AMERICA SERVICE GROUP INC /DE - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
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: 0-23340
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 300 37027
BRENTWOOD, TENNESSEE (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (615) 373-3100

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

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

The aggregate market value of the Common Stock held by non-affiliates
of the registrant as of March 21, 2001 (based on the last reported closing price
per share of Common Stock as reported on The Nasdaq National Market on such
date) was approximately $134,012,711. As of March 21, 2001, the registrant had
5,414,655 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on June 6, 2001 are incorporated by reference in Part
III.
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PART I

ITEM 1. BUSINESS

This Form 10-K contains statements which may constitute
"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 statements regarding the intent, belief or
current expectations of America Service Group Inc. and members of its management
team. Prospective investors are cautioned that any such forward-looking
statements are not guarantees of future performance and involve a number of
risks and uncertainties, and that actual results may differ materially from
those contemplated by such forward-looking statements. Important factors
currently known to management that could cause actual results to differ
materially from those in forward-looking statements are set forth below under
the caption "Cautionary Statements." America Service Group Inc. undertakes no
obligation to update or revise forward-looking statements to reflect changed
assumptions, the occurrence of unanticipated events or changes to future
operating results over time.

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 correctional facilities and military
installations throughout the United States. ASG was incorporated in 1990 as a
holding company for PHS. Unless the context otherwise requires, the term
"Company" refers to ASG and its direct and indirect subsidiaries. ASG's
executive offices are located at 105 Westpark Drive, Suite 300 Brentwood,
Tennessee 37027. Its telephone number is (615) 373-3100.

RECENT DEVELOPMENTS

On February 5, 2001, the Company completed the conversion of 125,000
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
has registered the shares of Common Stock issued upon conversion of the Series A
Convertible Preferred Stock for resale. The transaction is more fully described
in Notes 11 and 20 to the consolidated financial statements.

CORRECTIONAL HEALTHCARE SERVICES

Generally. ASG, through PHS, EMSA Correctional, and CHS, contracts with
state, county and local governmental agencies to provide comprehensive
healthcare services to inmates of prisons and jails, with a focus on those
facilities that maintain an average daily population of over 300 inmates.

ASG generally enters into fixed fee contracts to provide comprehensive
healthcare to inmates from their admission to the facility through their
release. ASG's revenues from correctional healthcare services are generated
primarily by payments from governmental agencies, none of which are dependent on
third party payment sources. Services provided by ASG include a wide range of
on-site healthcare programs, as well as off-site hospitalization and specialty
outpatient care. See "-- Services Provided." Such hospitalization and specialty
outpatient care is performed through subcontract arrangements with independent
doctors and local hospitals.

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The following table sets forth information regarding ASG's correctional
contracts.

HISTORICAL
DECEMBER 31,
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2000 1999 1998 1997 1996
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Number of correctional contracts(1) ................... 130 106 35 32 34
Average number of inmates in all facilities covered
by correctional contracts(2) ...................... 176,563 132,304 63,783 54,364 83,288

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(1) Indicates the number of contracts in force at the end of the period
specified.

(2) Based on an average number of inmates during the last month of each
period specified.

ASG's target correctional market consists of state prisons and county
and local jails. A prison is a facility in which an inmate is incarcerated for
an extended period of time (typically one year or longer). A jail is a facility
in which the inmate is held for a shorter period of time, often while awaiting
trial or sentencing. The higher inmate turnover in jails requires that
healthcare be provided to a much larger number of individual inmates over time.
Conversely, the costs of long-term healthcare requirements are greater with
respect to state prison contracts. State prison contracts often cover a larger
number of facilities and often have longer terms than jail contracts.

Services Provided. Generally, ASG's obligation to provide services to a
particular inmate begins upon the inmate's admission into the correctional
facility and ends upon the inmate's release. Emphasis is placed upon early
identification of serious injuries or illnesses so that prompt and
cost-effective treatment is commenced.

Medical services provided on-site include physical and mental health
screening upon intake. Screening includes the compilation of the inmate's health
history and the identification of any current, chronic or acute healthcare
needs. After initial screening, services provided may include regular physical
and dental screening and care, psychiatric care, OB-GYN screening and care and
diagnostic testing. Sick call is held on a regular basis and infirmary bed care
is provided in some facilities. Nursing rounds are regularly conducted and
physicians, nurse practitioners, physicians' assistants and others are also
involved in the delivery of care on a regular basis. Appropriate medications are
administered by nursing staff, as needed.

Medical services provided off-site include specialty outpatient
diagnostic testing and care, emergency room care, surgery and hospitalization.
In addition, ASG provides administrative support services both on-site and at
ASG's headquarters and regional offices. Administrative programs include on-site
medical records and management and employee education and licensing. Central and
regional offices provide quality assurance, medical audits, credentialing,
continuing education and clinical program development activities. ASG maintains
a utilization review system to monitor the extent and duration of most
healthcare services required by inmates on an inpatient and outpatient basis.
See "-- Administrative Systems."

Most of the Company's correctional contracts require it to staff the
facilities it serves with nurses 24 hours a day. Doctors at the facilities have
regular hours and are generally available on call. In addition, dentists,
psychiatrists and other specialists are often available on a routine basis. ASG
enters into contractual arrangements with independent doctors and local
hospitals with respect to more significant off-site procedures and
hospitalization. ASG is responsible for all of the costs of such arrangements,
unless the relevant contract contains a limit on ASG's obligations in connection
with the treatment costs. See "--Contract Provisions."

The National Commission on Correctional Health Care (the "NCCHC") sets
standards for the correctional healthcare industry and offers accreditation to
facilities that meet its standards. These standards provide specific guidance
related to a service provider's operations including administration, personnel,
support services such as hospital care, regular services such as sick call,
records management and medical and legal issues. Although accreditation is
voluntary, many contracts require compliance with NCCHC standards.

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Contract Provisions. ASG's correctional contracts generally provide for
a fixed fee, payable monthly. In addition to the fixed annual fee, some of ASG's
contracts provide for per diem price adjustments based upon fluctuations in the
size of inmate populations beyond a specified range. Most contracts also provide
for annual increases in the fixed fee based upon the regional medical care
component of the Consumer Price Index. In all other contracts that extend beyond
one year, ASG utilizes a projection of the future inflation rate when bidding
and negotiating the fixed fee for future years. ASG bears the risk of increased
or unexpected costs, which could reduce its profits or cause it to sustain
losses, and benefits when costs are lower than projected. Certain contracts also
contain financial penalties when performance criteria are not achieved.

In general, contracts may be terminated by the governmental agency, and
often by ASG as well, without cause at any time upon proper notice (typically
between 30 and 180 days). Governmental agencies may be subject to political
influences that could lead to termination of a contract with no fault of the
contractor. As with other governmental contracts, ASG's contracts are subject to
adequate budgeting and appropriation of funds by the governing legislature or
administrative body.

Administrative Systems. ASG has centralized its administrative systems
in order to enhance economies of scale and to provide management with accurate,
up-to-date field data for forecasting purposes. These systems also enable ASG to
refine its bids and help ASG reduce the costs associated with the delivery of
consistent healthcare.

ASG maintains a utilization review system to monitor the extent and
duration of most healthcare services required by inmates on an inpatient and
outpatient basis. The current automated utilization review program is an
integral part of the services provided at each facility. The system is designed
to ensure that the medical care rendered is medically necessary and is provided
safely in a clinically appropriate setting while maintaining traditional
standards of quality of care. The program provides for determinations of medical
necessity by medical professionals through a process of pre-authorization and
concurrent review of the appropriateness of any hospital stay. The program seeks
to identify the maximum capability of on-site healthcare units so as to allow
for a more timely discharge from the hospital back to the correctional facility.
The utilization review staff consists of doctors and nurses who are supported by
a medical director at the corporate level and a panel of medical specialists who
are consultants to ASG.

ASG has developed a variety of customized databases to facilitate and
improve operational review including (i) a claims management tracking system
that monitors current incidents, claims and litigation against ASG, (ii) a
comprehensive cost review system that analyzes ASG's average costs per inmate at
each facility including pharmaceutical utilization and trend analysis available
from SPP and (iii) a daily operating report to control staffing and off-site
utilization.

Bid Process. Contracts with governmental agencies are obtained
primarily through a competitive bidding process, which is governed by applicable
state and local statutes and ordinances. Although practices vary, typically a
formal request for proposal ("RFP") is issued stating the scope of work to be
performed, length of contract, performance bonding requirements, minimum
qualifications of bidders, selection criteria and the format to be followed in
the bid or proposal. Usually, a committee appointed by the governmental agency
reviews bids and makes an award determination. The committee may award the
contract to a particular bidder or decide not to award the contract to the
private sector. The award of a contract may be subject to formal or informal
protest, through a governmental appeals process, by unsuccessful bidders.

Many RFPs for significant contracts require the bidder to post a bid
bond. Performance bonding requirements may cover one year or up to the length of
the contract and at December 31, 2000, generally ranged between 25% and 100% of
the 2000 contract fee.

A successful bidder must often agree to comply with numerous additional
requirements regarding record-keeping and accounting, non-discrimination in the
hiring of personnel, safety, safeguarding classified information, management
qualifications, professional licensing requirements, emergency healthcare needs
of corrections employees and other matters. Upon a violation of the terms of an
applicable contractual or statutory provision, a contractor may be debarred or
suspended from obtaining future contracts for specified periods of time in the
applicable location. ASG has never been debarred or suspended in any
jurisdiction.

Marketing. ASG gathers and analyzes information on prisons and jails
around the country in order to identify the ones that best meet its marketing
criteria. Relevant factors include the quality and costs of healthcare in the
region, the management and operations of the correctional facility, the
financial stability of the governmental agency and the composition of the inmate
population. ASG then devotes a substantial portion of its marketing resources to
such potential customers. State prison systems, because of their more stable
inmate populations and, in many cases, larger number of facilities and longer
contract terms, are an important focal point of ASG's marketing plans. Also, ASG
will continue to identify those county and local jails that fit its market
profile and will pursue contracts with those facilities.

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ASG maintains a staff of sales and marketing representatives assigned
to specific geographic areas of the United States. In addition, ASG uses
consultants to help identify marketing opportunities, to determine the needs of
specific potential customers and to engage customers on ASG's behalf. ASG uses
paid advertising and promotion to reach prospective clients as well as to
reinforce its image with existing clients.

With the inmate population increasing an average of approximately 6%
compounded annually, the medical Consumer Price Index increasing by an average
of 3% and the trend towards privatization of correctional healthcare, management
anticipates opportunities for revenue growth from increased marketing activity.

MILITARY HEALTHCARE SERVICES

EMSA Military provides a broad range of emergency medicine and primary
healthcare services to active and retired military personnel and their
dependents in medical facilities operated by the United States Department of
Defense ("DOD") and the United States Veterans Administration ("VA"). EMSA
Military began providing healthcare services to DOD clients in 1988 and has
provided in excess of 3.5 million patient visits. During the fiscal year ended
December 31, 2000, EMSA Military provided services under nine contracts.

Most military contracts are for a period of five years, with an initial
one year base period and four one year options. EMSA Military's bidding strategy
is to seek contract opportunities that will be awarded on a best value, rather
than a low cost basis. This allows EMSA Military to highlight the Company's
operational expertise and the overall quality of its provider staff. Margins are
determined by the size and risk associated with a specific contract.

PHARMACEUTICAL DISTRIBUTION SERVICES

ASG, through its wholly-owned subsidiary Secure Pharmacy Plus, Inc.
("SPP"), contracts with federal, state and local governments and certain private
entities to distribute pharmaceuticals and certain medical supplies to inmates
of correctional facilities. SPP utilizes three packaging and distribution
centers to fill prescriptions and ship pharmaceuticals to over 400 sites in 41
states covering over 300,000 inmates. SPP is the largest provider of
correctional pharmacy services in the United States with annualized revenues of
approximately $80 million, $37 million of which relates to services provided for
ASG contracted sites which is eliminated in consolidation.

