##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
 
 (Mark One)
 x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from ____________ to ____________
 
 AMERICA SERVICE GROUP INC.
  Delaware
    
    51-0332317(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)105 Westpark Drive, Suite 200Brentwood, Tennessee
    
    37027(Address of principal executive offices)
    
    (Zip Code)
 (615) 373-3100
 x o
  o x o o
  o x




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##### 



AMERICA SERVICE GROUP INC.
 QUARTERLY REPORT ON FORM 10-Q
INDEX
 PageNumberPART I. FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007
    
    
    3Condensed Consolidated Statements of Income for the quarters and six months ended
June 30, 2008 and 2007
    
    
    4Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and 2007
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    37Item 4. Controls and Procedures
    
    
    37PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    38Item 1A. Risk Factors
    
    
    42Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    42Item 3. Defaults Upon Senior Securities
    
    
    42Item 4. Submission of Matters to a Vote of Security Holders
    
    
    42Item 5. Other Information
    
    
    42Item 6. Exhibits
    
    
    43Signatures
    
    
    44Ex-31.1 Section 302 Certification of the CEOEx-31.2 Section 302 Certification of the CFOEx-32.1 Section 906 Certification of the CEOEx-32.2 Section 906 Certification of the CFO
  2




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##### Table of Contents



PART I:
 FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 AMERICA SERVICE GROUP INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (shown in 000s except share and per share amounts)
 (UNAUDITED)
 June 30,
    
    
    December 31,2008
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    16,841
    
    
    $
    8,969Accounts receivable, net of allowance for doubtful accounts of $553 and $689, respectively
    
    
    47,262
    
    
    
    62,663Inventories
    
    
    2,777
    
    
    
    2,999Prepaid expenses and other current assets
    
    
    10,999
    
    
    
    10,727Current deferred tax assets
    
    
    5,653
    
    
    
    5,442Total current assets
    
    
    83,532
    
    
    
    90,800Property and equipment, net
    
    
    5,613
    
    
    
    5,055Goodwill, net
    
    
    40,772
    
    
    
    40,772Contracts, net
    
    
    3,071
    
    
    
    3,911Other intangibles, net
    
    
    269
    
    
    
    384Other assets
    
    
    8,994
    
    
    
    9,182Noncurrent deferred tax assets
    
    
    
    
    
    
    816Total assets
    
    $
    142,251
    
    
    $
    150,920LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    19,531
    
    
    $
    20,264Accrued medical claims liability
    
    
    17,193
    
    
    
    22,184Accrued expenses
    
    
    36,713
    
    
    
    33,860Deferred revenue
    
    
    3,025
    
    
    
    11,996Revolving credit facility
    
    
    7,500
    
    
    
    7,500Total current liabilities
    
    
    83,962
    
    
    
    95,804Noncurrent portion of accrued expenses
    
    
    14,389
    
    
    
    15,466Noncurrent deferred tax liabilities
    
    
    719
    
    
    
    Total liabilities
    
    
    99,070
    
    
    
    111,270Commitments and contingenciesStockholders equity:Preferred stock, $0.01 par value, 2,000,000 shares authorized at June 30, 2008 and
December 31, 2007; no shares issued or outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value, 20,000,000 shares authorized at June 30, 2008 and December
31, 2007; 9,319,038 and 9,316,014 shares issued and outstanding at June 30, 2008 and
December 31, 2007, respectively
    
    
    93
    
    
    
    93Additional paid-in capital
    
    
    38,683
    
    
    
    37,485Retained earnings
    
    
    4,405
    
    
    
    2,072Total stockholders equity
    
    
    43,181
    
    
    
    39,650Total liabilities and stockholders equity
    
    $
    142,251
    
    
    $
    150,920
 
 3




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##### Table of Contents



AMERICA SERVICE GROUP INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 (shown in 000s except share and per share amounts)
 (UNAUDITED)
 Quarter ended
    
