<PAGE>
 
================================================================================

                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON D.C.  20549
                                ---------------
                                  FORM 10-KSB
         
           MARK ONE:

           [X]      ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
                  For the Fiscal Year Ended December 31, 1995

                                      OR

           [ ]      TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

                        For the transition period from
                           __________ to __________
 
                        Commission File Number  0-11453

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

                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
                (Name of small business issuer 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                                  78746
            AUSTIN, TEXAS                                        (Zip Code)
(Address of principal executive offices)

                          Issuer's telephone number:
                                (512) 328-0888

        SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:

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

        SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
                         COMMON STOCK, $.10 PAR VALUE
                               (Title of Class)

     Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the past 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   [  ]
 
     Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will  be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form
10-KSB or any amendment to this Form 10-KSB   ____

     State issuer's revenues for its most recent fiscal year.  $20,490,000 for
the fiscal year ended December 31, 1995.

     State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within 60 days prior
to the date of filing.

            AGGREGATE MARKET VALUE AT MARCH 25, 1996:  $32,017,632

     State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.

                                                 NUMBER OF SHARES OUTSTANDING AT
             TITLE OF EACH CLASS                          MARCH 25, 1996
             -------------------                          --------------
         Common Stock, $.10 par value                        4,002,204

                      DOCUMENTS INCORPORATED BY REFERENCE

    Selected portions of the Registrant's definitive proxy material for the 1996
annual meeting of shareholders are incorporated by reference into Part III of
the Form 10-KSB.

================================================================================
<PAGE>
 
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.

                          ANNUAL REPORT ON FORM 10-KSB

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

GENERAL

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

     The Company owns 3,064,000 shares of common stock of Prime Medical
Services, Inc. ("Prime Medical"), representing at March 15, 1996 approximately
21% of the outstanding shares of common stock of Prime Medical.  Three of Prime
Medical's nine directors are members of the Company's board of directors.  The
Company records its pro-rata share of Prime Medical's results on the equity
basis.  Prime Medical is the third largest operator of lithotripters in the
United States, currently servicing 160 hospitals in 22 states.  Lithotripsy is a
non-invasive method of treating kidney stones through the use of shock waves.
The common stock of Prime Medical is traded on the NASDAQ National Market under
the symbol "PMSI."  Prime Medical is a Delaware corporation which is required to
file annual, quarterly and other reports and documents with the Securities and
Exchange Commission, which reports and documents contain financial and other
information regarding Prime Medical. The summary information regarding Prime
Medical contained herein is qualified in its entirety by reference to such
reports and documents.  Such reports and documents may be examined and copies
may be obtained from the offices of the Securities and Exchange Commission.
Three of the Company's five directors are members of Prime Medical's board of
directors.

     The Company was organized in October 1974 under the laws of the State of
Texas.  The Company maintains its principal executive office at 1301 Capital of
Texas Highway, Suite C-300, Austin, Texas 78746, and its telephone number is
(512) 328-0888.  Unless the context otherwise requires, all references herein to
the "Company" shall mean American Physicians Service Group, Inc. and its
subsidiaries (other than Prime Medical).
<PAGE>
 
     The Company had previously published Spanish language buying guides of
U.S. businesses for distribution in Mexico. This business segment had been
unprofitable for the Company. In 1995 substantially all of the assets of this
business were sold. There was no material financial impact on the Company.

FINANCIAL SERVICES

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

     Management of Medical Malpractice Insurance Company
     ---------------------------------------------------

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

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

                                       2
<PAGE>
 
agreement, FMI's authority to act as manager of the exchange is automatically
renewed each year unless a majority of the subscribers to APIE terminates this
agreement by reason of an adjudication that FMI has been grossly negligent, has
acted in bad faith or with fraudulent intent or has committed willful
misfeasance in its management activities.

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

     APIE is a reciprocal insurance exchange authorized to do business in the
states of Texas and Arkansas.  APIE is also a surplus lines carrier in Arizona.
APIE specializes in writing medical professional liability insurance for health
care providers and also writes professional liability insurance for hospitals.
The insurance written in Texas is primarily through purchasing groups, which
insurance is not subject to certain rate and policy form regulations issued by
the Texas Department of Insurance.  Applicants for insurance coverage are
reviewed based on the nature of their practices, prior claims records and other
underwriting criteria.  APIE is the third largest medical professional liability
insurance company in the State of Texas  and is one of the largest in the State
of Arkansas.  APIE is the only insurance company based in Texas that is wholly-
owned by its subscriber physicians.

     Generally, medical professional liability insurance is offered on either a
"claims made" basis or an "occurrence" basis.  "Claims made" policies insure
physicians only against claims actually  made during the period covered by the
policy.  "Occurrence" policies insure physicians against claims based on
occurrences during the policy period regardless of when the claim is actually
made.  APIE offers only a "claims made" policy but provides for an extended
reporting option upon termination.  APIE reinsures 100% of all coverage per
medical incident between $250,000 and $1,000,000, primarily through Lloyds of
London and certain other domestic and international insurance companies.

     The following table presents selected financial and other data for APIE.
APIE has a contract to pay management fees to FMI based on APIE's earned
premiums before reinsurance.  The fee percentage is 13.5% with the provision
that any profits of APIE will be shared equally with FMI so long as the total
reimbursement (fees and profit sharing) do not exceed a cap based on premium
levels.  No profit sharing fee was received in 1993.  In 1995, 1994, 1992, and
1991, management fees attributable to profit sharing were $700,000,  $1,107,000,
$1,678,000, and $841,000, respectively.

                                       3
<PAGE>
 
<TABLE>
<CAPTION>
                                                                      Year Ended December 31,
                                                                      -----------------------
                                                           1991          1992          1993          1994           1995
                                                           ----          ----          ----          ----           ----
<S>                                                       <C>            <C>           <C>           <C>            <C>
(thousands, except for number of insureds)
Earned premiums before reinsurance premiums...........    $28,026       $27,934       $29,205       $30,261       $ 30,857
Total assets..........................................     88,008        96,343        94,019        98,302        101,251
Total surplus.........................................      8,046         8,209         9,196         9,315          9,402
Management fees to FMI................................      4,301  (1)    5,397  (2)    3,790  (3)    4,703  (5)     5,010  (7)
Number of  insureds...................................      4,859         5,154         3,575  (4)    3,216  (6)     3,226
----------------
</TABLE>

     (1) Gross fee of $4,624 less tax refund of $323 attributable to APIE's
         association with FMI.

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

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

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

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

     (6) 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.

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


          Management of Lawyers Professional Liability Company
          ----------------------------------------------------

          Late in 1994 PLE, Inc. ("PLE"), a wholly-owned subsidiary of Insurance
Services, was formed to manage the operations of the newly formed Lawyers
Professional Liability Exchange ("LPLE").  In late 1995, the decision was made
to discontinue the operations of LPLE.  Such decision will not have a
significant effect on the ongoing revenues or income of the Company as  PLE's
results of operations in 1995 and 1994 were immaterial.

          Brokerage and Investment Services
          ---------------------------------

          APS Financial, a fully licensed broker/dealer, provides brokerage and
investment services to individual and institutional clients.  APS Financial
provides complete portfolio analysis and management services, primarily in the
fixed-income area, to insurance companies, banks and savings and loan
associations.

                                       4
<PAGE>
 
          APS Financial's employees have extensive investment expertise and
knowledge.  APS Financial is a member of the National Association of Securities
Dealers, Inc. ("NASD") and the Securities Investor Protection Corporation and,
in addition, is licensed in 44 states.   Six states and the District of Columbia
were dropped in 1995 as the volume did not justify the licensing fee.

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

          Every registered broker-dealer doing business with the public is
subject to stringent rules with respect to net capital requirements promulgated
by the Securities and Exchange Commission.  These rules, which are designed to
measure the financial soundness and liquidity of broker-dealers, specify minimum
net capital requirements.  Since the Company is not itself a registered broker-
dealer, it is not subject to these rules.  However, APS Financial is subject to
these rules.  Compliance with applicable net capital rules could limit
operations of APS Financial such as trading activities that 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, 1995, APS Financial was in compliance with all net capital
requirements.

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

COMPUTER SYSTEMS AND SOFTWARE SALES

          APS Systems Inc. ("APS Systems") sells computer systems and software
and has designed the APS Bullet/3000 System specifically for sale to large,
multi-physician medical clinics, medical schools, Physician Hospital
Organizations (PHOs) and other physician networks.  The Company also offers
facilities management of the total data processing requirements of these
clinics, schools and networks.

          The APS Bullet/3000 System is an extensive practice management system.
The system integrates patient and physician financial, demographic and medical
information into a database that makes information from varied sources available
for on-line inquiry.  The system permits users to generate patient scheduling,
patient recalls and to produce a variety of special reports on matters such as
revenues and patient profiles.  The system not only produces statements for
direct

                                       5
<PAGE>
 
billing to patients, but also prepares forms for filing of insurance claims. A
telecommunication feature developed by APS Systems permits systems users to file
insurance claims through computer link-up directly with the agencies
administering Medicare and Medicaid programs and with Blue Shield and other
insurance companies.