SPP provides clinical pharmacy services in concert with their
systematic delivery process. SPP's clinical pharmacological management provides
therapeutic value to services as well as fiscal responsibility to its clients.
In addition, SPP's expanding medical and commissary supply services create
additional value for its clients as products are specific to the corrections
environment. SPP's contracts typically cover one year with automatic renewals
upon agreement of both parties.

RISK MANAGEMENT

Prior to December 1, 1997, Harbour Insurance, Inc. ("Harbour"), a
wholly owned subsidiary of PHS and a captive insurance company, provided
insurance covering PHS's medical professional and general liability arising out
of its provision of healthcare services. Since December 1, 1997, the Company has
maintained professional and general liability insurance through an unaffiliated
insurer. In October 1998, ASG liquidated Harbour and entered into a novation
agreement pursuant to which an unaffiliated insurer assumed substantially all of
the liabilities of Harbour for outstanding claims as of August 31, 1998 incurred
prior to December 1, 1997.

For contracts where ASG's exposure to the risk of inmates' catastrophic
illness or injury is not limited, ASG maintains stop loss insurance to cover 90%
of ASG's exposure with respect to hospitalization for amounts in excess of
$200,000 per inmate. ASG believes this insurance mitigates its exposure to
unanticipated expenses of catastrophic hospitalization.

There can be no assurance that third-party commercial insurance will
continue to be available in the future or will be available at reasonable
prices. ASG believes its insurance coverage is maintained at reasonable levels,
but there can be no assurance that it will cover all claims that may be asserted
against ASG and its employees and agents.

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EMPLOYEES AND INDEPENDENT CONTRACTORS

The services provided by ASG require an experienced staff of healthcare
professionals and facilities administrators. In particular, a nursing staff with
experience in correctional healthcare and specialized skills in all necessary
areas contributes significantly to ASG's ability to provide efficient service.
In addition to nurses, ASG's staff of employees or independent contractors
includes physicians, dentists, psychologists and other healthcare professionals.

As of December 31, 2000, ASG had approximately 6,000 employees,
including approximately 600 doctors and 3,200 nurses. ASG also had under
contract approximately 480 independent contractors, most of whom are not
full-time, including physicians, dentists, psychiatrists and psychologists.
ASG's employees at its Alameda County, California, City of Philadelphia, Butte
County, Colorado and York County, Pennsylvania facilities are represented by
labor unions. In addition, ASG's contract with Rikers Island, which started on
January 1, 2001, includes approximately 850 additional unionized employees. ASG
believes that its employee relations are good.

COMPETITION

The business of providing correctional healthcare services to
governmental agencies is highly competitive. ASG is in direct competition with
local, regional and national correctional healthcare providers. ASG believes
that one competitor has financial and human resources equivalent to those of
ASG. As the private market for providing correctional healthcare matures, ASG's
competitors may gain additional experience in bidding and administering
correctional healthcare contracts. In addition, new competitors, some of whom
may have extensive experience in related fields or greater financial resources
than ASG, may enter the market.

MAJOR CONTRACTS

ASG's operating revenue with respect to its correctional healthcare
operations is derived primarily from contracts with federal, state, county and
local governmental agencies. No one contract accounted for 10% of revenues
during the year ended December 31, 2000; however, the contract with the Maryland
Department of Public Safety and Correctional Services would have exceeded 10% of
2000 revenues had the contract been in effect for the entire year. The Company
expects its contract with Rikers Island to exceed 10% of its revenues for the
year ending December 31, 2001.

ASG's correctional contracts typically provide for a monthly fixed fee,
but certain contracts including some of ASG's largest contracts include
provisions which mitigate a portion of the Company's risk. For example, the
contract with the Indiana Department of Corrections provides for fixed payment
on a per inmate, per day basis. The contract with the City of Philadelphia
provides for a fixed payment on a fixed dollar basis with additional
reimbursement for individual event costs exceeding prescribed catastrophic
limits but subject to a maximum limit. The remainder of ASG's largest existing
contracts for the year ended December 31, 2000 -- contracts with the
Pennsylvania Department of Corrections Western Region and Eastern Region, Kansas
Department of Corrections, and the Maryland Department of Public Safety and
Correctional Services -- provide for per diem price adjustments based upon
fluctuations in the size of inmate populations beyond a specified range. The
fixed fees under all six contracts take into account projected levels of
inflation.

Contracts accounting for approximately 57% of revenues for the year
ended December 31, 2000 contain no limits on ASG's exposure for treatment costs
related to catastrophic illnesses or injuries to inmates. These contracts
include the Maryland Department of Corrections, Indiana Department of
Corrections, Pennsylvania Department of Corrections for the Western Region and
Eastern Region and Kansas Department of Corrections. Although the cost of
certain medicines are reimbursed in varying degrees under certain contracts,
typically a dollar limit is placed on ASG's responsibility for costs related to
illness of or injury to an individual inmate, injuries to more than one inmate
resulting from an accident or contagious illnesses affecting more than one
inmate. When preparing bid proposals, ASG estimates the extent of its exposure
to cost increases, severe individual cases and catastrophic events and attempts
to compensate for its exposure in the pricing of its bids. ASG's management has
experience in evaluating these risks for bidding purposes and maintains an
extensive database of historical experience. Nonetheless, increased or
unexpected costs against which ASG is not protected could render a contract
unprofitable. In an effort to manage risk of catastrophic illness or injury of
inmates under contracts that do not limit ASG's exposure to such risk, ASG
maintains stop loss insurance from an unaffiliated insurer covering
hospitalization for amounts in excess of $200,000 per inmate. Such stop loss
insurance covers 90% of ASG's exposure for such treatment costs. ASG believes
this insurance mitigates its exposure to unanticipated expenses of catastrophic
hospitalization. See "-- Risk Management."

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CAUTIONARY STATEMENTS

All statements made by ASG that are not historical facts are based on
current expectations. These statements are forward looking in nature and involve
a number of risks and uncertainties. Actual results may differ materially. Among
the factors that could cause actual results to differ materially are the
following: dependence on major contracts; price competition in the prison
healthcare industry; ASG's ability to provide adequate staffing to meet its
contractual commitments; changes in performance bonding requirements;
substantial damage awards against ASG in connection with medical malpractice
claims; changes in laws or regulations or the application thereof; general
business and economic conditions; and the other risk factors described in ASG's
reports filed from time to time with the Securities and Exchange Commission.
Certain of these factors are described in greater detail below.

Dependence on Major Contracts. ASG's operating revenue is derived
almost exclusively from contracts with federal, state, county and local
governmental agencies. Generally, contracts may be terminated by the
governmental agency at will and without cause upon proper notice (typically
between 30 and 180 days). Governmental agencies may be subject to political
influences that could lead to termination of a contract through no fault of the
contractor. Although ASG generally attempts to renew or renegotiate contracts at
or prior to their termination, contracts that are put out for bid are subject to
intense competition. The loss of one or more of the major contracts could have a
material adverse effect on ASG's business.

Contracts with government agencies are generally complex in nature and
subject contractors to extensive regulation under federal, state, county and
local law. Under certain circumstances, a government contractor may be debarred
or suspended from obtaining future contracts. While ASG considers the
possibility remote, such debarment or suspension could have a material adverse
effect on ASG.

Privatization of Government Services, Competition and Correctional
Population. ASG's future financial performance will depend in part on continued
privatization by state, county and local governmental agencies of healthcare
services for correctional facilities. There can be no assurance that this market
will continue to grow or that existing contracts will continue to be made
available to the private sector. The business of providing correctional
healthcare services to governmental agencies is highly competitive. ASG is in
direct competition with local, regional and national correctional healthcare
providers. As the private market for providing correctional healthcare matures,
ASG's competitors may gain additional experience in bidding and administering
correctional healthcare contracts. In addition, new competitors, some of whom
may have extensive experience in related fields or greater financial resources
than ASG, may enter the market. ASG's business could also be adversely affected
by material decreases in the inmate population of correctional facilities.

Acquisitions. ASG's expansion strategy involves both internal growth
and, as opportunities become available, acquisitions. The Company took
significant steps toward implementing this strategy with the EMSA acquisition in
January 1999 and the CPS, CHS and SPP acquisitions during 2000. ASG previously
had limited experience acquiring businesses and integrating them into its
operations; however, the successful transitions of the recent acquisitions
provide valuable frameworks for future acquisition opportunities.

Catastrophic Limits. Contracts accounting for 57% of revenues for the
year ended December 31, 2000 contain no limits on ASG's exposure for treatment
costs related to catastrophic illnesses or injuries to inmates. For those
contracts that contain no catastrophic limits, ASG maintains stop loss insurance
for 90% of its exposure with respect to catastrophic illnesses or injuries for
amounts in excess of $200,000 per inmate. ASG attempts to compensate for the
increased financial risk when pricing contracts that do not contain catastrophic
limits. Although the occurrence of severe individual cases without such limits
could render the contract unprofitable and could have a material adverse effect,
ASG believes the potential impact of any such occurrences is mitigated by such
insurance.

Dependence on Key Personnel. The success of ASG depends in large part
on the ability and experience of its senior management. The loss of services of
one or more key employees could adversely affect ASG's operations. ASG has
employment contracts with Michael Catalano, Chairman, President and Chief
Executive Officer, Gerard F. Boyle, Executive Vice President and Chief
Development Officer, Bruce A. Teal, Executive Vice President and Chief Operating
Officer and S. Walker Choppin, Senior Vice President and Chief Financial
Officer.

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Dependence on Healthcare Personnel. ASG's success depends on its
ability to attract and retain highly skilled healthcare personnel. A shortage of
trained and competent employees and/or independent contractors may result in
overtime costs or the need to hire less efficient temporary staff. Attracting
qualified nurses at a reasonable cost has been and continues to be of concern to
ASG. There can be no assurance that ASG will be successful in attracting and
retaining a sufficient number of qualified healthcare personnel in the future.

Corporate Exposure to Professional Liability. ASG periodically becomes
involved in medical malpractice claims with the attendant risk of substantial
damage awards. 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. ASG may be liable, as employer, for the negligence of
healthcare professionals who are employees of ASG even though the risk is
mitigated to a degree as such professionals are required to maintain
professional liability insurance policies by the Company. ASG may also have
potential liability for the negligence of healthcare professionals engaged by
ASG as independent contractors. ASG's contracts generally provide for ASG to
indemnify the governmental agency for losses incurred related to healthcare
provided by ASG and its agents. ASG maintains professional liability insurance
and requires its independent contractors to maintain professional liability
insurance in amounts deemed appropriate by management based upon ASG's claims
history and the nature and risks of its business. There can be no assurance that
a future claim or claims will not exceed the limits of available insurance
coverage or that such coverage will continue to be available at a reasonable
cost.

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ITEM 2. PROPERTIES

The Company occupies approximately 22,600 square feet of leased office
space in Brentwood, Tennessee, where it maintains its corporate headquarters.
The Company's lease on its current headquarters expires in October 2003. The
Company leases additional office facilities in Franklin, Tennessee; Hanover,
Maryland; Indianapolis, Indiana; Alameda, California; Topeka, Kansas; Fort
Lauderdale, Florida; Verona, New Jersey; and Camp Hill and Pittsburgh,
Pennsylvania. While the Company may open additional offices to meet the local
needs of future contracts awarded in new areas, management believes that its
current facilities are adequate for its existing contracts for the foreseeable
future.

ITEM 3. LEGAL PROCEEDINGS

The Company is subject to claims and suits in the ordinary course of
business. In management's opinion, such currently pending legal proceedings and
claims against the Company will not, in the aggregate, have a material adverse
effect on the Company.

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

None.