    
    Six months endedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Healthcare revenues
    
    $
    125,721
    
    
    $
    117,277
    
    
    $
    251,859
    
    
    $
    235,759Healthcare expenses
    
    
    115,309
    
    
    
    108,811
    
    
    
    231,891
    
    
    
    219,008Gross margin
    
    
    10,412
    
    
    
    8,466
    
    
    
    19,968
    
    
    
    16,751Selling, general and administrative expenses
    
    
    6,861
    
    
    
    6,768
    
    
    
    13,340
    
    
    
    14,098Audit Committee investigation and related expenses
    
    
    
    
    
    
    26
    
    
    
    58
    
    
    
    40Depreciation and amortization
    
    
    966
    
    
    
    933
    
    
    
    1,885
    
    
    
    1,961Income from operations
    
    
    2,585
    
    
    
    739
    
    
    
    4,685
    
    
    
    652Interest, net
    
    
    177
    
    
    
    358
    
    
    
    449
    
    
    
    720Income (loss) from continuing operations before income tax
provision
    
    
    2,408
    
    
    
    381
    
    
    
    4,236
    
    
    
    (68
    )Income tax provision
    
    
    935
    
    
    
    238
    
    
    
    1,722
    
    
    
    68Income (loss) from continuing operations
    
    
    1,473
    
    
    
    143
    
    
    
    2,514
    
    
    
    (136
    )Income (loss) from discontinued operations, net of taxes
    
    
    (122
    )
    
    
    1,156
    
    
    
    (181
    )
    
    
    2,795Net income
    
    $
    1,351
    
    
    $
    1,299
    
    
    $
    2,333
    
    
    $
    2,659Net income (loss) per common share  basic:Income (loss) from continuing operations
    
    $
    0.16
    
    
    $
    0.02
    
    
    $
    0.27
    
    
    $
    (0.01
    )Income (loss) from discontinued operations, net of taxes
    
    
    (0.01
    )
    
    
    0.12
    
    
    
    (0.02
    )
    
    
    0.29Net income
    
    $
    0.15
    
    
    $
    0.14
    
    
    $
    0.25
    
    
    $
    0.28Net income (loss) per common share  diluted:Income (loss) from continuing operations
    
    $
    0.16
    
    
    $
    0.02
    
    
    $
    0.27
    
    
    $
    (0.01
    )Income (loss) from discontinued operations, net of taxes
    
    
    (0.01
    )
    
    
    0.12
    
    
    
    (0.02
    )
    
    
    0.29Net income
    
    $
    0.15
    
    
    $
    0.14
    
    
    $
    0.25
    
    
    $
    0.28Weighted average common shares outstanding:Basic
    
    
    9,194,473
    
    
    
    9,367,231
    
    
    
    9,187,139
    
    
    
    9,654,671Diluted
    
    
    9,218,425
    
    
    
    9,486,331
    
    
    
    9,209,483
    
    
    
    9,654,671
 
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AMERICA SERVICE GROUP INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (shown in 000s)
 (UNAUDITED)
 Six month endedJune 30,2008
    
    
    2007Cash flows from operating activities:Net income
    
    $
    2,333
    
    
    $
    2,659Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    1,897
    
    
    
    2,008Loss on retirement of fixed assets
    
    
    16
    
    
    
    24Finance cost amortization
    
    
    21
    
    
    
    58Deferred income taxes
    
    
    1,324
    
    
    
    1,822Share-based compensation expense
    
    
    1,123
    
    
    
    2,085Changes in operating assets and liabilities, net of effect of sale of SPP assets:Accounts receivable, net
    
    
    15,401
    
    
    
    12,027Inventories
    
    
    222
    
    
    
    1,199Prepaid expenses and other current assets
    
    
    (272
    )
    
    
    3,009Other assets
    
    
    166
    
    
    
    1,363Accounts payable
    
    
    (733
    )
    
    
    (3,111
    )Accrued medical claims liability
    
    
    (4,991
    )
    
