##### Table of Contents



---

---

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



---



FORM 10-Q



---



|           |  |                                                                                         
|---------- |  | ----------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                         
|x          |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|           |  |                                                                                         
|           |  | For the quarterly period ended March 31, 2003                                           
|           |  |                                                                                         
|OR        
|           |  |                                                                                         
|o          |  | 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: 0-20135



---

AMERICA SERVICE GROUP INC.
(Exact name of registrant as specified in its charter)

|                                         |  |                    
|---------------------------------------- |  | -------------------
|Delaware                                 |  | 51-0332317         
|(State or other jurisdiction of          |  | (I.R.S. Employer   
|incorporation or organization)           |  | Identification No.)
|                                         |  |                    
|105 Westpark Drive, Suite 200            |  | 37027              
|Brentwood, Tennessee                     |  | (Zip Code)         
|(Address of principal executive offices) |  |                    

(615) 373-3100
(Registrants telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed under 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 o

Indicate by check mark whether the registrant is an accelerated filer as
defined in Rule 12b-2 of the Act. Yes o No x

There were 6,268,555 shares of Common Stock outstanding as of May 9, 2003.





---

---



---

TABLE OF CONTENTS



|                                   |                                                                                                 |                                                      |  |  |  |  |  | 
|---------------------------------- | ----------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I:                           
|FINANCIAL INFORMATION             
|                                   | ITEM 1.  FINANCIAL STATEMENTS                                                                 
|                                   |                                                                                                 | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                                   |                                                                                                 | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                                   |                                                                                                 | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                                   |                                                                                                 | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                                   | ITEM 2.  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                   | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                             
|                                   | ITEM 4. CONTROLS AND PROCEDURES                                                                
|PART II:                          
|OTHER INFORMATION                 
|                                   | ITEM 1.  LEGAL PROCEEDINGS                                                                    
|                                   | ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                        
|CERTIFICATIONS                    
|EX-99.1 SARBANES CEO CERTIFICATION
|EX-99.2 SARBANES CFO CERTIFICATION



---



##### Table of Contents



AMERICA SERVICE GROUP INC.

QUARTERLY REPORT ON FORM 10-Q
INDEX

|                              |                                                                                               |  |        |    | 
|----------------------------- | --------------------------------------------------------------------------------------------- |  | ------ | -- | 
|                              |                                                                                               |  | Page  
|                              |                                                                                               |  | Number
|                              |                                                                                               |  |       
|PART I. FINANCIAL INFORMATION |                                                                                               |  |        |   
|Item 1.                       | Financial Statements (Unaudited)                                                              |  |        |    | 
|                              | Condensed Consolidated Balance Sheets as
of March 31, 2003 and December 31, 2002              |  |        | 3  | 
|                              | Condensed Consolidated Statements of
Operations for the quarter ended March 31, 2003 and 2002 |  |        | 4  | 
|                              | Condensed Consolidated Statements of
Cash Flows for the quarter ended March 31, 2003 and 2002 |  |        | 5  | 
|                              | Notes to Condensed Consolidated
Financial Statements                                          |  |        | 6  | 
|Item 2.                       | Managements Discussion and Analysis
of Financial Condition and Results of Operations         |  |        | 14 | 
|Item 3.                       | Quantitative and Qualitative Disclosures
About Market Risk                                    |  |        | 23 | 
|Item 4.                       | Controls and Procedures                                                                       |  |        | 23 | 
|PART II. OTHER INFORMATION    |                                                                                               |  |        |   
|Item 1.                       | Legal Proceedings                                                                             |  |        | 24 | 
|Item 6.                       | Exhibits and Reports on Form 8-K                                                              |  |        | 25 | 
|Signatures                    |                                                                                               |  | 26     |   
|Certifications                |                                                                                               |  | 27     |   

2



---



##### Table of Contents






PART I:




FINANCIAL INFORMATION




ITEM 1.  FINANCIAL STATEMENTS




AMERICA SERVICE GROUP INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


|                                                                                              |                                                               |   |                                  |         |              |   |         |         |  
|--------------------------------------------------------------------------------------------- | ------------------------------------------------------------- | - | -------------------------------- | ------- | ------------ | - | ------- | ------- | -
|                                                                                              |                                                               |   | March 31,                        |         | December 31,
|                                                                                              |                                                               |   | 2003                             |         | 2002        
|                                                                                              |                                                               |   |                                  |         |             
|                                                                                              |                                                               |   | (shown in
000's except share and
|                                                                                              |                                                               |   | per share
amounts)              
|ASSETS                                                                                        |                                                               |   |                                  |         |              |   |         |        
|Current assets:                                                                               |                                                               |   |                                  |         |              |   |         |        
|                                                                                              | Cash and cash equivalents                                     |   | $                                | 3,370   |              |   | $       | 3,770   |  
|                                                                                              | Restricted cash                                               |   |                                  | 6,250   |              |   |         | 6,250   |  
|                                                                                              | Accounts receivable: healthcare and other, less allowances    |   |                                  | 61,300  |              |   |         | 72,477  |  
|                                                                                              | Inventories                                                   |   |                                  | 6,375   |              |   |         | 6,390   |  
|                                                                                              | Prepaid expenses and other current assets                     |   |                                  | 11,568  |              |   |         | 13,100  |  
|                                                                                              |                                                               |   |                                  |         |              |   |         |        
|Total current assets                                                                          |                                                               |   | 88,863                           |         |              |   | 101,987 |        
|Property and equipment, net                                                                   |                                                               |   | 5,733                            |         |              |   | 6,240   |        
|Goodwill                                                                                      |                                                               |   | 43,896                           |         |              |   | 43,896  |        
|Contracts, net                                                                                |                                                               |   | 11,641                           |         |              |   | 12,048  |        
|Other intangibles, net                                                                        |                                                               |   | 1,433                            |         |              |   | 1,483   |        
|Other assets                                                                                  |                                                               |   | 5,094                            |         |              |   | 5,852   |        
|                                                                                              |                                                               |   |                                  |         |              |   |         |        
|Total assets                                                                                  |                                                               | $ | 156,660                          |         |              | $ | 171,506 |        
|                                                                                              |                                                               |   |                                  |         |              |   |         |        
|LIABILITIES AND STOCKHOLDERS EQUITY                                                          |                                                               |   |                                  |         |              |   |         |        
|Current liabilities:                                                                          |                                                               |   |                                  |         |              |   |         |        
|                                                                                              | Accounts payable                                              |   | $                                | 37,575  |              |   | $       | 40,892  |  
|                                                                                              | Medical claims liability                                      |   |                                  | 12,407  |              |   |         | 13,697  |  
|                                                                                              | Accrued expenses                                              |   |                                  | 30,565  |              |   |         | 33,482  |  
|                                                                                              | Deferred revenue                                              |   |                                  | 5,044   |              |   |         | 6,203   |  
|                                                                                              | Current portion of loss contract reserve                      |   |                                  | 3,369   |              |   |         | 3,306   |  
|                                                                                              | Current portion of long-term debt                             |   |                                  | 1,667   |              |   |         | 1,667   |  
|                                                                                              | Revolving credit facility classified as current (see Note 11) |   |                                  | 33,078  |              |   |         | 41,135  |  
|                                                                                              |                                                               |   |                                  |         |              |   |         |        
|Total current liabilities                                                                     |                                                               |   | 123,705                          |         |              |   | 140,382 |        
|Noncurrent portion of accrued expenses                                                        |                                                               |   | 7,120                            |         |              |   | 7,924   |        
|Noncurrent portion of loss contract reserve                                                   |                                                               |   | 4,489                            |         |              |   | 5,681   |        
|Long-term debt, net of current portion                                                        |                                                               |   | 2,777                            |         |              |   | 3,194   |        
|                                                                                              |                                                               |   |                                  |         |              |   |         |        
|Total liabilities                                                                             |                                                               |   | 138,091                          |         |              |   | 157,181 |        
|                                                                                              |                                                               |   |                                  |         |              |   |         |        
|Commitments and contingencies                                                                 |                                                               |   |                                  |         |              |   |         |        
|Stockholders equity                                                                          |                                                               |   |                                  |         |              |   |         |        
|Common stock, $.01 par
value, 10,000,000 shares authorized; 6,263,000 and                     |                                                               |   |                                  |         |              |   |         |        
|6,122,000 shares issued and outstanding at March 31, 2003 and December 31, 2002,
respectively |                                                               |   | 63                               |         |              |   | 61      |        
|                                                                                              | Additional paid-in capital                                    |   |                                  | 37,923  |              |   |         | 36,561  |  
|                                                                                              | Stockholders notes receivable                                |   |                                  | (1,260  | )            |   |         | (1,241  | )
|                                                                                              | Accumulated deficit                                           |   |                                  | (18,157 | )            |   |         | (21,056 | )
|                                                                                              |                                                               |   |                                  |         |              |   |         |        
|Total stockholders equity                                                                    |                                                               |   | 18,569                           |         |              |   | 14,325  |        
|                                                                                              |                                                               |   |                                  |         |              |   |         |        
|Total liabilities and stockholders equity                                                    |                                                               | $ | 156,660                          |         |              | $ | 171,506 |        
|                                                                                              |                                                               |   |                                  |         |              |   |         |        

The accompanying notes to condensed consolidated financial statements
are an integral part of these balance sheets. The condensed
consolidated balance sheet at December 31, 2002 is taken from the
audited financial statements at that date.