          The APS Bullet/3000 System consists of internally developed,
proprietary software.  The central processing units and peripherals used in the
systems are provided by Hewlett Packard Company ("HP").  APS Systems resells HP
hardware accompanied by APS Systems' software.  While APS Systems provides
support for its software, HP provides hardware maintenance for the HP computers.

          In 1993 APS Systems, Inc. announced a strategic business relationship
with AMISYS Managed Care (formerly ADVANTA Systems, Inc.).  AMISYS sells
computer systems and software to large managed care organizations (HMOs).  In
1994 the companies developed an integration product to link the two systems and
both organizations are joint marketing the products.

          The computer industry is characterized by rapid changes in both
hardware and software which require that software programs be continuously
updated, modified, and enhanced in order to stay abreast of state-of-the-art
technology.  The products and systems now sold by APS Systems are subject to
technological obsolescence which is characteristic of an industry experiencing
rapidly advancing technology.  Based on in-house market research and analysis,
product planning, and customer feedback, APS Systems continuously modifies and
upgrades its software.

          The Company believes that APS Systems' software is of a proprietary
nature, but it is possible that users or competitors could copy portions of such
software.  In order to protect its software, APS Systems does not sell or
otherwise transfer title to it, but instead licenses its use for a perpetual
period under agreements that restrict its use to a designated site and prohibit
reproduction or disclosure of the software.  The Company believes that because
of technological changes in the computer software industry, copyright or patent
protection for its office systems is of lesser significance than factors such as
the skill, knowledge, and experience of APS Systems' personnel and their ability
to develop the software for the systems and to market the systems.

REAL ESTATE

          APS Realty, Inc., a wholly-owned subsidiary of the Company ("APS
Realty"), owns condominium space in an office project located in Austin, Texas.
It leases approximately 53% of this space to the Company, its subsidiaries and
Prime Medical.  The remainder is leased to unaffiliated parties.

                                       6
<PAGE>
 
COMPETITION

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

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

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

REGULATION

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

          APS Financial is subject to extensive regulation under both federal
and state laws.  The Securities and Exchange Commission ("SEC") is the federal
agency charged with administration of the federal securities laws.  Much of the
regulation of broker-dealers, however, has been

                                       7
<PAGE>
 
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 Securities Investor
Protection Corporation ("SIPC").  When the SIPC fund falls below a certain
minimum amount (as it has done in 1993, 1994 and 1995), members are required to
pay annual assessments in varying amounts not to exceed .5% of their adjusted
gross revenues to restore the fund.  This assessment amounted to approximately
$7,300 in 1995, $4,600 in 1994 and $3,500 in 1993.  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, 1996, the Company employed, on a full time basis,
approximately 119 persons, including 54 by Insurance Services, 35 by APS
Systems, 20 by APS Financial, and 10 directly by the Company.  The Company
considers its employee relations to be good.  None of the Company's employees is
represented by a labor union and the Company has experienced no work stoppages.

ITEM 2. PROPERTIES

          APS Realty owns approximately 53,000 square feet of condominium space
in an office project.  The Company, its subsidiaries and Prime Medical use
approximately 28,000 square feet of this space as their principal executive
offices, and APS Realty leases the remainder to third parties.  The area
available for lease to third parties was 100% occupied as of March 25, 1996.

                                       8
<PAGE>
 
          FMI leases offices for its operations in San Antonio, Texas and APS
Systems leases offices in Little Rock, Arkansas. The aggregate monthly amount of
those leases is approximately $4,500.

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

          None.

                                    PART II


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

          The following table represents the high and low prices of the
Company's Common Stock in the over-the-counter market as reported by the
National Association of Securities Dealers, Inc., Automated Quotations System
for the periods indicated.  At March 1, 1996, the Company had approximately 500
shareholders of record.

<TABLE>
<CAPTION> 
                              1995                  1994
                       ------------------  --------------------
                          High     Low       High        Low
                       --------- --------  ---------- ---------
     <S>               <C>      <C>        <C>       <C>      
     First Quarter     $ 2 7/8  $ 2   3/8  $  2 3/8  $  1   3/4
     Second Quarter      3 7/16   2 11/16     2 1/8     1   1/2
     Third Quarter       4 1/2    3           2 3/8     1 13/16
     Fourth Quarter      9 7/8    4           2 7/8     1 15/16
</TABLE>

                                       9
<PAGE>
 
The Company has no present intention of paying any cash dividends on its Common
Stock in the foreseeable future.  It is the present policy of the Board of
Directors to retain all earnings to provide funds for the growth of the Company.
The declaration and payment of dividends in the future will be determined by the
Board of Directors based upon the Company's earnings, financial condition,
capital requirements and such other factors as the Board of Directors may deem
relevant.

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

RESULTS OF OPERATIONS

1995 Compared to 1994
---------------------

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


Financial Services

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

     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 six years under the contract, profit-
sharing has ranged from zero to 13% of the segment's revenues.  The broker
dealer, primarily a provider of fixed income securities, is subject to general
market conditions as well as interest rates and is in an industry characterized
by high turnover in top producing brokers.  1995's top producer, accounting for
22% of the segments revenue, has left the firm.  Management has been successful
in replacing similar performers in the past, but cannot be assured of doing so.

Computer Systems/Software

     Revenues declined 12% compared to 1994.  The decrease reflects being in a
later stage of the contracts where lower, but higher margin, revenues from
software and installation were being recognized, as opposed to the hardware
revenue being recognized in 1994.  All contracts

                                      10
<PAGE>
 
were substantially complete at the end of 1995, compared to a backlog of
approximately $1 million at the end of 1994.  A lack of new contracts in 1995
reduced the backlog.  The Company continues to actively bid on contracts in a
very competitive market, but cannot predict with certainty its success ratio.

     Expenses in 1995 decreased by 14% in 1995 compared to 1994.  The
significant decrease was in hardware cost of sales, due to the lower volume of
hardware delivered in 1995.  Costs of travel and legal were also reduced in
1995.  Partially offsetting these reductions was a 20% increase in personnel-
related expenses.

     In 1996, the officer in charge of this segment was accused of a felony
unrelated to the business.  He has taken a leave from the Company pending the
outcome of the matter.   The duration of the leave and impact on the Company are
uncertain.  A senior vice president remains in charge of all day-to-day
activities.

Real Estate

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

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

Investment and Other

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

General and Administrative Expenses

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

                                      11
<PAGE>
 
     Interest Expense decreased 18% due to lower rates on floating rate debt and
to lower debt outstanding.

Affiliates

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

1994 Compared to 1993
---------------------

     Revenues from continuing operations in 1994 were approximately 6% greater
than in 1993.  Net income increased by 15% compared to 1993 and fully diluted
earnings per share increased 17% compared to 1993.  The reasons for these
changes follow.

Financial Services

While financial services revenue was less than one percent lower in 1994 than in
1993, the sources of the revenue changed substantially between the two years.
In 1994, Insurance Services received a portion of APIE's profits, as provided in
its contract.  This profit sharing amounted to approximately 10% of the
segment's 1994 revenues.  No profit sharing was received in 1993.  Broker dealer
revenues were lower in 1994 than in 1993.  Both a general downturn in the bond
market, due to rising interest rates, and specific losses on several bond issues
held in inventory negatively affected this primarily fixed income business.

     Financial services expenses increased just under 1% from 1993.
Approximately 70% of these expenses consist of payroll and payroll related
costs.  Normal salary increases and some change in the mix of employees from
clerical to professional caused such personnel expenses to increase 4.5%.  This
increase was partially offset by lower litigation-related expenses due to the
resolution of a major lawsuit.

Computer Systems/Software

     Revenues in 1994 increased 29% compared to 1993.  The increase was due to
continuation/completion of larger contracts begun in 1993 plus new contracts
received in 1994.  The backlog from these contracts at the end of 1994 was
approximately $1 million compared to approximately $2.3 million at the end of
1993.  Recurring revenues from facilities management of data center operations
remained at approximately the same level as in 1993.

                                      12
<PAGE>
 
     Expenses in 1994 also increased 29% compared to 1993.  Of the increase,
approximately 35% resulted from increased cost of sales related to the higher
sales volume, 23% was from personnel increases needed to handle the additional
volume and the remainder was due to increases in legal, professional and general
office operating expenses.

Real Estate

     Total revenue was approximately the same in 1994 as in 1993.  Recurring
revenue from rents was up 16% due to rising rates.  Revenue in 1993 had been
increased by the gain on sale of real estate.  No such sales occurred in 1994.

     Expenses of real estate operation increased 25% when compared to 1993.
Improving property values caused property taxes to increase 38%.  Depreciation
and amortization related to tenant buildout and leasing fees was up 26% and
building operating expenses were up 36%, primarily to establish funds for long-
term repairs.