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PART II

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

The Common Stock is traded on The Nasdaq Stock Market's National Market
System under the symbol "ASGR." As of March 21, 2001, there were approximately
55 registered holders of record of the Common Stock. The high and low prices of
the Common Stock as reported on The Nasdaq Stock Market during each quarter from
January 1, 1999 through December 31, 2000 are shown below:

QUARTER ENDED HIGH LOW
------------- -------- --------

March 31, 1999.................................................................. $ 13.75 $ 11.63
June 30, 1999................................................................... 15.25 9.50
September 30, 1999.............................................................. 17.50 13.25
December 31, 1999............................................................... 15.00 11.75
March 31, 2000.................................................................. 15.00 13.00
June 30, 2000................................................................... 20.50 14.13
September 30, 2000.............................................................. 26.00 17.13
December 31, 2000............................................................... 28.00 21.00

The Company did not pay cash dividends on the Common Stock during the
years ended December 31, 2000 and 1999. The Company does not currently intend to
pay cash dividends on the Common Stock in the foreseeable future because, under
the terms of its Credit Facility, the Company is prohibited from paying cash
dividends on the Common Stock.

ITEM 6. SELECTED FINANCIAL DATA

FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

STATEMENT OF OPERATIONS DATA:
Healthcare revenues ................................... $381,946 $272,926 $113,287 $129,211 $152,282
Income (loss) before income taxes (benefits) .......... 13,310 7,731 5,099 1,786 (9,933)
Net income (loss) ..................................... 7,807 4,640 5,724 1,685 (8,686)
Net income (loss) attributable to common shares ....... 7,159 2,328 5,724 1,742 (8,912)
Net income (loss) per common shares -- basic ........... 1.86 0.64 1.61 0.50 (2.81)
Net income (loss) per common shares -- diluted ......... 1.40 0.60 1.57 0.48 (2.81)
Weighted average common shares outstanding ............ 3,854 3,613 3,554 3,480 3,171
Weighted average common shares outstanding and
common equivalent shares outstanding ................ 5,587 3,877 3,653 3,657 3,171
Cash dividends per share .............................. -- -- -- -- --

See Management's Discussion and Analysis of Financial Condition and
Results of Operations and Notes to Consolidated Financial Statements describing
the financial impact for 2000 due to the CPS, CHS and SPP acquisitions, for 1999
due to the EMSA acquisition and for 1998 due to the MedPartners' Settlement.

AS OF DECEMBER 31,
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2000 1999 1998 1997 1996
-------- -------- --------- --------- ---------

BALANCE SHEET DATA:
Working capital (deficit)..................................... $ 15,573 $ 9,498 $ 10,515 $ 257 $ (2,434)
Total assets.................................................. 161,402 98,727 28,375 27,754 42,709
Mandatory redeemable preferred stock.......................... 12,397 12,375 -- -- --
Mandatory redeemable common stock............................. -- 1,842 1,842 1,842 1,916
Common stock, additional paid-in capital,
retained earnings and stockholders'
notes receivable............................................ 28,965 16,723 10,949 4,799 2,468

9
11

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

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.

YEAR ENDED DECEMBER 31,
-------------------------------
PERCENTAGE OF TOTAL REVENUES 2000 1999 1998
- ---------------------------- ----- ----- -----

Healthcare revenue..................................................................... 100.0% 100.0% 100.0%
Healthcare expenses.................................................................... 90.3 90.0 89.9
----- ----- -----
Gross margin........................................................................... 9.7 10.0 10.1
Selling, general and administrative expenses........................................... 3.6 4.5 8.6
Depreciation and amortization.......................................................... 1.6 1.3 1.1
MedPartners settlement gain............................................................ -- -- (3.6)
----- ----- -----
Income from operations................................................................. 4.5 4.2 4.0
Interest expense (income).............................................................. 1.1 1.4 (0.5)
----- ----- ------
Income before taxes.................................................................... 3.4 2.8 4.5
Provision for income taxes (benefits).................................................. 1.4 1.1 (0.6)
----- ----- -----
Net income............................................................................. 2.0 1.7 5.1
Redeemable preferred stock dividends................................................... 0.1 0.8 --
----- ----- -----
Net income attributable to common stock................................................ 1.9% 0.9% 5.1%
===== ===== =====

2000 Compared to 1999

Healthcare revenues increased $109.0 million from $272.9 million in
1999 to $381.9 million in 2000, representing a 40% increase. Approximately $56.6
million of this increase relates to the acquisitions of CPS, CHS and SPP during
2000. Additionally, the Company added fourteen new contracts generating revenues
of $24.7 million in 2000 and experienced $37.7 million of revenue growth from
existing contracts through contract renegotiations, automatic price adjustments
and from certain contracts being in effect for the full year. Revenues were
negatively impacted by the loss of twelve contracts during 2000 resulting in a
decrease in revenues of approximately $10.0 million from 1999 to 2000.

The cost of healthcare increased $99.3 million from 1999 to 2000 due
mainly to the new contracts from both acquisition and marketing activity.
Healthcare expenses as a percentage of revenues increased by .3% primarily due
to increased pharmaceutical costs and increased temporary labor utilization due
to labor shortages in certain geographic areas. Pharmaceutical costs increased
from 8.9% to 10.4% of revenues (excluding net pharmaceutical sales) from 1999 to
2000. Temporary labor costs increased from 6.0% to 7.6% of revenues (excluding
net pharmaceutical sales) from 1999 to 2000.

Selling, general and administrative expenses were $13.8 million or 3.6%
of revenue in 2000 compared to $12.3 million or 4.5% of revenue in 1999. The
percentage decrease reflects the Company's ability to leverage its corporate
support services to a broader revenue base with the contract gains from 2000
acquisitions and net marketing activity.

Earnings before interest, taxes, depreciation and amortization
increased from $15.1 million in 1999 to $23.3 million in 2000 or an increase as
a percentage of revenue from 5.5% in 1999 to 6.0% in 2000. This percentage
increase reflects the Company's ability to effectively manage contract margins
while leveraging its selling, general and administrative expenses with the
increased 2000 revenues.

Depreciation and amortization expenses increased to $6.0 million or
1.6% of revenue in 2000 from $3.5 million or 1.3% of revenue in 1999. The
increase is primarily related to the goodwill, contract and non-compete
amortization expense related to the CPS, CHS and SPP acquisitions during 2000 of
approximately $1.8 million. Net interest expense increased to $4.1 million or
1.1% of revenue in 2000 from $3.7 million or 1.4% in 1999. The percentage
decrease during 2000 demonstrates the Company's ability to manage the additional
leverage required to finance the 2000 acquisitions.

The provision for income taxes was $5.5 million in 2000 for an
effective tax rate of 41%, an increase from the 1999 effective tax rate of 40%.
The increase in the effective tax rate is due to the non-deductibility of
certain intangible assets related to the CHS acquisition for tax purposes. The
preferred stock dividends of $.6 million relate to the redeemable preferred
stock and have decreased by $1.7 million from 1999 due to a $1.9 million
noncash, nonrecurring dividend related to a beneficial conversion feature at the
date the stock was issued, which increased additional paid-in capital during
1999.

10
12

1999 Compared to 1998

Healthcare revenues increased $159.6 million from $113.3 million in
1998 to $272.9 million in 1999, representing a 141% increase. The increase in
revenues resulted primarily from the Company's acquisition of EMSA Correctional
and EMSA Military on January 26, 1999. EMSA Correctional and EMSA Military
generated revenues of $139.2 million in the year ended December 31, 1999. Apart
from the EMSA acquisition, the Company added sixteen new contracts in 1999,
which generated $12.6 million in new revenues, and experienced $8.1 million of
revenue growth from existing contracts through contract renegotiations,
automatic price adjustments and from contracts being in effect a full year.
Revenues were negatively impacted by the loss of two PHS contracts during 1999,
which generated $1.8 million of revenues in 1999, compared to $2.1 million of
revenues in 1998.

The cost of healthcare increased $143.6 million due mainly to the EMSA
acquisition. Healthcare expenses as a percentage of revenues were relatively
unchanged at 90.0% in 1999 versus 89.9% in 1998. Personnel costs and fringe
benefits (including subcontractors) related to inmate care were 61% of revenues
in 1999 versus 57% of revenues in 1998. The increase is attributable to the
Company's focus on more fully utilizing its on-site infirmaries. Costs related
to outside services (defined as hospitalization, emergency room and ambulance
and outpatient surgeries and visits) were 13% of revenues in 1999 and 15% in
1998. The Company was also able to improve its pharmacy cost from 10% of revenue
in 1998 to 9% in 1999.

Selling, general and administrative expenses were $12.3 million or 4.5%
of revenue in 1999 compared to $9.8 million or 8.6% of revenue in 1998. The
dollar increase relates primarily to the EMSA acquisition, but also demonstrates
the ability to leverage corporate support services.

Depreciation and amortization increased $2.3 million in 1999 to $3.5
million. The increase is directly related to the goodwill, contract and
non-compete amortization expense related to the EMSA acquisition of
approximately $2.4 million between goodwill, contracts and non-compete
agreements.

The provision for income taxes was $3.1 million in 1999 for an
effective tax rate of 40%, compared to a $0.6 million benefit in 1998, when the
Company recognized net operating loss carryforwards.

The preferred stock dividends of $2.3 million relate to the redeemable
preferred stock and include a $1.9 million noncash nonrecurring dividend,
related to a beneficial conversion feature at the date the stock was issued,
which increased additional paid-in capital.

LIQUIDITY AND CAPITAL RESOURCES

The Company's cash and cash equivalents remain basically unchanged from
$400,000 at December 31, 1999 to $300,000 at December 31, 2000. As part of the
CPS acquisition, the Company borrowed $14 million under its then existing Senior
Credit Facility. In order to finance the acquisition of CHS, the Company
increased its then existing Senior Credit Facility by $15 million to $55 million
and borrowed $17 million. On August 1, 2000, the Company replaced its existing
Senior Credit Facility with a $65 million Senior Credit Facility syndicated to a
group of four commercial banks (referred to as the "2000 Credit Facility" and
discussed further in Footnote 8 to the consolidated financial statements). As
part of the SPP acquisition, the Company borrowed $8 million under the 2000
Credit Facility and expanded the 2000 Credit Facility by $7.5 million through
December 29, 2000. During the course of the year, however, the Company repaid
$7.7 million of the net principal amounts borrowed, resulting in a net increase
in long-term debt of $31.3 million. The principal balance of debt outstanding at
December 31, 2000 is $56.8 million.

The Company's working capital increased by $6.1 million during the year
and each of the underlying components of working capital - accounts receivable,
inventory, prepaid expenses and other current assets, accounts payable and other
accrued expenses - increased primarily in proportion to the Company's 40% growth
in revenues during the year. Management believes that the current levels of
internally generated funds coupled with cash and the borrowing availability
under the 2000 Credit Facility (currently $8.2 million) are sufficient to meet
the Company's immediate foreseeable future cash needs and anticipated contract
renewal activity. The Company believes that it may have additional borrowing
availability from one or more of its syndicate banks since it did not use any
proceeds from the $7.5 million expansion to the 2000 Credit Facility. In fact,
the expansion was reduced to $5 million as of December 31, 2000 and extended
through February 15, 2001, upon which time it was canceled by the Company.

11
13

INFLATION

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. 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, such excess 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.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest expense represents a significant component of the Company's
total expenses, 1.1% and 1.4% of the Company's total expenses for 2000 and 1999,
respectively. As discussed in "Liquidity and Capital Resources" above, long-term
debt of $56,800 represents 35.2% of the Company's total liabilities and
stockholders' equity as of December 31, 2000. The 2000 Credit Facility required
the Company to protect its operating results from increases in interest rates.
The Company, therefore, hedged $30 million of the $65 million available under
the 2000 Credit Facility by entering into four separate interest rate collar
agreements with three of its syndicate banks for notional amounts ranging from
$6 million to $9 million. These collar agreements are cash flow hedges which
establish floors and ceilings on the 90-day LIBO rate which reduce the
volatility of the Company's interest rate.