3



---



##### Table of Contents






AMERICA SERVICE GROUP INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


|                                                  |                                                              |                                                   |         |                         |      |      |         |       |      | 
|------------------------------------------------- | ------------------------------------------------------------ | ------------------------------------------------- | ------- | ----------------------- | ---- | ---- | ------- | ----- | ---- | 
|                                                  |                                                              |                                                   |         | Quarter ended March 31,
|                                                  |                                                              |                                                   |         |                        
|                                                  |                                                              |                                                   |         | 2003                    |      | 2002
|                                                  |                                                              |                                                   |         |                         |      |     
|                                                  |                                                              |                                                   |         | (shown in
000s except 
|                                                  |                                                              |                                                   |         | per
share amounts)     
|Healthcare revenues                               |                                                              | $                                                 | 133,068 |                         |      | $    | 109,667 |      
|Healthcare expenses                               |                                                              |                                                   | 124,622 |                         |      |      | 103,052 |      
|                                                  |                                                              |                                                   |         |                         |      |      |         |      
|                                                  | Gross margin                                                 |                                                   |         | 8,446                   |      |      |         | 6,615 |     
|Selling, general, and administrative expenses     |                                                              |                                                   | 3,478   |                         |      |      | 4,085   |      
|Depreciation and amortization                     |                                                              |                                                   | 1,096   |                         |      |      | 1,161   |      
|                                                  |                                                              |                                                   |         |                         |      |      |         |      
|                                                  | Income from operations                                       |                                                   |         | 3,872                   |      |      |         | 1,369 |     
|Interest, net                                     |                                                              |                                                   | 1,063   |                         |      |      | 1,499   |      
|                                                  |                                                              |                                                   |         |                         |      |      |         |      
|                                                  | Income (loss) from continuing operations before income taxes |                                                   |         | 2,809                   |      |      |         | (130  | )   
|Income tax provision (benefit)                    |                                                              |                                                   | 166     |                         |      |      | (173    | )    
|                                                  |                                                              |                                                   |         |                         |      |      |         |      
|                                                  | Income from continuing operations                            |                                                   |         | 2,643                   |      |      |         | 43    |     
|Income from discontinued operations, net of taxes |                                                              |                                                   | 256     |                         |      |      | 1,936   |      
|                                                  |                                                              |                                                   |         |                         |      |      |         |      
|Net income                                        |                                                              | $                                                 | 2,899   |                         |      | $    | 1,979   |      
|                                                  |                                                              |                                                   |         |                         |      |      |         |      
|Net income per common share  basic:              |                                                              |                                                   |         |                         |      |      |         |      
|                                                  |                                                              | Income from continuing operations                 |         | $                       | 0.43 |      |         | $     | 0.01 | 
|                                                  |                                                              | Income from discontinued operations, net of taxes |         |                         | 0.04 |      |         |       | 0.35 | 
|                                                  |                                                              |                                                   |         |                         |      |      |         |      
|                                                  |                                                              | Net income                                        |         | $                       | 0.47 |      |         | $     | 0.36 | 
|                                                  |                                                              |                                                   |         |                         |      |      |         |      
|Net income per common share  diluted:            |                                                              |                                                   |         |                         |      |      |         |      
|                                                  |                                                              | Income from continuing operations                 |         | $                       | 0.42 |      |         | $     | 0.01 | 
|                                                  |                                                              | Income from discontinued operations, net of taxes |         |                         | 0.04 |      |         |       | 0.35 | 
|                                                  |                                                              |                                                   |         |                         |      |      |         |      
|                                                  |                                                              | Net income                                        |         | $                       | 0.46 |      |         | $     | 0.36 | 
|                                                  |                                                              |                                                   |         |                         |      |      |         |      
|Weighted average common shares outstanding:       |                                                              |                                                   |         |                         |      |      |         |      
|Basic                                             |                                                              |                                                   | 6,208   |                         |      |      | 5,440   |      
|                                                  |                                                              |                                                   |         |                         |      |      |         |      
|Diluted                                           |                                                              |                                                   | 6,350   |                         |      |      | 5,526   |      
|                                                  |                                                              |                                                   |         |                         |      |      |         |      

The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.

4



---



##### Table of Contents






AMERICA SERVICE GROUP INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


|                                                                                  |                                                        |                                           |                                           |       |                          |        |        |       |        |        |  
|--------------------------------------------------------------------------------- | ------------------------------------------------------ | ----------------------------------------- | ----------------------------------------- | ----- | ------------------------ | ------ | ------ | ----- | ------ | ------ | -
|                                                                                  |                                                        |                                           |                                           |       | Quarter ended March 31, 
|                                                                                  |                                                        |                                           |                                           |       |                         
|                                                                                  |                                                        |                                           |                                           |       | 2003                     |        | 2002  
|                                                                                  |                                                        |                                           |                                           |       |                          |        |       
|                                                                                  |                                                        |                                           |                                           |       | (Amounts shown
in 000's)
|Operating Activities                                                              |                                                        |                                           |                                           |       |                          |        |        |      
|Net income                                                                        |                                                        | $                                         | 2,899                                     |       |                          | $      | 1,979  |      
|Adjustments to reconcile net income to net cash provided by
operating activities: |                                                        |                                           |                                           |       |                          |        |        |      
|                                                                                  | Depreciation and amortization                          |                                           |                                           | 1,101 |                          |        |        | 1,183 |       
|                                                                                  | Loss on retirement of fixed assets                     |                                           |                                           | 114   |                          |        |        | 36    |       
|                                                                                  | Finance cost amortization                              |                                           |                                           | 139   |                          |        |        | 232   |       
|                                                                                  | Interest on stockholders notes receivable             |                                           |                                           | (19   | )                        |        |        | (20   | )     
|                                                                                  | Other comprehensive income charged to interest expense |                                           |                                           |      |                          |        |        | 181   |       
|                                                                                  | Changes in operating assets and liabilities:           |                                           |                                           |       |                          |        |        |       |       
|                                                                                  |                                                        | Accounts receivable                       |                                           |       | 11,176                   |        |        |       | (3,937 | )     
|                                                                                  |                                                        | Inventories                               |                                           |       | 15                       |        |        |       | (187   | )     
|                                                                                  |                                                        | Prepaid expenses and other current assets |                                           |       | 1,533                    |        |        |       | (1,703 | )     
|                                                                                  |                                                        | Other assets                              |                                           |       | 618                      |        |        |       | (15    | )     
|                                                                                  |                                                        | Accounts payable                          |                                           |       | (3,316                   | )      |        |       | 1,567  |       
|                                                                                  |                                                        | Medical claims liability                  |                                           |       | (1,290                   | )      |        |       | (392   | )     
|                                                                                  |                                                        | Accrued expenses                          |                                           |       | (3,720                   | )      |        |       | 4,598  |       
|                                                                                  |                                                        | Deferred revenue                          |                                           |       | (1,159                   | )      |        |       | 616    |       
|                                                                                  |                                                        | Loss contract reserve                     |                                           |       | (1,129                   | )      |        |       | (1,905 | )     
|                                                                                  |                                                        |                                           |                                           |       |                          |        |        |      
|                                                                                  |                                                        |                                           | Net cash provided by operating activities |       |                          | 6,962  |        |       |        | 2,233  |  
|                                                                                  |                                                        |                                           |                                           |       |                          |        |        |      
|Investing Activities                                                              |                                                        |                                           |                                           |       |                          |        |        |      
|Capital expenditures                                                              |                                                        |                                           | (252                                      | )     |                          |        | (316   | )    
|                                                                                  |                                                        |                                           |                                           |       |                          |        |        |      
|                                                                                  |                                                        |                                           | Net cash used in investing activities     |       |                          | (252   | )      |       |        | (316   | )
|                                                                                  |                                                        |                                           |                                           |       |                          |        |        |      
|Financing Activities                                                              |                                                        |                                           |                                           |       |                          |        |        |      
|Net payments on line of credit and term loan                                      |                                                        |                                           | (8,474                                    | )     |                          |        | (8,969 | )    
|Payment of deferred financing costs                                               |                                                        |                                           |                                          |       |                          |        | (348   | )    
|Issuance of common stock                                                          |                                                        |                                           | 205                                       |       |                          |        |       |      
|Exercise of stock options                                                         |                                                        |                                           | 1,159                                     |       |                          |        |       |      
|                                                                                  |                                                        |                                           |                                           |       |                          |        |        |      
|                                                                                  |                                                        |                                           | Net cash used in financing activities     |       |                          | (7,110 | )      |       |        | (9,317 | )
|                                                                                  |                                                        |                                           |                                           |       |                          |        |        |      
|Net decrease in cash and cash equivalents                                         |                                                        |                                           | (400                                      | )     |                          |        | (7,400 | )    
|Cash and cash equivalents at beginning of period                                  |                                                        |                                           | 3,770                                     |       |                          |        | 10,382 |      
|                                                                                  |                                                        |                                           |                                           |       |                          |        |        |      
|Cash and cash equivalents at end of period                                        |                                                        | $                                         | 3,370                                     |       |                          | $      | 2,982  |      
|                                                                                  |                                                        |                                           |                                           |       |                          |        |        |      

The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.

5



---



##### Table of Contents






AMERICA SERVICE GROUP INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003(shown in 000s except share and per share amounts)
(unaudited)

1. Basis of Presentation

The interim condensed consolidated financial statements as of March 31,
2003 and for the quarter then ended are unaudited, but in the opinion of
management, have been prepared in conformity with accounting principles
generally accepted in the United States applied on a basis consistent with
those of the annual audited consolidated financial statements. Such interim
condensed consolidated financial statements reflect all adjustments (consisting
of normal recurring accruals) necessary for a fair presentation of the
financial position and the results of operations for the quarter presented.
The results of operations for the quarter presented are not necessarily
indicative of the results to be expected for the year ending December 31, 2003.
The interim condensed consolidated financial statements should be read in
connection with the audited consolidated financial statements for the year
ended December 31, 2002.

2. Description of Business

America Service Group Inc. and its consolidated subsidiaries (the
Company) provide managed healthcare services to correctional facilities under
capitated contracts (with certain adjustments) with state and local
governments, certain private entities and medical facilities operated by the
Department of the Navy and Veterans Administration. The health status of
inmates may impact results of operations under such contractual arrangements.

3. Recently Issued Accounting Pronouncements

In August 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
SFAS No. 144 supercedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed ofand resolves
significant implementation issues that had evolved since the issuance of SFAS
No. 121. SFAS No. 144 established a single accounting model for long-lived
assets to be disposed of by sale or abandonment. Additionally, SFAS No. 144
expanded the scope of financial accounting and reporting of discontinued
operations to require that all components of an entity that have either been
disposed of (by sale, by abandonment, or in a distribution to owners) or are
held for sale and whose operations and cash flows can be clearly distinguished,
operationally and for financial reporting purposes from the rest of the entity,
should be presented as discontinued operations. SFAS No. 144 is effective for
financial statements issued for fiscal years beginning after December 15, 2001.
The provisions for presenting the components of an entity as discontinued
operations are effective only for disposal activities after the effective date
of SFAS No. 144. The Company adopted the provisions of SFAS No. 144 effective
January 1, 2002. Pursuant to SFAS No. 144, each of the Companys contracts is
a component of the entity, whose operations can be distinguished from the rest
of the Company. Therefore, when a contract terminates, by expiration or
otherwise, the contracts operations generally will be eliminated from the
ongoing operations of the Company. Accordingly, the operations of such
contracts, net of applicable income taxes, have been presented as discontinued
operations and prior period Consolidated Statements of Operations have been
reclassified. See Note 5 for a further discussion of discontinued operations.

4. Stock Options

The Company has elected to follow Accounting Principles Board Opinion
(APB) No. 25, Accounting for Stock Issued to Employeesand related
Interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under SFAS No. 123, Accounting
for Stock-Based Compensationrequires use of option valuation models that were
not developed for use in valuing employee stock options. Under APB No. 25,
compensation expense is recognized as the difference between the exercise price
of the Companys employee stock options and the market price of the underlying
stock on the date of grant.

6



---



##### Table of Contents



Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
Statement. The Company did not issue any options in the first quarter of 2003.
The fair value of options, issued during the first quarter of 2002, was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions:

|                      |  |      |     |  
|--------------------- |  | ---- | --- | -
|                      |  | 2002
|                      |  |     
|Volatility            |  |      | 0.8 |  
|Interest rate         |  |      | 3-4 | %
|Expected life (years) |  |      | 3   |  
|Dividend yields       |  |      | 0.0 | %

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Companys employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value estimate,
in managements opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.

