##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission
File Number: 0-20135
 AMERICA SERVICE GROUP INC.
  Delaware(State or other jurisdiction of 
incorporation or organization)
    
    51-0332317(I.R.S. Employer
Identification No.)105 Westpark Drive, Suite 200
Brentwood, Tennessee
(Address of principal executive offices)
    
    37027
(Zip Code)
 (615) 373-3100
 þ o
  Large Accelerated Filer o           Accelerated Filer þ           Non-Accelerated filer o
 o þ




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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, 2007 and December 31, 2006
    
    
    3Condensed Consolidated Statements of Operations for the quarters and six months ended
June 30, 2007 and 2006
    
    
    4Condensed Consolidated Statements of Cash Flows for the six months ended
June 30, 2007 and 2006
    
    
    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
    
    
    36Item 4. Controls and Procedures
    
    
    36PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    37Item 1A. Risk Factors
    
    
    41Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    41Item 3. Defaults Upon Senior Securities
    
    
    42Item 4. Submission of Matters to a Vote of Security Holders
    
    
    42Item 5. Other Information
    
    
    42Item 6. Exhibits
    
    
    43Signatures
    
    
    44Exhibit 10.1EX-10.2 AMENDED AND RESTATED INCENTIVE STOCK PLANEX-10.3 AMENDED AND RESTATED INCENTIVE STOCK PLANExhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
  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 31,2007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    10,042
    
    
    $
    13,736Accounts receivable, net of allowance for doubtful accounts of $761 and $524, respectively
    
    
    68,863
    
    
    
    80,945Inventories
    
    
    3,980
    
    
    
    7,070Prepaid expenses and other current assets
    
    
    9,806
    
    
    
    12,851Current deferred tax assets
    
    
    7,326
    
    
    
    8,864Total current assets
    
    
    100,017
    
    
    
    123,466Property and equipment, net
    
    
    5,003
    
    
    
    6,800Goodwill, net
    
    
    40,772
    
    
    
    40,772Contracts, net
    
    
    4,725
    
    
    
    5,538Other intangibles, net
    
    
    499
    
    
    
    615Other assets
    
    
    6,121
    
    
    
    7,540Total assets
    
    $
    157,137
    
    
    $
    184,731LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    23,697
    
    
    $
    26,809Accrued medical claims liability
    
    
    31,694
    
    
    
    31,005Accrued expenses
    
    
    36,823
    
    
    
    37,541Deferred revenue
    
    
    2,244
    
    
    
    11,740Revolving credit facility
    
    
    10,000
    
    
    
    10,000Total current liabilities
    
    
    104,458
    
    
    
    117,095Noncurrent portion of accrued expenses
    
    
    13,605
    
    
    
    20,634Noncurrent deferred tax liabilities
    
    
    832
    
    
    
    548Total liabilities
    
    
    118,895
    
    
    
    138,277Commitments and contingenciesStockholders equity:Preferred stock, $0.01 par value, 2,000,000 shares authorized at June 30, 2007 and
December 31, 2006; no shares issued or outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value, 20,000,000 shares authorized at June 30, 2007 and December
31, 2006; 9,200,010 and 10,049,587 shares issued and outstanding at June 30, 2007 and
December 31, 2006, respectively
    
    
    92
    
    
    
    100Additional paid-in capital
    
    
    36,234
    
    
    
    47,597Retained earnings (deficit)
    
    
    1,916
    
    
    
    (1,243
    )Total stockholders equity
    
    
    38,242
    
    
    
    46,454Total liabilities and stockholders equity
    
    $
    157,137
    
    
    $
    184,731
 
 3




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AMERICA SERVICE GROUP INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  (shown in 000s except share and per share amounts)  (UNAUDITED)
 Quarter ended
    
    
    Six months endedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Healthcare revenues
    
    $
    138,959
    
    
    $
    131,608
    
    
    $
    281,183
    
    
    $
    270,107Healthcare expenses
    
    
    127,735
    
    
    
    121,829
    
    
    
    258,864
    
    
    
