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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED
MARCH 31, 2004

or

[ ] TRANSITION REPORT PURSUANT TO 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.
(Exact name of registrant as specified in its charter)


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


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

(512) 328-0888
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d ) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

YES X NO
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

NUMBER OF SHARES
OUTSTANDING AT
TITLE OF EACH CLASS April 26, 2004
-------------------- ----------------
Common Stock, $.10 par value 2,504,467

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PART I

FINANCIAL INFORMATION


- 2 -


AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

(In thousands, except per share data)

Item 1 - Financial Statements
Three Months Ended March 31,
2004 2003
-------- ------
Revenues:
Financial services $3,832 $4,035
Insurance services 3,458 2,556
------ ------

Total revenues 7,290 6,591

Expenses:
Financial services 3,241 3,340
Insurance services 2,622 1,972
General and administrative 513 426
Gain on sale of assets (12) (2)
------ -----

Total expenses 6,364 5,736
------ -----

Operating income 926 855
Gain on sale of investments (Note 4) 27 15
Gain on forgivenes of debt (Note 5) 63 -
------ -----

Income from continuing operations before
interest, income taxes and minority interest 1,016 870

Interest income 83 94
Other loss (8) -
Interest expense - 1
Income tax expense 397 346
Minority interests - 65
------ -----


Net income $694 $552
====== =====



See accompanying notes to condensed consolidated financial statements.

- 3 -



AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS, continued
(Unaudited)

(In thousands, except per share amounts)
Three Months Ended
March 31,
-----------------------
2004 2003
------ ------
Net income per common share

Basic:
Income from operations $ 0.28 $ 0.26
------ ------
Net income $ 0.28 $ 0.26
====== ======

Diluted:
Income from operations $ 0.25 $ 0.25
------ ------
Net income $ 0.25 $ 0.25
====== ======

Basic weighted average shares
outstanding 2,473 2,132
====== ======

Diluted weighted average
shares outstanding 2,769 2,228
====== ======




See accompanying notes to condensed consolidated financial statements.

- 4 -



AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS


(In thousands)


March 31, December 31,
2004 2003
----------- -------------
ASSETS (Unaudited)

Current Assets:

Cash and cash equivalents $9,161 $8,989
Trading account securities 110 67
Notes receivable 150 16
Management fees and other receivables 175 1,079
Deposit with clearing organization 500 500
Receivable from clearing organization 67 67
Income tax receivable 997 1,678
Net deferred income taxes 79 532
Prepaid expenses and other current assets 884 565
----------- ----------
Total current assets 12,123 13,493


Notes receivable, less current portion 298 436
Property and equipment, net 364 378
Investment in available-for-sale equity securities (Note 6) 8,984 8,729
Investment in available-for-sale fixed income securities 921 897
Goodwill 1,247 1,257
Other assets 421 448
----------- ----------

Total Assets $ 24,358 $ 25,638
=========== ==========







See accompanying notes to condensed consolidated financial statements.

- 5 -

AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS


(In thousands, except share data)



March 31, December 31,
2004 2003
-------------- ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited)

Current liabilities:

Accounts payable - trade $253 $201
Payable to clearing broker 121 67
Accrued incentive compensation 484 2,716
Accrued expenses and other liabilities (Note 7) 1,386 1,485
Deferred gain (Note 4) 487 487
--------- ---------

Total current liabilities 2,731 4,956

Payable under loan participation agreements 121 259
Deferred income tax liability 169 146
Deferred gain (Note 4) 1,037 1,171
--------- ---------

Total liabilities 4,058 6,532

Minority interests 1 --
Contingencies ( Note 3)

Shareholders' Equity:
Preferred stock, $1.00 par value, 1,000,000
shares authorized, none issued or outstanding -- --
Common stock, $0.10 par value, shares authorized 20,000,000;
2,480,467 and 2,454,667 issued and outstanding at 03/31/04
and 12/31/03, respectively 248 245
Additional paid-in capital 7,055 6,918
Retained earnings 13,067 12,314
Accumulated other comprehensive loss, net of taxes (71) (371)
--------- ---------

Total shareholders' equity 20,299 19,106
--------- ---------

Total Liabilities and Shareholders' Equity $24,358 $25,638
========= =========



See accompanying notes to condensed consolidated financial statements.