Investments and Other

     Investment and other income declined 35%.  The decline was due to the
permanent impairment in the value of two bond issues which were being held for
investment purposes.

General and Administrative and Interest Expense

     General and administrative expense declined 51%.  Actual costs of
operations in 1994 remained approximately the same as in 1993.  The reported
decline resulted primarily from the reversal of a previously established
contingency for litigation which was settled in 1994.

     Interest Expense increased 7% as a result of the effect that the prime rate
increasing 2.5 points during 1994 had on floating rate debt.

Affiliates

     Earnings from the Company's investment in Prime Medical increased by 56%
compared to 1993.  Prime continued its profitable transition into a lithotripsy
company.  Acquisition of additional lithotripsy operations and the final
disposition of the remaining diagnostic imaging business combined to improve
Prime's profitability in 1994.

                                      13
<PAGE>
 
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.

LIQUIDITY AND CAPITAL RESOURCES

     Net working capital was $7,466,000 and $6,086,000 at December 31, 1995 and
1994, respectively.  The increase in working capital is primarily the result of
income from operations, reimbursement of expenses from prior litigation and
certain long term notes receivable being collected prior to maturity.
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.  To
further its ability to meet its liquidity requirements, the Company has
established a $2,000,000 revolving credit commitment at the prime rate with a
bank.  As of March 15, 1996, no funds have been advanced under this agreement.

     Capital expenditures for equipment were $419,000, $99,000, and $159,000 in
1995, 1994 and 1993, respectively.  In addition, the Company improved or
purchased office space in 1995, 1994 and 1993 for $64,000, $86,000 and $114,000,
respectively.  The Company expects capital expenditures in 1996 to be within the
range of the prior three years.

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

     Management believes that its present cash position together with funds
generated from operations and from available lines of credit will provide
sufficient resources to meet all present and reasonably foreseeable future
capital needs.

ADOPTION OF ACCOUNTING STANDARDS

     The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of ("Statement 121") in March 1995 for
implementation in fiscal years beginning after December 15, 1995.  The statement
addresses the impact on an enterprise's financial statements when circumstances
indicate the carrying amount of an asset may not be recoverable.  The Company
does not expect adoption of Statement 121 to have a material effect on the
financial statements at adoption.

                                      14
<PAGE>
 
     The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation
("Statement 123"), in October 1995 for implementation in fiscal years beginning
after December 15, 1995.  The  Company has not elected early adoption of
Statement 123.  Statement 123 becomes effective beginning with the Company's
first quarter of fiscal year 1996 and will not have a material effect on the
Company's financial position or results of operations.  Upon adoption of
Statement 123, the Company will continue to measure compensation expense for its
stock-based employee compensation plans using the intrinsic value method
prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees and
will provide proforma disclosures of net income and earnings per share as if the
fair value-based method prescribed by Statement 123 had been applied in
measuring compensation expense.

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

                            SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(In thousands, except per share data)
                                                 For the Year Ended or At December 31,
                                                ---------------------------------------        
                                                 1995     1994    1993    1992    1991
                                                -------  ------  ------  ------  ------
<S>                                             <C>      <C>     <C>     <C>     <C>
Selected Income Statement Data:
 
  Revenues                                      $20,490  17,737  16,720  17,015  16,449
 
  Earnings from continuing operations before
  income taxes and accounting changes             3,483   2,218   1,784     544     844
 
  Net earnings                                  $ 2,024   1,254   1,086     445     496
 
Per Share Amounts - Fully Diluted:
 
  Net earnings                                  $   .49     .35     .30     .11     .11
 
  Fully Diluted Weighted Average
  Shares Outstanding                              4,163   3,614   3,622   3,926   4,417
 
Selected Balance Sheet Data:
 
  Total assets                                  $23,740  19,918  18,326  18,024  19,262
 
  Long-term obligations                             574     878   1,215   1,639   2,730
 
  Total liabilities                               6,146   4,927   4,562   5,488   5,248
 
  Total equity                                   17,594  14,491  13,688  12,459  13,926
 
  Book value per share                          $  4.80    4.47    4.15    3.85    3.17
</TABLE>

                                      15
<PAGE>
 
  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, 1995 of Prime Medical Services, Inc., which Item 14(a) is
incorporated herein by reference.

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

  None.
                                    PART III

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

  The information required by this item is contained in the definitive proxy
material of the Company to be filed in connection with its 1996 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, 1995, the executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name                        Age                Position
----                        ---                --------               
<S>                         <C>  <C>
 
Kenneth S. Shifrin           46  Chairman of the Board, President and
                                 Chief Executive Officer
 
Jack R. Chandler, M.D.       71  Vice Chairman of the Board
 
Roger T. Scaggs              56  Senior Vice President - Data
                                 Processing
 
Samuel R. Granett            50  Senior Vice President - Financial
                                 Services
 
Duane K. Boyd                51  Senior Vice President - Insurance
 
William H. Hayes             48  Senior Vice President - Finance and
                                 Secretary
 
Thomas R. Solimine           37  Controller
</TABLE>

                                      16
<PAGE>
 
          All officers serve until the next annual meeting of directors and
until their successors are elected and qualified.

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

          Dr. Chandler, a founder of the Company, has been a Director of the
Company since July 1983 and has served as Vice Chairman of the Board since
February 1985.  Dr. Chandler was Vice Chairman of APIE from August 1975 to April
1978 and was Chairman of its Board of Directors from April 1978 to April 1985.
Dr. Chandler was a physician in private practice in San Antonio, Texas from 1956
until his retirement in 1985.

          Mr. Scaggs has been the Senior Vice President - Data Processing since
June 1988 and President of APS Systems, Inc. since February 1988.  He was Senior
Vice President - Corporate Development, from February 1985 to June 1988 and a
director of the Company from March 1984 to October 1987.  Mr. Scaggs was with
EDS prior to joining the Company.

          Mr. Granett was named Senior Vice President - Financial Services in
1991.  He had been Vice President - Financial Services since February 1987.  He
has been President of APS Financial since February 1987 and was Chairman and
Chief Executive Officer from September 1989 to February 1995.

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

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

          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.

                                      17
<PAGE>
 
          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 anual meeting of the stockholders.

          In March 1996, Mr. Scaggs was accused of a felony unrelated to the
business.  He has taken a leave from the Company pending the outcome of the
matter.

ITEM 10. EXECUTIVE COMPENSATION

          The information required by this item is contained in the definitive
proxy statement of the Company to be filed in connection with its 1996 annual
meeting of shareholders, which information is incorporated herein by reference.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

          The information required by this item is contained in the definitive
proxy statement of the Company to be filed in connection with its 1996 annual
meeting of shareholders, which information is incorporated herein by reference.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

          The information required by this item is contained in the definitive
proxy statement of the Company to be filed in connection with its 1996 annual
meeting of shareholders, which information is incorporated herein by reference.

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K.

      (a)  EXHIBITS (1)

        3.1    Restated Articles of Incorporation of the Company, as amended.(7)

        3.2    Amended and Restated Bylaws of the Company.(7)

        4.1    Specimen of Common Stock Certificate.(2)

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

                                      18
<PAGE>
 
       *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.(11)

       *10.7   Form of Non-Employee Directors Stock Option Agreement.(11)

       *10.8   1995 Incentive and Non-Qualified Stock Option Plan of American
               Physicians Service Group, Inc.(11)

       *10.9   Form of Stock Option Agreement (ISO).(11)

       *10.10  Form of Stock Option Agreement (Non-Qualified).(11)

        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.(6)

        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  Employment Agreement dated July 1, 1991, between the Company and
               Duane K. Boyd, Jr.(8)

        10.16  Loan Agreement dated April 7, 1992, among the Company, APS Realty
               and NationsBank of Texas, N.A.(9)

                                      19
<PAGE>
 
        10.17  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.(9)

        10.18  Loan Agreement dated July 30, 1992, among the Company, FMI, APS
               Systems, APS Communications and NationsBank of Texas, N.A.(9)

        10.19  Master Note dated July 30, 1992, executed by the Company in the
               principal amount of $2,000,000 payable to NationsBank of Texas,
               N.A.(9)

        10.20  Purchase Agreement, dated January 24, 1995, between Hewlett
               Packard Company and APS Systems.(10)

        11.1   Computation of per share earnings (included in Appendix A).(11)

        21.1   List of subsidiaries of the Company.(11)

        23.1   Independent Auditors Consent of KPMG Peat Marwick.(11)
________________
  (*)   Executive Compensation plans and arrangements.
 
  (1) The exhibits listed will be furnished to any security holder upon written
request for such exhibit to W. H. Hayes, American Physicians Service Group,
Inc., 1301 Capital of Texas Highway, Suite C-300, Austin, Texas  78746.  A
reproduction fee of $.20 per page will be charged for documents requested.
Copies of all public filings are also available from the SEC by calling
Disclosure, Inc. at 800-638-8241.

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

  (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 Annual Report on Form 10-K of the Company for
the year ended December 31, 1985 and incorporated herein by reference.