The following table illustrates the effect on net income per common share
as if the Company had applied the fair value recognition provisions of SFAS 123
for each of the quarters ended March 31, 2003 and 2002:

|                                                                                    |                                                    |   |                         |      |      |   |       |       |  
|----------------------------------------------------------------------------------- | -------------------------------------------------- | - | ----------------------- | ---- | ---- | - | ----- | ----- | -
|                                                                                    |                                                    |   | Quarter Ended March 31,
|                                                                                    |                                                    |   |                        
|                                                                                    |                                                    |   | 2003                    |      | 2002
|                                                                                    |                                                    |   |                         |      |     
|Income from continuing operations as reported                                       |                                                    | $ | 2,643                   |      |      | $ | 43    |      
|Add: Stock based compensation expense included in
reported net income, net of taxes |                                                    |   |                        |      |      |   |      |      
|Deduct: Stock based compensation expense determined
under SFAS 123, net of taxes    |                                                    |   | 141                     |      |      |   | 400   |      
|                                                                                    |                                                    |   |                         |      |      |   |       |      
|Pro forma income (loss) from continuing operations                                  |                                                    |   | 2,502                   |      |      |   | (357  | )    
|Income from discontinued operations                                                 |                                                    |   | 256                     |      |      |   | 1,936 |      
|                                                                                    |                                                    |   |                         |      |      |   |       |      
|Pro forma net income attributable to common shares                                  |                                                    | $ | 2,758                   |      |      | $ | 1,579 |      
|                                                                                    |                                                    |   |                         |      |      |   |       |      
|Pro forma net income (loss) per common share  basic:                               |                                                    |   |                         |      |      |   |       |      
|                                                                                    | Pro forma income (loss) from continuing operations |   | $                       | 0.40 |      |   | $     | (0.06 | )
|                                                                                    | Pro forma income from discontinued operations      |   |                         | 0.04 |      |   |       | 0.35  |  
|                                                                                    |                                                    |   |                         |      |      |   |       |      
|                                                                                    | Pro forma net income                               |   | $                       | 0.44 |      |   | $     | 0.29  |  
|                                                                                    |                                                    |   |                         |      |      |   |       |      
|Pro forma net income (loss) per common share  diluted:                             |                                                    |   |                         |      |      |   |       |      
|                                                                                    | Pro forma income (loss) from continuing operations |   | $                       | 0.39 |      |   | $     | (0.06 | )
|                                                                                    | Pro forma income from discontinued operations      |   |                         | 0.04 |      |   |       | 0.35  |  
|                                                                                    |                                                    |   |                         |      |      |   |       |      
|                                                                                    | Pro forma net income                               |   | $                       | 0.43 |      |   | $     | 0.29  |  
|                                                                                    |                                                    |   |                         |      |      |   |       |      

The resulting pro forma disclosures may not be representative of that to
be expected in future years. The weighted average fair value of options granted
during the quarter ended March 31, 2002 as determined under the fair value
provisions of SFAS No. 123, is $3.04. No options were granted during the
quarter ended March 31, 2003. The above pro forma adjustments do not include
any offsetting income tax benefits due to the Companys use of a tax valuation
allowance during the periods presented.

7



---



##### Table of Contents



5. Discontinued Operations

Pursuant to the provisions of SFAS No. 144 and as previously described in
Note 3, the Company has classified contracts that expired subsequent to January
1, 2002, the effective date of SFAS No. 144, as discontinued operations. The
components of income from discontinued operations, net of taxes, are as
follows:

|                                                  |  |                         |       |      |  |   |        | 
|------------------------------------------------- |  | ----------------------- | ----- | ---- |  | - | ------ | 
|                                                  |  | Quarter ended March 31,
|                                                  |  |                        
|                                                  |  | 2003                    |       | 2002
|                                                  |  |                         |       |     
|Healthcare revenues                               |  | $                       | 3,815 |      |  | $ | 28,188 | 
|Healthcare expenses                               |  |                         | 3,550 |      |  |   | 26,227 | 
|                                                  |  |                         |       |      |  |   |        | 
|Gross margin                                      |  |                         | 265   |      |  |   | 1,961  | 
|Depreciation and amortization                     |  |                         | 5     |      |  |   | 22     | 
|                                                  |  |                         |       |      |  |   |        | 
|Income from discontinued operations before taxes  |  |                         | 260   |      |  |   | 1,939  | 
|Income tax provision                              |  |                         | 4     |      |  |   | 3      | 
|                                                  |  |                         |       |      |  |   |        | 
|Income from discontinued operations, net of taxes |  | $                       | 256   |      |  | $ | 1,936  | 
|                                                  |  |                         |       |      |  |   |        | 

6. Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets are stated at cost and comprised
of the following:

|                                 |  |           |        |              |  |   |        | 
|-------------------------------- |  | --------- | ------ | ------------ |  | - | ------ | 
|                                 |  | March 31, |        | December 31,
|                                 |  | 2003      |        | 2002        
|                                 |  |           |        |             
|Prepaid insurance                |  | $         | 8,980  |              |  | $ | 10,458 | 
|Prepaid performance bonds        |  |           | 236    |              |  |   | 390    | 
|Deposit  appeal bond collateral |  |           | 2,035  |              |  |   | 2,035  | 
|Prepaid other                    |  |           | 317    |              |  |   | 217    | 
|                                 |  |           |        |              |  |   |        | 
|                                 |  | $         | 11,568 |              |  | $ | 13,100 | 
|                                 |  |           |        |              |  |   |        | 

7. Property and Equipment

Property and equipment are stated at cost and comprised of the following:

|                               |  |           |         |              |  |              |         |   |  |         |  | 
|------------------------------ |  | --------- | ------- | ------------ |  | ------------ | ------- | - |  | ------- |  | 
|                               |  | March 31, |         | December 31, |  | Estimated   
|                               |  | 2003      |         | 2002         |  | Useful Lives
|                               |  |           |         |              |  |             
|Leasehold improvements         |  | $         | 1,188   |              |  | $            | 1,183   |   |  | 5 years
|Equipment and furniture        |  |           | 11,406  |              |  |              | 11,327  |   |  | 5 years
|Computer software              |  |           | 1,404   |              |  |              | 1,404   |   |  | 3 years
|Medical equipment              |  |           | 2,348   |              |  |              | 2,384   |   |  | 5 years
|Automobile                     |  |           | 14      |              |  |              | 14      |   |  | 5 years
|                               |  |           |         |              |  |              |         |   |  |         |  | 
|                               |  |           | 16,360  |              |  |              | 16,312  |   |  |         |  | 
|Less: Accumulated depreciation |  |           | (10,627 | )            |  |              | (10,072 | ) |  |         |  | 
|                               |  |           |         |              |  |              |         |   |  |         |  | 
|                               |  | $         | 5,733   |              |  | $            | 6,240   |   |  |         |  | 
|                               |  |           |         |              |  |              |         |   |  |         |  | 

Depreciation expense for the quarters ended March 31, 2003 and 2002 was
$644 and $695, respectively.

8. Contracts and Other Intangible Assets

The gross and net values of contracts and other intangible assets consist of
the following:

|                         |  |           |        |              |  |   |        |  
|------------------------ |  | --------- | ------ | ------------ |  | - | ------ | -
|                         |  | March 31, |        | December 31,
|                         |  | 2003      |        | 2002        
|                         |  |           |        |             
|Contracts:               |  |           |        |              |  |   |        |  
|Gross value              |  | $         | 15,200 |              |  | $ | 15,200 |  
|Accumulated amortization |  |           | (3,559 | )            |  |   | (3,152 | )
|                         |  |           |        |              |  |   |        |  
|                         |  | $         | 11,641 |              |  | $ | 12,048 |  
|                         |  |           |        |              |  |   |        |  
|Non-compete agreements:  |  |           |        |              |  |   |        |  
|Gross value              |  | $         | 2,400  |              |  | $ | 2,400  |  
|Accumulated amortization |  |           | (967   | )            |  |   | (917   | )
|                         |  |           |        |              |  |   |        |  
|                         |  | $         | 1,433  |              |  | $ | 1,483  |  
|                         |  |           |        |              |  |   |        |  

8



---



##### Table of Contents



Estimated aggregate amortization expense related to the above intangibles
for the remainder of 2003 is $1,370 and for each of the next four years is
$1,827.

9. Accrued Expenses

Accrued expenses consist of the following:

|                                                          |  |           |        |              |  |   |        |  
|--------------------------------------------------------- |  | --------- | ------ | ------------ |  | - | ------ | -
|                                                          |  | March 31, |        | December 31,
|                                                          |  | 2003      |        | 2002        
|                                                          |  |           |        |             
|Salaries and employee benefits                            |  | $         | 19,346 |              |  | $ | 21,818 |  
|Professional liability claims                             |  |           | 8,120  |              |  |   | 8,924  |  
|Accrued workers compensation                             |  |           | 4,155  |              |  |   | 3,773  |  
|Other                                                     |  |           | 6,064  |              |  |   | 6,891  |  
|                                                          |  |           |        |              |  |   |        |  
|                                                          |  |           | 37,685 |              |  |   | 41,406 |  
|Less: Noncurrent portion of professional liability claims |  |           | (7,120 | )            |  |   | (7,924 | )
|                                                          |  |           |        |              |  |   |        |  
|                                                          |  | $         | 30,565 |              |  | $ | 33,482 |  
|                                                          |  |           |        |              |  |   |        |  

10. Reserve for Loss Contracts

As of March 31, 2003, the Company had a loss contract reserve totaling
$7,858, which relates to two remaining loss contracts, the State of Kansas
contract and a county contract, both of which expire on June 30, 2005.
Negative gross margin and overhead costs charged against the loss contract
reserve related to loss contracts totaled $1,129 and $1,905 for the quarters
ended March 31, 2003 and 2002, respectively.

11. Banking Arrangements

On October 31, 2002, the Company entered into a new credit facility with
CapitalSource Finance LLC (the CapitalSource Credit Facility). The
CapitalSource Credit Facility matures on October 31, 2005 and includes both a
$55,000 revolving credit facility (the Revolver) and a $5,000 term loan (the
Term Loan). Proceeds from the CapitalSource Credit Facility were used to
repay the borrowings outstanding pursuant to the Companys previously existing
revolving credit facility (the Prior Credit Facility), at which time the
Company wrote-off approximately $726 of deferred loan costs related to the
Prior Credit Facility.

The CapitalSource Credit Facility is secured by substantially all assets
of the Company and its operating subsidiaries. At March 31, 2003, the Company
had borrowings outstanding under the CapitalSource Credit Facility totaling
$37,522 and $8,227 available, based on the Companys collateral base on that
date, for additional borrowing. Included in the borrowings outstanding on
March 31, 2003, was $6,250 of restricted cash being used to collateralize
outstanding letters of credit.