- 6 -


AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)



Three Months Ended March 31,
2004 2003
------- -------
Cash flows from operating activities:
Net Income $ 694 $ 552

Adjustments to reconcile net income to cash used in operating activities:

Depreciation and amortization 76 50
Forgiveness of debt and other (59) 41
Minority interest in consolidated earnings -- 239
Gain on sale of assets (122) (124)
Loss (gain) on sale of investment (12) 19
Provision for bad debt -- 21
Changes in operating assets and liabilities:
Trade receivables -- (198)
Trading account securities (43) --
Income tax receivable 822 393
Deferred income tax 476 53
Receivable from clearing organization 54 10
Management fees & other receivables 904 20
Prepaid expenses & other assets (318) 29
Deferred income (122) --
Trade accounts payable 52 (15)
Accrued expenses & other liabilities (2,409) (1,201)
------- -------
Net cash used in operating activities (7) (111)

Cash flows from investing activities:
Capital expenditures (30) (58)
Proceeds from the sale of available-for-sale equity
and fixed income securities 207 --
Purchase of available-for-sale equity securities -- (812)
Proceeds from the sale of an investment -- 612
Funds loaned to others -- (150)
Collection of notes receivable -- 129
Other -- 44
------- -------
Net cash provided by (used in) investing activities 177 (235)

Cash flows from financing activities:
Exercise of stock options 2 --
Purchase and cancellation of treasury stock -- (14)
------- -------
Net cash provided by (used in) financing activities 2 (14)

Net change in cash and cash equivalents $ 172 $ (360)

Cash and cash equivalents at beginning of period 8,989 6,691
------- -------
Cash and cash equivalents at end of period $ 9,161 $ 6,331
======= ========



See accompanying notes to condensed consolidated financial statements.

- 7 -


AMERICAN PHYSICIANS SERVICE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE LOSS
For the three months ended 2003 and March 31, 2004

(In thousands)



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

Balance December 31, 2002 (audited) $ 213 $ 5,584 $ 9,515 $ 1,830 $ -- $ 17,142
------------------------------------------------------------------------------------------------
Comprehensive income:
Net income -- -- 552 $ 552 -- -- 552
Other comprehensive income:
Unrealized loss on securities,
net of taxes of $710 -- -- -- (678) (678) -- (678)
------
Comprehensive loss -- -- -- $ (126) -- -- --
========
Treasury stock purchase -- -- -- -- (14) (14)
Cancelled treasury stock -- (14) -- 14 --
------------------------------------------------------------------------------------------------
Balance March 31, 2003 (unaudited) $ 213 $ 5,584 $10,053 $ -- $ 1,152 $ -- $ 17,002
================================================================================================


Balance December 31, 2003 (audited) $ 245 $ 6,918 $ 12,314 $ -- $ (371) $ -- $ 19,106
------------------------------------------------------------------------------------------------
Comprehensive income:
Net income -- -- 694 $ 694 -- -- 694
Other comprehensive income:
Unrealized gain on securities,
net of taxes of $155 -- -- -- 300 300 -- 300
----

Comprehensive income: -- -- -- $ 994 -- -- --
======
Stock options exercised 3 137 -- -- -- 140
Forgiveness of Uncommon Care Debt -- -- 60 -- -- 60
------------------------------------------------------------------------------------------------
Balance March 31, 2004 (unaudited) $ 248 $ 7,055 $13,067 $ -- $ (71) $ -- $ 20,299
================================================================================================








See accompanying notes to condensed consolidated financial statements.

- 8 -



AMERICAN PHYSICIANS SERVICE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(Unaudited)


1. GENERAL

The accompanying unaudited condensed consolidated financial statements
have been prepared in conformity with accounting principles generally accepted
in the United States of America and pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. The consolidated
financial statements for the three months ended March 31, 2004 and 2003 reflect
all adjustments which are, in the opinion of management, necessary for a fair
presentation of the financial position, results of operations and cash flows for
the periods presented. Such adjustments consist of only items of a normal
recurring nature. These consolidated financial statements have not been audited
by our independent certified public accountants. The operating results for the
interim periods are not necessarily indicative of results for the full fiscal
year.