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

                                      20
<PAGE>
 
  (7) 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.

  (8) Filed as an Exhibit to the Annual Report on Form 10-K of the Company for
the year ended December 31, 1991 and incorporated herein by reference.

  (9) Filed as an Exhibit to the Annual Report on Form 10-K of the Company for
the year ended December 31, 1992 and incorporated herein by reference.

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

  (11)  Filed herewith.


(b)  REPORTS ON FORM 8-K.

        No current report on Form 8-k was filed by the Company during the fourth
quarter of 1995.

                                      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 26, 1996

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

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

Date: March 26, 1996


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

Date: March 26, 1996


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

Date: March 26, 1996

                                      22
<PAGE>
 
By: /s/ Jack R. Chandler
   ------------------------------------------------------
  Jack R. Chandler, M.D.
  Vice Chairman of the Board and
  Director

Date: March 26, 1996



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

Date: March 26, 1996



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

Date: March 26, 1996



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

Date: March 26, 1996

                                      23
<PAGE>
 
                                   APPENDIX A



                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------
<TABLE>
<CAPTION>
 
 
                                                       Page
                                                       ----
<S>                                                    <C>
 
Independent Auditors' Report                           A-2
 
Financial Statements
 
Consolidated Statements of Earnings for the years      A-3
ended December 31, 1995, 1994 and 1993.
 
Consolidated Balance Sheets at December 31, 1995       A-5
and December 31, 1994.
 
Consolidated Statements of Cash Flows for the years    A-7
ended December 31, 1995, 1994 and 1993.
 
Consolidated Statements of Shareholders' Equity        A-9
at December 31, 1995, 1994 and 1993.
 
Notes to Consolidated Financial Statements.            A-10
 
Financial Statement Schedules
 
Valuation and Qualifying Accounts, Schedule II         S-1
 
</TABLE>

                                      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.  In connection with our audits of the consolidated financial
statements, we also have audited the financial statement schedule as listed in
the accompanying index.  These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule 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, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995, in conformity with generally accepted
accounting principles.  Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.

As discussed in notes 1 and 10 to the consolidated financial statements, the
Company changed its method of accounting for income taxes in 1993 to adopt the
provisions of the Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes.


Austin, Texas
March 8, 1996

                                      A-2
<PAGE>
 
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
                      CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
 
(In thousands, except per share data)
                                                              Year Ended
                                                             December 31,
                                                      ---------------------------
                                                        1995     1994      1993
                                                      --------  -------  --------
<S>                                                   <C>       <C>      <C>
 
Revenues:
  Financial services (Note 3)                         $13,762   11,451    11,503
  Computer systems/software                             4,738    5,404     4,179
  Real estate (Note 6)                                    668      586       581
  Investments and other (Note 2)                        1,322      296       457
                                                      -------   ------    ------
    Total revenues                                     20,490   17,737    16,720
                                                      -------   ------    ------
 
Expenses:
  Financial services                                   11,582   10,626    10,619
  Computer systems/software                             4,262    4,970     3,866
  Real estate                                             510      452       392
  General and administrative                            2,037      255       517
  Interest                                                124      151       141
                                                      -------   ------    ------
    Total expenses                                     18,515   16,454    15,535
                                                      -------   ------    ------
 
  Operating income                                      1,975    1,283     1,185
 
  Equity in earnings of
    unconsolidated affiliate (Note 14)                  1,508      950       608
  
  Minority interest in consolidated
    earnings                                               --      (15)       (9)
                                                      -------   ------    ------
 
  Earnings from continuing operations before
    income taxes and cumulative effect
    of change in accounting for income taxes            3,483    2,218     1,784
 
  Income tax expense (Note 10)                          1,108      798       611
                                                      -------   ------    ------
 
  Earnings from continuing operations before
    cumulative effect of change in
    accounting for income taxes                         2,375    1,420     1,173
                                                      -------   ------    ------
 
Loss from discontinued operations net of income
   tax benefit of $181, $86 and $148 in 1995, 1994
   and 1993, respectively                                (351)    (166)     (288)
 
  Cumulative effect of change in
    accounting for income taxes (Note 10)                  --       --       201
                                                      -------   ------    ------
 
    Net earnings                                      $ 2,024    1,254     1,086
                                                      =======   ======    ======
 
</TABLE>

See accompanying notes to consolidated financial statements

                                      A-3
<PAGE>
 
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
                      CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
 
 
                                                      1995          1994         1993
                                                    --------       ------       ------
<S>                                                  <C>           <C>          <C>
  Earnings per common share:                                            
                                                                        
  Primary:                                                              
    Earnings from continuing operations before                          
      cumulative effect of change in                                    
      accounting for income taxes                     $ 0.62        0.40        0.32
                                                                        
    Discontinued operations                           $(0.09)      (0.05)      (0.08)
                                                                        
    Cumulative effect of change in                                      
      accounting for income taxes                     $   --          --        0.06
                                                      ------       -----       -----
                                                                        
    Net earnings                                      $ 0.53        0.35        0.30
                                                      ======       =====       =====
                                                                        
  Fully diluted:                                                        
    Earnings from continuing operations before                          
      cumulative effect of change in                                    
      accounting for income taxes                     $ 0.57        0.40        0.32
                                                                        
   Discontinued operations                            $(0.08)      (0.05)      (0.08)
                                                                        
    Cumulative effect of change in                                      
      accounting for income taxes                     $   --          --        0.06
                                                      ------       -----       -----
                                                                        
    Net earnings                                      $ 0.49        0.35        0.30
                                                      ======       =====       =====
                                                                        
Primary weighted average shares                                         
 outstanding                                           3,843       3,537       3,622
                                                      ======      ======      ======
                                                                        
Fully diluted weighted average                                          
 shares outstanding                                    4,163       3,614       3,622
                                                      ======      ======      ======
</TABLE> 

See accompanying notes to consolidated financial statements

                                      A-4
<PAGE>
 
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
                          CONSOLIDATED BALANCE SHEETS


(In thousands, except share data)

<TABLE> 
<CAPTION> 
                                                           December 31,
                                                     -----------------------
                                                         1995        1994
                                                     -----------  ---------- 
<S>                                                    <C>            <C>
ASSETS 
Current assets:
     Cash and cash equivalents                         $ 6,798        3,266
     Marketable securities (Note 2)                      2,004        1,491
     Trading account securities                          1,014          661
     Management fees and other receivables (Note 3)      1,748        2,932
     Notes receivable - current (Note 4)                   223          325
     Receivable from clearing broker                       780          491
     Net deferred tax asset (Note 10)                      159          163
     Prepaid expenses and other                            312          806
                                                       -------       ------
          Total current assets                          13,038       10,135
 
 
 
Notes receivable, less current portion (Note 4)             83          915
Property and equipment, net (Note 6)                     2,129        2,025
Investment in Prime Medical (Note 14)                    7,412        5,658
Other assets                                             1,078        1,185
                                                       -------       ------
          Total assets                                 $23,740       19,918
                                                       =======       ======
</TABLE>

          See accompanying notes to consolidated financial statements

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


(In thousands, except share data)

<TABLE> 
<CAPTION> 
                                                              December 31,
                                                          ------------------   
                                                            1995      1994
                                                          --------  --------
<S>                                                       <C>        <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
 
Current liabilities:
     Current portion of long term obligations (Note 8)    $   299      327
     Accounts payable - trade                                 353      809
     Accrued compensation                                     861      488
     Accrued expenses and other liabilities (Note 7)        3,501    2,168
     Income taxes payable                                     558      257
                                                          -------   ------
          Total current liabilities                         5,572    4,049
 
 
 
Long-term obligations (Note 8)                                574      878
                                                          -------   ------
 
          Total liabilities                                 6,146    4,927
                                                          -------   ------
 
Shareholders' equity:
     Preferred stock, $1.00 par value, 1,000,000
      shares authorized                                        --       --
     Common stock, $0.10 par value, 20,000,000 shares
      authorized; 3,663,871 issued at 12/31/95
      and 3,471,684 at 12/31/94                               366      347
     Additional paid-in capital                             4,530    4,469
     Unrealized holding gains                                  --       44
     Retained earnings                                     12,698   10,674
     Reciprocal stockholdings (Note 14)                        --     (543)
                                                          -------   ------
 

          Total shareholders' equity                       17,594   14,991
                                                          -------   ------
Commitments and contingencies
       (notes 5, 8, 9, 12 and 14)
          Total liabilities and shareholders' equity      $23,740   19,918
                                                          =======   ======
</TABLE>

          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,
                                                         -------------------------------                        
                                                            1995        1994       1993
                                                         --------     -------    -------
<S>                                                      <C>          <C>        <C>
Cash flows from operating activities:
 Cash received from customers                            $ 21,068      16,138     17,405
 Cash paid to suppliers and employees                     (17,860)    (15,740)   (16,143)
 Change in trading account securities                        (353)        475        318
 Change in receivable from clearing broker                   (289)       (308)      (737)
 Interest paid                                               (124)       (151)      (141)
 Income taxes paid                                           (494)        (15)      (343)
 Interest, dividends and other investment
  proceeds                                                  1,322         456        136
                                                         --------     -------    -------
  Net cash from operating activities                        3,270         855        495
                                                         --------     -------    -------
 