For the year ended December 31, 2000, no settlements with any of the
three syndicate banks were required as the 90-day LIBO rate remained within the
range of respective floors and ceilings. During January 2001, however, interest
rates began a significant decline which will result in the 90-day LIBO rate
falling below the floors of certain of the collar agreements as of the second
quarter of 2001. The Company will have $24.0 million of long-term debt priced at
a weighted average interest rate of 8.35% through October 2, 2002, and $9.0
million priced at 8.25% thereafter and through March 31, 2003. As discussed in
Note 9 to the consolidated financial statements, the Company recorded a
liability of $212, net of taxes, on its balance sheet as of January 1, 2001,
representing the fair market value of the cash flow hedge derivative instruments
as of such date. The Company expects this liability to fluctuate during 2001 but
to have a similar fair market value as of December 31, 2001. The Company will
continue to assess the current interest rate market conditions and to implement
additional hedging instruments as deemed appropriate.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Company's Consolidated Financial Statements, together with the
report thereon of Ernst & Young LLP, dated February 9, 2001, begin on page F-1
of this Report.

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

There are no disagreements with accountants on accounting and financial
disclosure required to be reported in this annual report pursuant to Item 304 of
Regulation S-K.

12
14

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

For information regarding the Directors of the Company, the heading
"Information as to Directors, Nominees and Executive Officers" and the
subsection "Compliance with Section 16(a) of the Securities Exchange Act" under
the heading "Additional Information" in the Company's Proxy Statement for its
2001 Annual Meeting of Stockholders (the "Company's Proxy Statement") and the
accompanying text are incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The subsection under the heading "Additional Information" entitled
"Committees and Meetings" and the heading entitled "Executive Compensation" in
the Company's 2001 Proxy Statement and the accompanying text are incorporated
herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The headings "Information as to Directors, Nominees and Executive
Officers" and "Principal Stockholders" in the Company's 2001 Proxy Statement and
the accompanying text are incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The heading "Certain Transactions" in the Company's 2001 Proxy
Statement and the accompanying text is incorporated hereby by reference.

13
15
PART IV

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

(a) (1) Financial Statements

Listed on the Index to the Consolidated Financial Statements and Schedule on
page F-1 of this Report.

(2) Financial Statement Schedule

Listed on the Index to the Consolidated Financial Statements and Schedule on
page F-1 of this Report.

(3) Exhibits

EXHIBIT DESCRIPTION
------- -----------

2.1 -- Asset Purchase Agreement, dated as of December 18, 1998,
between the Company and InPhyNet Administrative Services, Inc.
(incorporated herein by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K filed on January 5,
1999).

2.2 -- First Amendment to Stock Purchase Agreement, dated as of
January 26, 1999, between the Company and InPhyNet
Administrative Services, Inc. (incorporated herein by
reference to Exhibit 99.8 to the Company's Current Report on
Form 8-K filed on February 10, 1999).

2.3 -- Securities Purchase Agreement, dated as of January 26, 1999,
among the Company, Health Care Capital Partners L.P. and
Health Care Executive Partners L.P. (incorporated herein by
reference to Exhibit 99.2 to the Company's Current Report on
Form 8-K filed on February 10, 1999).

2.4 -- First Amendment to Securities Purchase Agreement, dated as
of June 17, 1999, among the Company, Health Care Capital
Partners L.P. and Health Care Executive Partners L.P.
(incorporated herein by reference to Exhibit 2.4 to the
Company's Amended Annual Report on Form 10-K/A for the year
ended December 31, 1998, which Amended Annual Report was filed
on July 29, 1999).

2.5 -- Plan and Agreement of Merger, as amended, dated October 1,
1997, between the Company, MedPartners, Inc. and ASG Merger
Corporation, a wholly-owned subsidiary of MedPartners, Inc.
(incorporated herein by reference to Exhibit 2.1 to the
Company's Current Report on form 8-K filed on October 2, 1997
and Exhibit 2.1 to the Company's Current Report on Form 8-K
filed on December 30, 1997).

2.6 -- Consent and Agreement, dated January 19, 1998, by and among
the Company, MedPartners, Inc. and ASG Merger Corporation, a
wholly-owned subsidiary of MedPartners, Inc. (incorporated
herein by reference to Exhibit 2.1 to the Company's Current
Report on Form 8-K filed on January 20, 1998).

2.7 -- Release and Settlement Agreement, dated February 25, 1998, by
and among the Company, MedPartners, Inc. and ASG Merger
Corporation and EMSA Correctional Care, Inc. (incorporated
herein by reference to Exhibit 2.3 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1997).

2.8 -- Asset Purchase Agreement, dated as of March 29, 2000, between
the Company and Correctional Physician Services, Inc., Kenan
Umar and Emre Umar, as amended by Amendment One to Asset
Purchase Agreement, dated as of March 29, 2000.

2.9 -- Stock Purchase Agreement, dated as of April 24, 2000, between
the Company and the Shareholders of Correctional Health
Services, Inc. (incorporated herein by reference to Exhibit
99.1 to the Company's Current Report on Form 8-k filed on July
14, 2000).

2.10 -- Asset Purchase Agreement, dated September 20, 2000, by and
among Secure Pharmacy Plus, Inc.; Stadtlander Operating
Company L.L.C.; Stadtlander Licensing Company, LLC;
Stadtlander Drug of California, LP and Stadtlander Drug of
Hawaii, LP (incorporated herein by reference to Exhibit 99.1
to the Company's Current Report on From 8-k filed on October
4, 2000).

3.1 -- Amended and Restated Certificate of Incorporation of America
Service Group Inc. (incorporated herein by reference to
Exhibit 3.1 to the Company's Registration Statement on Form
S-1, Registration No. 33-43306).

3.2 -- Certificate of Designation of the Series A Convertible
Preferred Stock (incorporated herein by reference to Exhibit
99.3 to the Company's Current Report on Form 8-K filed on
February 10, 1999).

14
16

3.3 -- Amended and Restated Bylaws of America Service Group Inc.
(incorporated herein by reference to Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996).

4.1 -- The Company's 12% Subordinated Convertible Bridge Notes
due January 26, 2000, issued to Health Care Capital Partners
L.P. on January 26, 1999 (incorporated herein by reference to
Exhibit 99.4 to the Company's Current Report on Form 8-K filed
on February 10, 1999).

4.2 -- Specimen Common Stock Certificate (incorporated by reference
to Exhibit 4.1 to the Company's Registration Statement on Form
S-1, Registration No. 33-43306, as amended).

10.1 -- Amended and Restated Credit Agreement, dated as of January 26,
1999, among the Company, as Borrower, the Company's
subsidiaries as listed therein, as Guarantors, the Lenders
identified therein and NationsBank, N.A., as Administrative
Agent and as Issuing Bank (incorporated herein by reference to
Exhibit 99.1 to the Company's Current Report on Form 8-K filed
on February 10, 1999).

10.2 -- Warrant, dated as of January 26, 1999, issued by the Company
to Health Care Capital Partners L.P. to purchase shares of the
Common Stock (incorporated herein by reference to Exhibit 99.6
to the Company's Current Report on Form 8-K filed on February
10, 1999).

10.2.1 -- Amended and Restated Warrant, dated as of January 26, 1999
and amended and restated on July 2, 1999, issued by the
Company to Health Care Capital Partner L.P.

10.3 -- Warrant, dated as of January 26, 1999, issued by the Company
to Health Care Executive Partners L.P. to purchase shares of
the Common Stock (incorporated herein by reference to
Exhibit 99.7 to the Company's Current Report on Form 8-K filed
on February 10, 1999).

10.3.1 -- Amended and Restated Warrant, dated as of January 26, 1999
and amended and restated on July 2, 1999, issued by the
Company to Health Care Executive Partners L.P.

10.4 -- Registration Rights Agreement, dated as of January 26, 1999,
among the Company, Health Care Capital Partners L.P. and
Health Care Executive Partners L.P. (incorporated herein by
reference to Exhibit 99.8 to the Company's Current Report on
Form 8-K filed on February 10, 1999).

10.5 -- America Service Group Inc. Amended Incentive Stock Plan
(as adopted by the Board of Directors on March 19, 1996)
(incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the three month period
ending June 30, 1996).

10.6 -- America Service Group Inc. 401(k) Profit Sharing Plan
(incorporated by reference to Exhibit 10.9 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1992).

10.7 -- Prison Health Services, Inc. Medical Services Agreement
for Alameda County, California, dated July 1, 1992
(incorporated by reference to Exhibit 10.6 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1992).

10.8 -- Prison Health Services, Inc. Agreement for the Department of
Corrections of the State of Kansas, dated February 22, 1991,
and Amendment thereto, dated August 27, 1991 (incorporated by
reference to Exhibit 10.7 to the Company's Registration
Statement on Form S-1, Registration No. 33-43306, as amended).

10.9 -- Prison Health Services, Inc. Health Services Contract for
State of Maryland, Department of Public Safety and
Correctional Services dated November 30, 1992 (incorporated by
reference to Exhibit 10.14 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994).

10.10 -- Prison Health Services, Inc. Health Services Contract for
the City of Philadelphia Department of Public Health
(incorporated by reference to Exhibit 10.13 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1993).

10.11 -- Healthcare Services Contract with the State of Delaware,
dated June 3, 1996 (incorporated by reference to Exhibit 10.5
to the Company's Quarterly Report on Form 10-Q for the three
month period ending June 30, 1996).

10.12 -- Contractual Agreement between the Indiana Department of
Correction and Prison Health Services, Inc. dated April 18,
1997 (incorporated by reference to Exhibit 10.26 to the
Company's Quarterly Report on Form 10-Q for the three month
period ending June 30, 1997).

10.13 -- Credit Agreement dated May 30, 1997 for $20,000,000 with
NationsBank of Tennessee, N.A. (incorporated by reference to
Exhibit 10.25 to the Company's Quarterly Report on Form 10-Q
for the three month period ending June 30, 1997).

15
17

10.14 -- Employment Agreement, dated April 1, 1996, between Scott
L. Mercy and the Company, as amended (incorporated herein by
reference to Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the three month period ended June 30, 1996 and
10.28 to the Company's Quarterly Report on Form 10-Q for the
three month period ended June 30, 1997).

10.15 -- Amended and Restated Employment Agreement, dated September 1,
1998, between Scott L. Mercy and America Service Group Inc.
(incorporated herein by reference to Exhibit 10.16 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1999).

10.16 -- Employment Agreement, dated July 12, 1996, between Michael
Catalano and the Company (incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the
three month period ending September 31, 1996).

10.17 -- Amended and Restated Employment Agreement, dated September 1,
1998, between Michael Catalano and the Company (incorporated
by reference to Exhibit 10.1 to the Company's Quarterly Report
on Form 10-Q for the three month period ending September 31,
1998).

10.18 -- Non-Qualified Stock Option between the Company and Michael
Catalano, dated July 12, 1996, (incorporated by reference to
Exhibit 10.20 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996).

10.19 -- Employment Agreement dated February 20, 1998 between Bruce
A. Teal and the Company (incorporated by reference to Exhibit
10.18 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997).

10.20 -- Non-Qualified Stock Option between the Company and Bruce
A. Teal dated, December 18, 1996, (incorporated by reference
to Exhibit 10.21 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996).

10.21 -- Employment Agreement, dated February 12, 1998, between
Gerard F. Boyle and the Company (incorporated by reference to
Exhibit 10.20 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997).

10.22 -- Non-Qualified Stock Option between the Company and Gerard
F. Boyle, dated February 12, 1998 (incorporated by reference
to Exhibit 10.21 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997).

10.23 -- Employment Agreement, dated October 10, 2000, between S.
Walker Choppin and the Company.

10.24 -- Lease by and between Principal Mutual Life Insurance Company
and America Service Group Inc. dated September 6, 1996
(incorporated herein by reference to Exhibit 10.23 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1997).

10.25 -- Amended and Restated Incentive Stock Plan of the Company
(incorporated by reference to Exhibit 10.27 to the Company's
Quarterly Report on Form 10-Q for the three months ending June
30, 1997).

10.26 -- America Service Group Inc. 1999 Incentive Stock Plan
(incorporated by reference to Annex B to the Company's
definitive Proxy Statement for its Annual Meeting of
Stockholders held on August 30, 1999, which definitive Proxy
Statement was filed on July 28, 1999).

10.27 -- Amended and Restated Credit Agreement, dated as of August 1,
2000, between the Company as Borrower, the Company's
subsidiaries as listed therein, as Guarantors, the Lenders
identified therein and Bank of America, N.A., as
Administrative Agent and as Issuing Bank.