The notes to consolidated financial statements appearing in our Annual
Report on Form 10-KSB for the year ended December 31, 2003 filed with the
Securities Exchange Commission should be read in conjunction with this Quarterly
Report on Form 10-Q. There have been no significant changes in the information
reported in those notes other than from normal business activities.

Certain reclassifications have been made to amounts in prior periods to
be consistent with the 2004 presentation.


2. MANAGEMENT'S ESTIMATES

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


3. CONTINGENCIES

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



- 9 -


4. GAIN RECOGNITION

During the three months ended March 31, 2004, we received proceeds of
approximately $207,000 and recognized a gain of $27,000 resulting from the sale
of approximately 36,000 shares of available-for-sale equity securities.

Additionally, during the three months ended March 31, 2004, we
recognized $122,000 of deferred gain related to the November 2001 sale and
subsequent leaseback of real estate to Prime Medical. Due to our continuing
involvement in the property, we deferred recognizing approximately $2,400,000 of
the approximately $5,100,000 gain and are recognizing it in earnings, as a
reduction of rent expense, monthly through November 2006. A total of $1,300,000
remains to be recognized in the coming thirty-two months. In addition, 15% of
the gain ($760,000) related to our then 15% ownership in the purchaser, was
deferred. As our ownership percentage in Prime declines through our sales of
Prime common stock, we recognize these gains proportionately to our reduction of
our interest in Prime. During the first three months of 2004, we recognized
$12,000 of these deferred gains, leaving a balance of approximately $224,000
remaining to be recognized.


5. GAIN ON FORGIVENESS OF DEBT

We recorded $63,000 in the first quarter of 2004 as gain on forgiveness
of debt. This represents that amount of liability that was released in the
quarter by participants in our loan to this affiliate, net of $15,000 interest
due them from prior period payments made by Uncommon Care. Due to poor operating
results, Uncommon Care was in default and not making scheduled payments under
its loan agreement with us in which the participations had been sold. As a
result, the loan participants released us from any obligations under the
participation agreements. That portion of the releases entered into with related
parties, totaling $60,000, was taken directly into equity. The effect of these
transactions on our balance sheet for the period ended March 31, 2004 was to
reduce the long-term liability account, "Payable under loan participation
agreements", by $138,000.


6. INVESTMENT IN AVAILABLE-FOR-SALE EQUITY SECURITIES

On June 4, 2003 we purchased from Financial Industries Corporation
("FIC")(NASDAQ: FNIN) and a foundation 339,879 shares of FIC's common stock as
an investment. The purchase price was approximately $5,000,000, which was all
sourced from our cash reserves. Earlier in 2004 we had purchased 45,121 FIC
shares in the open market. The 385,000 shares represents an approximate 4%
ownership in FIC. The shares purchased from FIC and the foundation are not
registered, but are subject to a registration rights agreement requiring FIC's
best efforts to register them within one year of the transaction. We have
classified all of these shares as securities available-for-sale and have
recorded changes in their value, net of tax, in our balance sheet as part of
Accumulated Other Comprehensive Income (Loss). A material decline in the value
of this investment could have a material effect in our financial condition and
results of operations.



- 10 -


As part of this transaction we were granted options to purchase an
additional 323,000 shares of FIC's common stock at $16.42 per share. There is a
significant revenue-related performance requirement that must be met before
these options are exercisable. There are presently no registered FIC shares
available to issue upon the exercise of these options. We have assigned no value
to these options.