Cash flows from investing activities:
 Payments for purchase of property and
  equipment                                                  (483)       (185)      (273)
 Proceeds from sale of assets                                  47          76        119
 Proceeds from the sale of discontinued operation              67          --         --
 Net decrease (increase) in marketable
  securities                                                 (530)     (1,183)       407
 Funds loaned to others                                        --          --       (731)
 Collection of notes receivable                             1,119       1,863        334
                                                         --------     -------    -------
  Net cash from (used in) investing
   activities                                                 220         571       (144)
                                                         --------     -------    -------
 
Cash flows from financing activities:
 Proceeds from long-term obligations                           --          --         17
 Repayment of long-term obligations                          (332)       (613)      (317)
 Acquisition of treasury stock                               (125)         --         --
 Exercise of stock options                                    499          --         --
 Increase (decreased) in minority interest                     --         (91)         8
                                                         --------     -------    -------
  Net cash provided by (used in) financing activities          42        (704)      (292)
                                                         --------     -------    -------
 
Net change in cash and cash equivalents                     3,532         722         59
 
Cash and cash equivalents at beginning of year              3,266       2,544      2,485
                                                         --------     -------    -------
Cash and cash equivalents at end of year                 $  6,798       3,266      2,544
                                                         ========     =======    =======
</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,
                                                              ----------------------------------
                                                                 1995       1994        1993
                                                              ----------  ---------  -----------
<S>                                                           <C>         <C>        <C>
Reconciliation of net earnings to net cash
    from operating activities:
 Net earnings                                                  $  2,024      1,254        1,086
Adjustments to reconcile net earnings to
  net cash from operating activities:
Depreciation and amortization                                       399        323          484
Writedown of goodwill                                                --         --          166
Minority interest                                                    --         15            9
Cumulative effect of change in accounting for income taxes           --         --         (201)
Loss (gain) on sale or disposition of assets                        (72)        31          (77)
Recognition of long-term capital loss carryback                      --         88           --
Gain on exchange of affiliate stock for note                         --         --          (21)
Loss on permanent impairment of debt securities                      --        160           --
Provision to increase valuation
  allowance on marketable securities                                 --         --         (321)
Provision for deferred income tax                                    27        480          342
Gain on sale of marketable securities                               (50)       (33)          --
Undistributed earnings of affiliate                              (1,508)      (950)        (608)
Change in income tax payable                                        301        129         (222)
Change in trading account securities                               (353)       475          318
Change in receivable from clearing broker                          (289)      (308)        (737)
Change in management fees and other receivables                   1,183     (1,301)         279
Change in prepaids and other assets                                 493       (358)        (167)
Change in trade accounts payable                                   (456)        11          166
Change in accrued expenses and other liabilities                  1,571        839           (1)
                                                               --------     ------        -----
  Net cash from operating activities                           $  3,270        855          495
                                                               ========     ======        =====
</TABLE>
Summary of non-cash transactions:

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.

The Company sold APS Communications in a non-cash transaction as follows:
<TABLE> 
     <S>                                 <C>
     Note received                       $  183
                                         ======

     Fixed assets sold                     ( 48)
     Deferred income                       (135)
                                          ----- 
                                         $  183
                                         ======
</TABLE> 

         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, 1995, 1994 and 1993

(In thousands, except share data)

<TABLE>
<CAPTION>
 
                                                                                                                        
                                   Common Stock        Additional   Unrealized                                Total    
                              ---------------------     paid-in      holding    Retained    Reciprocal    shareholders' 
                                 Shares      Amount     capital       gains     earnings   stockholdings      equity
                              -----------------------------------------------------------------------------------------
<S>                           <C>            <C>      <C>          <C>          <C>       <C>             <C>
Balance, January 1, 1993         3,543,364      354        4,725           --      8,334        ( 954)       12,459
Net earnings                                                                       1,086           --         1,086
Issuance of common stock            18,400        2           37           --         --           --            39
Shares repurchased &
 cancelled                         (90,075)      (9)        (294)          --         --           --         ( 303)
 
Pro rata portion of Company
   common stock held by
   affiliate (Note 14)                  --       --           --           --         --          407           407
                              -----------------------------------------------------------------------------------------
Balance December 31, 1993        3,471,689      347        4,468           --      9,420         (547)       13,688
Net earnings                            --       --           --           --      1,254           --         1,254
Unrealized gains on
 securities                             --       --           --           44         --           --            44
    available for sale
Shares repurchased &                    (5)      --           --           --         --           --            --
 cancelled
Contributed capital                     --       --            1           --         --           --             1
Pro rata portion of Company
   common stock held by
   affiliate (Note 14)                  --       --           --           --         --            4             4
                              -----------------------------------------------------------------------------------------
Balance December 31, 1994        3,471,684     $347        4,469           44     10,674         (543)       14,991
Net earnings                            --       --           --           --      2,024           --         2,024
Unrealized loss on
 securities                             --       --           --          (44)        --           --           (44)
   available for sale
Shares issued (Note 12)            314,333       31          468           --         --           --           499
Shares repurchased &
cancelled (Note 14)               (122,146)     (12)        (407)          --         --           --          (419)
Pro rata portion of Company
    common stock held by
    affiliate (Note 14)                 --       --           --           --         --          543           543
                              -----------------------------------------------------------------------------------------
Balance December 31, 1995        3,663,871      366        4,530           --     12,698           --        17,594
                              =========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.

                                      A-9
<PAGE>
 
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
                   Notes To Consolidated Financial Statements
                        December 31, 1995, 1994 and 1993

(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; and computer systems and software packages to medical
     clinics, medical schools, physician hospital organizations and other
     physician networks.  The brokerage and computer businesses have clients
     nationally. Insurance management is a service provided primarily in Texas,
     but is available to clients nationally.  American Physicians Service Group,
     Inc. also owns space in the office building which serves as its
     headquarters.  Through its real estate subsidiary it leases space that is
     surplus to its needs.  During the three years presented in the financial
     statements, financial services and computer systems generated approximately
     66% and 25%, respectively, of total revenues.

     (b)  Estimates

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

(c)  Principles of Consolidation

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

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

                                      A-10
<PAGE>
 
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
             Notes To Consolidated Financial Statements, Continued

(1)  Summary of Significant Accounting Policies, continued

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

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

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

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

     (e) Broker, Dealer and Securities Transactions

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

     (f)  Marketable Securities

     The Financial Accounting Standards Board issued Statement of Financial
     Accounting Standards No. 115, Accounting for Certain Investments in Debt
     and Equity Securities (Statement 115), in May, 1993 for implementation in
     fiscal years beginning after December 15, 1993.  Statement 115 addresses
     the accounting and reporting for investments in debt and equity securities.
     Under Statement 115, those investments are to be classified in three
     categories and accounted for as follows:

                                      A-11
<PAGE>
 
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
             Notes To Consolidated Financial Statements, Continued

(1)  Summary of Significant Accounting Policies, continued

<TABLE> 
<CAPTION> 
     <C>                   <S>
     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
</TABLE> 

     The Company adopted Statement 115 on January 1, 1994 and has included its
     marketable securities in the available for sale category.  Because of
     previous valuation allowances established to record investment securities
     at the lower of aggregate cost or market, implementation of Statement 115
     on January 1, 1994 resulted in no significant change to equity.

     (g)   Property and Equipment

     Property and equipment are stated at cost.  Equipment under capital lease
     is stated at the present value of minimum lease payments at the beginning
     of the lease term.  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).  Equipment under capital lease is
     amortized using the straight-line method over the shorter of the lease
     terms or estimated useful lives of the assets (5 years).

     (h)  Long-Lived Assets

     The Financial Accounting Standards Board issued Statement of Financial
     Accounting Standards No. 121, Accounting for the Impairment of Long-Lived
     Assets and for Long-Lived Assets to be Disposed of ("Statement 121") in
     March 1995 for implementation in fiscal years beginning after December 15,
     1995.  The statement addresses the impact on an enterprise's financial
     statements when circumstances indicate the carrying amount of an asset may
     not be recoverable. The Company does not expect Statement 121 to have a
     material affect on the financial statements at adoption.

                                      A-12
<PAGE>
 
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
             Notes To Consolidated Financial Statements, Continued

(1)  Summary of Significant Accounting Policies, continued

     (i)   Income Taxes

     Effective January 1, 1993, the Company adopted the provisions of Statement
     of Financial Accounting Standards No. 109, Accounting for Income Taxes and
     reported the cumulative effect of that change in the method of accounting
     for income taxes in the 1993 consolidated statement of earnings. Deferred
     tax assets and liabilities are recognized for the future tax consequences
     attributable to differences between the financial statement carrying
     amounts of existing assets and liabilities and their respective tax bases
     and operating loss and tax credit carryforwards. Deferred tax assets and
     liabilities are measured using enacted tax rates expected to apply to
     taxable income in the years in which those temporary differences are
     expected to be recovered or settled. The effect on deferred tax assets and
     liabilities of a change in tax rates is recognized in income in the period
     that includes the enactment date.