    251,595Gross margin
    
    
    11,224
    
    
    
    9,779
    
    
    
    22,319
    
    
    
    18,512Selling, general and administrative expenses
    
    
    6,768
    
    
    
    6,611
    
    
    
    14,098
    
    
    
    12,523Audit Committee investigation and related expenses
    
    
    26
    
    
    
    1,028
    
    
    
    40
    
    
    
    4,597Depreciation and amortization
    
    
    951
    
    
    
    1,040
    
    
    
    1,999
    
    
    
    2,010Income (loss) from operations
    
    
    3,479
    
    
    
    1,100
    
    
    
    6,182
    
    
    
    (618
    )Interest, net
    
    
    358
    
    
    
    502
    
    
    
    720
    
    
    
    1,015Income (loss) from continuing operations before income tax
provision (benefit)
    
    
    3,121
    
    
    
    598
    
    
    
    5,462
    
    
    
    (1,633
    )Income tax provision (benefit)
    
    
    1,354
    
    
    
    65
    
    
    
    2,320
    
    
    
    (839
    )Income (loss) from continuing operations
    
    
    1,767
    
    
    
    533
    
    
    
    3,142
    
    
    
    (794
    )Income (loss) from discontinued operations, net of taxes
    
    
    (468
    )
    
    
    (19
    )
    
    
    (483
    )
    
    
    160Net income (loss)
    
    $
    1,299
    
    
    $
    514
    
    
    $
    2,659
    
    
    $
    (634
    )Net income (loss) per common share  basic:Income (loss) from continuing operations
    
    $
    0.19
    
    
    $
    0.05
    
    
    $
    0.33
    
    
    $
    (0.07
    )Income (loss) from discontinued operations, net of taxes
    
    
    (0.05
    )
    
    
    
    
    
    
    (0.05
    )
    
    
    0.01Net income (loss)
    
    $
    0.14
    
    
    $
    0.05
    
    
    $
    0.28
    
    
    $
    (0.06
    )Net income (loss) per common share  diluted:Income (loss) from continuing operations
    
    $
    0.19
    
    
    $
    0.05
    
    
    $
    0.32
    
    
    $
    (0.07
    )Income (loss) from discontinued operations, net of taxes
    
    
    (0.05
    )
    
    
    
    
    
    
    (0.05
    )
    
    
    0.01Net income (loss)
    
    $
    0.14
    
    
    $
    0.05
    
    
    $
    0.27
    
    
    $
    (0.06
    )Weighted average common shares outstanding:Basic
    
    
    9,367,231
    
    
    
    10,783,918
    
    
    
    9,654,671
    
    
    
    10,775,099Diluted
    
    
    9,486,331
    
    
    
    10,873,073
    
    
    
    9,758,140
    
    
    
    10,775,099
 
 4




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AMERICA SERVICE GROUP INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (shown in 000s)  (UNAUDITED)
 Six months endedJune 30,2007
    
    
    2006Cash flows from operating activities:Net income (loss)
    
    $
    2,659
    
    
    $
    (634
    )Adjustments to reconcile net income (loss) to net cash provided by
operating activities:Depreciation and amortization
    
    
    2,008
    
    
    
    2,051Loss on retirement of fixed assets
    
    
    24
    
    
    
    3Finance cost amortization
    
    
    58
    
    
    
    53Deferred income taxes
    
    
    1,822
    
    
    
    (779
    )Share-based compensation expense
    
    
    2,085
    
    
    
    2,068Excess tax benefits from share-based compensation expense
    
    
    
    
    
    
    (408
    )Changes in operating assets and liabilities, net of effect of sale of SPP assets:Accounts receivable, net
    
    
    12,027
    
    
    
    4,431Inventories
    
    
    1,199
    
    
    
    (2,270
    )Prepaid expenses and other current assets
    
    
    3,009
    
    
    
    1,260Other assets
    
    
    1,363
    
    
    
    2,423Accounts payable
    
    
    (3,111
    )
    