Borrowings under the Revolver are limited to the lesser of (1) 85% of
eligible receivables (as defined) or (2) $55,000 (the Revolver Capacity).
Interest under the Revolver is payable monthly at the greater of 5.75% or the
Citibank N.A. prime rate plus 1.0%. The Company is also required to pay a
monthly letter of credit fee equal to an annual rate of 3.5% on the outstanding
balance of letters of credit issued pursuant to the Revolver. The Company is
also required to pay a monthly collateral management fee, equal to an annual
rate of 1.38%, on average borrowings outstanding under the Revolver.

Under the terms of the CapitalSource Credit Facility, the Company is
required to pay a monthly unused line fee equal to an annual rate of 0.6% on
the difference between actual average borrowings outstanding under the Revolver
for the month, including the balance of any outstanding letters of credit, and
the Revolver Capacity.

All amounts outstanding under the Revolver will be due and payable on
October 31, 2005. If the Revolver is extinguished prior to July 1, 2005, the
Company will be required to pay an early termination fee equal to 1.0% of the
Revolver Capacity. In connection with the Revolver, the CapitalSource Credit
Facility requires a lockbox agreement, which provides for all cash receipts to
be swept daily to reduce borrowings outstanding. This agreement, combined with
the existence of a Material Adverse Effect (MAE) clause in the Capital Source
Credit Facility, requires the Revolver to be classified as a current liability,
in accordance with EITF Issue No. 95-22, Balance Sheet Classification of
Borrowings Outstanding under Revolving Credit Agreements that Include Both a
Subjective Acceleration Clause and a Lock-Box Arrangement. The MAE clause,
which is a typical requirement in commercial credit agreements, allows the
lender to require the loan to become due if the lender determines there has
been a material adverse effect on the Companys operations, business,
properties, assets, liabilities, condition or prospects. The classification of
the Revolver as a current liability is a
9Table of Contents

result only of the combination of the two aforementioned factors: the
lockbox agreements and the MAE clause. The Revolver does not expire or have a
maturity date within one year. As discussed above, the Revolver has a final
expiration date of October 31, 2005.

The Term Loan requires monthly principal payments of $139 through its
maturity on October 31, 2005. Interest under the Term Loan is payable monthly
at the greater of 8.5% or the Citibank, N.A. prime rate plus 3.5%. Upon
expiration of the Term Loan, the Company will be required to pay a fee of $100.

The CapitalSource Credit Facility requires the Company to meet certain
financial covenants related to minimum levels of earnings. At March 31, 2003,
the Company was in compliance with the covenants. The CapitalSource Credit
Facility also contains restrictions on the Company with respect to certain
types of transactions including acquisition of the Companys own stock, payment
of dividends, indebtedness and sales or transfers of assets.

The Company is dependent on the availability of borrowings pursuant to the
CapitalSource Credit Facility to meet its working capital needs, capital
expenditure requirements and other cash flow requirements during 2003.
Management believes that the Company can comply with the terms of the
CapitalSource Credit Facility and meet its expected obligations throughout
2003. However, should the Company fail to meet its projected results, it may
be forced to seek additional sources of financing in order to fund its working
capital needs.

At March 31, 2003, the Company had standby letters of credit outstanding
totaling $6,250 which were collateralized by borrowings under the CapitalSource
Credit Facility.

12. Professional and General Liability Insurance

The Company records a liability for reported and unreported professional
and general liability claims based upon an actuarial estimate of the cost of
settling losses and loss adjustment expenses. Amounts accrued were $8,120 and
$8,924 at March 31, 2003 and December 31, 2002, respectively, and are included
in accrued expenses and non-current portion of accrued expenses. Changes in
estimates of losses resulting from the continuous review process and
differences between estimates and actual loss payments are recognized in the
period in which the estimates are changed or payments are made. Reserves for
professional liability exposures are subject to fluctuations in frequency and
severity. Given the inherent degree of variability in any such estimates, the
reserves reported at March 31, 2003 represent managements best estimate of the
amounts necessary to discharge the Companys obligations.

13. Commitments and Contingencies

Catastrophic Limits

Many of the Companys contracts require the Companys customers to
reimburse the Company for all treatment costs or, in some cases, only
out-of-pocket treatment costs related to certain catastrophic events, and/or
for AIDS or AIDS-related illnesses. Certain contracts do not contain such
limits. The Company attempts to compensate for the increased financial risk
when pricing contracts that do not contain individual, catastrophic or specific
disease diagnosis-related limits. However, the occurrence of severe individual
cases, AIDS-related illnesses or a catastrophic event in a facility governed by
a contract without such limitations could render the contract unprofitable and
could have a material adverse effect on the Companys operations. For contracts
that do not contain catastrophic protection, the Company maintains insurance
from an unaffiliated insurer for annual hospitalization amounts in excess of
$500 per inmate up to an annual per inmate cap of $2,000. The Company believes
this insurance significantly mitigates its exposure to unanticipated expenses
of catastrophic hospitalization. Catastrophic insurance premiums and
recoveries, neither of which is significant, are included in healthcare
expenses. Receivables for insurance recoveries, which are not significant, are
included in accounts receivable.

10



---



##### Table of Contents



Litigation and Claims

The Company is appealing a $1,700 judgment against it. In December 1995,
the Florida Association of Counties Trust (FACT), as the insurer for the Polk
County Sheriffs Office, and the Sheriff of Polk County, Florida, brought an
action against Prison Health Services, Inc. (PHS) in the Circuit Court, 10th
Judicial Circuit, Polk County, Florida seeking indemnification for $1,000 paid
on behalf of the plaintiffs for settlement of a lawsuit brought against the
Sheriffs Office. The recovery is sought for amounts paid in settlement of a
wrongful death claim brought by the estate of an inmate who died as a result of
injuries sustained from a beating from several corrections officers employed by
the Sheriffs Office. The plaintiffs contend that an indemnification provision
in the contract between PHS and the Sheriffs Office obligates the Company to
indemnify the Sheriffs Office against losses caused by its own wrongful acts.
The Company was represented by counsel provided by Reliance Insurance Company
(Reliance), the Companys insurer. In April 2001, FACTs motion for summary
judgment on the question of liability for indemnity was denied, but on
rehearing in July 2001 the prior denial was reversed and summary judgment was
granted. In October 2001, Reliance filed for receivership. In January 2002,
the court entered final judgment in favor of FACT for approximately $1,700 at a
hearing at which the Company was not represented, as counsel provided by
Reliance had simultaneously filed a motion to withdraw. The Company retained
new counsel in February 2002 and has filed a notice of appeal on the judgment.
The Company expects a decision on the appeal in 2003. The Company has posted
an appeal bond in the amount of $2,035, which has been classified as a deposit
and included in prepaid expenses and other current assets on its Consolidated
Balance Sheet. As of March 31, 2003, the Company has reserved $473 related to
costs associated with this proceeding. The Company believes that it will be
successful on appeal. The Company has numerous defenses to FACTs claim,
including the Companys belief that the court that granted summary judgment in
favor of FACT upon rehearing made an error of law when it ruled that the
Companys contract with the Sheriffs Office obligated the Company to indemnify
the Sheriffs Office against its own wrongful acts. In addition, the Sheriffs
Office released the Company from liability for this claim subsequent to filing
the lawsuit. In the event that the Company is not successful on appeal, the
Company does not believe that the adverse judgment will have a material adverse
effect on its financial position, although it may affect its quarterly or
annual results of operations.

In addition to the matter discussed above, the Company is a party to
various legal proceedings incidental to its business. Certain claims, suits and
complaints arising in the ordinary course of business have been filed or are
pending against the Company. An estimate of the amounts payable on existing
claims for which the liability of the Company is probable is included in
accrued expenses at March 31, 2003 and December 31, 2002. The Company is not
aware of any material unasserted claims and, based on its past experience,
would not anticipate that potential future claims would have a material adverse
effect on its consolidated financial position or results of operations.

Performance Bonds

The Company is required under certain contracts to provide performance
bonds. At March 31, 2003, the Company has outstanding performance bonds
totaling approximately $40,224. These performance bonds are collateralized by
letters of credit totaling $6,250 (see Note 11).

11



---



##### Table of Contents



14. Net Income Per Share

Net income per share is measured at two levels: basic income per share and
diluted income per share. Basic income per share is computed by dividing net
income by the weighted average number of common shares outstanding during the
period. Diluted income per share is computed by dividing net income by the
weighted average number of common shares outstanding after considering the
additional dilution related to other dilutive securities. The Companys other
dilutive securities outstanding consist of warrants and options to purchase
shares of the Companys common stock. The table below sets forth the
computation of basic and diluted earnings per share as required by SFAS No.
128, Earnings Per Share,for the quarters ended March 31, 2003 and 2002.

|                                                                                                      |                                                   |   |                         |         |      |   |           |        | 
|----------------------------------------------------------------------------------------------------- | ------------------------------------------------- | - | ----------------------- | ------- | ---- | - | --------- | ------ | 
|                                                                                                      |                                                   |   | Quarter Ended March 31,
|                                                                                                      |                                                   |   |                        
|                                                                                                      |                                                   |   | 2003                    |         | 2002
|                                                                                                      |                                                   |   |                         |         |     
|Numerator:                                                                                            |                                                   |   |                         |         |      |   |           |       
|Net
income from continuing operations                                                                 |                                                   | $ | 2,643                   |         |      | $ | 43        |       
|Income from discontinued operations, net of taxes                                                     |                                                   |   | 256                     |         |      |   | 1,936     |       
|                                                                                                      |                                                   |   |                         |         |      |   |           |       
|Numerator
for basic and diluted net income                                                            |                                                   | $ | 2,899                   |         |      | $ | 1,979     |       
|                                                                                                      |                                                   |   |                         |         |      |   |           |       
|Denominator:                                                                                          |                                                   |   |                         |         |      |   |           |       
|Denominator for basic earnings per share 
weighted average shares                                    |                                                   |   | 6,208,000               |         |      |   | 5,440,000 |       
|Effect of dilutive securities:                                                                        |                                                   |   |                         |         |      |   |           |       
|                                                                                                      | Warrants                                          |   |                         | 21,000  |      |   |           | 19,000 | 
|                                                                                                      | Employee stock options                            |   |                         | 121,000 |      |   |           | 67,000 | 
|                                                                                                      |                                                   |   |                         |         |      |   |           |       
|Denominator for diluted earnings per share 
adjusted weighted average shares and assumed
conversions |                                                   |   | 6,350,000               |         |      |   | 5,526,000 |       
|                                                                                                      |                                                   |   |                         |         |      |   |           |       
|Net income per common share  basic:                                                                  |                                                   |   |                         |         |      |   |           |       
|                                                                                                      | Income from continuing operations                 |   | $                       | 0.43    |      |   | $         | 0.01   | 
|                                                                                                      | Income from discontinued operations, net of taxes |   |                         | 0.04    |      |   |           | 0.35   | 
|                                                                                                      |                                                   |   |                         |         |      |   |           |       
|                                                                                                      | Net income                                        |   | $                       | 0.47    |      |   | $         | 0.36   | 
|                                                                                                      |                                                   |   |                         |         |      |   |           |       
|Net income per common share  diluted:                                                                |                                                   |   |                         |         |      |   |           |       
|                                                                                                      | Income from continuing operations                 |   | $                       | 0.42    |      |   | $         | 0.01   | 
|                                                                                                      | Income from discontinued operations, net of taxes |   |                         | 0.04    |      |   |           | 0.35   | 
|                                                                                                      |                                                   |   |                         |         |      |   |           |       
|                                                                                                      | Net income                                        |   | $                       | 0.46    |      |   | $         | 0.36   | 
|                                                                                                      |                                                   |   |                         |         |      |   |           |       

For the quarters ended March 31, 2003 and 2002, there were no more than
approximately 872,000 and 1,442,000 options, respectively, to purchase common stock with
weighted average exercise prices of $16.30 and $13.97, respectively, excluded
from the computation of diluted income per share because the options exercise
price was greater than the average market price for the period of the common
shares and, therefore, the effect would be anti-dilutive.