(j)  Earnings Per Share

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

(k)  Cash and Cash Equivalents

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

     (l) Post Retirement/Post Employment Benefits

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

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

                                      A-13
<PAGE>
 
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
             Notes To Consolidated Financial Statements, Continued

(1)  Summary of Significant Accounting Policies, continued

     (n)  Notes Receivable

     Notes receivable are recorded at cost, less allowances for doubtful
     accounts when deemed necessary.  The Financial Accounting Standards Board
     issued Statement of Financial Accounting Standards No. 114, Accounting by
     Creditors for Impairment of a Loan (Statement 114), in May 1993 and the
     related Statement of Financial Accounting Standards No. 118 Accounting by
     Creditors for Impairment of a Loan - Income Recognition and Disclosures, in
     October 1994 for implementation in fiscal years beginning after December
     15, 1994.  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.   The adoption
     of Statements 114 and 118 by the Company on January 1, 1995 did not have a
     material affect on the financial statements.

(o)  Stock-Based Compensation

     The Financial Accounting Standards Board issued Statement of Financial
     Accounting Standards No. 123, Accounting for Stock-Based Compensation
     ("Statement 123"), in October 1995 for implementation in fiscal years
     beginning after December 15, 1995.  The  Company has not elected early
     adoption of Statement 123.  Statement 123 becomes effective beginning with
     the Company's first quarter of fiscal year 1996 and will not have a
     material effect on the Company's financial position or results of
     operations.  Upon adoption of Statement 123, the Company will continue to
     measure compensation expense for its stock-based employee compensation
     plans using the intrinsic value method prescribed by APB Opinion No. 25,
     Accounting for Stock Issued to Employees and will provide proforma
     disclosures of net income and earnings per share as if the fair value-based
     method prescribed by Statement 123 had been applied in measuring
     compensation expense.

                                      A-14
<PAGE>
 
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
             Notes To Consolidated Financial Statements, Continued

(1)  Summary of Significant Accounting Policies, continued

(p)  Reclassification

     Certain reclassifications have been made to amounts presented in previous
     years to be consistent with the 1995 presentation.

(2)  Marketable Securities

     The Company holds various marketable securities as short-term investments.
     At December 31, 1995 and 1994, these marketable securities consisted of:

<TABLE>
<CAPTION>
 
                                              1995        1994
                                           ----------  ----------
<S>                                        <C>         <C>
 
Debt securities, at cost                   $2,004,000  $1,424,000
 
         Add: adjustment to fair value             --      67,000
                                           ----------  ----------
         Total marketable securities at
           fair value                      $2,004,000  $1,491,000
                                           ==========  ==========
</TABLE>

At December 31, 1995, there were no gross unrealized gains.   At December 31,
1994, there were gross unrealized gains, net of applicable federal income tax,
of $44,000.

<TABLE>
<CAPTION>
 
Investment income includes the following:
                                               1995       1994        1993
                                             ---------  ---------  ----------
<S>                                          <C>        <C>        <C>
     Interest                                 $243,000    68,000      23,000
     Realized gains                             50,000    42,000      94,000
     Realized losses                                --   (10,000)    (275,000)
     Permanent impairment of
      debt securities                               --  (160,000)         --
     Decrease in
      valuation allowance                           --        --     324,000
                                              --------  --------   ---------
                                              $293,000   (60,000)    166,000
                                              ========  ========   =========
</TABLE>
No individual issuer exceeded 10% of stockholder's equity at December 31, 1995.

                                      A-15
<PAGE>
 
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
             Notes To Consolidated Financial Statements, Continued

(3)  Management Fees and Other Receivables

Management fees and other receivables consist of the following:

<TABLE> 
<CAPTION> 
 
                                                       December 31,
                                                  -----------------------
                                                      1995       1994
                                                  ----------   ----------
<S>                                               <C>          <C> 
Management fees receivable                        $  342,000   1,131,000
Trade accounts receivable                          1,034,000     561,000
Less:  allowance for doubtful accounts              (132,000)    (59,000)
Accrued interest receivable                           45,000      57,000
Other receivables                                    459,000   1,242,000
                                                  ----------   ---------
                                                  $1,748,000   2,932,000
                                                  ==========   =========
</TABLE>

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

The Company earned management fees of $5,288,000, $5,358,000 and $3,958,000 and
received expense reimbursements of $355,000, $247,000 and $255,000 for the years
ended December 31, 1995, 1994 and 1993, respectively, related to these
agreements.

(4)  Notes Receivable

Notes receivable consists of the following:

<TABLE> 
<CAPTION> 
                                                          December 31,
                                                  --------------------------
                                                     1995              1994    
                                                  ----------        --------- 
<S>                                               <C>               <C> 
 Regan Publishing Company
  The unsecured note bears interest at 7%.
  Payments of $50,000 plus interest are
  due June 30, 1996, December 31, 1996,
  and June 30, 1997, with the balance due
  December 31, 1997.                                $183,000             --

</TABLE> 

                                      A-16
<PAGE>
 
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
             Notes To Consolidated Financial Statements, Continued
      
(4)  Notes Receivable, continued

<TABLE>
<S>                                                     <C>        <C> 
     Whited, Winters, Newton & Clarissimeaux
      The  note was paid in full when due.               --       35,000
 
     Ron Luke and Associates, Inc.
      The  note was paid in full in May, 1995.           --    1,000,000
 
     The Billings Clinic
      The note is secured by computer equipment
      and bears interest at a weighted average
      rate of 11.38%.  Monthly payments of
      principal and interest are due through
      December 1996.                                123,000      205,000
                                                 ----------    ---------
                                                    306,000    1,240,000
Less current portion                                223,000      325,000
                                                 ----------    ---------
Long term portion                                $   83,000      915,000
                                                 ==========    =========
</TABLE>

In connection with the Ron Luke & Associates, Inc. note, the Company received a
warrant to acquire 50% of Ron Luke & Associates, Inc. for $1,000,000 and
received the right to appoint two out of the five directors on Ron Luke &
Associates, Inc.'s board of directors.  Such provisions expire in February,
1997.   No value has been assigned to the warrant.

(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 Corporation
disclose estimated fair values for its financial instruments as of December 31,
1995 and 1994:
<TABLE>
<CAPTION>
                                                    1995             1994
                                              ---------------  ---------------
                                              Carrying  Fair   Carrying  Fair
                                               Amount   Value   Amount   Value
                                              --------  -----  --------  -----
<S>                                           <C>       <C>    <C>       <C>
 
         Cash and cash equivalents               6,798  6,798     3,266  3,266
         Marketable Securities and Trading
              Account Securities                 3,018  3,018     2,152  2,152
</TABLE>

                                      A-17
<PAGE>
 
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
             Notes To Consolidated Financial Statements, Continued

(5)  Fair Value of Financial Instruments, continued

<TABLE>
<CAPTION>
                                              1995             1994
                                        ---------------  ---------------
                                        Carrying  Fair   Carrying  Fair
                                         Amount   Value   Amount   Value
                                        --------  -----  --------  -----
<S>                                     <C>       <C>    <C>       <C>
     Management fees and other
        Receivables                        1,748  1,748     2,932  2,932
     Notes receivable                        306    293     1,240  1,240
     Receivable from clearing broker         780    780       491    491
     Debt                                    873    873     1,205  1,205
     Accounts Payable                        353    353       809    809
</TABLE>

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

     Cash and Cash Equivalents
     -------------------------

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

     Marketable Securities and Trading Account
     -----------------------------------------

The fair value of securities owned is estimated based on bid prices published in
financial newspapers or bid quotations received from securities dealers.  The
carrying values of marketable securities are 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
managements' estimate of current interest rates for notes of similar credit
quality.

                                      A-18
<PAGE>
 
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
             Notes To Consolidated Financial Statements, Continued

(5)  Fair Value of Financial Instruments, continued

Receivable from Clearing Broker
-------------------------------

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

Debt
----

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

Accounts Payable
----------------

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

Limitations
-----------

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

                                      A-19
<PAGE>
 
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
             Notes To Consolidated Financial Statements, Continued

(6)  Property and equipment

     Property and equipment consists of the following:

<TABLE>
<CAPTION>
                                        December 31,
                                    ---------------------
                                       1995       1994
                                    ----------  ---------
<S>                                 <C>         <C>
 
Office condominium                  $1,896,000  1,831,000
  Furniture and equipment            3,422,000  3,065,000
                                    ----------  ---------
                                     5,318,000  4,896,000
Accumulated depreciation and
  amortization                       3,189,000  2,871,000
                                    ----------  ---------
                                    $2,129,000  2,025,000
                                    ==========  =========
</TABLE>

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 28,000 square feet and the remainder is leased
to third parties.  Rental income received from third parties during the years
ended December 31, 1995, 1994 and 1993  totaled approximately $382,000, $308,000
and $260,000, respectively.  Future minimum lease payments to be received under
the terms of the office condominium leases are as follows:  1996 - $337,000;
1997 - $275,000; 1998 - $208,000; 1999 - $59,000 and none thereafter.