    
    (3,099
    )Accrued medical claims liability
    
    
    689
    
    
    
    666Accrued expenses
    
    
    (7,100
    )
    
    
    1,808Deferred revenue
    
    
    (9,496
    )
    
    
    (5,211
    )Net cash provided by operating activities
    
    
    7,236
    
    
    
    2,362Cash flows from investing activities:Capital expenditures, net
    
    
    (1,284
    )
    
    
    (1,554
    )Proceeds from sale of SPP assets
    
    
    3,811
    
    
    
    Net cash provided by (used in) investing activities
    
    
    2,527
    
    
    
    (1,554
    )Cash flows from financing activities:Net borrowings on line of credit
    
    
    
    
    
    
    6,427Share repurchases
    
    
    (13,655
    )
    
    
    (2,980
    )Reduction in restricted cash used to collateralize letters of credit
    
    
    
    
    
    
    4,200Excess tax benefits from share-based compensation expense
    
    
    
    
    
    
    408Issuance of common stock, net
    
    
    198
    
    
    
    215Exercise of stock options
    
    
    
    
    
    
    955Net cash provided by (used in) financing activities
    
    
    (13,457
    )
    
    
    9,225Net increase (decrease) in cash and cash equivalents
    
    
    (3,694
    )
    
    
    10,033Cash and cash equivalents at beginning of period
    
    
    13,736
    
    
    
    Cash and cash equivalents at end of period
    
    $
    10,042
    
    
    $
    10,033
 
 5




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##### Table of Contents



AMERICA SERVICE GROUP INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
 1. Basis of Presentation
 Accounting for Uncertainty in Income Taxes  an
interpretation of FASB Statement No. 109
  2. Description of Business
   6




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##### Table of Contents



3. Audit Committee Investigation
  4. Recently Issued Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes. Accounting for Income
Taxes
 Fair Value Measurement. Fair Value Measurement
  5. Share-Based Compensation
 Share-Based Payment
 7




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##### Table of Contents



Quarter ended
    
    Six months endedJune 30, 2006
    

June 30, 2006Volatility
    
    
    0.62
    
    
    
    0.64Interest rate
    
    
    5.05
    %
    
    
    5.03
    %Expected life (years)
    
    
    4.65
    
    
    
    4.66Dividend yields
    
    
    0.00
    %
    
    
    0.00
    %
   Weighted Average
    
    Aggregate IntrinsicWeighted Average
    
    Remaining
    
    Value (inOptions
    
    Exercise Price
    
    Contractual Term
    
    thousands) (1)Outstanding, December 31, 2006
    
    
    1,363,507
    
    
    $
    17.47Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Canceled
    
    
    (2,666
    )
    
    
    22.35Outstanding, March 31, 2007
    
    
    1,360,841
    
    
    $
    17.46Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Canceled
    
    
    (33,569
    )
    
    
    19.78Outstanding, June 30, 2007
    
    
    1,327,272
    
    
    $
    17.40
    
    
    
    6.72
    
    
    $
    2,906Exercisable, June 30, 2007
    
    
    1,084,947
    
    
    $
    17.95
    
    
    
    5.85
    
    
    $
    2,442
 
 (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 grant price of in-the-money options.  Weighted AverageRestricted
    
    Grant-Date FairShares
    
    ValueNonvested, December 31, 2006
    
    
    54,500
    
    
    $
    14.62Granted
    
    
    
    
    
    
    Vested
    
    
    (14,000
    )
    
    
    15.80Forfeited
    
    
    
    
    
    
    Nonvested, June 30, 2007
    
    
    40,500
    
    
    $
    14.22
 6. Discontinued Operations
 Accounting for the Impairment
or Disposal of Long-Lived Assets
 8




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Quarter ended
    
    
    Six months endedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2007Healthcare revenues
    
    $
    2,470
    
    
    $
    28,283
    
    
    $
    6,699
    
    
    $
    57,347Healthcare expenses
    
    
    3,255
    
    
    
    28,282
    
    
    
    7,506
    
    
    