7. ACCRUED EXPENSES AND OTHER LIABILITIES

Accrued expenses and other liabilities consists of the following:

March 31 December 31
2004 2003
(Unaudited)
----------- -----------
Commissions payable $ 920,000 $ 964,000
Taxes payable 170,000 116,000
Vacation 158,000 158,000
401(k) plan matching 70,000 121,000
Other 68,000 126,000
---------- -----------
$1,386,000 $1,485,000
========== ===========


8. NET INCOME PER SHARE

Basic income per share is based on the weighted average shares
outstanding without any dilutive effects considered. Diluted income per share
reflect dilution from all contingently issuable shares, such as options and
convertible debt. A reconciliation of earnings and weighted average shares
outstanding used in the calculation of basic and diluted earnings per share from
operations follows:
For the Three Months Ended March 31, 2004
--------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ----------

Income from operations $ 694,000

Basic EPS
Income available to
common stockholders 694,000 2,473,000 $0.28
=====

Diluted EPS
Effect of dilutive securities -- 296,000
---------- ----------

Income available to
common stockholders and
assumed conversions $ 694,000 2,769,000 $0.25
========== ========== =====



- 11 -



For the Three Months Ended March 31, 2003
-------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
---------- ------------ ---------

Income from operations $ 552,000

Basic EPS
Income available to 552,000 2,132,000 $ 0.26
common stockholders ======


Diluted EPS
Effect of dilutive securities -- 96,000
--------- ----------

Income available to common
stockholders and assumed
conversions $ 552,000 2,228,000 $ 0.25
========== ========== ======


Unexercised employee stock options to purchase zero and 575,000 shares
of the Company's common stock as of March 31, 2004 and 2003, respectively, were
not included in the computations of diluted EPS because the effect would be
antidilutive as their exercise price exceeds the average stock price during the
period.









- 12 -



9. Segment Information

The Company's segments are distinct by type of service provided. Comparative
financial data for the three month periods ended March 31, 2004 and 2003 are
shown as follows:

Three months ended March 31,
2004 2003
----------- ------------
Operating Revenue:
Financial services $ 3,832,000 $ 4,035,000
Insurance services 3,458,000 2,556,000
Corporate 1,600,000 --
------------ ------------
Total Segment Revenues $ 8,890,000 $ 6,591,000
============ ============

Reconciliation to Consolidated
Statement of Operations:
Total segment revenues $ 8,890,000 $ 6,591,000
Less: Intercompany dividends (1,600,000) --
------------ ------------
Total Revenues $ 7,290,000 $ 6,591,000
============ ============

Operating Income
Financial services $ 591,000 $ 695,000
Insurance services 836,000 584,000
Corporate (501,000) (424,000)
---------- -----------
Total segments operating income 926,000 855,000

Gain on sale of investments 27,000 15,000
Gain on forgiveness of debt 63,000 --
---------- -----------

Income from operations before interest,
income taxes and minority interest 1,016,000 870,000

Interest income 83,000 94,000
Other loss (8,000) --
Interest expense -- 1,000
Income tax expense 397,000 346,000
Minority interest -- 65,000
--------- ----------

Net income $ 694,000 $ 552,000
========= =========







- 13 -



10. SALE OF APS CONSULTING

Effective November 1, 2003, APS Consulting was able to obtain third
party financing and repay their note payable to us in exchange for our agreeing
to discount the note by $35,000. We provided no guarantees or credit
enhancements in connection with APS Consulting securing this financing.
Accordingly, we no longer have a risk of loss related to these operations and
have recognized the transaction as a divestiture. As a result, we ceased
consolidation of APS Consulting financial statements effective November 1, 2003.
Our consolidated statements of operations for the three months ended March 31,
2003 have been adjusted to reflect this divestiture. Specifically, revenues of
$899,000 have been reversed, expenses of $626,000 have been reversed, and the
operating profit of $273,000 was reversed from federal income taxes and minority
interest. There was no change to the net income as of March 31, 2003 as a result
of these reversals because prior to the disposal transaction, we consolidated
the division's operations, but recognized a 100% minority interest in its
earnings. As the division had earnings in the prior period presented, there were
no earnings attributable to discontinued operations, after adjustments made to
reclassify its revenue, expenses and the related minority interest.



11. STOCK-BASED COMPENSATION

We have adopted the disclosure-only provisions of Statement of
Accouting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS
123"), as amended by SFAS 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure", but measure compensation expense for our stock-based
employee compensation plans using the intrinsic value method prescribed by APB
Opinion No. 25, Accounting for Stock Issued to Employees. Proforma disclosures
of net income and earnings per share as if the fair value-based method
prescribed by SFAS 123 had been applied in measuring compensation expense
follow. For purposes of the proforma disclosures, the estimated fair value of
the options is amortized to expense over the option's vesting periods.