Included in furniture and equipment at December 31, 1995 and 1994 are computers
and equipment under capital lease of approximately $191,000.   Accumulated
amortization on this equipment under capital lease was $139,000 and $101,000 at
December 31, 1995 and 1994, respectively.

(7)  Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities consists of the following:
<TABLE>
<CAPTION>
                                                              1995           1994
                                                          ----------      ----------
<S>                                                       <C>             <C>
 
         Taxes payable - other                             $  150,000        36,000
         Commissions payable                                   38,000       110,000
         Deferred income                                      434,000       685,000
         Health insurance and other claims                 
           payable                                             73,000       104,000
         Contractual/legal claims                           2,360,000       836,000
</TABLE> 

                                      A-20
<PAGE>
 
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
             Notes To Consolidated Financial Statements, Continued
 
(7)  Accrued Expenses and Other Liabilities, continued

<TABLE> 
<S>                                                        <C>              <C> 
                                                                             
         Vacation payable                                      127,000        137,000
         Funds held for others                                  51,000         48,000
         Interest payable                                        5,000          5,000
         Other                                                 263,000        207,000
                                                            ----------      ---------
                                                            $3,501,000      2,168,000
                                                            ==========      =========
</TABLE> 
 
(8)  Long-term Obligations
 
     Long-term obligations consist of the following:

<TABLE> 
<CAPTION> 
                                                              1995                 1994
                                                          ----------            ---------
<S>                                                       <C>                   <C>  
Capital leases                                            $  280,000              297,000
  Less amounts representing interest                         (12,000)             (32,000)
                                                          ----------            ---------
Present value of net                                                          
    minimum payments                                         168,000              265,000
Notes payable secured by office buildings                    642,000              742,000
         Other                                                63,000              198,000
                                                          ----------            ---------
Total long term obligations                                  873,000            1,205,000
  Less current portion                                       299,000              327,000
                                                          ----------            ---------
Long-term portion                                         $  574,000              878,000
                                                          ==========            =========
</TABLE>

Capital leases are at a weighted average interest rate of 9.09% and are payable
monthly through April 1997.  Notes payable secured by office buildings are at
the prime rate of interest and are payable monthly, in installments of
approximately $13,000, through April 1997 at which time the balance of $517,000
is due.

Long-term obligations are repayable by the Company in approximate annual
installments as follows:  1996, $299,000 and 1997, $574,000.

The Company has a $2,000,000 revolving credit commitment with a bank through
July 1996 at the prime rate.  The agreement requires the maintenance of certain
financial ratios and contains other restrictive covenants.  No funds had been
advanced under the line of credit as of December 31, 1995.

                                      A-21
<PAGE>
 
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
             Notes To Consolidated Financial Statements, Continued

(9)  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.

Rent expense under all operating leases for the years ended December 31, 1995,
1994 and 1993 was $103,000, $127,000 and $108,000, respectively. Future minimum
payments for leases which extend for more than one year are not significant at
December 31, 1995.

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.

(10) Income Taxes

As discussed in Note 1, the Company adopted Statement 109 as of January 1, 1993.
The cumulative effect of this change in accounting for income taxes of $201,000
was determined as of January 1, 1993 and was reported separately in the
consolidated statement of earnings for the year ended December 31, 1993.

Income tax expense (benefit) consists of the following:

<TABLE>
<CAPTION>
                                 Year Ended
                                 December 31,
                         -------------------------- 
                           1995    1994     1993
                         -------  -------  -------
<S>                      <C>      <C>      <C>
Federal
     Current              $795,000  109,000  105,000
     Deferred               27,000  480,000  342,000
State - current            105,000  123,000   16,000
                          --------  -------  -------
                          $927,000  712,000  463,000
                          ========  =======  ======= 
</TABLE> 

                                      A-22
<PAGE>
 
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
             Notes To Consolidated Financial Statements, Continued

(10) Income Taxes, continued

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:

<TABLE>
<CAPTION>
 
                                                                     Year Ended
                                                                   December 31,
                                                        ----------------------------------
                                                           1995         1994        1993
                                                        -----------  -----------  --------
<S>                                                     <C>          <C>          <C>
Expected federal income tax
  expense                                               $1,003,000      668,000   458,000
Deduction allowed for tax purposes
  for non-qualified stock options exercised               (128,000)          --        --
State taxes                                                105,000      123,000    16,000
Other, net                                                 (53,000)     (79,000)  (11,000)
                                                        ----------      -------   -------
                                                        $  927,000      712,000   463,000
                                                        ==========      =======   =======
</TABLE>

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

The tax effect of temporary differences that gives rise to significant portions
of deferred tax assets and deferred tax liabilities at December 31, 1995 and
1994 are presented below:

<TABLE>
<CAPTION>
                                                          1995           1994
                                                       ---------       ---------
<S>                                                    <C>             <C>
Deferred tax assets:
Marketable securities write downs not taken
  for tax purposes                                        $    46,000   $  72,000
Accrued expenses                                              993,000     490,000
Writedown of Paid Dental Administrators, Inc.
  to net realizable value                                          --     118,000
Accounts receivable, principally due
  to allowance for doubtful accounts                           77,000      54,000
 Deferred income for books not for tax                        129,000          --
 Other                                                          7,000      13,000
                                                          -----------   ---------
         Total gross deferred tax assets                    1,252,000     747,000
                                                          -----------   ---------
</TABLE> 

                                      A-23
<PAGE>
 
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
             Notes To Consolidated Financial Statements, Continued
 
(10) Income Taxes, continued

<TABLE> 
<S>                                                       <C>           <C> 
Deferred tax liabilities:
Investment in Prime Medical Services, Inc.
 due to use of equity method for books                    (1,033,000)   (494,000)
Unrealized gains on investments available
 for sale                                                        --      (23,000)
Capitalized expenses, principally due to
 deductibility for tax purposes                              (60,000)    (67,000)
                                                          ----------   ---------
         Total gross deferred tax liabilities             (1,093,000)   (584,000)
                                                          -----------   ---------
Net deferred tax asset                                    $   159,000   $ 163,000
                                                          ===========   =========
</TABLE>

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

(11)   Employee Benefit Plans

The Company has an employee benefit plan qualifying under Section 401(k) of the
Internal Revenue Code for all eligible employees.  Employees become eligible
upon meeting certain service and age requirements.  Employees may defer up to
15% (not to exceed $9,240 in 1995) 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, 1995, 1994 and 1993,
contributions  by the Company aggregated $100,000, $105,000, and $87,000,
respectively.

(12) Stock Options and Stock Grants

The Company has an employee stock option plan for key employees which provides
for the issuance of up to 700,000 shares of common stock.  The Company also has
a stock option plan for directors which provides for issuance of up to 700,000
shares of common stock.  Options granted under the plans could be qualified
incentive stock options or non-qualified options through July 17, 1993.  After
that date only non-qualified options may be granted.

                                      A-24
<PAGE>
 
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
             Notes To Consolidated Financial Statements, Continued

(12) Stock Options and Stock Grants, continued

In 1995 the Board of Directors adopted two new plans.  A non-employee directors
plan provides for the issuance of up to 200,000 shares of common stock to non-
employee directors who serve on the Option Committee.  The other plan is for
directors and key employees and provides for the issuance of up to 800,000
shares of common stock.  Both plans are subject to approval by shareholders at
the Company's 1996 Annual Meeting.

The exercise price for each non-qualified option share is determined by the
Option Committee of the Board of Directors.  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.

     Option transactions are shown below:
<TABLE>
<CAPTION>
 
Number of Shares                        1995     1994     1993
----------------                       -------  -------  -------
<S>                                    <C>      <C>      <C>
 
     Balance at January 1              921,000  926,000  930,000
     Options granted                   235,000   70,000   30,000
     Options exercised:
        Number                         314,000       --       --
        Average price                     1.59       --       --
     Options forfeited                   5,000   75,000   34,000
 
     At December 31:
     Balance of Options outstanding    837,000  921,000  926,000
     Average price                        2.18     1.57     1.68
     Options exercisable               550,000  813,000  818,000
     Shares available for grant        249,000  479,000  474,000
</TABLE>

At December 31, 1995 the 837,000 outstanding options consisted of 159,000
incentive options and 678,000 non-qualified options and ranged in price from
$1.375 to $9.625 per share.

In 1993 the Company issued 18,000 shares of common stock as compensation to an
officer of the Company.