    57,026Gross margin
    
    
    (785
    )
    
    
    1
    
    
    
    (807
    )
    
    
    321Depreciation and amortization
    
    
    5
    
    
    
    26
    
    
    
    9
    
    
    
    41Interest, net
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    16Income (loss) from discontinued operations before taxes
    
    
    (790
    )
    
    
    (31
    )
    
    
    (816
    )
    
    
    264Income tax provision (benefit)
    
    
    (322
    )
    
    
    (12
    )
    
    
    (333
    )
    
    
    104Income (loss) from discontinued operations, net of taxes
    
    $
    (468
    )
    
    $
    (19
    )
    
    $
    (483
    )
    
    $
    160
 7. Accounts Receivable
  June 30,
    
    
    December 31,2007
    
    
    2006Billed accounts receivable
    
    $
    36,270
    
    
    $
    40,242Unbilled accounts receivable
    
    
    33,005
    
    
    
    40,375Other accounts receivable
    
    
    349
    
    
    
    85269,624
    
    
    
    81,469Less: Allowances for doubtful accounts
    
    
    (761
    )
    
    
    (524
    )$
    68,863
    
    
    $
    80,945
       9




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##### Table of Contents



8. Prepaid Expenses and Other Current Assets
  June 30,
    
    
    December 31,2007
    
    
    2006Prepaid insurance
    
    $
    5,130
    
    
    $
    6,295Prepaid cash deposits for professional
liability claims losses
    
    
    3,900
    
    
    
    6,000Prepaid performance bonds
    
    
    42
    
    
    
    134Prepaid other
    
    
    734
    
    
    
    422$
    9,806
    
    
    $
    12,851
 9. Property and Equipment
  June 30,
    
    
    December 31,
    
    
    Estimated2007
    
    
    2006
    
    
    Useful LivesLeasehold improvements
    
    $
    96
    
    
    $
    1,230
    
    
    5 yearsEquipment and furniture
    
    
    8,572
    
    
    
    10,986
    
    
    5 yearsComputer software
    
    
    2,868
    
    
    
    4,645
    
    
    3-5 yearsMedical equipment
    
    
    1,028
    
    
    
    2,334
    
    
    5 yearsAutomobiles
    
    
    70
    
    
    
    60
    
    
    5 yearsManagement information systems under development
    
    
    58
    
    
    
    102
    
    
    
    12,692
    
    
    
    19,357Less: Accumulated depreciation
    
    
    (7,689
    )
    
    
    (12,557
    )$
    5,003
    
    
    $
    6,800
  10




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##### Table of Contents



10. Other Assets
  June 30,
    
    
    December 31,2007
    
    
    2006Deferred financing costs
    
    $
    334
    
    
    $
    334Less: Accumulated amortization
    
    
    (182
    )
    
    
    (124
    )152
    
    
    
    210Prepaid cash deposits for professional liability
claims losses
    
    
    256
    
    
    
    1,382Excess deposits for professional liability claims
    
    
    2,133
    
    
    
    2,369Prepaid insurance
    
    
    3,523
    
    
    
    3,523Other refundable deposits
    
    
    57
    
    
    
    56$
    6,121
    
    
    $
    7,540
 11. Contracts and Other Intangible Assets
  June 30,
    
    
    December 31,2007
    
    
    2006Contracts:Gross value
    
    $
    15,870
    
    
    $
    15,870Less: Accumulated amortization
    
    
    (11,145
    )
    
    
    (10,332
    )$
    4,725
    
    
    $
    5,538Non-compete agreements:Gross value
    
    $
    2,400
    
    
    $
    2,400Less: Accumulated amortization
    
    
    (1,901
    )
    
    
    (1,785
    )$
    499
    
    
    $
    615
  12. Accrued Expenses
  June 30,
    
    
    December 31,2007
    
    
    2006Salaries and employee benefits
    
    $
    18,455
    
    
    $
    17,926Professional liability claims
    
    
    19,482
    
    
    
    23,511Accrued workers compensation claims
    
    
    6,263
    
    
    