    
    689Accrued expenses
    
    
    1,776
    
    
    
    (7,100
    )Deferred revenue
    
    
    (8,971
    )
    
    
    (9,496
    )Net cash provided by operating activities
    
    
    9,312
    
    
    
    7,236Cash flows from investing activities:Capital expenditures, net
    
    
    (1,515
    )
    
    
    (1,284
    )Proceeds from sale of SPP assets
    
    
    
    
    
    
    3,811Net cash provided by (used in) investing activities
    
    
    (1,515
    )
    
    
    2,527Cash flows from financing activities:Share repurchases
    
    
    
    
    
    
    (13,655
    )Issuance of common stock
    
    
    75
    
    
    
    198Net cash provided by (used in) financing activities
    
    
    75
    
    
    
    (13,457
    )Net increase (decrease) in cash and cash equivalents
    
    
    7,872
    
    
    
    (3,694
    )Cash and cash equivalents at beginning of period
    
    
    8,969
    
    
    
    13,736Cash and cash equivalents at end of period
    
    $
    16,841
    
    
    $
    10,042
 
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AMERICA SERVICE GROUP INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 June 30, 2008
  1. Basis of Presentation
   2. Description of Business
   6




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##### Table of Contents



3. Audit Committee Investigation
  4. Recently Issued Accounting Pronouncements
 Fair Value Measurement. Fair Value Measurement
 Effective Date of FASB Statement No.
 Fair Value Option for Financial Assets and Financial Liabilities The Fair Value Option for Financial
Assets and Financial Liabilities
  5. Share-Based Compensation
 Share-Based Payment
 7




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Weighted Average
    
    
    Aggregate IntrinsicWeighted Average
    
    
    Remaining
    
    
    Value (inOptions
    
    
    Exercise Price
    
    
    Contractual Term
    
    
    thousands) (1)Outstanding, December 31, 2007
    
    
    1,193,951
    
    
    $
    17.19Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Canceled
    
    
    (76,640
    )
    
    
    12.12Outstanding, June 30, 2008
    
    
    1,117,311
    
    
    $
    17.54
    
    
    
    5.79
    
    
    $
    145Exercisable, June 30, 2008
    
    
    1,028,638
    
    
    $
    17.79
    
    
    
    5.60
    
    
    $
    145
 
 (1)
    
    Based upon the difference between the closing market price of the Companys common stock on the last trading day of the
quarter and the exercise price of in-the-money options.  WeightedRestricted
    
    
    Average Grant-Shares
    
    
    Date Fair ValueNonvested, December 31, 2007
    
    
    141,230
    
    
    $
    15.44Granted
    
    
    
    
    
    
    Vested
    
    
    (12,000
    )
    
    
    15.07Forfeited
    
    
    (1,500
    )
    
    
    16.28Nonvested, June 30, 2008
    
    
    127,730
    
    
    $
    15.46
 6. Discontinued Operations
 Accounting for the Impairment
or Disposal of Long-Lived Assets
  Quarter ended
    
    
    Six months endedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Healthcare revenues
    
    $
    343
    
    
    $
    24,152
    
    
    $
    2,573
    
    
    $
    52,123Healthcare expenses
    
    
    545
    
    
    
    22,179
    
    
    
    2,865
    
    
    
    47,362Gross margin
    
    
    (202
    )
    
    
    1,973
    
    
    
    (292
    )
    
    
    4,761Depreciation and amortization
    
    
    3
    
    
    
    23
    
    
    
    12
    
    
    
    47Income (loss) from discontinued operations before taxes
    
    
    (205
    )
    
    
    1,950
    
    
    
    (304
    )
    
    
    4,714Income tax provision (benefit)
    
    
    (83
    )
    
    
    794
    
    
    
    (123
    )
    
    
    1,919Income (loss) from discontinued operations, net of taxes
    
    $
    (122
    )
    