10.28 -- Overline Agreement, dated September 19, 2000, among the
Company, and its subsidiaries who are parties to the Amended
and Restated Credit Agreement, the several lenders who are
parties to Amended and Restated Credit Agreement, and Bank of
America N.A.

21.1 -- Subsidiaries of the Company.

23.1 -- Consent of Ernst & Young LLP.

16
18

(b) Reports on Form 8-K.

On October 4, 2000, the Company filed Current Report on Form 8-K
announcing the acquisition by Secure Pharmacy Plus, Inc., a wholly-owned
subsidiary of America Service Group Inc., of the assets comprising Stadtlanders
Corrections Division from certain affiliates of Bergen Brunswig Corporation.

17
19

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registration has duly caused this report to be signed
on behalf of the undersigned, thereunto duly authorized, on March 30, 2001.

AMERICA SERVICE GROUP INC.

By: /s/ MICHAEL CATALANO
-------------------------------------
Michael Catalano
Chairman, President and
Chief Executive Officer

Pursuant to the Requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities
indicated on March 30, 2001.

SIGNATURES TITLE
- ---------- -----

/s/ MICHAEL CATALANO Chairman, President and Chief Executive Officer
- -----------------------------------------------------
Michael Catalano

/s/ S. WALKER CHOPPIN Senior Vice President and Chief Financial Officer
- -----------------------------------------------------
S. Walker Choppin

/s/ WILLIAM D. EBERLE Director
- -----------------------------------------------------
William D. Eberle

/s/ BURTON EINSPRUCH Director
- -----------------------------------------------------
Burton Einspruch

/s/ DAVID A. FREEMAN Director
- -----------------------------------------------------
David A. Freeman

/s/ CAROL R. GOLDBERG Director
- -----------------------------------------------------
Carol R. Goldberg

/s/ RICHARD M. MASTALER Director
- -----------------------------------------------------
Richard M. Mastaler

/s/ JEFFREY L. MCWATERS Director
- -----------------------------------------------------
Jeffrey L. McWaters

/s/ RICHARD D. WRIGHT Director
- -----------------------------------------------------
Richard D. Wright

18

20
AMERICA SERVICE GROUP INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE

PAGE
----

FINANCIAL STATEMENTS
Report of Independent Auditors............................................................................................ F-2
Consolidated Balance Sheets at December 31, 2000 and 1999................................................................. F-3
Consolidated Statements of Income for the years ended December 31, 2000, 1999, and 1998................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31,
2000, 1999 and 1998..................................................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998................................ F-6
Notes to Consolidated Financial Statements................................................................................ F-7

FINANCIAL STATEMENT SCHEDULE
Valuation and qualifying Accounts and Reserves (Schedule II) for the years ended December 31,
2000, 1999 and 1998..................................................................................................... F-19

All other schedules are omitted as the required information is
inapplicable or is presented in the Company's Consolidated Financial Statements
or the Notes thereto.

F-1
21

REPORT OF INDEPENDENT AUDITORS

Board of Directors and Stockholders
America Service Group Inc.

We have audited the accompanying consolidated balance sheets of America
Service Group Inc. as of December 31, 2000 and 1999, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2000. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of America
Service Group Inc. at December 31, 2000 and 1999, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects the
information set forth therein.

/s/ ERNST & YOUNG LLP

Nashville, Tennessee
February 9, 2001

F-2
22

AMERICA SERVICE GROUP INC.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31,
---------------------------
2000 1999
--------- --------
(SHOWN IN 000'S EXCEPT SHARE
AMOUNTS)

ASSETS
Current assets:
Cash and cash equivalents ................................................. $ 256 $ 444
Accounts receivable: Healthcare and other less allowances of $205
and $420 at December 31, 2000 and 1999, respectively .................... 64,053 39,738
Inventories ............................................................... 7,497 2,838
Prepaid expenses and other current assets ................................. 1,427 4,602
Current deferred taxes .................................................... 1,143 1,289
--------- --------
Total current assets ........................................................ 74,376 48,911
Property and equipment, net ................................................. 8,651 3,932
Deferred taxes .............................................................. -- 562
Goodwill, net ............................................................... 61,358 33,870
Contracts, net .............................................................. 14,002 10,678
Other intangibles, net ...................................................... 1,925 242
Other assets ................................................................ 1,090 532
--------- --------
Total assets ................................................................ $ 161,402 $ 98,727
========= ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................................... $ 21,664 $ 11,531
Medical claims liability .................................................. 11,285 10,436
Accrued expenses .......................................................... 24,213 16,555
Deferred revenue .......................................................... 1,641 891
--------- --------
Total current liabilities ................................................... 58,803 39,413
Noncurrent portion of accrued expenses ...................................... 3,680 2,874
Deferred taxes .............................................................. 757 --
Long-term debt .............................................................. 56,800 25,500
Commitments and contingencies
Mandatory redeemable preferred stock, 500,000 shares authorized;
125,000 shares issued and outstanding at December 31, 2000 and 1999 ....... 12,397 12,375
Mandatory redeemable common stock, 186,000 shares issued and
outstanding at December 31, 1999 .......................................... -- 1,842
Common stock, $.01 par value, 10,000,000 shares authorized; 4,057,000 and
3,729,000 shares issued and outstanding at December 31, 2000 and 1999,
respectively ............................................................. 41 37
Additional paid-in capital .................................................. 18,259 12,856
Stockholders' notes receivable .............................................. (1,384) (1,060)
Retained earnings ........................................................... 12,049 4,890
--------- --------
Total liabilities and stockholders' equity .................................. $ 161,402 $ 98,727
========= ========

See accompanying notes.

F-3
23

AMERICA SERVICE GROUP INC.

CONSOLIDATED STATEMENTS OF INCOME

YEAR ENDED DECEMBER 31,
---------------------------------------------------
(SHOWN IN 000'S EXCEPT SHARE AND PER SHARE AMOUNTS)
2000 1999 1998
---------- ---------- -----------

Healthcare revenue .............................. $ 381,946 $ 272,926 $ 113,287
Healthcare expenses ............................. 344,759 245,485 101,884
---------- ---------- -----------
Gross margin .................................... 37,187 27,441 11,403
Selling, general, and administrative expenses ... 13,838 12,335 9,752
Depreciation and amortization ................... 5,962 3,545 1,199
MedPartners settlement gain ..................... -- -- (4,047)
---------- ---------- -----------
Income from operations .......................... 17,387 11,561 4,499
Interest expense (income) ....................... 4,077 3,830 (600)
---------- ---------- -----------
Income before income taxes (benefits) ........... 13,310 7,731 5,099
Provision for income taxes (benefits) ........... 5,503 3,091 (625)
---------- ---------- -----------
Net income ...................................... 7,807 4,640 5,724
Preferred stock dividends ....................... 648 2,312 --
---------- ---------- -----------
Net income attributable to common shares ........ $ 7,159 $ 2,328 $ 5,724
========== ========== ===========
Net income per common share:
Basic ......................................... $ 1.86 $ 0.64 $ 1.61
========== ========== ===========
Diluted ....................................... $ 1.40 $ 0.60 $ 1.57
========== ========== ===========
Weighted average common shares outstanding:
Basic ......................................... 3,854,000 3,613,000 3,554,000
========== ========== ===========
Diluted ....................................... 5,587,000 3,877,000 3,653,000
========= ========= =========

See accompanying notes.

F-4
24

AMERICA SERVICE GROUP INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

COMMON STOCK ADDITIONAL STOCKHOLDERS' RETAINED
--------------------- PAID-IN NOTES EARNINGS
SHARES AMOUNT CAPITAL RECEIVABLES (DEFICIT)
--------- ------ ---------- ------------- ---------

BALANCE AT JANUARY 1, 1998 .................. 3,529,000 $ 35 $ 7,926 -- $ (3,162)
Issuance of common stock under employee
stock plan ................................ 13,000 -- 138 -- --
Exercise of options and related
tax benefits .............................. 31,000 1 287 -- --
Net income .................................. -- -- -- -- 5,724
--------- ----- ------- ------- --------
BALANCE AT DECEMBER 31, 1998 ................ 3,573,000 36 8,351 -- 2,562
Issuance of common stock under employee
stock plan ................................ 26,000 -- 310 -- --
Exercise of options and related
tax benefits .............................. 55,000 -- 519 -- --
Issuance of common stock under incentive
stock plan ................................ 75,000 1 1,075 (1,039) --
Issuance of common stock warrants ........... -- -- 659 -- --
Noncash, nonrecurring dividend on
redeemable preferred stock-- beneficial
conversion feature ........................ -- -- 1,942 -- (1,942)
Dividends on redeemable preferred stock ..... -- -- -- -- (370)
Interest income on stockholders' notes
receivable ................................ -- -- -- (21) --
Net income .................................. -- -- -- -- 4,640
--------- ----- ------- ------- --------
BALANCE AT DECEMBER 31, 1999 ................ 3,729,000 37 12,856 (1,060) 4,890
Issuance of common stock under employee
stock plan ................................ 38,000 1 615 -- --
Exercise of options and related
tax benefits .............................. 274,000 3 2,646 -- --
Issuance of common stock under incentive
stock plan ................................ 16,000 -- 300 (263) --
Dividends on redeemable preferred stock ... -- -- -- -- (648)
Interest income on stockholders' notes
receivable ................................ -- -- -- (61) --
Expiration of redemption feature of
redeemable common stock ................... -- -- 1,842 -- --
Net income .................................. -- -- -- -- 7,807
--------- ----- ------- ------- --------
BALANCE AT DECEMBER 31, 2000 ................ 4,057,000 $ 41 $18,259 $(1,384) $ 12,049
========= ===== ======= ======= ========

See accompanying notes.

F-5
25

AMERICA SERVICE GROUP INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEAR ENDED DECEMBER 31,
-------------------------------------
2000 1999 1998
-------- -------- -------
(AMOUNTS SHOWN IN 000'S)

OPERATING ACTIVITIES
Net income ........................................................ $ 7,807 $ 4,640 $ 5,724
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization ................................... 5,962 3,545 1,199
Accretion of subordinated notes ................................. -- 534 --
Amortization of deferred financing costs ........................ 232 121
Interest on stockholders' notes receivable ...................... (61) (21) --
Provision for doubtful accounts ................................. 142 544 --
Deferred income tax provision ................................... 1,464 2,220 (762)
Changes in operating assets and liabilities, net of effects
of acquisitions:
Accounts receivable ........................................... (22,539) 12,931 (5,518)
Prepaid expenses and other current assets ..................... 2,533 (5,544) 1,286
Other assets .................................................. 4 216 (52)
Accounts payable .............................................. 9,481 9,093 (805)
Accrued expenses .............................................. 2,412 (5,525) (3,314)
Deferred revenue .............................................. 750 891 (1,410)
-------- -------- -------
Net cash provided by (used in) operating activities ............... 8,187 23,645 (3,652)

INVESTING ACTIVITIES
Cash paid for acquisitions, net of cash acquired .................. (38,669) (66,077) --
Capital expenditures .............................................. (3,089) (1,910) (739)
Proceeds of short-term investments ................................ -- -- 1,559
Proceeds from maturity or sale of restricted investments .......... -- -- 7,191
Purchases of restricted investments ............................... -- -- (1,552)
Proceeds from sale of property and equipment ...................... -- -- 533
Other ............................................................. -- (400) --
-------- -------- -------
Net cash provided by (used in) investing activities ............... (41,758) (68,387) 6,992

FINANCING ACTIVITIES
Proceeds from long-term debt ...................................... 44,606 47,000 --
Proceeds from subordinated notes .................................. -- 15,000 --
Proceeds from mandatory redeemable preferred stock ................ -- 5,000 --
Payments on long-term debt ........................................ (13,306) (21,500) --
Payment of mandatory redeemable preferred stock dividends ......... (468) (370) --
Payment on subordinated notes ..................................... -- (7,500) --
Deferred financing costs .......................................... (751) (520) --
Issuance of common stock .......................................... 653 346 138
Exercise of stock options ......................................... 2,649 519 288
-------- -------- -------
Net cash provided by financing activities ......................... 33,383 37,975 426
Net increase (decrease) in cash and cash equivalents .............. (188) (6,767) 3,766
Cash and cash equivalents at beginning of year .................... 444 7,211 3,445
-------- -------- -------
Cash and cash equivalents at end of year .......................... $ 256 $ 444 $ 7,211
======== ======== =======

SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest ............................................ $ 3,423 $ 3,355 $ --
======== ======== =======
Cash paid for income taxes ........................................ $ 4,870 $ 639 $ 58
======== ======== =======

NONCASH TRANSACTIONS
Conversion of subordinated notes to mandatory redeemable
preferred stock ................................................. $ -- $ 7,370 $ --
======== ======== =======
Discount on subordinated notes for stock warrants issued .......... $ -- $ 659 $ --
======== ======== =======
Non-recurring dividend on mandatory redeemable preferred stock .... $ -- $ 1,942 $ --
======== ======== =======
Issuance of common stock under Incentive Plan for stockholders'
notes receivable ................................................ $ 263 $ 1,039 $ --
======== ======== =======

See accompanying notes.

