presentation  and  disclosure
         requirements  for  earnings  per share and is  required  to be  applied
         retroactively  upon initial adoption.  The Company has adopted SFAS No.
         128 effective  with the release of December 31, 1997 earnings data, and
         accordingly, has restatated herein all previously reported earnings per
         share data.  Basic earnings per share is based on the weighted  average
         shares outstanding without any dilutive effects  considered.  Diluted
         earnings per share  reflects  dilution from all  contingently  issuable
         shares,  including  options and covertible  debt. A  reconciliation  of
         income and average shares  outstanding used in the calculation of basic
         and diluted earnings per share from continuing operations follows:

                                       For the Year Ended December 31, 1997
                                          Income         Shares        Per-Share
                                        (Numerator)    (Denominator)    Amount
                                        ----------      -----------    ---------
Earnings from continuing
operations                              $3,468,000

Basic EPS
 Income available to common
 stockholders                            3,468,000        4,106,000        $.84
                                                                            ===

Effect of Dilutive Securities
 Options                                        --          114,000
 Contingently issuable shares           (   18,000)          21,000
                                        ----------          -------

Diluted EPS
 Income available to common
 stockholders and assumed
 conversions                            $3,450,000        4,241,000        $.81
                                        ==========        =========         ===


                                      A-29

<PAGE>


                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued





(15) Earnings per Share, continued

                                         For the Year Ended December 31, 1996
                                     Income          Shares           Per-Share
                                   (Numerator)    (Denominator)         Amount
                                   ----------     -----------         ---------
Earnings from continuing
operations                         $1,948,000

Basic EPS
 Income available to common
 stockholders                       1,948,000        4,025,000             $.48
                                                                            ===


Effect of Dilutive Securities
 Options                                   --          194,000
                                    ---------         --------

Diluted EPS
 Income available to common
 stockholders and assumed
 conversions                       $1,948,000        4,219,000             $.46
                                   ==========       ==========             ====


                                          For the Year Ended December 31, 1995
                                     Income            Shares         Per-Share
                                   (Numerator)      (Denominator)       Amount
                                    ---------        -----------      ---------
Earnings from continuing
operations                         $2,061,000

Basic EPS
 Income available to common
 stockholders                       2,061,000         3,480,000            $.59
                                                                           ====

Effect of Dilutive Securities
 Options                                   --           318,000
                                    ---------         ---------

Diluted EPS
 Income available to common
 stockholders                      $2,061,000         3,798,000            $.54
                                    =========         =========            ====

         At December 31, 1997 the Company's affiliate Syntera had issued 166,000
         shares  which are  convertible  into  122,000 of the  Company's  common
         shares in the event that the Syntera shares are not publicly- tradeable
         by May 1, 1999.

                                      A-30

<PAGE>


                     AMERICAN PHYSICIANS SERVICE GROUP, INC.
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued



(15)     Earnings per Share, continued

         Unexercised  employee  stock options to purchase  304,500,  282,000 and
         10,000  shares of the  Company's  common stock as of December 31, 1997,
         1996 and 1995,  respectively,  were not included in the computations of
         diluted EPS because the  options'exercise  prices were greater than the
         average  market  price  of  the  Company's   common  stock  during  the
         respective periods.

(16)     Subsequent Events

         On  March  20,  1998  the  Company  purchased  non-voting   convertible
         preferred stock of Uncommon Care, Inc. ("Uncommon Care"). Uncommon Care
         is a developer and operator of dedicated  Alzheimer's  care facilities.
         The shares,  purchased for  approximately  $2,000,000,  are convertible
         into  approximately 34% of Uncommon Care's equity. The Company has also
         agreed to  provide a line of credit to  Uncommon  Care in the amount of
         $2,400,000.  The loan will bear interest at 10%, payable quarterly, and
         is due in March 2003.


                                      A-31