    $
    1,156
    
    
    $
    (181
    )
    
    $
    2,795
 8




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7. Accounts Receivable
  June 30,
    
    
    December 31,2008
    
    
    2007Billed accounts receivable
    
    $
    25,965
    
    
    $
    36,199Unbilled accounts receivable
    
    
    23,670
    
    
    
    28,439Other accounts receivable
    
    
    712
    
    
    
    1,25450,347
    
    
    
    65,892Less: Allowances
    
    
    (553
    )
    
    
    (689
    )49,794
    
    
    
    65,203Less: Receivables reclassified as noncurrent
    
    
    (2,532
    )
    
    
    (2,540
    )$
    47,262
    
    
    $
    62,663
     9




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10




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8. Prepaid Expenses and Other Current Assets
  June 30,
    
    
    December 31,2008
    
    
    2007Prepaid insurance
    
    $
    4,082
    
    
    $
    5,637Prepaid cash deposits for
professional liability claims losses
    
    
    6,100
    
    
    
    4,500Prepaid performance bonds
    
    
    46
    
    
    
    114Prepaid other
    
    
    771
    
    
    
    476$
    10,999
    
    
    $
    10,727
 9. Property and Equipment
  June 30,
    
    
    December 31,
    
    
    Estimated2008
    
    
    2007
    
    
    Useful LivesLeasehold improvements
    
    $
    96
    
    
    $
    96
    
    
    5 yearsEquipment and furniture
    
    
    10,150
    
    
    
    9,356
    
    
    5 yearsComputer software
    
    
    3,284
    
    
    
    3,075
    
    
    3-5 yearsMedical equipment
    
    
    1,075
    
    
    
    1,047
    
    
    5 yearsAutomobiles
    
    
    60
    
    
    
    70
    
    
    5 yearsManagement information systems under development
    
    
    445
    
    
    
    
    
    
    
    15,110
    
    
    
    13,644Less: Accumulated depreciation
    
    
    (9,497
    )
    
    
    (8,589
    )$
    5,613
    
    
    $
    5,055
  Accounting for the Costs of Computer Software Developed or Obtained for Internal
Use
 10. Other Assets
  June 30,
    
    
    December 31,2008
    
    
    2007Deferred financing costs
    
    $
    383
    
    
    $
    334Less: Accumulated amortization
    
    
    (262
    )
    
    
    (241
    )121
    
    
    
    93Excess deposits for professional liability claims
    
    
    1,959
    
    
    
    2,160Prepaid insurance deposits
    
    
    4,273
    
    
    
    4,273Long-term receivables
    
    
    2,532
    
    
    
    2,540Other refundable deposits
    
    
    109
    
    
    
    116$
    8,994
    
    
    $
    9,182
 11




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11. Contracts and Other Intangible Assets
  June 30,
    
    
    December 31,2008
    
    
    2007Contracts:Gross value
    
    $
    15,870
    
    
    $
    15,870Less: Accumulated amortization
    
    
    (12,799
    )
    
    
    (11,959
    )$
    3,071
    
    
    $
    3,911Non-compete agreements:Gross value
    
    $
    2,400
    
    
    $
    2,400Less: Accumulated amortization
    
    
    (2,131
    )
    
    
    (2,016
    )$
    269
    
    
    $
    384
   12. Accrued Expenses
  June 30,
    
    
    December 31,2008
    
    
    2007Salaries and employee benefits
    
    $
    18,220
    
    
    $
    16,940Professional liability claims
    
    
    20,717
    
    
    
    19,693Accrued workers compensation claims
    
    
    7,487
    
    
    
    7,022Other
    
    
    4,678
    
    
    
    5,67151,102
    
    
    
    49,326Less: Noncurrent portion of professional
liability and workers compensation
claims
    
    
    (14,389
    )
    
    
    (15,466
    )$
    36,713
    
    
    $
    33,860
 13. Reserve for Loss Contracts
  12




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14. Banking Arrangements
     Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements
that Include Both a Subjective Acceleration Clause and a Lock-Box Arrangement
  13