12



---



##### Table of Contents



15. Comprehensive Income

The components of comprehensive income, net of related taxes, are as
follows for the quarters ended March 31, 2003 and 2002:

|                                                                                            |  |                         |       |      |  |   |       | 
|------------------------------------------------------------------------------------------- |  | ----------------------- | ----- | ---- |  | - | ----- | 
|                                                                                            |  | Quarter ended March 31,
|                                                                                            |  |                        
|                                                                                            |  | 2003                    |       | 2002
|                                                                                            |  |                         |       |     
|Net income                                                                                  |  | $                       | 2,899 |      |  | $ | 1,979 | 
|                                                                                            |  |                         |       |      |  |   |       | 
|Amortization of fair value of interest
rate swaps previously qualifying as cash
flow hedges |  |                         |      |      |  |   | 181   | 
|                                                                                            |  |                         |       |      |  |   |       | 
|Other comprehensive income                                                                  |  |                         |      |      |  |   | 181   | 
|                                                                                            |  |                         |       |      |  |   |       | 
|Comprehensive income                                                                        |  | $                       | 2,899 |      |  | $ | 2,160 | 
|                                                                                            |  |                         |       |      |  |   |       | 

16. Segments

The Company generally views its operating segments on a managed healthcare
services contract basis. The Company considers its managed healthcare services
contract business to be one reportable segment under SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information, as the economic
characteristics, the nature of the services, the type and class of customers
for the services and the methods used to provide the services are similar.
Consequently, reportable segment information is not applicable.

13



---



##### Table of Contents






|        |  |   |  |                                                                                      
|------- |  | - |  | -------------------------------------------------------------------------------------
|ITEM 2. |  |  |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

America Service Group Inc. (ASG or the Company) is the leading
non-governmental provider of managed correctional healthcare services in the
United States and provider of healthcare services to county/municipal jails and
detention centers. The Company provides healthcare services to approximately
165,000 inmates at over 193 sites in 27 states. The Company also distributes
pharmaceuticals and medical supplies to approximately 208,000 inmates at over
345 sites in 33 states. Many of the inmates to whom the Company distributes
pharmaceuticals and medical supplies also receive its healthcare services.

The Company operates through its subsidiaries Prison Health Services, Inc.
(PHS), EMSA Correctional Care, Inc. (EMSA Correctional), EMSA Military
Services, Inc. (EMSA Military), Correctional Health Services, Inc. (CHS),
and Secure Pharmacy Plus, Inc. (SPP). ASG was incorporated in 1990 as a
holding company for PHS. Unless the context otherwise requires, the terms
ASG or the Company refer to ASG and its direct and indirect subsidiaries.
ASGs executive offices are located at 105 Westpark Drive, Suite 200,
Brentwood, Tennessee 37027. Its telephone number is (615) 373-3100.

Forward Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements
made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements represent
managements current expectations regarding future events. Forward-looking
statements typically are identified by use of terms such as may, will,
should, plan, expect, anticipate, estimate and similar words,
although some forward-looking statements are expressed differently. Actual
results may differ materially from current expectations. Significant factors
that could cause actual results to differ materially from the forward-looking
statements include the following:



| |  |  | the Companys ability to
retain existing client contracts and obtain new contracts;                                                                    
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | whether or not government
agencies continue to privatize correctional healthcare services;                                                             
|
| |  |  | increased competition for new
contracts and renewals of existing contracts;                                                                            
|
| |  |  | the Companys ability to
execute its expansion strategies;                                                                                             
|
| |  |  | the Companys ability to
limit its exposure for catastrophic illnesses and injuries in excess
of amounts covered under contracts or insurance coverage;
|
| |  |  | the Companys dependence
on key personnel;                                                                                                             
|
| |  |  | the Companys ability to
attract and retain highly skilled healthcare personnel;                                                                       
|
| |  |  | the Companys ability to
obtain adequate levels of professional liability insurance coverage
at a reasonable cost;                                     
|
| |  |  | the Companys ability to
maintain compliance with the terms of its credit facility; and                                                                
|
| |  |  | the Companys ability to
obtain new or renew existing performance bonds.                                                                               

Because the risk factors referred to above, as well as the risk factors
set forth in the Companys Annual Report on Form 10-K for the year ended
December 31, 2002 under the heading Item 1. Business  Cautionary Statements
and the Registration Statement (File No. 333-98355) on Form S-3 filed on August
19, 2002 (as amended) under the heading Risk Factors, could cause actual
results or outcomes to differ materially from those expressed in any
forward-looking statements made by the Company or on the Companys behalf,
stockholders should not place undue reliance on any forward-looking statements.
Further, any forward-looking statement speaks only as of the date on which it
is made, and the Company undertakes no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which the
statement is made or to reflect the occurrence of unanticipated events. New
factors emerge from time to time, and it is not possible for the Company to
predict which factors will arise. In addition, the Company cannot assess the
impact of each factor on its business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from
those contained in any forward-looking statements.

14



---



##### Table of Contents



Critical Accounting Policies And Estimates

General

The Companys discussion and analysis of its financial condition and
results of operations are based upon its consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure
of contingent assets and liabilities. On an on-going basis, the Company
evaluates its estimates, including, but not limited to, those related to:



| |  |  | revenue and cost recognition,                    
| | - |  | -------------------------------------------------
|
| |  |  | loss contracts,                                  
|
| |  |  | professional and general liability insurance,    
|
| |  |  | legal contingencies,                             
|
| |  |  | impairment of intangible assets and goodwill, and
|
| |  |  | income taxes.                                    

The Company bases its estimates on historical experience and on various
other assumptions that are believed 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.

The Company believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements.

Revenue and Cost Recognition

The Companys contracts with correctional institutions are principally
fixed price contracts adjusted for census fluctuations. Such contracts
typically have a term of one to three years with subsequent renewal options.
The contracts may also contain certain risk sharing arrangements, such as
stop-loss provisions and aggregate limits for off-site or pharmaceutical costs.
Revenues earned under contracts with correctional institutions are recognized
in the period that services are rendered. Cash received in advance for future
services is recorded as deferred revenue and recognized as income when the
service is performed.

Revenues are calculated based on the specific contract terms and fall into
one of three general categories: fixed fee, population based, or cost-plus a
margin. For fixed fee contracts, revenues are recorded based on fixed monthly
amounts established in the service contract. Revenue for population based
contracts is calculated either as a fixed fee adjusted using a per diem rate
for variances in the inmate population from predetermined population levels or
by a per diem rate times the average inmate population for the period of
service. For cost plus contracts, revenues are calculated based on actual
expenses incurred during the service period plus a contractual margin. Under
all contracts, the Company records revenues net of any estimated contractual
allowances for potential adjustments resulting from performance or staffing
related criteria, as well as the impact of any risk sharing arrangements, on an
accrual basis in the period the services are provided. If necessary, the
Company revises its estimates for such adjustments in future periods when the
actual amount of the adjustment is determined.

Revenues for the distribution of pharmaceutical and medical supplies are
recognized upon delivery of the related products.

Healthcare expenses include the compensation of physicians, nurses and
other healthcare professionals including any related benefits and all other
direct costs of providing the managed care. The cost of healthcare services
provided or contracted for are recognized in the period in which they are
provided based in part on estimates, including an accrual for unbilled medical
services rendered through the balance sheet date. The Company estimates the
accrual for unbilled medical services using an actuarial analysis prepared
monthly by an independent actuary. The analysis takes into account historical
claims experience (including the average historical costs and billing lag time
for such services) and other actuarial data.

Actual payments and future reserve requirements will differ from the
Companys current estimates. The differences could be material if significant
adverse fluctuations occur in the healthcare cost structure or the Companys
future claims experience. Changes in estimates of claims resulting from such
fluctuations and differences between actuarial estimates and actual claims
payments are recognized in the period in which the estimates are changed or the
payments are made.

15



---



##### Table of Contents



Loss Contracts

The Company accrues losses under its fixed price contracts when it is
probable that a loss has been incurred and the amount of the loss can be
reasonably estimated. The Company performs this loss accrual analysis on a
specific contract basis taking into consideration such factors as future
contractual revenue, projected future healthcare and maintenance costs,
projected future stop-loss insurance recoveries and each contracts specific
terms related to future revenue increases as compared to increased healthcare
costs. The projected future healthcare and maintenance costs are estimated
based on historical trends and managements estimate of future cost increases.
These estimates are subject to the same adverse fluctuations and future claims
experience as previously noted. Some of the Companys contracts provide for
annual increases in the fixed base fee upon changes in the regional medical
care component of the Consumer Price Index, while others contain fixed
increases.

The Company performs a periodic comprehensive review of its portfolio of
contracts for the purpose of identifying loss contracts and developing a
contract loss reserve for succeeding periods. As a result of its 2001 review,
the Company identified five non-cancelable contracts with combined 2001 annual
revenues of $59.7 million and negative gross margin of $4.7 million. Based
upon managements projections, these contracts were expected to continue to
incur negative gross margin over their remaining terms. In December 2001, the
Company recorded a charge of $18.3 million to establish a reserve for future
losses under these non-cancelable contracts. The five contracts covered by the
charge had expiration dates ranging from June 30, 2002 through June 30, 2005.
Ninety percent of the charge related to the State of Kansas contract, which
expires June 30, 2005, and the City of Philadelphia contract, which was
renewable annually, at the clients option, through June 30, 2004. The
remaining ten percent of the charge related to the State of Maine contract,
which was due to expire June 30, 2002, a county contract that expires on June
30, 2005 and a county contract that was renewed on more favorable terms on
August 15, 2002. Negative gross margin and overhead costs charged against the
loss contract reserve related to these loss contracts totaled $1.1 million and
$1.9 million for the quarters ended March 31, 2003 and 2002, respectively.

In June 2002, the Company and the City of Philadelphia reached a mutual
agreement that the contract between PHS and the City of Philadelphia would
expire effective June 30, 2002. As a result of the earlier than anticipated
expiration of this loss contract, the Company performed a reassessment of its
loss contract reserve requirements. This reassessment included a review of
managements projected future losses under the remaining three loss contracts
as well as a comprehensive review of the Companys portfolio of contracts at
June 30, 2002 for the purpose of identifying any additional loss contracts. No
new loss contracts were identified as a result of this review. Based upon the
reassessment, the Company recorded a gain of $3.3 million, in the second
quarter of 2002, to reduce its reserve for loss contracts.