    6,438Other
    
    
    6,228
    
    
    
    10,30050,428
    
    
    
    58,175Less: Noncurrent portion of professional
liability and workers compensation claims
    
    
    (13,605
    )
    
    
    (20,634
    )$
    36,823
    
    
    $
    37,541
 13. Reserve for Loss Contracts
   11




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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
  12




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15. Income Taxes
 Accounting for Income Taxes
       13




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##### Table of Contents



16. Professional and General Liability Self-insurance Retention
  17. Commitments and Contingencies
 Catastrophic Limits
  Litigation and Claims
 Lake Professional Liability Suit.
 EMSA lease matter. th
 14




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##### Table of Contents



Albert Einstein Healthcare Network v. The City of Philadelphia and Prison Health Services,
Inc.
 The Health and Hospital Corporation of Marion County, Indiana v. 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.
 15




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##### Table of Contents



Saint Josephs Regional Medical Center v. Correctional Health Services, et al.
 Matters involving PHS and Baltimore County, Maryland.
  16




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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.
 17




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##### Table of Contents



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




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##### Table of Contents



Earnings Per Share,
 Quarter ended
    
    
    Six months endedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Numerator:Income (loss) from continuing operations
    
    $
    1,767
    
    
    $
    533
    
    
    $
    3,142
    
    
    $
    (794
    )Income (loss) from discontinued operations, net of taxes
    
    
    (468
    )
    
    
    (19
    )
    
    
    (483
    )
    
    
    160Numerator for basic and diluted net income (loss) per share
    
    $
    1,299
    
    
    $
    514
    
    
    $
    2,659
    
    
    $
    (634
    )Denominator:Denominator
for basic net income (loss) per share 
weighted average shares
    
    
    9,367,231
    
    
    
    10,783,918
    
    
    
    9,654,671
    
    
    
    10,775,099Effect of dilutive securities:Employee stock options
    
    
    119,100
    
    
    
    89,155
    
    
    
    103,469
    
    
    
    Denominator
for diluted net income (loss) per share 
adjusted weighted average shares and assumed
conversions
    
    
    9,486,331
    
    
    
    10,873,073
    
    
    
    9,758,140
    
    
    
    10,775,099Net income (loss) per common share  basic:Income (loss) from continuing operations
    
    $
    0.19
    
    
    $
    0.05
    
    
    $
    0.33
    
    
    $
    (0.07
    )Income (loss) from discontinued operations, net of taxes
    
    
    (0.05
    )
    
    
    
    
    
    
    (0.05
    )
    
    
    0.01Net income (loss)
    
    $
    0.14
    
    
    $
    0.05
    
    
    $
    0.28
    
    
    $
    (0.06
    )Net income (loss) per common share  diluted:Income (loss) from continuing operations
    
    $
    0.19
    
    
    $
    0.05
    
    
    $
    0.32
    
    
    $
    (0.07
    )Income (loss) from discontinued operations, net of taxes
    
    
    (0.05
    )
    
    
    
    
    
    
    (0.05
    )
    
    
    0.01Net income (loss)
    
    $
    0.14
    
    
    $
    0.05
    
    
    $
    0.27
    
    
    $
    (0.06
    )
  Quarter ended
    
    
    Six months endedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Options excluded from computation of diluted
income per share as effect would be anti-dilutive
    
    
    903,207
    
    
    
    1,092,619
    
    
    
    919,580
    
    
    
    1,466,400Weighted average exercise price of excluded options
    
    $
    20.32
    
    
    $
    19.89
    
    
    $
    20.29
    
    
    $
    17.44
 19. Comprehensive Income
  20. Segment Data
   19




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##### Table of Contents



Correctional
    
    
    Pharmaceutical
    
    
    Elimination ofHealthcare
    
    
    Distribution
    
    
    IntersegmentServices
    
    
    Services
    
    
    Sales
    
    
    ConsolidatedQuarter ended June 30, 2007:Healthcare revenues
    
    $
    138,119
    
    
    $
    4,690
    
    
    $
    (3,850
    )
    
