##### Table of Contents



---

---

FORM 10Q  QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

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 fiscal quarter ended March 31, 2002                                             
|           |  |                                                                                         
|           |  | OR                                                                                      
|           |  |                                                                                         
|[  ]       |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
|           |  |                                                                                         
|           |  | For the transition period from  to                                                      

Commission File Number: 0-20135



---



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
Brentwood, Tennessee 37027
(Address and zip code of principal executive office)

(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 xNoo

There were 5,449,612 shares of Common Stock outstanding as of May 6,
2002.





---

TABLE OF CONTENTS



|                             |                                                                                                 |                                                      |  |  |  |  |  | 
|---------------------------- | ----------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I:FINANCIAL INFORMATION
|                             |                                                                                                 | 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                           
|PART II: OTHER INFORMATION  
|                             | ITEM 5.  OTHER INFORMATION                                                                    
|                             | ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                  



---



##### 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, 2002 and December 31, 2001               |  |        | 3  | 
|                                                                                               |  |        |    | 
|Condensed Consolidated Statements of Operations for the quarters ended March 31, 2002 and 2001 |  |        | 4  | 
|                                                                                               |  |        |    | 
|Condensed Consolidated Statements of Cash Flows for the quarters ended March 31, 2002 and 2001 |  |        | 5  | 
|                                                                                               |  |        |    | 
|Notes to Condensed Consolidated Financial Statements                                           |  |        | 6  | 
|                                                                                               |  |        |    | 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations  |  |        | 11 | 
|                                                                                              
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                             |  |        | 17 | 
|                                                                                               |  |        |    | 
|PART II. OTHER INFORMATION                                                                     |  |        |    | 
|                                                                                               |  |        |    | 
|Item 5: Other Information                                                                      |  |        | 18 | 
|                                                                                               |  |        |    | 
|Item 6: Exhibits and Reports on Form 8-K                                                       |  |        | 18 | 
|                                                                                               |  |        |    | 
|Signature page                                                                                 |  |        | 19 | 

2



---



##### Table of Contents






PART I:

FINANCIAL INFORMATION

AMERICA SERVICE GROUP INC.




CONDENSED CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                                        |                                                           |   |                                      |        |              |   |         |        | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------- | - | ------------------------------------ | ------ | ------------ | - | ------- | ------ | 
|                                                                                                                                                                        |                                                           |   | March 31,                            |        | December 31,
|                                                                                                                                                                        |                                                           |   | 2002                                 |        | 2001        
|                                                                                                                                                                        |                                                           |   |                                      |        |             
|                                                                                                                                                                        |                                                           |   | (shown in 000's except share and per
|                                                                                                                                                                        |                                                           |   | share amounts)                      
|ASSETS                                                                                                                                                                  |                                                           |   |                                      |        |              |   |         |       
|Current assets:                                                                                                                                                         |                                                           |   |                                      |        |              |   |         |       
|                                                                                                                                                                        | Cash and cash equivalents                                 |   | $                                    | 2,982  |              |   | $       | 10,382 | 
|                                                                                                                                                                        | Accounts receivable: healthcare and other less allowances |   |                                      | 68,628 |              |   |         | 64,691 | 
|                                                                                                                                                                        | Inventories                                               |   |                                      | 7,933  |              |   |         | 7,747  | 
|                                                                                                                                                                        | Prepaid expenses and other current assets                 |   |                                      | 10,774 |              |   |         | 9,070  | 
|                                                                                                                                                                        |                                                           |   |                                      |        |              |   |         |       
|Total current assets                                                                                                                                                    |                                                           |   | 90,317                               |        |              |   | 91,890  |       
|Property and equipment, net                                                                                                                                             |                                                           |   | 7,407                                |        |              |   | 7,827   |       
|Goodwill, net                                                                                                                                                           |                                                           |   | 43,896                               |        |              |   | 43,896  |       
|Contracts, net                                                                                                                                                          |                                                           |   | 13,479                               |        |              |   | 13,912  |       
|Other intangibles, net                                                                                                                                                  |                                                           |   | 1,633                                |        |              |   | 1,683   |       
|Other assets                                                                                                                                                            |                                                           |   | 1,302                                |        |              |   | 1,172   |       
|                                                                                                                                                                        |                                                           |   |                                      |        |              |   |         |       
|Total assets                                                                                                                                                            |                                                           | $ | 158,034                              |        |              | $ | 160,380 |       
|                                                                                                                                                                        |                                                           |   |                                      |        |              |   |         |       
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)                                                                                                                          |                                                           |   |                                      |        |              |   |         |       
|Current liabilities:                                                                                                                                                    |                                                           |   |                                      |        |              |   |         |       
|                                                                                                                                                                        | Accounts payable                                          |   | $                                    | 32,726 |              |   | $       | 31,159 | 
|                                                                                                                                                                        | Medical claims liability                                  |   |                                      | 14,846 |              |   |         | 15,238 | 
|                                                                                                                                                                        | Accrued expenses                                          |   |                                      | 33,982 |              |   |         | 30,148 | 
|                                                                                                                                                                        | Deferred revenue                                          |   |                                      | 4,777  |              |   |         | 4,161  | 
|                                                                                                                                                                        | Current portion of loss contract reserve                  |   |                                      | 3,797  |              |   |         | 4,310  | 
|                                                                                                                                                                        | Current portion of long-term debt                         |   |                                      | 3,731  |              |   |         | 10,700 | 
|                                                                                                                                                                        |                                                           |   |                                      |        |              |   |         |       
|Total current liabilities                                                                                                                                               |                                                           |   | 93,859                               |        |              |   | 95,716  |       
|Noncurrent portion of accrued expenses                                                                                                                                  |                                                           |   | 7,493                                |        |              |   | 6,810   |       
|Noncurrent portion of loss contract reserve                                                                                                                             |                                                           |   | 12,616                               |        |              |   | 14,008  |       
|Long-term debt, net of current portion                                                                                                                                  |                                                           |   | 45,400                               |        |              |   | 47,400  |       
|                                                                                                                                                                        |                                                           |   |                                      |        |              |   |         |       
|Total liabilities                                                                                                                                                       |                                                           |   | 159,368                              |        |              |   | 163,934 |       
|Commitments and contingencies                                                                                                                                           |                                                           |   |                                      |        |              |   |         |       
|Common stock, $.01 par value, 10,000,000 shares
authorized; 5,450,000 and 5,437,000 shares issued and
outstanding at March 31, 2002 and December 31, 2001,
respectively |                                                           |   | 55                                   |        |              |   | 54      |       
|Additional paid-in capital                                                                                                                                              |                                                           |   | 31,457                               |        |              |   | 31,377  |       
|Stockholders notes receivable                                                                                                                                          |                                                           |   | (1,403                               | )      |              |   | (1,383  | )     
|Accumulated other comprehensive loss                                                                                                                                    |                                                           |   | (465                                 | )      |              |   | (645    | )     
|Retained earnings (deficit)                                                                                                                                             |                                                           |   | (30,978                              | )      |              |   | (32,957 | )     
|                                                                                                                                                                        |                                                           |   |                                      |        |              |   |         |       
|Total liabilities and stockholders equity (deficit)                                                                                                                    |                                                           | $ | 158,034                              |        |              | $ | 160,380 |       
|                                                                                                                                                                        |                                                           |   |                                      |        |              |   |         |       