The Company continued to provide services to the State of Maine under a
cost plus a fixed management fee transition agreement through March 31, 2003.
The Company also entered into a transition arrangement with the City of
Philadelphia under which it continued to provide services through September 30,
2002 under modified contract terms. On September 30, 2002, the Company and the
City of Philadelphia entered into a new contract amendment under which the
Company will continue to provide healthcare services to the City of
Philadelphia, under modified contract terms, through June 30, 2003.

As of March 31, 2003, the Company had a loss contract reserve totaling
$7.9 million, which relates to two remaining loss contracts, the State of
Kansas and a county contract, both of which expire on June 30, 2005.

Professional and General Liability Insurance

As a healthcare provider, the Company is subject to medical malpractice
claims and lawsuits. The most significant source of potential liability in
this regard is the risk of suits brought by inmates alleging lack of timely or
adequate healthcare services. The Company may also be liable, as employer, for
the negligence of healthcare professionals it employs or the healthcare
professionals it engages as independent contractors. The Companys contracts
generally require it to indemnify the governmental agency for losses incurred
related to healthcare provided by the Company or its agents.

To mitigate a portion of this risk, the Company maintains professional
liability insurance on a claims made basis and assumes certain self-insurance
risks resulting from the use of large deductibles in 2001 and 2000 and the use
of adjustable premium policies in 2002 and 2003. For 2002 and 2003, the
Company is covered by separate policies each of which contains a 42-month
retro-premium with adjustment based on actual losses after 42 months. The
Companys ultimate premium for its 2002 policy and its 2003 policy will depend
on the final incurred losses related to each of these separate policy periods.
Reserves for estimated losses are provided for on an undiscounted basis in the
period of the related coverage based on an independent actuarial analysis.
These reserves are monitored
16Table of Contents

for adequacy on a quarterly basis using internal and external evaluations
of the merits of the individual claims, analysis of claim history and the
estimated reserves assigned by the Companys third-party administrator. Any
adjustments resulting from the review are reflected in current earnings.

In addition to its reserves for known claims, the Company maintains a
reserve for incurred but not reported claims. The reserve for incurred but not
reported claims is recorded on an undiscounted basis. The Companys estimates
of this reserve are supported by an independent actuarial analysis, which is
obtained on a quarterly basis.

Reserves for medical malpractice liability fluctuate because the number of
claims and the severity of the underlying incidents change from one period to
the next. Furthermore, payments with respect to previously estimated
liabilities frequently differ from the estimated liability. Changes in
estimates of losses resulting from such fluctuations and differences between
actuarial estimates and actual loss payments are recognized by an adjustment to
the reserve for medical malpractice liability in the period in which the
estimates are changed or payments are made. The reserves can also be affected
by changes in the financial health of the third-party insurance carriers used
by the Company. Changes in reserve requirements resulting from a change in the
financial health of a third-party insurance carrier are recognized in the
period in which such factor becomes known.

Legal Contingencies

In addition to professional and general liability claims, the Company is
also subject to other legal proceedings in the ordinary course of business.
Such proceedings generally relate to labor, employment or contract matters.
The Company accrues an estimate of the probable costs for the resolution of
these claims. This estimate is developed in consultation with outside counsel
handling the Companys defense in these matters and is based upon an estimated
range of potential results, assuming a combination of litigation and settlement
strategies. The Company does not believe these proceedings will have a
material adverse effect on its consolidated financial position. However, it
is possible that future results of operations for any particular quarterly or
annual period could be materially affected by changes in assumptions, new
developments or changes in approach such as a change in settlement strategy in
dealing with such litigation.

Amortization and Impairment of Intangible Assets and Goodwill

The Company adopted Statement of Financial Accounting Standards No. 142
(SFAS 142) on January 1, 2002, at which time it ceased amortization of
goodwill. In accordance with SFAS 142, goodwill acquired is reviewed for
impairment on an annual basis or more frequently whenever events or
circumstances indicate that the carrying value may not be recoverable. The
Company will perform its annual review as of December 31, 2003.

The Companys other identifiable intangible assets, such as customer
contracts acquired in acquisitions and covenants not to compete, are amortized
on the straight-line method over their estimated useful lives. The Company
also assesses the impairment of its other identifiable intangibles whenever
events or changes in circumstances indicate that the carrying value may not be
recoverable.

Important factors taken into consideration when evaluating the need for an
impairment review include the following:



| |  |  | significant underperformance or loss of key contracts acquired
in an acquisition relative to expected historical or projected
future operating results;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | significant changes in the manner of use of the Companys
acquired assets or in the Companys overall business strategy; and                           
|
| |  |  | significant negative industry or economic trends.                                                                                                      

When the Company determines that the carrying value of goodwill may be
impaired based upon the existence of one or more of the above indicators of
impairment or as a result of its annual impairment review, any impairment is
measured using a fair-value-based goodwill impairment test as required under
the provisions of SFAS 142. Fair value is the amount at which the asset could
be bought or sold in a current transaction between willing parties and may be
estimated using a number of techniques, including quoted market prices or
valuations by third parties, present value techniques based on estimates of
cash flows, or multiples of earnings or revenues performance measures. The
fair value of the asset could be different using different estimates and
assumptions in these valuation techniques.

When the Company determines that the carrying value of other intangible
assets may not be recoverable based upon the existence of one or more of the
above indicators of impairment, any impairment is measured using an estimate of
the assets fair value based on the projected net cash flows expected to result
from that asset, including eventual disposition.

17



---



##### Table of Contents



Future events could cause the Company to conclude that impairment
indicators exist and that goodwill associated with its acquired businesses is
impaired. Any resulting impairment loss could have a material adverse impact
on the Companys financial condition and results of operations.

The Company evaluates the estimated remaining useful life of its contract
intangibles on at least a quarterly basis, taking into account new facts and
circumstances, including its retention rate for acquired contracts. If such
facts and circumstances indicate the current estimated life is no longer
reasonable, the Company adjusts the estimated useful life on a prospective
basis. In the third quarter of 2002, the Company revised the estimated life of
the contract intangibles, acquired in its 1999 acquisition of EMSA, from 20
years to 10 years. The revised life impacted contract intangibles with a gross
value of $11.2 million and, beginning October 1, 2002, resulted in an increase
to annual amortization expense of $867,000.

Income Taxes

The Company accounts for income taxes under SFAS No. 109, Accounting for
Income Taxes.Under the asset and liability method of SFAS No. 109, 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.

The Company regularly reviews its deferred tax assets for recoverability
taking into consideration such factors as historical losses, projected future
taxable income and the expected timing of the reversals of existing temporary
differences. SFAS No. 109 requires the Company to record a valuation
allowance when it is more likely than not that some portion or all of the
deferred tax assets will not be realized. It further states forming a
conclusion that a valuation allowance is not needed is difficult when there is
negative evidence such as cumulative losses in recent years. At March 31,
2003 and December 31, 2002, a 100% valuation allowance has been recorded equal
to the deferred tax assets after considering deferred tax assets that can be
realized through offsets to existing taxable temporary differences. Assuming
the Company achieves sufficient profitability in future years to realize the
deferred income tax assets, the valuation allowance will be reduced in future
years through a credit to income tax expense (increasing shareholders equity).
Due to the Companys net income in the quarter ended March 31, 2003, the
Companys deferred tax valuation allowance was reduced $1.3 million from $11.3
million at December 31, 2002 to $10.0 million at March 31, 2003, as a reduction
to the Companys income tax provision.

18



---



##### Table of Contents



Results of Operations

The
following table sets forth, for the periods indicated, the percentage
relationship to total revenue of certain items in the Condensed Consolidated
Statements of Operations.

|                                                      |  |                         |       |      |  |  |       |  
|----------------------------------------------------- |  | ----------------------- | ----- | ---- |  |  | ----- | -
|                                                      |  | Quarter Ended March 31,
|                                                      |  |                        
|                                                      |  | 2003                    |       | 2002
|                                                      |  |                         |       |     
|Percentage of Total Revenues                          |  |                         |       |      |  |  |       |  
|Healthcare revenues                                   |  |                         | 100.0 | %    |  |  | 100.0 | %
|Healthcare expenses                                   |  |                         | 93.7  |      |  |  | 94.0  |  
|                                                      |  |                         |       |      |  |  |       |  
|Gross margin                                          |  |                         | 6.3   |      |  |  | 6.0   |  
|Selling, general and administrative expenses          |  |                         | 2.6   |      |  |  | 3.7   |  
|Depreciation and amortization                         |  |                         | 0.8   |      |  |  | 1.1   |  
|                                                      |  |                         |       |      |  |  |       |  
|Income from operations                                |  |                         | 2.9   |      |  |  | 1.2   |  
|Interest, net                                         |  |                         | 0.8   |      |  |  | 1.3   |  
|                                                      |  |                         |       |      |  |  |       |  
|Income from continuing operations before income taxes |  |                         | 2.1   |      |  |  | (0.1  | )
|Income tax provision (benefit)                        |  |                         | 0.1   |      |  |  | (0.1  | )
|                                                      |  |                         |       |      |  |  |       |  
|Income from continuing operations                     |  |                         | 2.0   |      |  |  |      |  
|Income from discontinued operations, net of taxes     |  |                         | 0.2   |      |  |  | 1.8   |  
|                                                      |  |                         |       |      |  |  |       |  
|Net income                                            |  |                         | 2.2   | %    |  |  | 1.8   | %
|                                                      |  |                         |       |      |  |  |       |  

Quarter Ended March 31, 2003 Compared to Quarter Ended March 31, 2002

Healthcare revenues.Healthcare revenues for the quarter ended March 31,
2003 increased $23.4 million, or 21.3%, from $109.7 million for the quarter
ended March 31, 2002 to $133.1 million in 2003. Healthcare revenues in 2003
included $7.1 million of revenue growth resulting from contracts added in 2002
through marketing activities. Contracts in place at December 31, 2001 and
continuing beyond March 31, 2003, provided additional revenue of $12.0 million
during 2003 as the result of contract renegotiations and automatic price
adjustments. Correctional contracts in place throughout the entire quarter
during both 2003 and 2002 experienced revenue growth of 10.6%. In addition to
these revenue increases, SPP pharmaceutical distribution revenue increased $4.3
million as a result of new contracts added in 2002 and 2003. As discussed in
the discontinued operations section below, all contracts that expired
subsequent to January 1, 2002 have been classified as discontinued operations.