                                      A-25
<PAGE>
 
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
             Notes To Consolidated Financial Statements, Continued

(13) Discontinued Operations

On October 23, 1995 the Company sold substantially all of the assets of APS
Communications Corporation, a publisher of Spanish language directories of U. S.
businesses.  The Company received cash, a note (see note 4) and had certain
liabilities assumed by the purchaser.  The gain on the sale, to be recognized on
the installment basis through 1997, will not be material to the Company's
operations.  Historical results from the operation are presented in the
Consolidated Statements of Earnings as "Loss from discontinued operations."

(14) Investment in Prime Medical

On October 12, 1989, the Company purchased for cash 3,540,000 shares (42%) of
the common stock of Prime Medical. Members of the Company's Board currently
serve as three of the nine 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 and October 1993,
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 21% of the outstanding common stock of Prime Medical.
The Company's investment in Prime Medical is accounted for on the equity method.
The 3,064,000 shares of Prime Medical common stock held by the Company had a
market value of $27,576,000 (carrying amount of $7,412,000) at December 31, 1995
based on the market closing price of $9.00 per share.

At December 31, 1995 and 1994, the Company's retained earnings included
undistributed earnings, net of deferred tax, of Prime Medical totaling
$1,890,000 and $895,000, respectively.

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

        Condensed balance sheet at December 31, 1995 and 1994
        -----------------------------------------------------
<TABLE>
<CAPTION>
                                      1995         1994
                                  ------------  ----------
<S>                               <C>           <C>
 
              Current assets       $10,938,000   8,753,000
              Long-term assets      66,627,000  45,108,000
                                   -----------  ----------
                  Total assets      77,565,000  53,861,000
                                   ===========  ==========
</TABLE>

                                      A-26
<PAGE>
 
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
             Notes To Consolidated Financial Statements, Continued

(14) Investment in Prime Medical, continued
<TABLE> 
<CAPTION> 
                                                                   1995     1994
                                                                   ----     ----
<S>                                                           <C>           <C>
              Current liabilities                               11,055,000   6,528,000
              Long-term liabilities                             23,760,000  12,912,000
              Shareholders equity                               42,750,000  34,421,000
                                                               -----------  ----------
                  Total liabilities and equity                 $77,565,000  53,861,000
                                                               ===========  ==========
 
 
     Condensed statement of operations for the years ended
     December 31, 1995 and 1994
 
                                                                    1995        1994
                                                               -----------  ----------
 
              Total revenue                                    $23,195,000  24,768,000
                                                               ===========  ==========
              Net income                                       $ 7,204,000   4,504,000
                                                               ===========  ==========
</TABLE>

Prime Medical was the holder of 772,000 shares ($2,395,000 at cost) at December
31, 1994 of the Company's common stock.  During 1995 Prime divested itself of
substantially all of these shares.  The Company recorded its pro rata portion,
$543,000 (23%) at December 31, 1994 of this stock as reciprocal stockholdings.

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.

(15) Segment Information

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

                                      A-27
<PAGE>
 
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
             Notes To Consolidated Financial Statements, Continued

(15) Segment Information, continued

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

Real Estate income is derived from the leasing of office space.
<TABLE>
<CAPTION>
 
                                                    1995         1994          1993
                                                ------------  -----------  ------------
<S>                                             <C>           <C>          <C>
Operating Revenues:
     Financial services                         $13,762,000   11,451,000    11,503,000
     Computer systems/software vvvvv              4,738,000    5,404,000     4,179,000
     Real estate                                    668,000      586,000       581,000
                                                -----------   ----------    ----------
                                                $19,168,000   17,441,000    16,263,000
                                                ===========   ==========    ==========
 
Operating Profit:
     Financial services                         $ 2,118,000      731,000       797,000
     Computer Systems/Software                      476,000      434,000       313,000
     Real estate                                     96,000       77,000       135,000
                                                -----------   ----------    ----------
                                                  2,690,000    1,242,000     1,245,000
                                                -----------   ----------    ----------
 
Corporate investment and other income             1,322,000      296,000       457,000
Corporate expenses                               (2,037,000)    (255,000)     (517,000)
Minority interest                                        --      (15,000)       (9,000)
 
Equity in earnings of Prime Medical               1,508,000      950,000       608,000
                                                -----------   ----------    ----------
 
Earnings from continuing operations
 before income taxes and  cumulative 
 effects of change in accounting for 
 income taxes                                     3,483,000    2,218,000     1,784,000
 
Income tax expense (benefit)                      1,108,000      798,000       611,000
                                                -----------   ----------    ----------
 
</TABLE>

                                      A-28
<PAGE>
 
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
             Notes To Consolidated Financial Statements, Continued

(15) Segment Information, continued
<TABLE>
<CAPTION>
 
                                              1995         1994         1993
                                          ------------  -----------  -----------
<S>                                       <C>           <C>          <C>
Earnings from continuing operations
  before cumulative  effects of change
  in accounting  for income taxes           2,375,000    1,420,000    1,173,000
                                          -----------   ----------   ----------

Loss from discontinued operations,
  net of income tax benefit                  (351,000)    (166,000)    (288,000)
                                          -----------   ----------   ----------

Cumulative effect of change in
  accounting for income taxes                      --           --      201,000
                                          -----------   ----------   ----------
Net earnings                              $ 2,024,000    1,254,000    1,086,000
                                          ===========   ==========   ==========

Identifiable assets:
     Financial services                   $11,816,000   10,161,000    8,371,000
     Computer systems/software              1,732,000    1,426,000    1,680,000
     Real estate                            1,578,000    1,640,000    1,659,000
     Corporate                              8,614,000    6,094,000    6,193,000
     Discontinued Operations                       --      597,000      423,000
                                          -----------   ----------   ----------
                                          $23,740,000   19,918,000   18,326,000
                                          ===========   ==========   ==========

Capital expenditures:
     Financial service                    $   262,000       31,000       25,000
     Computer systems/software                 80,000       48,000       95,000
     Real estate                               64,000       86,000      114,000
     Corporate                                 73,000       12,000       36,000
     Discontinued operations                    4,000        8,000        3,000
                                          -----------   ----------   ----------
                                          $   483,000      185,000      273,000
                                          ===========   ==========   ==========
 
Depreciation/amortization expenses:
     Financial services                   $   164,000      106,000      135,000
     Computer systems/software                 94,000       48,000       57,000
     Real estate                              126,000      113,000       90,000
     Corporate                                  9,000        2,000       22,000
     Discontinued operations                    6,000        8,000       59,000
                                          -----------   ----------   ----------
                                          $   399,000      277,000      363,000
                                          ===========   ==========   ==========
</TABLE>

                                      A-29
<PAGE>
 
                    AMERICAN PHYSICIANS SERVICE GROUP, INC.
             Notes To Consolidated Financial Statements, Continued
                  
                  
(15) Segment Information, continued

<TABLE>
<CAPTION>
                                        1995   1994   1993
                                        -----  -----  -----
<S>                                     <C>    <C>    <C> 
Revenues attributable to customers
  generating greater than 10% of the
  revenues of each segment:
    Financial services
     Company A                            36%    45%    34%
              Company B                   10%    --     14%
              Company C                   --     12%    --
              Company D                   11%    --     --
                                        ----   ----   ----
                                          57%    57%    48%
                                        ====   ====   ====
 
    Computer systems/software
      Company E                           34%    28%    37%
               Company F                  --     --     19%
               Company G                  --     --     15%
               Company H                  13%    11%    13%
               Company I                  18%    29%    11%
                                        ----   ----   ----
                                          65%    68%    95%
                                        ====   ====   ====
</TABLE>

At December 31, 1995 the Company had long-term contracts with companies A and E
and was therefore not vulnerable to the risk of a near-term severe impact from a
reasonably possible loss of the revenue.  Companies B, D, H, and I did not have
contracts with the Company and the loss of their business, if not replaced by
other clients, would materially impact the Company's operations.

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.

                                      A-30
<PAGE>
 
                                                                     SCHEDULE II


                    AMERICAN PHYSICIANS SERVICE GROUP, INC.

                       Valuation and Qualifying Accounts

                      Three years ended December 31, 1995

<TABLE>
<CAPTION>
 
 
                                                 Additions
                                           ---------------------     
                               Balance at  Charged to   Charged                Balance at
                                beginning   costs and   to other   Bad debts      end
Description                     of period   expenses    accounts  written off  of period
-----------                     ---------  -----------  --------  -----------  ---------
<S>                             <C>        <C>          <C>       <C>          <C>
 
Trade accounts receivable--
  allowance for doubtful
  accounts:
 
Year ended December 31, 1995     $ 59,000    $ 82,000   $   --       $ 13,000   $128,000
                                =========  ==========   ========  ===========  =========
 
Year ended December 31, 1994     $233,000    $(56,000)  $   --       $118,000   $ 59,000
                                =========  ==========   ========  ===========  =========
 
Year ended December 31, 1993     $290,000    $189,000   $   --       $246,000   $233,000
                                =========  ==========   ========  ===========  =========
</TABLE>

                                      S-1