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

3



---



##### Table of Contents



AMERICA SERVICE GROUP INC.




CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

|                                             |         |   |                                |           |      |   |         |           | 
|-------------------------------------------- | ------- | - | ------------------------------ | --------- | ---- | - | ------- | --------- | 
|                                             |         |   | Quarter Ended March 31,       
|                                             |         |   |                               
|                                             |         |   | 2002                           |           | 2001
|                                             |         |   |                                |           |     
|                                             |         |   | (Amounts shown in 000's except
|                                             |         |   | share and per share amounts)  
|Healthcare revenue                           |         | $ | 137,855                        |           |      | $ | 137,941 |          
|Healthcare expenses                          |         |   | 129,279                        |           |      |   | 126,598 |          
|                                             |         |   |                                |           |      |   |         |          
|Gross margin                                 |         |   | 8,576                          |           |      |   | 11,343  |          
|Selling, general and administrative expenses |         |   | 4,085                          |           |      |   | 4,142   |          
|Depreciation and amortization                |         |   | 1,183                          |           |      |   | 1,983   |          
|                                             |         |   |                                |           |      |   |         |          
|Income from operations                       |         |   | 3,308                          |           |      |   | 5,218   |          
|Interest, net                                |         |   | 1,499                          |           |      |   | 1,288   |          
|                                             |         |   |                                |           |      |   |         |          
|Income before income tax provision (benefit) |         |   | 1,809                          |           |      |   | 3,930   |          
|Income tax provision (benefit)               |         |   | (170                           | )         |      |   | 1,592   |          
|                                             |         |   |                                |           |      |   |         |          
|Net income                                   |         |   | 1,979                          |           |      |   | 2,338   |          
|Preferred stock dividends                    |         |   |                               |           |      |   | (163    | )        
|                                             |         |   |                                |           |      |   |         |          
|Net income attributable to common shares     |         | $ | 1,979                          |           |      | $ | 2,175   |          
|                                             |         |   |                                |           |      |   |         |          
|Net income per common share:                 |         |   |                                |           |      |   |         |          
|                                             | Basic   |   | $                              | 0.36      |      |   | $       | 0.44      | 
|                                             |         |   |                                |           |      |   |         |          
|                                             | Diluted |   | $                              | 0.36      |      |   | $       | 0.40      | 
|                                             |         |   |                                |           |      |   |         |          
|Weighted average shares outstanding:         |         |   |                                |           |      |   |         |          
|                                             | Basic   |   |                                | 5,440,000 |      |   |         | 4,877,000 | 
|                                             |         |   |                                |           |      |   |         |          
|                                             | Diluted |   |                                | 5,526,000 |      |   |         | 5,913,000 | 
|                                             |         |   |                                |           |      |   |         |          

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

|                                                                                  |                                                        |                                           |        |                          |        |      |        |       |        |  
|--------------------------------------------------------------------------------- | ------------------------------------------------------ | ----------------------------------------- | ------ | ------------------------ | ------ | ---- | ------ | ----- | ------ | -
|                                                                                  |                                                        |                                           |        | Quarter Ended March 31, 
|                                                                                  |                                                        |                                           |        |                         
|                                                                                  |                                                        |                                           |        | 2002                     |        | 2001
|                                                                                  |                                                        |                                           |        |                          |        |     
|                                                                                  |                                                        |                                           |        | (Amounts shown in 000's)
|Operating activities:                                                             |                                                        |                                           |        |                          |        |      |        |      
|Net income                                                                        |                                                        | $                                         | 1,979  |                          |        | $    | 2,338  |      
|Adjustments to reconcile net income to net cash
provided by operating activities: |                                                        |                                           |        |                          |        |      |        |      
|                                                                                  | Depreciation and amortization                          |                                           |        | 1,183                    |        |      |        | 1,983 |       
|                                                                                  | Amortization of deferred financing costs               |                                           |        | 232                      |        |      |        | 95    |       
|                                                                                  | Interest on stockholders notes receivable             |                                           |        | (20                      | )      |      |        | (16   | )     
|                                                                                  | Other comprehensive loss amortized to interest expense |                                           |        | 181                      |        |      |        |      |       
|                                                                                  | Changes in operating assets and liabilities:           |                                           |        |                          |        |      |        |       |       
|                                                                                  |                                                        | Accounts receivable                       |        |                          | (3,937 | )    |        |       | (9,317 | )
|                                                                                  |                                                        | Prepaid expenses and other current assets |        |                          | (1,890 | )    |        |       | (1,886 | )
|                                                                                  |                                                        | Other assets                              |        |                          | (15    | )    |        |       | (148   | )
|                                                                                  |                                                        | Accounts payable                          |        |                          | 1,567  |      |        |       | 2,212  |  
|                                                                                  |                                                        | Accrued expenses                          |        |                          | 4,206  |      |        |       | 9,038  |  
|                                                                                  |                                                        | Reserve for loss contracts                |        |                          | (1,905 | )    |        |       |       |  
|                                                                                  |                                                        | Deferred revenue                          |        |                          | 616    |      |        |       |       |  
|                                                                                  |                                                        |                                           |        |                          |        |      |        |      
|Net cash provided by operating activities                                         |                                                        |                                           | 2,197  |                          |        |      | 4,299  |      
|                                                                                  |                                                        |                                           |        |                          |        |      |        |      
|Investing activities:                                                             |                                                        |                                           |        |                          |        |      |        |      
|Capital expenditures                                                              |                                                        |                                           | (316   | )                        |        |      | (694   | )    
|Other                                                                             |                                                        |                                           | 36     |                          |        |      |       |      
|                                                                                  |                                                        |                                           |        |                          |        |      |        |      
|Net cash used in investing activities                                             |                                                        |                                           | (280   | )                        |        |      | (694   | )    
|                                                                                  |                                                        |                                           |        |                          |        |      |        |      
|Financing activities:                                                             |                                                        |                                           |        |                          |        |      |        |      
|Net payments on line of credit                                                    |                                                        |                                           | (8,969 | )                        |        |      | (3,800 | )    
|Payment of deferred financing costs                                               |                                                        |                                           | (348   | )                        |        |      |       |      
|Payment of preferred stock dividends                                              |                                                        |                                           |       |                          |        |      | (61    | )    
|Exercise of stock options                                                         |                                                        |                                           |       |                          |        |      | 424    |      
|                                                                                  |                                                        |                                           |        |                          |        |      |        |      
|Net cash used in financing activities                                             |                                                        |                                           | (9,317 | )                        |        |      | (3,437 | )    
|                                                                                  |                                                        |                                           |        |                          |        |      |        |      
|Net increase (decrease) in cash and cash equivalents                              |                                                        |                                           | (7,400 | )                        |        |      | 168    |      
|Cash and cash equivalents, beginning of period                                    |                                                        |                                           | 10,382 |                          |        |      | 256    |      
|                                                                                  |                                                        |                                           |        |                          |        |      |        |      
|Cash and cash equivalents, end of period                                          |                                                        | $                                         | 2,982  |                          |        | $    | 424    |      
|                                                                                  |                                                        |                                           |        |                          |        |      |        |      