Healthcare expenses.Healthcare expenses for the quarter ended March 31,
2003 increased $21.6 million, or 20.9%, from $103.0 million for the quarter
ended March 31, 2002 to $124.6 million in 2003. Expenses related to new
contracts from marketing activities accounted for $6.2 million of the increase.
Healthcare expenses as a percentage of revenues decreased by 0.3% in 2003 as
compared to 2002. This decrease results primarily from reductions in off-site
utilization and diagnostic services partially offset by an increase in pharmacy
related expenses due to the new SPP contracts discussed above. The Companys
ongoing efforts when renewing or negotiating contracts to negotiate
risk-sharing arrangements, such as stop-loss provisions and aggregate limits
for off-site or pharmaceutical costs, also contributed to the reduction of
healthcare expenses. Approximately $1.0 million and $1.5 million in negative
operating margin related to the Companys loss contracts was charged against
the loss contract reserve during the quarter ended March 31, 2003 and 2002,
respectively.

Selling, general and administrative expenses.Selling, general and
administrative expenses for the quarter ending March 31, 2003 decreased $0.6
million from $4.1 million, or 3.7% of revenues, for the quarter ended March 31,
2002 to $3.5 million, or 2.6% of revenues, in 2003. The percentage of revenue
decrease is primarily the result of the increased revenue discussed above and a
reduction in salary expense that occurred in the fourth quarter of 2002.
Approximately $0.1 million and $0.4 million in overhead costs associated with
the Companys loss contracts was charged against the loss contract reserve
during the quarter ended March 31, 2003 and 2002, respectively.

Depreciation and amortization. Depreciation and amortization expense for
the quarter ended March 31, 2003 decreased $0.1 from $1.2 million for the
quarter ended March 31, 2002 to $1.1 million in 2003. This overall decrease
is primarily the result of a reduction in amortization associated with certain
contract intangibles that became fully amortized in December 2002 which was
partially offset by an increase in quarterly amortization of $217,000, due to
an adjustment, in the third quarter of 2002, of the estimated life for a
portion of the Companys contract intangibles from 20 years to 10 years.

19



---



##### Table of Contents



Interest, net. Net interest expense decreased to $1.1 million or 0.8% of
revenue for the quarter ended March 31, 2003 from $1.5 million or 1.3% of
revenue for the quarter ended March 31, 2002. This decrease is primarily the
result of a reduction in the level of debt outstanding.

Income tax provision (benefit).The provision for income taxes for the
quarter ended March 31, 2003 was $0.2 million or 0.1% of revenue, as compared
with a benefit of $0.2 million or 0.1% of revenue for the quarter ended March
31, 2002. Due to the Companys net income in 2003, the Companys deferred tax
valuation allowance, established in the fourth quarter of 2001, was reduced
$1.3 million from $11.3 million at December 31, 2002 to $10.0 million at March
31, 2003 as a reduction to income tax provision.

Income from continuing operations.Income from continuing operations for
the quarter ended March 31, 2003 was $2.6 million, or 2.1% of revenue, as
compared with $43,000 or less than one-tenth of one percent of revenue for the
quarter ended March 31, 2002.

Income from discontinued operations, net of taxes. Income from
discontinued operations for the quarter ended March 31, 2003 was $0.3 million,
or 0.2% of revenue, as compared with $1.9 million, or 1.8% of revenue for the
quarter ended March 31, 2002. Income from discontinued operations represents
the operating results of the Companys contracts that expired subsequent to
January 1, 2002. The classification of these expired contracts is the result
of the Companys adoption of SFAS No. 144 effective January 1, 2002. See Notes
3 and 5 of the Companys consolidated financial statements for further
discussion of SFAS No. 144.

Net income.Net income for the quarter ended March 31, 2003 was $2.9
million or 2.2% of revenue, as compared with net income of $2.0 million, or
1.8% of revenue, for the quarter ended March 31, 2002.

Liquidity and Capital Resources

Overview

The Company generated net income of $2.9 million for the quarter ended
March 31, 2003 compared to net income of $2.0 million for the quarter ended
March 31, 2002. The Company had stockholders equity of $18.6 million at March
31, 2003 as compared to $14.3 million at December 31, 2002. The Companys cash
and cash equivalents decreased to $3.4 million at March 31, 2003 from $3.8
million at December 31, 2002, a decrease of $0.4 million. The decrease in cash
was primarily the result of debt reductions. Restricted cash was $6.3 million
at March 31, 2003 and December 31, 2002.

Cash flows from operating activities during the quarter ended March 31,
2003 were $7.0 million, an increase of $4.8 million from cash flows from
operations for the quarter ended March 31, 2002 of $2.2 million. The increase
is primarily the result of the favorable impact of increased net income and
reductions in accounts receivable and prepaid expenses offset by the
unfavorable impact of decreases in current liabilities.

Cash flows used in financing activities during the quarter ended March 31,
2003 were $7.1 million and include net payments totaling $8.5 million to
reduce the amount of debt outstanding from $46.0 million at December 31, 2002
to $37.5 million at March 31, 2003. Also included in cash flows used in
financing activities during 2003 were cash receipts of $1.3 million resulting
from option exercises and issuance of common stock under an employee stock
purchase plan.

Credit Facility

The Companys primary sources of liquidity are cash flows from operating
activities and borrowings under its credit facility. On October 31, 2002, the
Company entered into a new credit facility with CapitalSource Finance LLC (the
CapitalSource Credit Facility). The CapitalSource Credit Facility matures on
October 31, 2005 and includes both a $55.9 million revolving credit facility
(the Revolver) and a $5.0 million term loan (the Term Loan). Proceeds from
the CapitalSource Credit Facility were used to repay the borrowings outstanding
pursuant to the Companys previously existing revolving credit facility (the
Prior Credit Facility) at which time the Company wrote-off approximately
$726,000 of deferred loan costs related to the Prior Credit Facility.

The CapitalSource Credit Facility is secured by substantially all assets
of the Company and its operating subsidiaries. At March 31, 2003, the Company
had borrowings outstanding under the CapitalSource Credit Facility totaling
$37.5 million and $8.2 million available, based on the Companys collateral
base on that date, for additional borrowing. Included in the borrowings
outstanding on March 31, 2003, was $6.3 million of restricted cash being used
to collateralize outstanding letters of credit.

20



---



##### Table of Contents



Borrowings under the Revolver are limited to the lesser of (1) 85% of
eligible receivables (as defined) or (2) $55.0 million (the Revolver
Capacity). Interest under the Revolver is payable monthly at the greater of
5.75% or the Citibank N.A. prime rate plus 1.0%. The Company is also required
to pay a monthly letter of credit fee equal to an annual rate of 3.5% on the
outstanding balance of letters of credit issued pursuant to the Revolver. The
Company is also required to pay a monthly collateral management fee, equal to
an annual rate of 1.38%, on average borrowings outstanding under the Revolver.

Under the terms of the CapitalSource Credit Facility, the Company is
required to pay a monthly unused line fee equal to an annual rate of 0.6% on
the difference between actual average borrowings outstanding under the Revolver
for the month, including the balance of any outstanding letters of credit, and
the Revolver Capacity.

All amounts outstanding under the Revolver will be due and payable on
October 31, 2005. If the Revolver is extinguished prior to July 1, 2005, the
Company will be required to pay an early termination fee equal to 1.0% of the
Revolver Capacity. In connection with the Revolver, the CapitalSource Credit
Facility requires a lockbox agreement, which provides for all cash receipts to
be swept daily to reduce borrowings outstanding. This agreement, combined with
the existence of a Material Adverse Effect (MAE) clause in the Capital Source
Credit Facility, requires the Revolver to be classified as a current liability,
in accordance with the Financial Accounting Standards Boards Emerging Issues
Task Force Issue (EITF) No. 95-22, Balance Sheet Classification of Borrowings
Outstanding under Revolving Credit Agreements that Include Both a Subjective
Acceleration Clause and a Lock-Box Arrangement. The MAE clause, which is a
typical requirement in commercial credit agreements, allows the lender to
require the loan to become due if the lender determines there has been a
material adverse effect on the Companys operations, business, properties,
assets, liabilities, condition or prospects. The classification of the Revolver
as a current liability is a result only of the combination of the two
aforementioned factors: the lockbox agreements and the MAE clause. The
Revolver does not expire or have a maturity date within one year. As discussed
above, the Revolver has a final expiration date of October 31, 2005.

The Term Loan requires monthly principal payments of $139,000 through its
maturity on October 31, 2005. Interest under the Term Loan is payable monthly
at the greater of 8.5% or the Citibank, N.A. prime rate plus 3.5%. Upon
expiration of the Term Loan, the Company will be required to pay a fee of
$100,000.

The CapitalSource Credit Facility will require the Company to achieve a
minimum level of EBITDA on a rolling three-month measurement period as outlined
below. The CapitalSource Credit Facility defines EBITDA as net income plus
interest expense, income taxes, depreciation expense, amortization expense, any
other non-cash non-recurring expense and loss from asset sales outside of the
normal course of business, minus gains on asset sales outside the normal course
of business, non-recurring gains, and charges against the Companys loss
contract reserve.

|                                                  |  |                |           | 
|------------------------------------------------- |  | -------------- | --------- | 
|Period                                            |  | Minimum EBITDA
|Three month periods ending prior to March 1, 2003 |  | $              | 2,750,000 | 
|Three month periods ending after March 1, 2003    |  | $              | 3,000,000 | 

The CapitalSource Credit Facility also requires the Company to maintain a
minimum fixed charge coverage ratio of 1.5. The CapitalSource Credit Facility
defines the fixed charge coverage ratio as EBITDA divided by the sum of
principal payments on outstanding debt, cash interest expense on outstanding
debt, capital expenditures, cash income taxes paid or accrued, and cash
dividends paid or accrued or declared. In addition, beginning on June 30, 2003
and continuing for each quarter thereafter, the Company will be required to
maintain a minimum fixed charge ratio of 1.75 calculated using the most recent
twelve-month period.

The Company was in compliance with these financial covenants as of March
31, 2003.

The CapitalSource Credit Facility also contains restrictions on the
Company with respect to certain types of transactions including acquisition of
the Companys own stock, payment of dividends, indebtedness and sales or
transfers of assets.

The Company is dependent on the availability of borrowings pursuant to the
CapitalSource Credit Facility to meet its working capital needs, capital
expenditure requirements and other cash flow requirements during 2003.
Management believes that the Company can comply with the terms of the
CapitalSource Credit Facility and meet its expected obligations throughout
2003. However, should the Company fail to meet its projected results, it may
be forced to seek additional sources of financing in order to fund its working
capital needs.

21



---



##### Table of Contents



Other Financing Transactions

At March 31, 2003, the Company had standby letters of credit outstanding
totaling $6.2 million which were collateralized by borrowings under the Credit
Facility.

Inflation

Some of the Companys contracts provide for annual increases in the fixed
base fee based upon changes in the regional medical care component of the
Consumer Price Index. In all other contracts that extend beyond one year, the
Company utilizes a projection of the future inflation rate when bidding and
negotiating the fixed fee for future years. If the rate of inflation exceeds
the levels projected, the excess costs will be absorbed by the Company.
Conversely, the Company will benefit should the actual rate of inflation fall
below the estimate used in the bidding and negotiation process.