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15. Income Taxes
 Accounting for Income Taxes
   Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109
   16. Professional and General Liability Self-insurance Retention
  14




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17. Commitments and Contingencies
 Litigation and Claims
 Albert Einstein Healthcare Network v. The City of Philadelphia and Prison Health Services,
Inc.
 Andrew Berkowitz, M.D., Individually and on behalf of all others similarly situated v. Prison
Health Services, Inc. and City of Philadelphia.
 Saint Josephs Regional Medical Center v. Correctional Health Services, et al.
 15




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Prison Health Services, Inc. v. Hillsborough County Sheriffs Office.
  Matters involving PHS and Baltimore County, Maryland.
  16




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Matters Related to the Audit Committee Investigation and Shareholder Litigation
  SEC and United States Attorney Informal Inquiries.
 Shareholder Litigation.
 17




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Delaware Department of Justice Inquiry
 Other Matters
  Performance Bonds
  18. Net Income (Loss) Per Share
  18




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Earnings Per Share,
 Quarter ended
    
    
    Six months endedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Numerator:Income (loss) from continuing operations
    
    $
    1,473
    
    
    $
    143
    
    
    $
    2,514
    
    
    $
    (136
    )Income (loss) from discontinued operations, net of taxes
    
    
    (122
    )
    
    
    1,156
    
    
    
    (181
    )
    
    
    2,795Numerator for basic and diluted net income per share
    
    $
    1,351
    
    
    $
    1,299
    
    
    $
    2,333
    
    
    $
    2,659Denominator:Denominator for basic net income (loss) per share 
weighted average shares
    
    
    9,194,473
    
    
    
    9,367,231
    
    
    
    9,187,139
    
    
    
    9,654,671Effect of dilutive securities:Employee stock options and restricted shares
    
    
    23,952
    
    
    
    119,100
    
    
    
    22,344
    
    
    
    Denominator for diluted net income (loss) per share 
adjusted weighted average shares and assumed
conversions
    
    
    9,218,425
    
    
    
    9,486,331
    
    
    
    9,209,483
    
    
    
    9,654,671Net income (loss) per common share  basic:Income (loss) from continuing operations
    
    $
    0.16
    
    
    $
    0.02
    
    
    $
    0.27
    
    
    $
    (0.01
    )Income (loss) from discontinued operations, net of taxes
    
    
    (0.01
    )
    
    
    0.12
    
    
    
    (0.02
    )
    
    
    0.29Net income
    
    $
    0.15
    
    
    $
    0.14
    
    
    $
    0.25
    
    
    $
    0.28Net income (loss) per common share  diluted:Income (loss) from continuing operations
    
    $
    0.16
    
    
    $
    0.02
    
    
    $
    0.27
    
    
    $
    (0.01
    )Income (loss) from discontinued operations, net of taxes
    
    
    (0.01
    )
    
    
    0.12
    
    
    
    (0.02
    )
    
    
    0.29Net income
    
    $
    0.15
    
    
    $
    0.14
    
    
    $
    0.25
    
    
    $
    0.28
  Quarter ended
    
    
    Six month endedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Options excluded from computation of diluted
income per share as effect would be anti-dilutive
    
    
    1,090,499
    
    
    
    903,207
    
    
    
    1,095,603
    
    
    
    1,327,272Weighted average exercise price of excluded options
    
    $
    17.87
    
    
    $
    20.32
    
    
    $
    17.87
    
    
    $
    17.40
 19. Comprehensive Income
  20. Segment Data
   19




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Correctional
    
    
    Pharmaceutical
    
    
    Elimination ofHealthcare
    
    
    Distribution
    
    
    IntersegmentServices
    
    
    Services
    
    
    Sales
    
    
    ConsolidatedQuarter ended June 30, 2007:Healthcare revenues
    
    $
    116,437
    
    
    $
    4,690
    
    
    $
    (3,850
    )
    