F-6
26

AMERICA SERVICE GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
(SHOWN IN 000'S EXCEPT INMATE, SHARE AND PER SHARE AMOUNTS)

1. 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.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Prison Health Services, Inc. ("PHS"),
EMSA Correctional Care, Inc. and EMSA Military Services, Inc. ("EMSA"),
Correctional Health Services, Inc. ("CHS") and Secure Pharmacy Plus, Inc.
("SPP") for 2000 and 1999 and its wholly-owned captive insurance subsidiary,
Harbour Insurance, Inc. ("Harbour"), and its wholly owned captive pharmacy,
UniSource, Inc. ("UniSource") for 1998. The Company liquidated and dissolved
Harbour in November 1998 and sold all fixed operating assets of UniSource during
1998. All significant intercompany transactions and account balances have been
eliminated.

Use of Estimates

The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results
could differ from those estimates. Estimates are used primarily in the recording
of the accruals of unbilled medical services calculated based upon a claims
payment lag methodology and professional and general liability claims. The
claims payment lag methodology utilized for recording amounts for unbilled
medical claims is based upon historical payment patterns using actual
utilization data including hospitalization, one day surgeries, physician visits
and emergency room and ambulance visits and their corresponding costs. Estimates
change as new events occur, more experience is acquired, or additional
information is obtained. A change in an estimate is accounted for in the period
of change.

Fair Value of Financial Instruments

The carrying amounts of the Company's financial instruments reported in
the Consolidated Balance Sheets, consist of cash and cash equivalents, accounts
receivable, accounts payable and long-term debt and approximate their fair
values.

Revenue and Cost Recognition

The Company engages principally in fixed price contracts with
correctional institutions 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 based upon a claims payment
lag methodology. Additionally, reserves have been recorded for certain reported
and unreported professional and general liability claims associated with the
delivery of medical services and included in accrued expenses and noncurrent
portion of accrued expenses on the accompanying Consolidated Balance Sheets.

The Company accrues losses under its fixed price contracts when it is
probable that a loss has been incurred (i.e., expected future healthcare costs
and maintenance costs will exceed anticipated future revenue and stop-loss
insurance recoveries if material) and the amount of the loss can be reasonably
estimated. The Company performs this loss accrual analysis on a specific
contract basis.

F-7
27

AMERICA SERVICE GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, demand deposits, money
market funds and investments with original maturities of three months or less
when purchased.

Accounts Receivable

Accounts receivable represent amounts due from state and local
governments and certain private entities for health care services provided by
the Company and pharmaceutical sales of the Company.

Inventory

Pharmacy and medical supplies inventory is stated at the lower of cost
(first-in, first-out method) or market.

Depreciation

Depreciation is provided using straight-line and accelerated methods
over the estimated useful lives of the assets which range from three to five
years.

Intangible Assets

The unamortized excess of the costs of acquisitions over the fair value
of the net tangible assets received at the date of acquisition include
contracts, non-compete agreements and goodwill. Goodwill amortization expense of
$3,387, $1,654 and $14 for 2000, 1999 and 1998, respectively, was computed using
the straight-line method over periods from 10 to 20 years. Contract amortization
expense of $676, $522 and $0 for 2000, 1999 and 1998, respectively, was computed
using the straight-line method over 20 years as determined by an independent
appraisal. Amortization of the non-compete agreements is calculated over 2 years
and approximates $317 and $158 for the years ended December 31, 2000 and 1999,
respectively. The Company wrote off the unamortized portion of cost in excess of
net assets acquired of $400 in June 1998 with the sale of UniSource. Accumulated
amortization of goodwill, contracts and non-compete agreements are $5,041,
$1,198 and $475 as of December 31, 2000, respectively, and $1,654, $522 and $158
as of December 31, 1999, respectively.

Other Assets

Other assets include $1,270 of deferred financing costs related to the
$65 million syndicated credit facility and previous versions thereof (see Note
3). Amortization of $232 and $121, for the years ended December 31, 2000 and
1999 respectively, related to the deferred financing costs is computed using the
straight-line method over the remaining life of the syndicated credit facility
and is included in interest expense on the accompanying Consolidated Statements
of Income. Accumulated amortization as of December 31, 2000 was $353.

Long-Lived Assets

Statement of Financial Accounting Standards (SFAS) No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, requires that companies consider whether indicators of impairment of
long-lived assets held for use are present. If such indicators are present,
companies determine whether the sum of the estimated undiscounted future cash
flows attributable to such assets is less than their carrying amount, and if so,
companies recognize an impairment loss based on the excess of the carrying
amount of the assets over their fair value. Accordingly, management periodically
evaluates the ongoing value of property and equipment and intangible assets and
considers events, circumstances and operating results, including consideration
of contract performance at the fixed price contract level, to determine if
impairment exists. If long-lived assets are deemed impaired, management adjusts
the asset value to fair value.

F-8
28

AMERICA SERVICE GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Preferred Stock

The Board of Directors has the power and authority to establish
preferences related to dividends, redemptions, payment on liquidation,
conversion privileges and voting rights. During 1999, the Company authorized
500,000 shares of mandatory redeemable convertible preferred stock, with a $100
per share liquidation value and a 5% coupon. During 1999, a total of 125,000 of
such shares were issued as part of the EMSA acquisition discussed in Note 3.

Income Taxes

The Company uses the liability method of accounting for federal and
state income taxes. Under the liability method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement carrying amounts and tax bases of assets and liabilities using enacted
tax rates in effect in the years in which the differences are expected to
reverse. Differences between taxable income and income for financial statement
purposes result from the recognition of certain income and expense items for tax
purposes in periods which differ from those used for financial statement
purposes.

Stock Options

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

Recently Issued Accounting Pronouncements

In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities
("SFAS No. 133"), as amended in June 2000 by Statement of Financial Accounting
Standards No. 138 ("SFAS 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. In July 1999, the FASB
issued Statement of Financial Accounting Standards No. 137, Accounting for
Derivative Instruments and Hedging Activities - Deferral of Effective Date of
FASB Statement No. 133, which deferred for one year the effective date of SFAS
133 to all fiscal quarters of fiscal years beginning after June 15, 2000. The
Company will adopt SFAS 133 effective January 1, 2001 and such adoption is not
expected to have a material impact on the Company's consolidated financial
position and results of operations (see Note 9).

Reclassifications

Certain prior period amounts have been reclassified in order to conform
to current period presentation.

3. ACQUISITIONS

2000 Acquisitions

On September 20, 2000, the Company acquired certain assets of
Stadtlanders Corrections Division, a subsidiary of Bergen Brunswig, Inc. and a
pharmacy company, for $7,900 in cash. The pharmacy division is operated as a
subsidiary of ASG under the name Secure Pharmacy Plus, Inc. ("SPP"). SPP is the
largest correctional pharmacy company in the United States servicing over
300,000 inmates in 41 states. SPP's sales to PHS are eliminated in
consolidation.

Effective June 1, 2000, the Company acquired the stock of Correctional
Health Services, Inc. ("CHS") for $16,662 in cash, net of $338 of cash received.
The purchase price was financed by advances pursuant to the Company's then
existing Senior Credit Facility, which was increased in connection with the
acquisition. CHS, with headquarters in Verona, New Jersey, services twenty-one
contracts providing health care services to approximately 12,000 inmates.

F-9
29

AMERICA SERVICE GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

On March 29, 2000, the Company acquired the Pennsylvania and New York operations
of Correctional Physician Services, Inc. ("CPS") for $14,000 in cash. CPS
assigned its contracts for the Eastern Region of the Pennsylvania Department of
Corrections and the Yonkers Region of the New York Department of Correctional
Services to PHS. CPS is a privately held company with headquarters in Blue Bell,
Pennsylvania. Combined, the Pennsylvania and New York operations of CPS provided
services to approximately 21,000 inmates and had approximately $41,000 in
revenue during 1999. Approximately $1,800 of the cash purchase price was placed
in escrow for payment of a portion of the seller's liability under a contract
cost sharing provision.

The 2000 acquisitions were financed under the Company's then existing
credit facilities or expansions thereof (see Note 8). The acquisitions were
accounted for using the purchase method of accounting and results of operations
of the acquired entities or contracts have been included in the accompanying
Consolidated Income Statements from the respective acquisition dates.

1999 Acquisitions

On January 26, 1999, the Company purchased all of the outstanding stock
of EMSA Government Services, Inc. ("EMSA") from InPhyNet Administrative
Services, Inc. ("InPhyNet") for $63,400 in cash, net of a $3,600 working capital
payment from InPhyNet. InPhyNet was a wholly-owned subsidiary of MedPartners,
Inc. ("MedPartners"). EMSA and its subsidiaries provide comprehensive managed
healthcare solutions to approximately 70,000 inmates housed in state and local
correctional facilities and provide emergency medicine and primary healthcare
services to active and retired military personnel and their dependents at
medical facilities operated by the U.S. Department of Defense and the Veterans
Administration.

The EMSA acquisition was financed by (i) funds available under the
Amended and Restated Credit Agreement, dated January 26, 1999, (ii) $15,000 of
proceeds from the issuance of the Company's 12% Subordinated Convertible Bridge
Notes due January 26, 2000 with detachable warrants to purchase an aggregate
135,000 shares of the Company's common stock, and (iii) $5,000 of proceeds from
the issuance of the Company's Mandatory Redeemable Preferred Stock. These debt
and equity instruments are more fully described in Notes 8 and 11, respectively.
The EMSA acquisition was accounted for using the purchase method of accounting
and results of operations of the acquired entity have been included in the
accompanying Consolidated Income Statements from the acquisition date.

The 2000 and 1999 acquisitions are summarized as follows:

EMSA CPS CHS SPP TOTAL
-------- ------- ------- ------ --------

Fair value of net operating assets acquired
(liabilities assumed) ........................ $ 19,000 $(2,200) $ (600) $4,500 $ 20,700
Fair value of contracts acquired ..............
Non-compete agreements ........................
Goodwill ...................................... 11,200 -- 4,000 -- 15,200
400 -- 2,000 -- 2,400
Cost of acquisitions (net of cash acquired) ... 35,500 16,200 11,300 3,400 66,400
-------- ------- ------- ------ --------
$ 66,100 $14,000 $16,700 $7,900 $104,700
======== ======= ======= ====== ========

The following unaudited pro forma results of operations give effect to
the operations of EMSA, CHS and SPP as if the acquisitions had occurred at the
beginning of the year of acquisition and the beginning of the immediately
preceding year.