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, 2002(shown in 000s except share and per share
amounts)


1.     Basis of Presentation

The interim condensed consolidated financial statements as of March 31,
2002 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, 2002.
The interim condensed consolidated financial statements should be read in
connection with the audited consolidated financial statements for the year
ended December 31, 2001.

2.     Description of Business

America Service Group Inc. (the Company) and its consolidated
subsidiaries 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 Defense and Veterans Administration. The health status of inmates
may impact results of operations under such contractual arrangements.

3.     Recently Issued Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities
(SFAS 133), as amended in June 2000 by SFAS No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities, which requires the
Company to recognize all derivatives as assets or liabilities measured at fair
value. Changes in fair value are recognized through either earnings or other
comprehensive income dependent on the effectiveness of the hedge instrument.
The Company currently maintains three interest collar agreements with three of
its syndicate banks for a notional amount of $24,000. The collar agreements
expire between October 2002 and May 2003.

On January 1, 2001, the Company adopted SFAS 133 and SFAS 138 resulting in
a charge to other comprehensive income of approximately $212, net of tax, as the cumulative
effect of a change in accounting principle representing the fair value of the
collar agreements on the date of adoption.

In June 2001, the FASB issued SFAS No. 141, Business Combinations and
SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. SFAS No. 141 also specifies criteria which
intangible assets acquired in purchase method business combinations after June
30, 2001 must meet to be recognized and reported apart from goodwill. SFAS No.
142 addresses the initial recognition and measurement of intangible assets
acquired outside of a business combination and the accounting for goodwill and
other intangible assets subsequent to their acquisition. SFAS No. 142 requires
that intangible assets with finite useful lives be amortized, and that goodwill
and intangible assets with indefinite lives no longer be amortized, but instead
be tested for impairment at least annually.

The Company adopted the provisions of SFAS No. 141 on July 1, 2001. Such
adoption had no effect on the Companys financial position or results of
operations. The Company adopted the provisions of SFAS No. 142 effective
January 1, 2002, at which time the amortization of the Companys existing
goodwill ceased. Other than the effect on net income of not amortizing
goodwill, the adoption of SFAS No. 142 had no effect on the Companys results
of operations or financial position. Amortization expense related to goodwill
during the quarter ended March 31, 2001 was $799.

6



---



##### Table of Contents



The following table reflects unaudited pro forma results of operations of
the Company for the quarters ended March 31, 2002 and 2001, giving effect to
SFAS No. 142 as if it were adopted on January 1, 2001:

|                                                      |             |   |       |      |      |   |       |      | 
|----------------------------------------------------- | ----------- | - | ----- | ---- | ---- | - | ----- | ---- | 
|                                                      |             |   | 2002  |      | 2001
|                                                      |             |   |       |      |     
|Net income attributable to common shares, as reported |             | $ | 1,979 |      |      | $ | 2,175 |     
|Add back: amortization expense, net of tax            |             |   |      |      |      |   | 518   |     
|                                                      |             |   |       |      |      |   |       |     
|Pro forma net income attributable to common shares    |             | $ | 1,979 |      |      | $ | 2,693 |     
|                                                      |             |   |       |      |      |   |       |     
|Basic earnings per common share:                      |             |   |       |      |      |   |       |     
|                                                      | As reported |   | $     | 0.36 |      |   | $     | 0.44 | 
|                                                      |             |   |       |      |      |   |       |     
|                                                      | Pro forma   |   | $     | 0.36 |      |   | $     | 0.55 | 
|                                                      |             |   |       |      |      |   |       |     
|Diluted earnings per common share:                    |             |   |       |      |      |   |       |     
|                                                      | As reported |   | $     | 0.36 |      |   | $     | 0.40 | 
|                                                      |             |   |       |      |      |   |       |     
|                                                      | Pro forma   |   | $     | 0.36 |      |   | $     | 0.48 | 
|                                                      |             |   |       |      |      |   |       |     

In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets effective for fiscal years
beginning after December 15, 2001. SFAS 144 establishes a single accounting
model for long-lived assets to be disposed of by sale, whether previously held
and used or newly acquired, and broadens the presentation of discontinued
operations to include more disposal transactions. The Company adopted the
provisions of SFAS 144 effective January 1, 2002. Such adoption had no impact
on the Companys financial position or results of operations.