    $
    117,277Healthcare expenses
    
    
    107,884
    
    
    
    4,777
    
    
    
    (3,850
    )
    
    
    108,811Gross margin
    
    $
    8,553
    
    
    $
    (87
    )
    
    $
    
    
    
    $
    8,466Depreciation and amortization expense
    
    $
    872
    
    
    $
    61
    
    
    $
    
    
    
    $
    933Six months ended June 30, 2007:Healthcare revenues
    
    $
    232,233
    
    
    $
    19,095
    
    
    $
    (15,569
    )
    
    $
    235,759Healthcare expenses
    
    
    215,168
    
    
    
    19,409
    
    
    
    (15,569
    )
    
    
    219,008Gross margin
    
    $
    17,065
    
    
    $
    (314
    )
    
    $
    
    
    
    $
    16,751Depreciation and amortization expense
    
    $
    1,717
    
    
    $
    244
    
    
    $
    
    
    
    $
    1,961
 21. Share Repurchases
  20




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 General
     Forward-Looking Statements
  
    
    the Companys ability to retain existing client contracts and obtain new contracts at
acceptable pricing levels;
    
    whether or not government agencies continue to privatize correctional healthcare
services;
    
    risks arising from governmental budgetary pressures and funding;
 21




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
    
    the possible effect of adverse publicity on the Companys business;
    
    increased competition for new contracts and renewals of existing contracts;
    
    risks arising from the possibility that the Company may be unable to collect accounts
receivable or that accounts receivable collection may be delayed;
    
    the Companys ability to limit its exposure for catastrophic illnesses, injuries or
medical malpractice claims in excess of amounts covered under contracts or insurance
coverage;
    
    the Companys ability to maintain and continually develop information technology and
clinical systems;
    
    the outcome or adverse development of pending litigation, including professional
liability litigation;
    
    the Companys determination whether to repurchase shares under its stock repurchase
program;
    
    risks arising from the
possibility that Maxor, the acquirer of certain assets of SPP,
cannot provide pharmaceuticals or related services at either a cost or service level
sufficient to allow the Company to meet its contractual obligations with its customers
without negatively impacting financial performance;
    
    the Companys dependence on key management and clinical personnel;
    
    risks arising from potential weaknesses or deficiencies in the Companys internal
control over financial reporting;
    
    risks associated with the possibility that the Company may be unable to satisfy
covenants under its credit facility;
    
    the risk that government or municipal entities (including the Companys government and
municipal customers) may bring enforcement actions against, seek additional refunds from,
or impose penalties on, the Company or its subsidiaries as a result of the matters
investigated by the Audit Committee in prior years or the previous restatement of the
Companys financial results; and
    
    the risks arising from shareholder litigation.
  Critical Accounting Policies And Estimates
 General
  22




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
    
    revenue (net of contractual allowances) and cost recognition (including the
estimated cost of off-site medical claims);
    
    allowance for doubtful accounts;
    
    loss contracts;
    
    professional and general liability self-insurance retention;
    
    other self-funded insurance reserves;
    
    legal contingencies;
    
    impairment of intangible assets and goodwill;
    
    amortizable life of contract intangibles;
    
    income taxes; and
    
    share-based compensation.
   Revenue and Cost Recognition
      23




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Percentage of Revenue fromContinuing OperationsFor the Six Months
    
    For the Six MonthsContract Category
    
    Ended June 30, 2008
    
    Ended June 30, 2007Fixed Fee
    
    
    14.9
    %
    
    
    15.1
    %Population Based
    
    
    59.4
    %
    
    
    58.1
    %Cost Plus a Fee
    
    
    25.7
    %
    
    
    25.3
    %Pharmacy Revenue*
    
    
    0.0
    %
    
    
    1.5
    %
 *
    
    Pharmacy revenue is revenue recognized by SPP. Effective April 30, 2007, SPP
sold certain of its assets to Maxor. For more information, see Item 2.  General.    24