2000 1999 1998
----------- ----------- -----------

Healthcare revenue ......................... $ 421,049 $ 335,927 $ 274,067
Net income attributable to common shares ... $ 6,303 $ 1,593 $ 6,229
Net income per common share:
Basic .................................... $ 1.64 $ 0.44 $ 1.75
Diluted .................................. $ 1.24 $ 0.41 $ 1.55

F-10
30

AMERICA SERVICE GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

4. RELEASE AND SETTLEMENT AGREEMENT

On October 1, 1997, the Company entered into a Plan and Agreement of
Merger (the "Merger Agreement") with MedPartners, Inc., a Delaware corporation
("MedPartners"), and a wholly owned subsidiary of MedPartners, pursuant to which
the Company would have been acquired by MedPartners (the "Merger").

On February 26, 1998, the Company announced the termination of the
Merger Agreement and the execution of a Release and Settlement Agreement (the
"Settlement Agreement") with MedPartners relating to the Merger Agreement.
Pursuant to the Settlement Agreement, MedPartners agreed to pay the Company
approximately $3,500 in cash and to assume certain other base and employee
healthcare benefit costs incurred by the Company of approximately $1,500.
Approximately $1,000 of these payments reimbursed the Company for costs directly
associated with the terminated Merger that were included in prepaid expenses and
other current assets at December 31, 1997. The resulting $4,047 is reported in
1998 as the MedPartners settlement gain.

In connection with the anticipated Merger, all of the UniSource
employees were informed of the Company's intent to cease operations and sell or
dispose of all of UniSource's operating assets. Costs of approximately $600
associated with the disposal of UniSource, including $400 of unamortized cost in
excess of net assets acquired, severance and other miscellaneous expenses are
included in selling, general and administrative expenses in 1998. Also in
connection with the Merger, the Company incurred employee stay bonuses and
severance costs of $700, which are included in selling, general and
administrative expenses in 1998.

5. PREPAID EXPENSES AND OTHER CURRENT ASSETS

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

DECEMBER 31,
-----------------
2000 1999
------ ------

Prepaid insurance ........... $ 898 $2,517

Prepaid pharmacy expenses ... -- 1,626
Prepaid performance bonds ... 163 180
Prepaid other ............... 366 279
------ ------
$1,427 $4,602
====== ======

6. PROPERTY AND EQUIPMENT

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

DECEMBER 31,
----------------------- ESTIMATED
2000 1999 USEFUL LIVES
-------- -------- ------------

Leasehold improvements ........... $ 1,153 $ 52 5 years
Equipment and furniture .......... 9,156 5,753 5 years
Computer software ................ 1,122 723 3 years
Medical equipment ................ 1,833 456 5 years
Automobile ....................... 14 12 5 years
-------- -------
13,278 6,996
Less: Accumulated depreciation ... (4,627) (3,064)
-------- -------
$ 8,651 $ 3,932
======== =======

Depreciation expense for the years ended December 31, 2000, 1999 and
1998 was $1,563, $1,200 and $800, respectively.

F-11
31

AMERICA SERVICE GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

7. ACCRUED EXPENSES

Accrued expenses consist of the following:

DECEMBER 31,
-----------------------
2000 1999
-------- --------

Salaries and employee benefits ................. $ 12,413 $ 13,048
Professional liability claims .................. 4,786 4,091
Accrued workers' compensation .................. 1,148 856
Accrual for impaired contract .................. -- 855
CPS cost sharing liability and other acquisition
costs......................................... 3,570 --
Other .......................................... 5,976 579
-------- --------
27,893 19,429
Less: Noncurrent portion of liability claims ... (3,680) (2,874)
-------- --------
$ 24,213 $ 16,555
======== ========

8. BANKING ARRANGEMENTS

2000 Credit Facility

On August 1, 2000, the Company entered into the Amended and Restated
Credit Agreement (the "2000 Credit Facility") with a syndicate of four banks
with Bank of America, N.A. serving as lead and administrative agent for a total
of $65,000. The 2000 Credit Facility amended the previous $52 million Credit
Facility entered into commensurate with the EMSA acquisition. The outstanding
principal amount under the 2000 Credit Facility matures in August 2003, and
$8,200 is currently available under the 2000 Credit Facility. The interest rate
is based on the LIBO rate or the prime rate plus a fixed percentage based upon
the operating performance of the Company for the immediately preceding six-month
period. The 2000 Credit Facility is collateralized by all assets and the Company
and its operating subsidiaries and is subject to certain quarterly financial
covenants, with which the Company was in compliance throughout 2000. The 2000
Credit Facility prohibits the Company from undertaking certain transactions such
as the payment of common stock dividends, the repurchase of common stock and the
incurrence of additional indebtedness. The 2000 Credit Facility also requires
the Company to maintain interest rate protection agreements for a minimum
$30,000 of the $65 million available under the facility for a minimum period of
two years (see Note 9).

1999 Credit Facility

In connection with the EMSA acquisition, the Company entered into a
$52 million Credit Facility ("1999 Credit Facility") expiring September 30,
2002, which replaced the Company's $20 million Credit Facility dated March 28,
1997. The 1999 Credit Facility included a $10,000 facility for working capital
and issuance of letters of credit for performance bonds. The interest rate was
based on LIBOR or prime rates subject to the quarterly operating performance of
the Company, as defined in such facility. The Credit Facility was collateralized
by all assets of the Company and its operating subsidiaries and was also subject
to certain quarterly financial covenants, with which the Company was in
compliance throughout 1999. No borrowings were outstanding under the working
capital portion of the 1999 Credit Facility at December 31, 1999 and 1998.

Letters of Credit

Although the Company's 2000 Credit Facility includes a $10,000 facility
for working capital and issuance of letters of credit for performance bonds,
there were no open letters of credit as of December 31, 2000 or 1999, and only
$500 outstanding as of December 31, 1998.

F-12
32

AMERICA SERVICE GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

9. DERIVATIVE FINANCIAL INSTRUMENTS

In order to protect the Company from interest rate volatility and as
required by the aforementioned 2000 Credit Facility, the Company entered into
four interest rate collar agreements ("the derivatives") during 2000 and 1999
with three of its syndicated banks ("the hedging banks") for a notional amount
of $30,000. The derivatives qualify as cash flows hedges under SFAS 133 and
expire between May 2001 and March 2003. The derivatives have 90-day settlement
periods at which time the Company is required to make payments to the hedging
banks for instances in which the 90-day LIBO rate drops below the designated
rate floors (generally ranging from 4.95% to 6.375%) or is entitled to receive
payments from the hedging banks for instances in which the 90-day LIBO rate
exceeds the designated rate ceilings (generally ranging from 7.25% to 7.75%). In
accordance with the provisions of SFAS 133, on January 1, 2001, the Company
recorded a liability for the derivatives of approximately $212, net of tax,
which represents the fair market value of the derivatives as of the date of
adoption of SFAS 133. The adjustment to record the derivatives at fair value was
charged to other comprehensive income as the cumulative effect of a change in
accounting principle. Subsequent changes to the fair value of the derivatives
will be charged to earnings to the extent of the derivatives' ineffectiveness,
with the remainder of the change in fair value charged to other comprehensive
income.

10. INCOME TAXES

Significant components of federal income tax expense are as follows:

YEAR ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998
---------- ---------- ----------

Current income taxes:
Federal........................................................ $ 3,534 $ 503 $ 50
State.......................................................... 505 368 87
---------- ---------- ----------
4,039 871 137
Deferred taxes:
Federal........................................................ 1,281 1,942 (682)
State.......................................................... 183 278 (80)
---------- ---------- ----------
1,464 2,220 (762)
---------- ---------- ----------
Income taxes (benefits).......................................... $ 5,503 $ 3,091 $ (625)
========== ========== ==========

Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets (liabilities) are as follows:

YEAR ENDED DECEMBER 31,
------------------------
2000 1999
-------- --------

Amortization ....................... $(2,043) $(1,722)
Self-insurance reserves ............ 1,845 1,539
Accrued vacation ................... 1,158 573
Prepaid insurance .................. (359) --
Depreciation ....................... (204) 29
Allowance for doubtful accounts .... 82 168
Accrued legal fees ................. 21 10
Executive stock options ............ -- 814
Net operating loss carryforwards ... -- 816
State taxes ........................ -- (286)
Other .............................. (114) (90)
------- -------
$ 386 $ 1,851
======= =======

A reconciliation of the federal statutory rate to the effective tax
rate is as follows:

YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
------- ------- -------

Federal tax ........................................ 35.0% 35.0% 34.0%
State income taxes ................................. 5.2 4.8 4.0
Alternative minimum tax ............................ -- -- 1.0
Nondeductible goodwill and contract amortization ... 1.2 -- --
Decrease in valuation allowance .................... -- -- (52.3)
Other .............................................. -- 0.2 1.0
---- ---- ----
41.4% 40.0% (12.3)%
==== ==== ====

F-13
33

AMERICA SERVICE GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

11. MANDATORY REDEEMABLE PREFERRED STOCK

Mandatory Redeemable Preferred Stock (the "Preferred Stock") consists
of 50,000 shares issued on January 26, 1999 and 75,000 shares issued on August
30, 1999 as part of the EMSA acquisition. The Preferred Stock contains a 5%
coupon rate and is mandatorily redeemable on July 26, 2005. Dividends have been
paid through September 30, 2000. Each share of Preferred Stock is convertible
into such number of fully paid and nonassessable shares of common stock as is
determined by dividing $100.00 by the conversion price ($9.45) at the option of
the holder at any time after the issue date and prior to the close of business
on the day prior to a date which the Company has set to redeem such shares of
Preferred Stock. The Company shall pay to each holder of shares of Preferred
Stock an amount equal to any accrued and unpaid dividends on the shares of
Preferred Stock surrendered for conversion to the date of such conversion.

The 75,000 shares issued on August 30, 1999 related to conversion of
$7.5 million of subordinated notes which had been issued at a discount.
Accordingly, the remaining $125,000 discount is being recognized through the
mandatory redemption date through additional noncash dividends.

Subsequent to December 31, 2000, the Company achieved the minimum
market price requirements as outlined in the shareholder agreements with the
holders of the Preferred Stock resulting in the conversion of the 125,000 shares
of the Preferred Stock into the 1,322,751 shares of the Company's common stock
(see Note 20).

12. MANDATORY REDEEMABLE COMMON STOCK

During 1996, the Company sold 146,000 shares of mandatory redeemable
common stock (purchased shares) and awarded 40,000 shares (awarded shares) of
mandatory redeemable common stock to its then Chief Executive Officer. The
146,000 shares were sold at the then current fair market value of $8.75 per
share. The vesting of the awarded shares could be, and was accelerated under the
terms of the award and a compensation charge of $8.75 per share was recorded
representing the fair market value of the shares on the date of issuance. During
1997, the redemption price was fixed at $9.90 per share, through an amendment to
the employment agreement.

On July 15, 2000, the outstanding shares of mandatory redeemable common
stock were sold to an independent third party resulting in the expiration of the
stock's redemption provision. The shares, accordingly, are reflected as
additional paid-in capital as of December 31, 2000.

13. STOCKHOLDERS' NOTES RECEIVABLE

On August 30, 1999, stockholders of the Company approved the America
Service Group Inc. 1999 Incentive Stock Plan (the "1999 Plan") to allow for the
issuance of stock options, restricted stock, stock appreciation rights and for
the purchase of shares of Common Stock and the extension of recourse loans to
certain of the Company's key employees and outside directors to permit them to
purchase such shares of Common Stock. There are 786,000 shares of Common Stock
available under the 1999 Plan. The Company is permitted to make up to $1,300 in
loans to fund the purchase of Common Stock pursuant to the 1999 Plan.

During 1999, a total of $1,039 of loans bearing market interest rates
and payable five years from the date of issuance were extended in order for
certain Company employees and directors to purchase 72,895 shares of Common
Stock. In connection with the purchase of the Common Stock, 225,657
non-incentive stock options and 63,171 incentive stock options were issued at
fair market value on the date of grant. Both the non-incentive and incentive
stock options issued expire ten years from date of grant, with the non-incentive
stock options vesting pro rata over four years and the incentive stock options
having a four-year cliff vesting.

During 2000, the Company extended loans bearing market interest rates
and payable five years from the date of issuance totaling $263 to certain
members of management and directors to purchase 16,049 shares of Common Stock.
In connection with such purchases, the Company issued 148,349 non-incentive
stock options and 19,010 incentive stock options at fair market value at the
date of grant with each option vesting ratably over a period of three to four
years.