    $
    138,959Healthcare expenses
    
    
    126,808
    
    
    
    4,777
    
    
    
    (3,850
    )
    
    
    127,735Gross margin
    
    $
    11,311
    
    
    $
    (87
    )
    
    $
    
    
    
    $
    11,224Depreciation and amortization expense
    
    $
    890
    
    
    $
    61
    
    
    $
    
    
    
    $
    951Quarter ended June 30, 2006:Healthcare revenues
    
    $
    126,471
    
    
    $
    22,369
    
    
    $
    (17,232
    )
    
    $
    131,608Healthcare expenses
    
    
    116,492
    
    
    
    22,569
    
    
    
    (17,232
    )
    
    
    121,829Gross margin
    
    $
    9,979
    
    
    $
    (200
    )
    
    $
    
    
    
    $
    9,779Depreciation and amortization expense
    
    $
    853
    
    
    $
    187
    
    
    $
    
    
    
    $
    1,040Six months ended June 30, 2007:Healthcare revenues
    
    $
    277,657
    
    
    $
    19,095
    
    
    $
    (15,569
    )
    
    $
    281,183Healthcare expenses
    
    
    255,024
    
    
    
    19,409
    
    
    
    (15,569
    )
    
    
    258,864Gross margin
    
    $
    22,633
    
    
    $
    (314
    )
    
    $
    
    
    
    $
    22,319Depreciation and amortization expense
    
    $
    1,755
    
    
    $
    244
    
    
    $
    
    
    
    $
    1,999Six months ended June 30, 2006:Healthcare revenues
    
    $
    259,171
    
    
    $
    42,703
    
    
    $
    (31,767
    )
    
    $
    270,107Healthcare expenses
    
    
    239,459
    
    
    
    43,903
    
    
    
    (31,767
    )
    
    
    251,595Gross margin
    
    $
    19,712
    
    
    $
    (1,200
    )
    
    $
    
    
    
    $
    18,512Depreciation and amortization expense
    
    $
    1,634
    
    
    $
    376
    
    
    $
    
    
    
    $
    2,010
 Correctional
    
    
    PharmaceuticalHealthcare
    
    
    DistributionServices
    
    
    Services
    
    
    ConsolidatedAs of June 30, 2007:Inventories
    
    $
    3,980
    
    
    $
    
    
    
    $
    3,980Property and equipment, net
    
    $
    5,003
    
    
    $
    
    
    
    $
    5,003Goodwill, net
    
    $
    40,772
    
    
    $
    
    
    
    $
    40,772Total assets
    
    $
    156,885
    
    
    $
    252
    
    
    $
    157,137As of December 31, 2006:Inventories
    
    $
    4,238
    
    
    $
    2,832
    
    
    $
    7,070Property and equipment, net
    
    $
    4,634
    
    
    $
    2,166
    
    
    $
    6,800Goodwill, net
    
    $
    40,772
    
    
    $
    
    
    
    $
    40,772Total assets
    
    $
    177,901
    
    
    $
    6,830
    
    
    $
    184,731
 21. Share Repurchases
  20




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##### Table of Contents



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;
    
    the possible effect of adverse publicity regarding the Companys business;
 21




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##### Table of Contents




    
    increased competition for new contracts and renewals of existing contracts;
    
    the Companys ability to locate and/or execute acquisition opportunities;
    
    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;
    
    risks arising from the possibility that 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 as a result of the matters investigated by
the Audit Committee in prior years or the previous restatement of the Companys financial
results;
  Critical Accounting Policies And Estimates
 General
  22




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##### Table of Contents




    
    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;
    
    income taxes; and
    
    share-based compensation.
   Revenue and Cost Recognition
     23




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##### Table of Contents



Allowance for Doubtful Accounts
     24




---



##### Table of Contents



Loss Contracts
   25




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##### Table of Contents



Professional and General Liability Self-Insurance Retention
     26




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##### Table of Contents



Other Self-Funded Insurance Reserves
  Legal Contingencies
  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.
 27