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Allowance for Doubtful Accounts
     25




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26




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Loss Contracts
   Professional and General Liability Self-Insurance Retention
   27




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Other Self-Funded Insurance Reserves
  Legal Contingencies
  28




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Impairment of Intangible Assets and Goodwill
 Goodwill and Other
Intangible Assets,
  
    
    significant underperformance or loss of key contracts relative to expected
historical or projected future operating results;
    
    significant changes in the manner of use of the Companys assets or in the
Companys overall business strategy; and
    
    significant negative industry or economic trends.
    Amortizable Life of Contract Intangibles
  Income Taxes
 Accounting for Income Taxes
 29




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Share-Based Compensation
 Share-Based Payment
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Results of Operations
  Quarter ended
    
    
    Six months endedJune 30,
    
    
    June 30,Percentage of Healthcare Revenues
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Healthcare revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Healthcare expenses
    
    
    91.7
    
    
    
    92.8
    
    
    
    92.1
    
    
    
    92.9Gross margin
    
    
    8.3
    
    
    
    7.2
    
    
    
    7.9
    
    
    
    7.1Selling, general and administrative expenses
    
    
    5.4
    
    
    
    5.8
    
    
    
    5.3
    
    
    
    6.0Audit Committee investigation and related expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    0.8
    
    
    
    0.8
    
    
    
    0.7
    
    
    
    0.8Income from operations
    
    
    2.1
    
    
    
    0.6
    
    
    
    1.9
    
    
    
    0.3Interest, net
    
    
    0.2
    
    
    
    0.3
    
    
    
    0.2
    
    
    
    0.3Income (loss) from continuing operations before income
tax provision
    
    
    1.9
    
    
    
    0.3
    
    
    
    1.7
    
    
    
    Income tax provision
    
    
    0.7
    
    
    
    0.2
    
    
    
    0.7
    
    
    
    0.1Income (loss) from continuing operations
    
    
    1.2
    
    
    
    0.1
    
    
    
    1.0
    
    
    
    (0.1
    )Income (loss) from discontinued operations, net of taxes
    
    
    (0.1
    )
    
    
    1.0
    
    
    
    (0.1
    )
    
    
    1.2Net income
    
    
    1.1
    %
    
    
    1.1
    %
    
    
    0.9
    %
    
    
    1.1
    %
 Quarter Ended June 30, 2008 Compared to Quarter Ended June 30, 2007
 Healthcare revenues.
 Healthcare expenses.
 Selling, general and administrative expenses.
 31




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Audit Committee investigation and related expenses.
 Depreciation and amortization
 Interest, net
 Income tax provision.
 Income from continuing operations.
 Income (loss) from discontinued operations, net of taxes
 Net
income.
 Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007
 Healthcare revenues.
 Healthcare expenses.
 32




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##### Table of Contents



Selling, general and administrative expenses.
 Audit Committee investigation and related expenses.
 Depreciation and amortization
 Interest,
net
 Income tax provision.
 Income (loss) from continuing operations.
 Income (loss) from discontinued operations, net of taxes
 Net
income.
 Liquidity and Capital Resources
 Overview
  33




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Credit Facility
      34




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Balance Sheet
Classification of Borrowings Outstanding under Revolving Credit Agreements that Include Both a
Subjective Acceleration Clause and a Lock-Box Arrangement
   Other Financing Transactions
  Contractual Obligations and Commercial Commitments
  Current
    
    
    2-3 years
    
    
    4-5 years
    
    
    After 5 yearsOperating leases
    
    $
    594
    
    
    $
    1,020
    
    
    $
    612
    
    
    $
    1,614Revolving credit facility
    
    
    7,500
    
    
    
    
    
    
    
    
    
    
    
    Workers compensation claims
    
    
    3,214
    
    
    
    3,317
    
    
    