4.     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,
|                          |  | 2002      |        | 2001        
|                          |  |           |        |             
|Prepaid insurance         |  | $         | 9,926  |              |  | $ | 8,489 | 
|Prepaid performance bonds |  |           | 241    |              |  |   | 281   | 
|Prepaid other             |  |           | 607    |              |  |   | 300   | 
|                          |  |           |        |              |  |   |       | 
|                          |  | $         | 10,774 |              |  | $ | 9,070 | 
|                          |  |           |        |              |  |   |       | 

5.     Property and Equipment

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

|                               |  |           |        |              |  |              |        |   |  |         |  | 
|------------------------------ |  | --------- | ------ | ------------ |  | ------------ | ------ | - |  | ------- |  | 
|                               |  | March 31, |        | December 31, |  | Estimated   
|                               |  | 2002      |        | 2001         |  | Useful Lives
|                               |  |           |        |              |  |             
|Leasehold improvements         |  | $         | 1,158  |              |  | $            | 1,158  |   |  | 5 years
|Equipment and furniture        |  |           | 10,707 |              |  |              | 10,469 |   |  | 5 years
|Computer software              |  |           | 1,333  |              |  |              | 1,317  |   |  | 3 years
|Medical equipment              |  |           | 2,205  |              |  |              | 2,155  |   |  | 5 years
|Automobile                     |  |           | 14     |              |  |              | 14     |   |  | 5 years
|                               |  |           |        |              |  |              |        |   |  |         |  | 
|                               |  |           | 15,417 |              |  |              | 15,113 |   |  |         |  | 
|Less: Accumulated depreciation |  |           | (8,010 | )            |  |              | (7,286 | ) |  |         |  | 
|                               |  |           |        |              |  |              |        |   |  |         |  | 
|                               |  | $         | 7,407  |              |  | $            | 7,827  |   |  |         |  | 
|                               |  |           |        |              |  |              |        |   |  |         |  | 

7



---



##### Table of Contents



6.     Contracts and Other Intangible Assets

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

|                        |                          |   |           |        |              |   |        |        |  
|----------------------- | ------------------------ | - | --------- | ------ | ------------ | - | ------ | ------ | -
|                        |                          |   | March 31, |        | December 31,
|                        |                          |   | 2002      |        | 2001        
|                        |                          |   |           |        |             
|Contracts:              |                          |   |           |        |              |   |        |       
|                        | Gross value              |   | $         | 15,870 |              |   | $      | 15,870 |  
|                        | Accumulated amortization |   |           | (2,391 | )            |   |        | (1,958 | )
|                        |                          |   |           |        |              |   |        |        |  
|                        |                          | $ | 13,479    |        |              | $ | 13,912 |       
|                        |                          |   |           |        |              |   |        |        |  
|Non-compete agreements: |                          |   |           |        |              |   |        |       
|                        | Gross value              |   | $         | 2,400  |              |   | $      | 2,400  |  
|                        | Accumulated amortization |   |           | (767   | )            |   |        | (717   | )
|                        |                          |   |           |        |              |   |        |        |  
|                        |                          | $ | 1,633     |        |              | $ | 1,683  |       
|                        |                          |   |           |        |              |   |        |        |  

Estimated aggregate amortization expense based on current intangibles
for the remainder of 2002 and the next four years is as follows: $1,146 in
2002, $960 in 2003, $777 in 2004, $760 in 2005 and $760 in 2006.

7.     Accrued Expenses

Accrued expenses consist of the following:

|                                             |  |           |        |              |  |   |        |  
|-------------------------------------------- |  | --------- | ------ | ------------ |  | - | ------ | -
|                                             |  | March 31, |        | December 31,
|                                             |  | 2002      |        | 2001        
|                                             |  |           |        |             
|Salaries and employee benefits               |  | $         | 22,517 |              |  | $ | 18,474 |  
|Professional liability claims                |  |           | 8,492  |              |  |   | 7,810  |  
|Accrued workers compensation                |  |           | 2,470  |              |  |   | 2,374  |  
|Other                                        |  |           | 7,996  |              |  |   | 8,300  |  
|                                             |  |           |        |              |  |   |        |  
|                                             |  |           | 41,475 |              |  |   | 36,958 |  
|Less: Noncurrent portion of liability claims |  |           | (7,493 | )            |  |   | (6,810 | )
|                                             |  |           |        |              |  |   |        |  
|                                             |  | $         | 33,982 |              |  | $ | 30,148 |  
|                                             |  |           |        |              |  |   |        |  

8.     Banking Arrangements

The Companys debt consists of a revolving credit facility which was
amended on March 15, 2002 (the Amended Credit Facility). At March 31, 2002,
the Company had $49,131 outstanding under the Credit Facility and $2,894
available for future borrowings. The Credit Facility was executed with a
syndicate of four banks (the Lenders) with Bank of America, N.A. acting as
the lead bank and administrative agent.

The Companys borrowings under the Amended Credit Facility are limited to
the lesser of 1) the sum of eligible accounts and other receivables (as
defined) plus an intangible advance of up to $11,000 (Intangible Advances) or
2) $57,000 (the Maximum Commitment). Interest under the Amended Credit
Facility is payable monthly at the Bank of America, N.A. prime rate plus 3.0%
(5.0% for balances due under Intangible Advances). The Amended Credit Facility
matures on April 1, 2003 and all amounts outstanding will be due and payable on
such date. In addition, the Company is required to make scheduled reductions
in the Intangible Advances allowed and the Maximum Commitment prior to that
date. The following table presents the Maximum Commitment and the maximum
allowed Intangible Advances (included within the Maximum Commitment) as of
March 31, 2002 and each scheduled reduction date.

|                  |  |            |        |            |  |   |        | 
|----------------- |  | ---------- | ------ | ---------- |  | - | ------ | 
|                  |  | Maximum    |        | Intangible
|Date              |  | Commitment |        | Advances  
|                  |  |            |        |           
|March 31, 2002    |  | $          | 57,000 |            |  | $ | 11,000 | 
|July 1, 2002      |  |            | 57,000 |            |  |   | 10,000 | 
|September 1, 2002 |  |            | 56,000 |            |  |   | 10,000 | 
|October 1, 2002   |  |            | 55,000 |            |  |   | 9,000  | 
|December 1, 2002  |  |            | 54,000 |            |  |   | 9,000  | 
|February 1, 2003  |  |            | 53,000 |            |  |   | 9,000  | 
|March 1, 2003     |  |            | 52,000 |            |  |   | 9,000  | 

The Amended Credit Facility is secured by substantially all of the assets of the Company and its operating subsidiaries. At March 31, 2002, the Company has classified $3,731 of the amount
outstanding under the Credit Facility as current based on the Maximum
Commitment reductions that will occur in 2002 as outlined above, and
managements estimates of principal reductions that will be required to allow
for increases in standby letters of credit anticipated in 2002.