Recently Issued Accounting Pronouncements

In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supercedes SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed ofand resolves significant implementation issues that
had evolved since the issuance of SFAS No. 121. SFAS No. 144 established a
single accounting model for long-lived assets to be disposed of by sale or
abandonment. Additionally, SFAS No. 144 expanded the scope of financial
accounting and reporting of discontinued operations to require that all
components of an entity that have either been disposed of (by sale, by
abandonment, or in a distribution to owners) or are held for sale and whose
operations and cash flows can be clearly distinguished, operationally and for
financial reporting purposes from the rest of the entity, should be presented
as discontinued operations. SFAS No. 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001. The
provisions for presenting the components of an entity as discontinued
operations are effective only for disposal activities after the effective date
of SFAS No. 144. The Company adopted the provisions of SFAS No. 144 effective
January 1, 2002. Pursuant to SFAS No. 144, each of the Companys contracts is
a component of an entity, whose operations can be distinguished from the rest
of the Company. Therefore, when a contract terminates, by expiration or
otherwise, the contracts operations generally will be eliminated from the
ongoing operations of the Company. Accordingly, the operations of such
contracts, net of applicable income taxes, have been presented as discontinued
operations and prior period Consolidated Statements of Operations have been
reclassified to reflect those contracts consistently. See Note 5 to the
Companys consolidated financial statements for further discussion of
discontinued operations.

22



---



##### Table of Contents






ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk represents the risk of loss that may impact the consolidated
financial statements of the Company due to adverse changes in financial market
prices and rates. The Companys exposure to market risk is primarily related
to changes in the variable interest rate under the CapitalSource Credit
Facility. The CapitalSource Credit Facility carries an interest rate based on
the Citibank N.A. prime rate, subject to a minimum stated interest
rate; therefore the Companys cash flow may be affected
by changes in the prime rate. For example, a hypothetical 10% change in the
underlying interest rate would have had no effect on interest expense
paid under the credit facility as the resulting interest rate would
have remained below the minimum stated interest rate. Interest expense represents 0.8% of the Companys revenues for each
of the quarters ended March 31, 2003 and 2002. Debt of $37.5 million at March
31, 2003 represents 24.0% of the Companys total liabilities and stockholders
equity.




ITEM 4. CONTROLS AND PROCEDURES

Disclosure controls and procedures are the Companys controls and other
procedures that are designed to ensure that information required to be
disclosed in the reports that the Company files or submits under the Securities
Exchange Act of 1934, as amended, (the Exchange Act) is recorded, processed,
summarized and reported, within the time periods specified in the SECs rules
and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed in the reports that the Company files under the Exchange Act is
accumulated and communicated to management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.

Within the 90 days prior to this report, the Company evaluated under the
supervision and with the participation of management, including the Chief
Executive Officer and Chief Financial Officer, the effectiveness of the design
and operation of the Companys disclosure controls and procedures, pursuant to
Exchange Act Rule 13a-14 and Rule 13a-15. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the
Companys disclosure controls and procedures are effective in timely alerting
them to material information that is required to be included in the Companys
periodic SEC filings. There have been no significant changes in the Companys
internal controls or in other factors that could significantly affect these
controls subsequent to the date of this evaluation.

23



---



##### Table of Contents






PART II:




OTHER INFORMATION




ITEM 1.  LEGAL PROCEEDINGS

The Company is appealing a $1.7 million judgment against it. In December
1995, the Florida Association of Counties Trust (FACT), as the insurer for
the Polk County Sheriffs Office, and the Sheriff of Polk County, Florida,
brought an action against Prison Health Services in the Circuit Court, 10th
Judicial Circuit, Polk County, Florida seeking indemnification for $1.0 million
paid on behalf of the plaintiffs for settlement of a lawsuit brought against
the Sheriffs Office. The recovery is sought for amounts paid in settlement of
a wrongful death claim brought by the estate of an inmate who died as a result
of injuries sustained from a beating from several corrections officers
employed by the Sheriffs Office. The plaintiffs contend that an
indemnification provision in the contract between Prison Health Services and
the Sheriffs Office obligates the Company to indemnify the Sheriffs Office
against losses caused by its own wrongful acts. The Company was represented by
counsel provided by Reliance Insurance Company (Reliance), the Companys
insurer. In April 2001, FACTs motion for summary judgment on the question of
liability for indemnity was denied, but on rehearing in July 2001 the prior
denial was reversed and summary judgment was granted. In October 2001,
Reliance filed for receivership. In January 2002, the court entered final
judgment in favor of FACT for approximately $1.7 million at a hearing at which
the Company was not represented, as counsel provided by Reliance had
simultaneously filed a motion to withdraw. The Company retained new counsel in
February 2002 and has filed a notice of appeal on the judgment. The Company
expects a decision on the appeal in early 2003. The Company has posted an
appeal bond in the amount of $2.0 million, which has been classified as a
deposit and included in prepaid expenses and other current assets on its
consolidated balance sheet. As of March 31, 2002, the Company has reserved
$473,000 related to costs associated with this proceeding. The Company
believes that it will be successful on appeal. The Company has numerous
defenses to FACTs claim, including the Companys belief that the court that
granted summary judgment in favor of FACT upon rehearing made an error of law
when it ruled that the Companys contract with the Sheriffs Office obligated
the Company to indemnify the Sheriffs Office against its own wrongful acts.
In addition, the Sheriffs Office released the Company from liability for this
claim subsequent to filing the lawsuit. In the event that the Company is not
successful on appeal, the Company does not believe that the adverse judgment
will have a material adverse effect on its financial position, although it may
affect its quarterly or annual results of operations.

In addition to the matter discussed above, the Company is a party to
various legal proceedings incidental to its business. Certain claims, suits and
complaints arising in the ordinary course of business have been filed or are
pending against the Company. An estimate of the amounts payable on existing
claims for which the liability of the Company is probable is included in
accrued expenses at March 31, 2003 and December 31, 2002. The Company is not
aware of any material unasserted claims and, based on its past experience,
would not anticipate that potential future claims would have a material adverse
effect on its consolidated financial position or results of operations.

24



---



##### Table of Contents






ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(A)  Exhibits

|     |  |   |  |                                                                                                                                                                                                                            
|---- |  | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1  |  |  |  | Amended and Restated Certificate of Incorporation of America Service
Group Inc. (incorporated herein by reference to Exhibit 3.1 to the
Companys Quarterly Report on 10-Q for the three month period ended June
30, 2002).
|     |  |   |  |                                                                                                                                                                                                                            
|3.2  |  |  |  | Amended and Restated Bylaws of America Service Group, Inc.
(incorporated herein by reference to Exhibit 3.2 to the Companys
Quarterly Report on 10-Q for the three month period ended June 30, 2002).                     
|     |  |   |  |                                                                                                                                                                                                                            
|4.1  |  |  |  | Specimen Common Stock Certificate (incorporated herein by reference to
Exhibit 4.1 to the Companys Quarterly Report on 10-Q for the three month
period ended June 30, 2002).                                              
|     |  |   |  |                                                                                                                                                                                                                            
|11   |  |  |  | Computation of Per Share Earnings.*                                                                                                                                                                                        
|     |  |   |  |                                                                                                                                                                                                                            
|99.1 |  |  |  | Certification of the Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.                                                                     
|     |  |   |  |                                                                                                                                                                                                                            
|99.2 |  |  |  | Certification of the Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.                                                                     



---

|* |  | Data required by SFAS No. 128, Earnings Per Share, is provided in note 14 to the
condensed consolidated financial statements in this report.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------

(B)  Reports on Form 8-K

On March 31, 2003, the Company filed a Form 8-K under Item 5 relating to its
press release announcing its revised interpretation of the applicability of
SFAS No. 144 as it relates to the expiration of the Companys service
contracts.

25



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly authorized this report to be signed on its behalf by the
undersigned thereunto duly authorized.

| |  |                                                
| |  | -----------------------------------------------
| |  | AMERICA SERVICE GROUP INC.                     
| |  |                                                
| |  | /s/ MICHAEL CATALANO                           
| |  |                                                
| |  | Michael Catalano                               
| |  | Chairman, President & Chief Executive Officer  
| |  | (Duly Authorized Officer)                      
| |  |                                                
| |  | /s/ MICHAEL W. TAYLOR                          
| |  |                                                
| |  | Michael W. Taylor                              
| |  | Senior Vice President & Chief Financial Officer
| |  | (Principal Financial Officer)                  

Dated: May 15, 2003

26



---



##### Table of Contents






CERTIFICATIONS

I, Michael Catalano, certify that



| | 1. |  | I have reviewed this quarterly report on Form 10-Q of
America Service Group Inc.;                                                                                                                                                                                                                                             
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
|
| | 3. |  | Based on my knowledge, the financial statements and
other financial information included in this quarterly report,
fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this quarterly report;                    
|
| | 4. |  | The registrants other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and we have:                                                                                                     



| | a) |  | designed such disclosure controls and
procedures to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly report
is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90
days prior to the filing date of this quarterly report (the
Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our
conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the
Evaluation Date;                                                                                                                        



| | 5. |  | The registrants other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrants auditors and the audit committee of registrants
board of directors (or persons performing the equivalent
function):
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or
operation of internal controls which could adversely affect
the registrants ability to record, process, summarize and
report financial data and have identified for the
registrants auditors any material weaknesses in internal
controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that
involves management or other employees who have a significant
role in the registrants internal controls; and                                                                                                                                        



| | 6. |  | The registrants other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                   |  |                                 
|------------------ |  | --------------------------------
|Date: May 15, 2003 |  | /s/ Michael Catalano            
|                   |  |                                 
|                   |  | Name: Michael Catalano          
|                   |  | Title:   Chairman, President and
|                   |  | Chief Executive Officer         

27



---



##### Table of Contents



I, Michael W. Taylor, certify that



| | 1. |  | I have reviewed this quarterly report on Form 10-Q of
America Service Group Inc.;                                                                                                                                                                                                                                             
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
|
| | 3. |  | Based on my knowledge, the financial statements and
other financial information included in this quarterly report,
fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this quarterly report;                    
|
| | 4. |  | The registrants other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and we have:                                                                                                     



| | a) |  | designed such disclosure controls and
procedures to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly report
is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90
days prior to the filing date of this quarterly report (the
Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our
conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the
Evaluation Date;                                                                                                                        



| | 5. |  | The registrants other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrants auditors and the audit committee of registrants
board of directors (or persons performing the equivalent
function):
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or
operation of internal controls which could adversely affect
the registrants ability to record, process, summarize and
report financial data and have identified for the
registrants auditors any material weaknesses in internal
controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that
involves management or other employees who have a significant
role in the registrants internal controls; and                                                                                                                                        



| | 6. |  | The registrants other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                   |  |                                   
|------------------ |  | ----------------------------------
|Date: May 15, 2003 |  | /s/ Michael W. Taylor             
|                   |  |                                   
|                   |  | Name: Michael W. Taylor           
|                   |  | Title:   Senior Vice President and
|                   |  | Chief Financial Officer           

28