F-14
34

AMERICA SERVICE GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

14. STOCK OPTION PLANS

In addition to the 1999 Incentive Stock Plan discussed in Note 13, the
Company has an Incentive Stock Plan which provides for the granting of options,
stock awards and stock appreciation rights to officers, key employees and
non-employee directors for up to 1,483,000 shares of the Company's common stock.
Awards and vesting periods under the plan are discretionary and are administered
by a committee of the Board of Directors. The exercise price of the options can
not be less than the fair market value at the date of grant. Options and other
benefits expire at such times as the committee determines at the time of grant,
but no later than ten years from the grant date.

The following is a summary of stock option activity under the Plans:

WEIGHTED
AVERAGE
OPTIONS PRICE RANGE EXERCISE PRICE
--------- ------------- --------------

Outstanding, December 31, 1998.............................................. 818,000 4.50-- 14.44 10.12
Granted................................................................... 587,000 13.00-- 14.81 13.99
Exercised................................................................. (54,000) 4.50-- 13.13 6.84
Canceled.................................................................. (86,000) 9.69-- 14.44 13.06
--------- ------------- -------
Outstanding, December 31, 1999.............................................. 1,265,000 $4.50--$14.81 $ 11.85
========= ============= =======
Granted................................................................... 449,000 13.81-- 20.00 17.15
Exercised................................................................. (274,000) 4.50-- 14.81 9.66
Canceled.................................................................. (16,000) 9.50-- 15.63 12.37
--------- ------------- -------
Outstanding, December 31, 2000.............................................. 1,424,000 $4.50--$20.00 $ 13.98
========= ============= =======

Total options available for future grants at December 31, 2000 and
1999, were 133,000 and 566,000, respectively.

As of December 31, 2000, 503,000 options were exercisable under all
plans. The Company has reserved 2,543,000 shares of common stock for options
outstanding and for options which may be granted in the future.

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ---------------------------------
WEIGHTED AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED AVERAGE EXERCISABLE AT WEIGHTED AVERAGE
EXERCISE PRICES AT 12/31/00 CONTRACTUAL LIVE EXERCISE PRICE 12/31/00 EXERCISE PRICE
------------------ -------------- ------------------ ----------------- --------------- ----------------

$4.50-- 6.50 11,000 3.75 $ 5.78 11,000 $ 5.78
8.69-- 11.19 315,000 7.52 9.67 226,000 9.55
13.00-- 14.81 658,000 8.61 13.93 227,000 13.65
15.00-- 20.00 440,000 8.69 17.35 39,000 15.63
-------------- --------- --------
$4.50-- 20.00 1,424,000 503,000
============== ========= ========

Options exercisable at December 31, 2000 had a weighted average
exercise of $11.66.

Pro forma information regarding net income and earnings per share is
required by SFAS No. 123 which also requires that the information be determined
as if the Company has accounted for its employee stock options granted
subsequent to December 31, 1994 under the fair value method of that Statement.
The fair value of these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions:

YEAR ENDED
DECEMBER 31,
---------------------
2000 1999
------- -------

Volatility.................................................................... 0.5 0.5
Interest rate................................................................. 6-7% 5-6%
Expected life (years)......................................................... 3 3
Dividend yields............................................................... 0.0% 0.0%

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

F-15
35

AMERICA SERVICE GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information for the years ended December 31, 2000, 1999 and 1998 are
as follows:

YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
2000 1999 1998
------------------- ------------------- ------------------
AS PRO AS PRO AS PRO
REPORTED FORMA REPORTED FORMA REPORTED FORMA
-------- -------- -------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Net income attributable to common
shares ............................................. $ 7,807 $ 5,989 $ 2,328 $ 1,572 $ 5,724 $ 5,231
Income per common share:
Basic .............................................. $ 1.86 $ 1.49 $ 0.64 $ 0.44 $ 1.61 $ 1.47
Diluted ............................................ $ 1.40 $ 1.03 $ 0.60 $ 0.41 $ 1.57 $ 1.44

The resulting pro forma disclosures may not be representative of that
to be expected in future years. The weighted average fair value of options
granted during 2000, 1999 and 1998 is $6.88, $5.43, and $4.26, respectively.

15. NET INCOME PER SHARE

The table below sets forth the computation of basic and diluted
earnings per share as required by FASB Statement No. 128 for the three years in
the period ended December 31, 2000.

YEAR ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998
----------- ----------- ----------

NUMERATOR:
Net Income ....................................... $ 7,807 $ 4,640 $ 5,724
Redeemable Preferred Stock dividends ............. (648) (2,312) --
----------- ----------- ----------
Numerator for basic earnings per share--
income available to common stockholders ........ $ 7,159 $ 2,328 $ 5,724
=========== =========== ==========
DENOMINATOR:
Denominator for basic earnings per share--
weighted average shares ........................ 3,854,000 3,613,000 3,554,000
Effect of dilutive securities:
Mandatory Redeemable Preferred Stock ........... 1,323,000 -- --
Warrants ....................................... 99,000 58,000 --
Employee stock options ......................... 311,000 206,000 99,000
----------- ----------- ----------
Denominator for diluted earnings per share--
adjusted weighted average shares and assumed
conversions .................................... 5,587,000 3,877,000 3,653,000
=========== =========== ==========
Basic earnings per share ......................... $ 1.86 $ 0.64 $ 1.61
=========== =========== ==========
Diluted earnings per share ....................... $ 1.40 $ 0.60 $ 1.57
=========== =========== ==========

During any given quarter for the years ended December 31, 2000, 1999,
and 1998 there were no more than 398,000, 4,000 and 388,000 options,
respectively, to purchase common stock with weighted average exercise prices of
$14.97, $14.38 and $12.04, respectively, not included in the computation of
diluted earnings per share because the options' exercise price was greater than
the average market price for the period of the common shares and, therefore, the
effect would be antidilutive. For the year ended December 31, 1999, the effect
of converting 125,000 shares of preferred stock into 1,322,751 shares of common
stock is not included in the compution of diluted earnings per share because the
effect would be antidilutive.

Under Financial Accounting Standards Board Statement No. 128, Earnings
Per Share, when one or more quarters has a loss available to common
stockholders, the treasury stock method of computing earnings per share may
yield diluted earnings per share amounts for annual periods that do not equal
the sum of the individual quarter's diluted earnings per share amounts, as is
the case for the Company in 1999.

F-16
36

AMERICA SERVICE GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

16. EMPLOYEE BENEFIT PLAN

The Company has a 401(k) Retirement Savings Plan (the "Plan") covering
substantially all employees who have completed one year and 1,000 hours of
service. The Plan permits eligible employees to defer and contribute to the plan
a portion of their compensation. The Company matches such employee contributions
to the Plan ranging from 1% to 3% of eligible compensation, depending on his or
her years of participation. The Company recorded an expense of $889, $700 and
$300 for the years ended December 31, 2000, 1999 and 1998, respectively, related
to the matching contributions of the Plan.

The Company instituted an Employee Stock Purchase Plan during 1996. The
Employee Stock Purchase Plan allows full-time employees to elect to purchase
shares of Common Stock through voluntary automatic payroll deductions of up to
10% of his or her annual salary. Purchases of stock under the plan are made at
the end of two six month offering periods each year, one beginning on January 1
and one beginning on July 1. At the end of each six-month period, the employee's
contributions during that six-month period are used to purchase shares of Common
Stock from the Company at 85% of the fair market value of the Common Stock on
the first day of that six-month period. The employee may elect to discontinue
participation in the plan for future periods at the end of any six-month period.

17. PROFESSIONAL AND GENERAL LIABILITY INSURANCE

During the years ended December 31, 2000, 1999 and 1998, the Company
maintained 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 maintained excess liability insurance of $15 million for
each claim and $15 million annual aggregate. Any liabilities in excess of the
third-party insurance limits are assumed by the Company.

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
$4,786 and $4,091 at December 31, 2000 and 1999, 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
December 31, 2000 represent management's best estimate of the amounts necessary
to discharge the Company's obligations.

18. COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company leases office space and equipment under certain
noncancelable operating leases.

In connection with the MedPartners Settlement Agreement, the Company
closed its regional offices in Atlanta, Georgia, and Newark, Delaware and
assigned future lease payments to MedPartners.

Future minimum annual lease payments at December 31, 2000 are as
follows:

YEAR ENDING DECEMBER 31:

2001.............................................................................. $ 1,167
2002.............................................................................. 962
2003.............................................................................. 637
2004.............................................................................. 237
2005.............................................................................. 217
Thereafter........................................................................ 630
-------
$ 3,850
=======

Rental expense under operating leases was $1,612, $1,200 and $400 for
the years ended December 2000, 1999 and 1998, respectively.

F-17
37

AMERICA SERVICE GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Catastrophic Limits

Many of the Company's contracts require reimbursement to the Company
for all treatment costs or, in some cases, only out-of-pocket treatment costs
related to certain catastrophic events, and/or for AIDS or AIDS-related
illnesses. Certain contracts do not contain such limits. The Company attempts to
compensate for the increased financial risk when pricing contracts that do not
contain individual, catastrophic or AIDS-related limits. However, the occurrence
of severe individual cases, AIDS-related illnesses or a catastrophic event in a
facility governed by a contract without such limitations could render the
contract unprofitable and could have a material adverse effect on the Company's
operations. The Company maintains insurance from an unaffiliated insurer for
contracts that do not contain catastrophic protection for hospitalization
amounts in excess of $125 per inmate through September 1998 and $200 per inmate
thereafter. The Company believes this insurance significantly mitigates its
exposure to unanticipated expenses of catastrophic hospitalization. Catastrophic
insurance premiums and recoveries, neither of which are significant, are
included in healthcare expenses. Receivables for insurance recoveries, which are
not significant, are included in accounts receivable.

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 December 31, 2000 and 1999. 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.

19. MAJOR CUSTOMERS AND GEOGRAPHICAL CONCENTRATIONS

The Company generally views its operating segments on a managed
healthcare contract basis. The Company considers its managed healthcare services
contract business to be one reportable segment under Financial Accounting
Standards Board Statement No. 131, Disclosures about Segments of an Enterprise
and Related Information, as the economic characteristics, the nature of the
services, and type and class of customers for the services and the methods used
to provide the services are similar. Consequently, other than the following
enterprise-wide disclosures relating to major customers and geographic
concentrations, reportable segment information is not applicable. The following
is a summary of revenues from major customers:

YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
2000 1999 1998
---------------------- --------------------- ---------------------
REVENUE PERCENT REVENUE PERCENT REVENUE PERCENT
--------- --------- --------- --------- --------- ---------

State of Pennsylvania ... $45,478 11.9% $20,036 7.3% $ -- 0.0%
State of Maryland ....... 31,654 8.3 -- 0.0 -- 0.0
State of Indiana ........ 26,996 7.1 24,804 9.1 23,968 21.2
City of Philadelphia .... 22,260 5.8 10,174 3.7 17,966 15.9
State of Kansas ......... 21,434 5.6 20,450 7.5 19,223 17.0
County of Alameda ....... 11,507 3.0 12,499 4.9 12,122 10.7

Estimated credit losses associated with the receivables are provided
for in the consolidated financial statements.

20. SUBSEQUENT EVENTS

The Company's shareholder agreement with the holders of the Preferred
Stock includes market price provisions which, if met, provide the Company the
right to force conversion of the Preferred Stock into shares of Common Stock. On
January 4, 2001, the market price of the Company's Common Stock exceeded 225% of
the initial conversion price ($9.45 per share) for 45 consecutive Trading Days
triggering the Company's ability to force conversion of the Preferred Stock into
a number of shares of Common Stock as is determined by dividing $100,000 by the
conversion price ($9.45). The holders of the Preferred Stock converted all
125,000 shares of Preferred Stock into 1,322,751 shares of the Company's Common
Stock on February 5, 2001 resulting in amortization of the remaining preferred
stock discounts.

F-18