8



---



##### Table of Contents



At March 31, 2002, the Company had standby letters of credit outstanding
totaling $4,975. The letters of credit were issued pursuant to the Amended
Credit Facility. The amount available to the Company for borrowing under the
Amended Credit Facility is reduced by the amount of each outstanding standby
letter of credit. Under the terms of the Amended Credit Facility, the Company
may have up to $6,600 of standby letters of credit outstanding.

Under the terms of the Amended Credit Facility, the Company will be
required to pay an annual commitment fee equal to 0.5% of the unused Maximum
Commitment and an annual standby letter of credit commitment fee equal to 4.5%
of the average standby letters of credit outstanding during the year.

The Amended Credit Facility requires the Company to meet certain financial
covenants related to minimum levels of net worth and earnings. As of March 31,
2002, the Company was in compliance with these financial covenant requirements.
The Amended Credit Facility also contains restrictions on the Company with
respect to certain types of transactions including payment of dividends,
capital expenditures, indebtedness and sales or transfers of assets.

The Company is dependent on the availability of borrowings pursuant to the
Amended Credit Facility to meet its working capital needs, capital expenditure
requirements and other cash flow requirements during the remainder of 2002.
Management believes that the Company can remain in compliance with the terms of
the Amended Credit Facility and meet its expected obligations throughout 2002.
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.

9.     Professional and General Liability Insurance

For fiscal 2002, the Company has obtained third party commercial insurance
on a claims-made basis with primary limits of $1,000 for each occurrence and $3,000
in the aggregate. In addition, the Company has excess liability insurance of
$10,000 for each claim and $10,000 annual aggregate. The Company assumes any
liabilities in excess of the third-party insurance limits.

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 $8,492 and
$7,810 at March 31, 2002, and December 31, 2001, 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 loss payments are recognized in the period in
which the estimates are changed or payments are made. Reserves for medical
malpractice 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, 2002 represent managements best estimate of the amounts
necessary to discharge the Companys obligations.

10.     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 certain 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 illness-related limits. However, the occurrence of severe individual cases 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.

9



---



##### Table of Contents



Litigation and Claims

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, 2002 and December 31,
2001. 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.

11.     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 for the quarters ended
March 31, 2002 and 2001.

|                                                                                       |  |      |       |      |  |   |       |  
|-------------------------------------------------------------------------------------- |  | ---- | ----- | ---- |  | - | ----- | -
|                                                                                       |  | 2002 |       | 2001
|                                                                                       |  |      |       |     
|Net income                                                                             |  | $    | 1,979 |      |  | $ | 2,338 |  
|Preferred stock dividends                                                              |  |      |      |      |  |   | (163  | )
|                                                                                       |  |      |       |      |  |   |       |  
|Numerator for basic net income per share  income
attributable to common stock holders |  | $    | 1,979 |      |  | $ | 2,175 |  
|                                                                                       |  |      |       |      |  |   |       |  
|Denominator for basic net income per share  weighted
average common shares            |  |      | 5,440 |      |  |   | 4,887 |  
|Effect of dilutive securities                                                          |  |      | 86    |      |  |   | 1,026 |  
|                                                                                       |  |      |       |      |  |   |       |  
|Denominator for diluted net income per share 
adjusted weighted average common shares |  |      | 5,526 |      |  |   | 5,913 |  
|                                                                                       |  |      |       |      |  |   |       |  
|Basic net income per share                                                             |  | $    | 0.36  |      |  | $ | 0.44  |  
|                                                                                       |  |      |       |      |  |   |       |  
|Diluted net income per share                                                           |  | $    | 0.36  |      |  | $ | 0.40  |  
|                                                                                       |  |      |       |      |  |   |       |  

12.     Comprehensive Income



| |                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------
| | The components of comprehensive earnings, net of related taxes, are as
follows for the quarters ended March 31, 2002 and 2001:

|                                                                                                                       |  |      |       |      |  |   |       |  
|---------------------------------------------------------------------------------------------------------------------- |  | ---- | ----- | ---- |  | - | ----- | -
|                                                                                                                       |  | 2002 |       | 2001
|                                                                                                                       |  |      |       |     
|Net income attributable to common shares                                                                               |  | $    | 1,979 |      |  | $ | 2,175 |  
|                                                                                                                       |  |      |       |      |  |   |       |  
|Cumulative effect of change in
accounting principle  fair value of
interest rate swaps qualifying as cash
flow hedges |  |      |      |      |  |   | (212  | )
|Net change in fair value of interest
rate swaps qualifying as cash flow
hedges                                         |  |      |      |      |  |   | (202  | )
|Amortization of fair value of interest
rate swaps previously qualifying as
cash flow hedges                            |  |      | 181   |      |  |   |      |  
|                                                                                                                       |  |      |       |      |  |   |       |  
|Other Comprehensive income (loss)                                                                                      |  |      | 181   |      |  |   | (414  | )
|                                                                                                                       |  |      |       |      |  |   |       |  
|Comprehensive income                                                                                                   |  | $    | 2,160 |      |  | $ | 1,924 |  
|                                                                                                                       |  |      |       |      |  |   |       |  

13.     Reclassifications

Certain amounts in
the 2001 financial statements have been reclassified to
conform with the 2002 presentation.