Three Months Ended March 31,

2004 2003
---- ----

Net Income as reported $694,000 $552,000

Deduct: Total additional stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (86,000) (59,000)
--------- ---------
Pro forma net income $608,000 $493,000
========= =========
Net income per share

Basic - as reported $ 0.28 $ 0.26
====== ======
Basic - pro forma $ 0.25 $ 0.23
====== ======
Diluted - as reported $ 0.25 $ 0.25
====== ======
Diluted - pro forma $ 0.22 $ 0.22
====== ======







- 14 -


12. RECENT ACCOUNTING PRONOUNCEMENTS

In March 2004, the Financial Accounting Standards Board ("FASB") issued
an exposure draft entitled "Share-Based Payment, an Amendment of FASB Statements
No. 123 and 95." This proposed statement addresses the accounting for
share-based payment transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the enterprise or (b)
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
The proposed Statement would eliminate the ability to account for share-based
compensation transactions using APB Opinion No. 25, "Accounting for Stock Issued
to Employees", and generally would require instead that such transactions be
accounted for using a fair-value-based method. As proposed, this statement would
be effective for the Company on January 1, 2005. We are currently unable to
determine what effect this statement will have on our financial position or
results of operations.









- 15 -

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

Forward-Looking Statements

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

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

GENERAL

We provide (1) financial services, including brokerage and investment
services to individuals and institutions, and (2) insurance services, including
management and agency services to medical malpractice insurance companies.

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

o APS Financial. APS Financial is a fully licensed broker/dealer that
provides brokerage and investment services primarily to institutional
and high net worth individual clients. APS Financial also provides
portfolio accounting, analysis, and other services to insurance
companies, banks and public funds. We recognize commissions revenue,
and the related compensation expense, on a trade date basis.

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

- 16 -



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

o FMI. APS Facilities Management, Inc., dba APMC Insurance Services, Inc., or
FMI, provides management and administrative services to APIE, a regional
insurance exchange that sells medical professional liability insurance only
to its physician subscribers, who pay annual insurance premiums and surplus
contributions to APIE. APIE is governed by a physician board of directors.
Pursuant to a management agreement and the direction of this board, FMI
manages and operates APIE, including performing policy issuance, claims
investigation and settlement, and all other management and operational
functions. As a management fee, FMI receives a percentage of APIE's earned
premiums and a portion of APIE's profit, subject to a cap based on premium
levels. We recognize revenues for the management fee portion based on a
percentage of earned premium on a monthly basis, and we recognize revenues
for the management fee portion based on profit sharing when it is reasonably
certain the managed company will have an annual profit, generally in the
fourth quarter. FMI's assets are not subject to APIE policyholder claims.

In addition, as of March 31, 2004, we have the following significant
investments accounted for as available-for-sale securities: (1) we own
approximately 693,000 shares of Prime Medical common stock, representing
approximately 4% of its outstanding common stock, and (2) we own 385,000 shares
of Financial Industries Corporation, representing approximately 4% of its
outstanding common stock. We account for these investments as available-for-sale
securities, which means they are reflected on our consolidated balance sheets at
fair value, and fluctuations in fair value are recognized as unrealized gains or
losses excluded from earnings and reported as a separate component of
stockholders' equity, net of income taxes.



CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

We believe the following critical accounting policies and estimates
affect our more significant judgments and estimates used in the preparation of
our consolidated financial statements. We periodically review the carrying value
of our assets to determine if events and circumstances exist indicating that
assets might be impaired. If facts and circumstances support this possibility of
impairment, our management will prepare undiscounted and discounted cash flow
projections, which require judgments that are both subjective and complex.
Management may also obtain independent valuations.



- 17 -


Our financial services revenues are composed primarily of commissions
on securities trades and asset management fees. Revenues related to securities
transactions are recognized on a trade date basis. Asset management fees are
recognized as a percentage of assets under management during the period based
upon the terms of agreements with the applicable customers.