    956
    
    
    
    Professional and general liability claims
    
    
    10,601
    
    
    
    8,325
    
    
    
    1,384
    
    
    
    407Total
    
    $
    21,909
    
    
    $
    12,662
    
    
    $
    2,952
    
    
    $
    2,021
  Off-Balance Sheet Transactions
  Inflation
  35




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Recently Issued Accounting Pronouncements
 Fair Value Measurement. Fair Value Measurement
 Effective Date of FASB Statement No.
 Fair Value Option for Financial Assets and Financial Liabilities The Fair Value Option for Financial
Assets and Financial Liabilities
  36




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
   37




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##### Table of Contents



PART II:
 OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 Albert Einstein Healthcare Network v. The City of Philadelphia and Prison Health Services,
Inc.
 Andrew Berkowitz, M.D., Individually and on behalf of all others similarly situated v. Prison
Health Services, Inc. and City of Philadelphia.
 Saint Josephs Regional Medical Center v. Correctional Health Services, et al.
 Prison Health Services, Inc. v. Hillsborough County Sheriffs Office.
 38




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##### Table of Contents



Matters involving PHS and Baltimore County, Maryland.
  39




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##### Table of Contents



Matters Related to the Audit Committee Investigation and Shareholder Litigation
  SEC and United States Attorney Informal Inquiries.
 Shareholder Litigation.
 40




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Delaware Department of Justice Inquiry
 Other Matters.
 41




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ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURTIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  Director
    
    Votes For
    
    
    Votes WithheldMichael Catalano
    
    
    6,846,302
    
    
    
    1,253,631Burton C. Einspruch, M.D.
    
    
    6,838,602
    
    
    
    1,261,331William M. Fenimore, Jr.
    
    
    6,839,352
    
    
    
    1,260,581John W. Gildea
    
    
    6,839,352
    
    
    
    1,260,581William E. Hale
    
    
    6,710,766
    
    
    
    1,389,167John C. McCauley
    
    
    6,842,952
    
    
    
    1,256,981Richard D. Wright
    
    
    6,845,789
    
    
    
    1,254,144
  Votes For
    
    Votes Against
    
    
    Votes Abstained6,847,452
    
    
    1,252,481
    
    
    
    1,226,605
 
 ITEM 5. OTHER INFORMATION
  42




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##### Table of Contents



ITEM 6. EXHIBITS
 3.1
    
    
    
    Amended and Restated Certificate of Incorporation of America Service Group Inc.
(incorporated herein by reference to Exhibit 3.1 to the Companys Quarterly Report on Form
10-Q for the three month period ended June 30, 2002).3.2
    
    
    
    Certificate of Amendment of Amended and Restated Certificate of Incorporation of America
Service Group Inc. (incorporated herein by reference to Exhibit 3.4 to the Companys Quarterly
Report on Form 10-Q for the three month period ended June 30, 2004).3.3
    
    
    
    Amended and Restated By-Laws of America Service Group Inc. (incorporated herein by
reference to Exhibit 99.1 to the Companys Current Report on Form 8-K filed on December 17,
2007).4.1
    
    
    
    Specimen Common Stock Certificate (incorporated herein by reference to Exhibit 4.1 to the
Companys Quarterly Report on Form 10-Q for the three month period ended June 30, 2002).4.2
    
    
    
    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).11
    
    
    
    Computation of Per Share Earnings.*31.1
    
    
    
    Certification of the Chief Executive Officer pursuant to Rule 13a-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    
    
    Certification of the Chief Financial Officer pursuant to Rule 13a-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    
    
    Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    
    
    Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  43




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SIGNATURES
  AMERICA SERVICE GROUP INC./s/ MICHAEL CATALANOMichael CatalanoChairman & Chief Executive Officer
(Duly Authorized Officer) /s/ MICHAEL W. TAYLORMichael W. TaylorExecutive Vice President & Chief Financial Officer
(Principal Financial Officer)  44