10



---



##### Table of Contents






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

This quarterly report on Form 10-Q contains and incorporates by reference
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Those statements include, among other things,
discussions of the Companys business strategy and expectations concerning the
Companys position in the industry, future operations, margins, profitability,
liquidity and capital resources. All these forward-looking statements are based
on estimates and assumptions made by management of the Company that, although
believed to be reasonable, are inherently uncertain. Therefore, undue reliance
should not be placed on such statements and estimates. No assurance can be
given that any of such estimates or statements will be realized, and it is
likely that actual results may differ materially from those contemplated by
such forward-looking statements. Factors that may cause such differences
include, but are not limited to, those set forth in the Companys Annual Report
on Form 10-K for the fiscal year ended December 31, 2001 (the 2001 Form 10-K)
under the heading Item 1. Business  Cautionary Statements, which cautionary
statements are hereby incorporated herein by reference. All forward-looking
statements attributable to the Company or persons acting on behalf of the
Company are expressly qualified in their entirety by the cautionary statements
set forth in the 2001 Form 10-K. In light of these and other uncertainties, the
inclusion of forward-looking statements herein or in any statement made by the
Company should not be regarded as a representation by the Company that the
Companys plans and objectives will be achieved.

General

America Service Group Inc. (ASG or the Company), 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), contracts to provide managed healthcare services including the
distribution of pharmaceuticals to over 250 correctional facilities and
military installations throughout the United States. Based upon revenue, the Company is the
leading provider of healthcare and pharmacy services to correctional facilities in the United States. 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.

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,
| |  |  | 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.

11



---



##### Table of Contents



Revenue and Cost Recognition

The Companys contracts with correctional institutions are principally
fixed price contracts adjusted for census fluctuations. 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.

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 dates. The Company estimates this
medical claims reserve using an actuarial analysis prepared monthly by an independent
actuary taking into account historical claims experience (including the average
historical costs and billing lag time for such services) and other actuarial
data.

While management believes that its estimation methodology effectively
captures trends in medical claims costs, actual payments and future reserve
requirements could differ significantly from the Companys current estimates 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.

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. As discussed above, 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
do not contain such provisions.

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 are 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 have expiration dates ranging from June 30, 2002 through June 30, 2005.
Ninety percent of the charge relates to the State of Kansas contract, which
expires June 30, 2005, and the City of Philadelphia contract, which expires
June 30, 2004. The remaining liability covers the State of Maine contract,
which expires June 30, 2002, and two county contracts, which expire August 15,
2002 and June 30, 2005. During the first quarter of 2002, $1,905 in negative
gross margin and overhead costs related to these five contracts was charged
against the reserve.

Professional and General Liability Insurance

As a healthcare provider, the Company may become subject to medical
malpractice claims or 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, in 2002, the Company has third party
commercial insurance on a claims-made basis with primary limits of $1 million
each occurrence and $3 million in the aggregate. In addition, the Company has
excess liability insurance of $10 million for each claim and $10 million annual
aggregate. The Company also requires the healthcare professionals it employs
and its independent contractors to maintain professional liability insurance.
The Company assumes liabilities in excess of these third-party insurance
limits.

12



---



##### Table of Contents



The Company records a liability for its estimated uninsured exposure to
reported and unreported professional liability claims based upon a quarterly independent
actuarial estimate of the cost of settling losses and projected loss adjustment
expenses using historical claims data, demographic factors, severity factors
and other actuarial assumptions. Reserves for medical malpractice exposures
are subject to fluctuations in frequency and severity of claims experience.
The reserves can also be affected by changes in the financial health of the
third-party insurance carriers used by the Company. Changes in estimates of
losses resulting from such fluctuations and differences between actuarial
estimates and actual loss payments are recognized in the period in which the
estimates are changed or payments are made.

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 has been 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.

Impairment of Intangible Assets and Goodwill

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

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;                               
| |  |  | 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 No. 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.

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.

13



---



##### Table of Contents



Income Taxes

The Company accounts for income taxes under SFAS No. 109, Accounting for
Income Taxes. Under the asset and liability method of SFAS 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 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, 2002 and December 31,
2001, 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).

Results of Operations

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

|                                             |  |                         |       |      |  |  |       |  
|-------------------------------------------- |  | ----------------------- | ----- | ---- |  |  | ----- | -
|                                             |  | Quarter Ended March 31,
|                                             |  |                        
|Percentage of Total Revenues                 |  | 2002                    |       | 2001
|                                             |  |                         |       |     
|Healthcare revenues                          |  |                         | 100.0 | %    |  |  | 100.0 | %
|Healthcare expenses                          |  |                         | 93.8  |      |  |  | 91.8  |  
|                                             |  |                         |       |      |  |  |       |  
|Gross margin                                 |  |                         | 6.2   |      |  |  | 8.2   |  
|Selling, general and administrative expenses |  |                         | 3.0   |      |  |  | 3.0   |  
|Depreciation and amortization                |  |                         | 0.8   |      |  |  | 1.4   |  
|                                             |  |                         |       |      |  |  |       |  
|Income from operations                       |  |                         | 2.4   |      |  |  | 3.8   |  
|Interest, net                                |  |                         | 1.1   |      |  |  | 0.9   |  
|                                             |  |                         |       |      |  |  |       |  
|Income before income tax provision (benefit) |  |                         | 1.3   |      |  |  | 2.9   |  
|Income tax provision (benefit)               |  |                         | (0.1  | )    |  |  | 1.2   |  
|                                             |  |                         |       |      |  |  |       |  
|Net income                                   |  |                         | 1.4   |      |  |  | 1.7   |  
|Preferred stock dividends                    |  |                         |      |      |  |  | 0.1   |  
|                                             |  |                         |       |      |  |  |       |  
|Net income attributable to common shares     |  |                         | 1.4   | %    |  |  | 1.6   | %
|                                             |  |                         |       |      |  |  |       |  

2002 Compared to 2001

Healthcare revenues for the first quarter of 2002 totaled $137.9 million,
which was approximately equal to the amount of healthcare revenues in the first quarter of 2001.
The Company experienced $6.5 million of revenue growth resulting from contracts
added in 2001 through marketing activities. The Company added four new
contracts in the first quarter of 2002 generating partial quarter revenues of
$554,000. Internal revenue growth for the first quarter of 2002 totaled $7.5
million, or 6.3%. The Companys internal revenue growth consists of revenue
growth on correctional contracts in place throughout both periods offset by
reductions in SPP pharmaceutical distribution revenue. Correctional contracts
in place throughout the first quarter of both 2002 and 2001 experienced revenue
growth of $12.9 million, or 12.1%, from contract renegotiations and automatic
price adjustments. During 2002, the Companys revenues were also negatively
impacted by the loss of correctional contracts, some of which the Company
elected not to renew, resulting in a decrease in revenues of approximately
$14.6 million from 2001 to 2002. Pharmaceutical distribution revenues
decreased $5.4 million from $12.2 million in 2001 to $6.8 million in 2002.
This decrease was the result of the loss of two pharmaceutical distribution
customers in the third quarter of 2001.