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

Effective November 1, 2003, our former consulting subsidiary, APS
Consulting, paid off the negotiated remainder of the note due us, allowing us to
cease accounting for them as a variable interest entity. Consequently, we have
reclassified the first quarter, 2003 income statement and balance sheets to
reflect the disposition of APS Consulting.



RESULTS OF OPERATIONS

REVENUES

Revenues from operations increased $699,000 (11%) in the three months ended
March 31, 2004 compared to the same period in 2003. Our income from continuing
operations before interest, income taxes and minority interest increased
$146,000 (17%) to $1,016,000 in the current quarter from $870,000 in first three
months of 2003. Our net income increased $142,000 (26%) in the current quarter
to a total of $694,000 compared to net earnings of $552,000 in the first three
months of 2003. Our diluted net income per share remained the same at $0.25 in
the current quarter and the first three months of 2003 even though our weighted
average of diluted shares outstanding increased 541,000 shares between the two
periods. The reasons for these changes are described below.

FINANCIAL SERVICES

Our financial services revenues decreased $203,000 (5%) in the first
three months of 2004 compared to the same period in 2003. The decrease was due
to lower commission revenues at APS Financial, the broker/dealer division of our
financial services segment. APS Financial derives most of its revenue from
trading in the fixed income market, both in investment and non-investment
securities. Although the treasury market generally continued to trade strong in
the first quarter of 2004, customers may have been skeptical about the
sustainability of these historically low levels of interest rates as several
signs of an economic recovery became more evident. Additionally, the predominant
thinking about the high yield market was that it was richly valued. Therefore,
many of our customers remained cautious or on the sidelines, reducing their
level of trading.



- 18 -



Our financial services expense decreased $99,000 (3%) in the first
three months of 2004 compared to the same period in 2003. The primary reason for
the current year decrease is a $173,000 (54%) decrease in incentive compensation
costs, which are down as a result of lower profits and higher minimum
performance criteria placed upon management at APS Financial for 2004. Payroll
related benefit costs were up $21,000 (8%) in 2004 as a result of higher payroll
taxes and retirement benefits resulting from higher incentive compensation
earned in 2003, but paid out in March, 2004. Partially offsetting these
increases were relatively minor current year decreases in ticket charges,
information services, professional fees, depreciation and advertising costs.
Information services increased $14,000 (16%) because of rate increases on
existing services as well as the addition of a new research service.



INSURANCE SERVICES

Our insurance services revenues from our premium-based insurance
management segment, APS Insurance Services, increased $902,000 (35%) in the
first three months of 2004 compared to the same period in 2003. The primary
reason for the current quarter increase is a $537,000 (66%) increase in
pass-through commissions earned by third party agents resulting from
approximately $4.8 million in additional written premium this quarter compared
to the first quarter of 2003. Net income is not affected by outside sales
commissions as these agents are paid commissions equivalent to the revenue
earned. Further contributing to the 2004 increase in revenues was a $228,000
(13%) increase in management fees resulting from an increase in earned premium
of approximately $1.8 million for the quarter. Lastly, our risk management fees
earned increased $106,000 (247%) in the current quarter compared to the same
period in 2003 as a result of a greater number of doctor groups receiving this
service as well as an increase in the rate charged.

Insurance services expenses increased $650,000 (33%) in the first three
months of 2004 compared to the same period in 2003. The current year increase is
primarily due to the above-mentioned $537,000 increase in third party
commissions paid. In addition, salaries expense was $53,000 (8%) higher in the
current quarter as a result of personnel additions, including a high-level
management position to help meet our growing financial reporting requirements,
as well as normal annual merit raises. Also, depreciation and amortization
expense increased $37,000 (167%) in the current quarter primarily as a result of
amortizing the non-compete agreement that was created upon the repurchase of the
20% minority interest in October, 2003. Partially offsetting these increases
were current quarter decreases in advertising, management incentive and
professional fees. Advertising declined $23,000 (79%) as a result of re-branding
efforts of the business in the first quarter of 2003. Management incentive costs
were $16,000 (12%) lower in 2004 as a result of reversing a slight over-accrual
of 2003 costs in the current quarter. Lastly, professional fees declined $14,000
(44%) in 2004 as a result of data software consulting fees incurred in the first
quarter of 2003.