Healthcare expenses increased $2.7 million from $126.6 million in 2001 to
$129.3 million in 2002. Healthcare expenses as a percentage of revenues
increased by 2.0% primarily due to increases in salaries and benefits costs
from 55.7% to 57.4% of revenues and increases in pharmaceutical costs from 8.5%
to 9.9% of revenues from 2001 to 2002.

Selling, general and administrative expenses were $4.1 million or 3.0% of
revenue in both 2002 and 2001.

14



---



##### Table of Contents



Depreciation and amortization expenses decreased from $2.0 million in 2001
to $1.2 million in 2002. This decrease is primarily the result of the
Companys adoption of SFAS No. 142, Goodwill and Other Intangible Assets,
effective January 1, 2002. Under the guidance of SFAS No. 142, goodwill is no
longer amortized but will be required to be monitored for impairment.
Amortization expense related to goodwill totaled approximately $799,000 in the
first quarter of 2001.

Net interest expense increased to $1.5 million or 1.1% of revenue in 2002
from $1.3 million or 0.9% of revenue in 2001.

The provision for income taxes for the first quarter of 2002 was a benefit
of $170,000, or 0.1% of revenue, as compared with expense of $1.6 million, or
1.2% of revenue, in the prior year quarter. Due to the Companys profitability
in the first quarter of 2002 and recently extended loss carryback periods, the
valuation allowance was reduced $1.1 million from $16.1 million to $15.0
million.

Net income was $2.0 million for the first quarter of 2002, or 1.4% of
revenue, as compared with net income attributable to common shares of $2.2
million, or 1.6% of revenue, in the prior year quarter.

Liquidity and Capital Resources

The Company generated net income attributable to common shares of $2.0
million in the first quarter of 2002 compared to net income attributable to
common shares of $2.2 million in the first quarter of 2001. The Company had a
stockholders deficit of $1.3 million at March 31, 2002. The Companys cash
and cash equivalents decreased to $3.0 million at March 31, 2002 from $10.4
million at December 31, 2001, a decrease of $7.4 million. Cash flows from
operating activities during the first quarter of 2002 were $2.2 million, a
decrease of $2.1 million from the cash provided from operating activities in
the first quarter of 2001 of $4.3 million. The decrease is primarily the
result of decreased income from operations. Cash flows used in financing
activities during the first quarter of 2002 were $9.3 million and include a
reduction of $9.0 million in the amount of debt outstanding from $58.1 million
at December 31, 2001 to $49.1 at March 31, 2002.

The Companys debt consists of a revolving credit facility which was
amended on March 15, 2002 (the Amended Credit Facility). At March 31, 2002,
the Company had approximately $49.1 million outstanding under the Credit Facility and approximately $2.9
million available for future borrowings. The Credit Facility was executed with
a syndicate of four banks (the Lenders) with Bank of America, N.A. acting as
the lead bank and administrative agent.

The Companys borrowings under the Amended Credit Facility are limited to
the lesser of (1) the sum of eligible accounts and other receivables (as
defined) plus an intangible advance of up to $11.0 million (Intangible
Advances) or (2) $57.0 million (the Maximum Commitment). Interest under the
Amended Credit Facility is payable monthly at the Bank of America, N.A. prime
rate plus 3.0% (5.0% for balances due under Intangible Advances). The Amended
Credit Facility matures on April 1, 2003 and all amounts outstanding will be
due and payable on such date. In addition, the Company is required to make
scheduled reductions in the Intangible Advances allowed and the Maximum
Commitment prior to that date. The following table presents the Maximum
Commitment and the maximum allowed Intangible Advances (included within the
Maximum Commitment) as of March 31, 2002 and each scheduled reduction date.

|                  |  |             |  |             |  |  |  | 
|----------------- |  | ----------- |  | ----------- |  |  |  | 
|                  |  | Maximum     |  | Intangible 
|Date              |  | Commitment  |  | Advances   
|                  |  |             |  |            
|March 31, 2002    |  | $57 million |  | $11 million
|July 1, 2002      |  | 57 million  |  | 10 million 
|September 1, 2002 |  | 56 million  |  | 10 million 
|October 1, 2002   |  | 55 million  |  | 9 million  
|December 1, 2002  |  | 54 million  |  | 9 million  
|February 1, 2003  |  | 53 million  |  | 9 million  
|March 1, 2003     |  | 52 million  |  | 9 million  

The Amended Credit Facility is secured by substantially all of the assets
of the Company and its operating subsidiaries.

At March 31, 2002, the Company had standby letters of credit outstanding
totaling approximately $5.0 million. The letters of credit were issued pursuant to the
Amended Credit Facility. The amount available to the Company for borrowing
under the Amended Credit Facility is reduced by the amount of each outstanding
standby letter of credit. Under the terms of the Amended Credit Facility, the
Company may have up to $6.6 million of standby letters of credit outstanding.

The Amended Credit Facility requires the Company to meet certain financial
covenants related to minimum levels of shareholders equity (deficit) and
earnings.