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GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses increased $87,000 (20%) in the
first three months of 2004 compared to the same period in 2003. Management
incentive expense was $68,000 (88%) higher in the current quarter as the monthly
accrual has been raised in order to better match anticipated annual earnings.
The majority of last year's management incentive costs were expensed in the
latter half of 2003 as it was not until then that we were able to more
accurately estimate 2003 earnings. In addition, payroll taxes were $16,000 (65%)
higher in the current quarter as a result of taxes paid on management incentive
payments disbursed in 2004. Partially offsetting these increases was a $23,000
(99%) decrease in legal fees, the result of non-recurring legal consulting fees
incurred in 2003 in connection with our investment in Financial Industries.



GAIN ON SALE OF ASSETS

Gain on sale of assets primarily represents the recognition of deferred
income. Approximately $760,000 of the $5,100,000 deferred gain on the sale of
real estate to Prime Medical in 2001 was due to our ownership interest in Prime
and is recognized upon the reduction of our ownership percentage in Prime
Medical through the sale of its stock. In the first three months of 2004, we
recognized about $12,000 from the sale of Prime Medical common stock versus a
gain of $2,000 in the same period of 2003.



GAIN ON SALE OF INVESTMENTS

Gain on the sale of investments increased $12,000 (80%) in the first
three months of 2004 compared to the same period in 2003. The current year
increase was due to the sale of an increased number of available-for-sale equity
securities in 2004 than were sold in the first three months of 2003.



GAIN ON FORGIVENESS OF DEBT

We recorded $63,000 in the first quarter of 2004 as a gain on
forgiveness of debt. This represents that amount of liability that was released
in the quarter by participants in our loan to this affiliate, net of $15,000 in
expenses associated with these releases. Due to poor operating results, Uncommon
Care was in default and not making scheduled payments under its loan agreement
with us in which the participations had been sold. As a result, the loan
participants released us from any obligations under the participation
agreements. That portion of the releases entered into with related parties,
totaling $60,000, was taken directly into equity. The effect of these
transactions on our balance sheet for the period ended March 31, 2004 was to
reduce the long-term liability account, "Payable under loan participation
agreements", by $138,000.



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INTEREST INCOME

Our interest income decreased $11,000 (12%) in the first three months of
2004 compared to the same period in 2003 primarily as a result of a higher
balance of interest-bearing securities held in 2003. In June 2003, we liquidated
approximately $4.0 million in interest-bearing securities in order to secure the
funds required to invest in 385,000 shares of Financial Industries common stock.

OTHER LOSS

Our other loss of $8,000 in the first quarter of 2004 represents inventory
losses at APS Financial totaling $29,000 partially offset by management fees
received from our former consulting division totaling $21,000. In the same
period in 2003, management fees from our former consulting division were
eliminated from earnings since they were still regarded as a variable interest
entity of ours and, as such, fees paid by them to us were eliminated as an
inter-company item.

MINORITY INTERESTS

During the first three months of 2003, minority interests represented the
combination of two outside interests in subsidiaries of the Company: a twenty
percent interest in Insurance Services owned by FPIC Insurance Group, Inc. and a
three percent interest in APS Asset Management, a subsidiary of the financial
services subsidiary of the Company (APS Investment Services), owned by key
individuals within APS Asset Management. Minority interests decreased in the
current year due to the repurchase of the 20% minority interest in Insurance
Services from the minority interest holder, FPIC Insurance Group effective
October 1, 2003.