15



---



##### Table of Contents



Under the Amended Credit Facility, the Company is required to maintain
minimum shareholders equity (deficit) as of the end of any fiscal quarter
ending on or after the period specified below as follows:

|                                        |  |                       |            |  
|--------------------------------------- |  | --------------------- | ---------- | -
|                                        |  | Minimum Shareholders'
|Period                                  |  | Equity (Deficit)     
|                                        |  |                      
|March 31, 2002 to June 29, 2002         |  | $                     | (3,250,000 | )
|June 30, 2002 to September 29, 2002     |  |                       | (2,500,000 | )
|September 30, 2002 to December 30, 2002 |  |                       | (1,000,000 | )
|December 31, 2002 to April 1, 2003      |  |                       | 0          |  

The Amended Credit Facility also requires the Company to achieve a minimum
level of cumulative EBITDA from January 1, 2002, through the end of each month
ending on each of the respective dates set forth below. The Amended Credit
Facility defines EBITDA to be the sum of consolidated net income, plus interest
expense, plus any provision for taxes based on income or profits that was
deducted in computing consolidated net income, plus depreciation, amortization
of intangible assets and other non-recurring non-cash charges, which non-cash
charges may not exceed $500,000 in any month or any fiscal quarter and $2
million in any Fiscal Year, less amounts charged against the Companys reserve
for loss contracts.

|                   |  |                    |            | 
|------------------ |  | ------------------ | ---------- | 
|                   |  | Monthly Cumulative
|Period Ending      |  | Minimum EBITDA    
|                   |  |                   
|March 31, 2002     |  | $                  | 1,800,000  | 
|April 30, 2002     |  |                    | 2,450,000  | 
|May 31, 2002       |  |                    | 2,775,000  | 
|June 30, 2002      |  |                    | 3,600,000  | 
|July 31, 2002      |  |                    | 4,275,000  | 
|August 31, 2002    |  |                    | 5,300,000  | 
|September 30, 2002 |  |                    | 6,800,000  | 
|October 31, 2002   |  |                    | 7,950,000  | 
|November 30, 2002  |  |                    | 9,200,000  | 
|December 31, 2002  |  |                    | 10,000,000 | 

After December 31, 2002, the Company will be required to achieve a minimum
monthly EBITDA of $500,000. The Amended Credit Facility also contains
restrictions on the Company with respect to certain types of transactions
including payment of dividends, capital expenditures, indebtedness and sales or
transfers of assets.

As of March 31, 2002, the Company was in compliance with these financial
covenant requirements.

Under the terms of the Amended Credit Facility, if any Amended Credit
Facility obligations remain outstanding at December 31, 2002, the Company will
be required to issue the Lenders warrants to purchase common shares equal to a
5.0% interest in the Companys outstanding common stock. The number of
warrants required to be issued will be reduced to a 2.5% interest if the
balance outstanding under the Amended Credit Facility does not exceed $45
million, there are no outstanding Intangible Advances and the Company is not in
default with the terms of the Amended Credit Facility. The exercise price of
the warrants will be $.01 per share.

The Company is dependent on availability of borrowings pursuant to the
Amended Credit Facility to meet its working capital needs, capital expenditures
requirements and other cash flow requirements. Management believes that the
Company can remain in compliance with the terms of the Amended Credit Facility
and meet its expected obligations throughout the remainder of 2002. 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.

On February 5, 2001, the Company completed the conversion of 12,500 shares
of Series A Convertible Preferred Stock, having an aggregate liquidation
preference of $12.5 million, into 1,322,751 shares of common stock. The
Company registered the shares of common stock issued upon conversion of the
preferred stock and warrants to purchase an additional 135,000 shares of common
stock.

16



---



##### Table of Contents



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 June 1998, the FASB issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended in June 2000 by SFAS No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities, which requires the
Company to recognize all derivatives as assets or liabilities measured at fair
value. Changes in fair value are recognized through either earnings or other
comprehensive income dependent on the effectiveness of the hedge instrument.
The Company currently maintains three interest collar agreements with three of
its syndicate banks for a notional amount of $24 million. The collar
agreements expire between October 2002 and May 2003.

On January 1, 2001, the Company adopted SFAS 133 and SFAS 138 resulting in
a charge to other comprehensive income of approximately $212,000, net of tax, as
the cumulative effect of a change in accounting principle representing the fair
value of the collar agreements on the date of adoption.

In June 2001, the FASB issued SFAS No. 141, Business Combinations and
SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. SFAS No. 141 also specifies criteria which
intangible assets acquired in purchase method business combinations after June
30, 2001 must meet to be recognized and reported apart from goodwill. SFAS No.
142 addresses the initial recognition and measurement of intangible assets
acquired outside of a business combination and the accounting for goodwill and
other intangible assets subsequent to their acquisition. SFAS No. 142 requires
that intangible assets with finite useful lives be amortized, and that goodwill
and intangible assets with indefinite lives no longer be amortized, but instead
be tested for impairment at least annually.

The Company adopted the provisions of SFAS No. 141 on July 1, 2001. Such
adoption had no effect on the Companys financial position or results of
operations. The Company adopted the provisions of SFAS No. 142 effective
January 1, 2002, at which time the amortization of the Companys existing
goodwill ceased. Other than the effect on net income of not amortizing
goodwill, the adoption of SFAS No. 142 had no effect on the Companys results
of operations or financial position. Amortization expense related to goodwill
during the first quarter of 2001 was approximately $799,000.

In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets effective for fiscal years
beginning after December 15, 2001. SFAS 144 establishes a single accounting
model for long-lived assets to be disposed of by sale, whether previously held
and used or newly acquired, and broadens the presentation of discontinued
operations to include more disposal transactions. The Company adopted the
provisions of SFAS 144 on January 1, 2002. Such adoption had no impact on the
Companys financial position or results of operations.




|          |  |                                                           
|--------- |  | ----------------------------------------------------------
|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 Amended Credit Facility. The Amended
Credit Facility carries an interest rate based on the Bank of
America, N.A. prime rate, therefore the Companys cash flow may be affected by changes in the prime rate. As of March 31, 2002, the
Company has approximately $49.1 million outstanding under the Amended
Credit Facility, which represents 31.1% of the Companys
total liabilities and stockholders deficit.

17



---



##### Table of Contents






PART II:

OTHER INFORMATION




ITEM 5.  OTHER INFORMATION

None.




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

(A)  Exhibits

None.

(B)  Reports on Form 8-K

None.

18



---



##### 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  
|                   |  |                                                
|                   |  |                                                
|                   |  | /s/ MICHAEL W. TAYLOR                          
|                   |  |                                                
|                   |  | Michael W. Taylor                              
|                   |  | Senior Vice President & Chief Financial Officer
|                   |  |                                                
|Dated: May 7, 2002 |  |                                                

19