LIQUIDITY AND CAPITAL RESOURCES

WORKING CAPITAL

Our net working capital was $9,392,000 and $8,537,000 at March 31, 2004 and
December 31, 2003, respectively. The increase in the current year was due in
part to cash received from the sale of equity securities. In addition, non-cash
changes to current assets from long-term assets also affected working capital.
Historically, we have maintained a strong working capital position and, as a
result, we have been able to satisfy our operational and capital expenditure
requirements with cash generated from our operating and investing activities.
These same sources of funds have also allowed us to pursue investment and
expansion opportunities consistent with our growth plans. Although there can be
no assurance our operating activities will provide positive cash flow in 2004,
we are optimistic that our working capital requirements will be met for the
foreseeable future for the following reasons: (1) our current cash position is
very strong, with a balance of approximately $9.2 million comprising 38 percent
of our total assets; (2) our investments in available-for-sale equity and fixed
income securities could provide an additional $9.9 million should the need
arise, although at March 31, 2004, a liquidation of these investments would have
caused a loss of $71,000 to be realized; (3) we expect federal income tax
refunds during the second half of 2003 totaling $1 million; and (4) we
established a line of credit in November 2003 that is described below.



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LINE OF CREDIT

During November 2003, we established a $3.0 million line of credit with
PlainsCapital Bank. The loan calls for interest payments only to be made on any
amount drawn until April 15, 2004, when the entire amount of the note, principal
and interest then remaining unpaid, shall be due and payable. We have since
renewed this line of credit for a period of one year following the April 15,
2004 maturity date. At March 31, 2004, there were no draws taken against this
line of credit. We are in compliance with the covenants of the loan agreement,
including requirements for a minimum of $5.0 million of unencumbered liquidity
and a minimum 2 to 1 debt to worth ratio.



CAPITAL EXPENDITURES

Our capital expenditures for equipment were $30,000 in the first
quarter of 2004. We expect capital expenditures in 2004 to be approximately
$375,000, including $200,000 in improvements to our reporting software. Our 2004
capital expenditure budget is expected to be funded through cash on hand.



ADOPTION OF RECENT ACCOUNTING PRONOUNCEMENTS


In March 2004, the Financial Accounting Standards Board ("FASB") issued
an exposure draft entitled "Share-Based Payment, an Amendment of FASB Statements
No. 123 and 95." This proposed statement addresses the accounting for
share-based payment transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the enterprise or (b)
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
The proposed Statement would eliminate the ability to account for share-based
compensation transactions using APB Opinion No. 25, "Accounting for Stock Issued
to Employees", and generally would require instead that such transactions be
accounted for using a fair-value-based method. As proposed, this statement would
be effective for the Company on Jaunary 1, 2005. We are currently unable to
determine what effect this statement will have on our financial position or
results of operations.




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Item 3.

CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed by us in reports that we file
or submit under the Securities Exchange Act, is recorded, processed, summarized
and reported within the time periods specified in the SEC's rules and forms and
that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosures. In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurances of achieving the desired
control objectives, and management necessarily is required to apply its judgment
in evaluating the cost-benefit relationship of possible controls and procedures.
As of the end of the period covered by this report, and under the supervision
and with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, we evaluated the effectiveness of the
design and operation of these disclosure procedures. Based on this evaluation
and subject to the foregoing, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures were effective in
reaching a reasonable level of assurance of achieving management's desired
controls and procedures objectives.

There have been no changes in internal controls over financial
reporting that occurred during our most recent fiscal quarter that have
materially affected, or are reasonably likely to affect, our internal control
over financial reporting.

As part of a continuing effort to improve our business processes we are
evaluating our internal controls and may update certain controls to accommodate
any modifications to our business processes or accounting procedures.





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PART II

OTHER INFORMATION





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Item 1. LEGAL PROCEEDINGS
-----------------

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


Item 2. CHANGES IN SECURITIES
---------------------
For the three months ended March 31, 2004, we issued 25,800 shares of
common stock upon exercise of options. The result of these exercisings of stock
options was an increase to common stock by $2,600 and an increase to paid-in
capital by $77,000, excluding income tax benefits to the Company.


Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits

31.1 Section 302 Certification of Chief Executive Officer
31.2 Section 302 Certification of Chief Financial Officer

32.1 Section 906 Certification of Chief Executive Officer
32.2 Section 906 Certification of Chief Financial Officer


(b) Reports on Form 8-K.

Report filed March 30, 2004 concerning the press
release reporting year-end 2003 results of operations and
financial condition.




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