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##### Table of Contents



Income Taxes
 Accounting for Income Taxes
     28




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Share-Based Compensation
  29




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Results of Operations
  Quarter ended
    
    Six months endedJune 30,
    
    June 30,Percentage of Healthcare Revenues
    
    2007
    
    2006
    
    2007
    
    2006Healthcare revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Healthcare expenses
    
    
    91.9
    
    
    
    92.6
    
    
    
    92.1
    
    
    
    93.1Gross margin
    
    
    8.1
    
    
    
    7.4
    
    
    
    7.9
    
    
    
    6.9Selling, general and administrative expenses
    
    
    4.9
    
    
    
    5.0
    
    
    
    5.0
    
    
    
    4.6Audit Committee investigation and related expenses
    
    
    
    
    
    
    0.8
    
    
    
    
    
    
    
    1.7Depreciation and amortization
    
    
    0.7
    
    
    
    0.8
    
    
    
    0.7
    
    
    
    0.8Income (loss) from operations
    
    
    2.5
    
    
    
    0.8
    
    
    
    2.2
    
    
    
    (0.2
    )Interest, net
    
    
    0.3
    
    
    
    0.3
    
    
    
    0.3
    
    
    
    0.4Income (loss) from continuing operations before income
tax provision (benefit)
    
    
    2.2
    
    
    
    0.5
    
    
    
    1.9
    
    
    
    (0.6
    )Income tax provision (benefit)
    
    
    0.9
    
    
    
    0.1
    
    
    
    0.8
    
    
    
    (0.3
    )Income (loss) from continuing operations
    
    
    1.3
    
    
    
    0.4
    
    
    
    1.1
    
    
    
    (0.3
    )Income (loss) from discontinued operations, net of taxes
    
    
    (0.4
    )
    
    
    
    
    
    
    (0.2
    )
    
    
    0.1Net income (loss)
    
    
    0.9
    %
    
    
    0.4
    %
    
    
    0.9
    %
    
    
    (0.2
    )%
 Quarter Ended June 30, 2007 Compared to Quarter Ended June 30, 2006
 Healthcare revenues.
 Healthcare expenses.
 Selling, general and administrative expenses.
 Audit Committee investigation and related expenses.
 30




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##### Table of Contents



Depreciation and amortization
 Interest, net
 Income tax provision.
 Income from continuing operations.
 Loss from discontinued operations, net of taxes
 Net income.
 Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006
 Healthcare revenues.
 Healthcare expenses.
 Selling, general and administrative expenses.
 Audit Committee investigation and related expenses.
 31




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##### Table of Contents



Depreciation and amortization
 Interest,
net
 Income tax provision (benefit).
 Income (loss) from continuing operations.
 Income (loss) from discontinued operations, net of taxes
 Net income (loss).
 Liquidity and Capital Resources
 Overview
    32




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##### Table of Contents



Credit Facility
     Balance Sheet Classification of Borrowings Outstanding under
Revolving Credit Agreements that Include Both a Subjective Acceleration Clause and a Lock-Box
Arrangement
 33




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##### Table of Contents



Other Financing Transactions
  Contractual Obligations and Commercial Commitments
  Current
    
    
    2-3 years
    
    
    4-5 years
    
    
    After 5 yearsOperating leases
    
    $
    645
    
    
    $
    1,043
    
    
    $
    
    
    
    $
    Revolving credit facility
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    Workers compensation claims
    
    
    2,740
    
    
    
    2,968
    
    
    
    555
    
    
    
    Professional and general liability claims
    
    
    9,400
    
    
    
    8,789
    
    
    
    1,281
    
    
    
    12Total
    
    $
    22,785
    
    
    $
    12,800
    
    
    $
    1,836
    
    
    $
    12
  Off-Balance Sheet Transactions
  Inflation
  Stock Repurchase Program
  34




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##### Table of Contents



Recently Issued Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes. Accounting for Uncertainty in Income Taxes  an
interpretation of FASB Statement No. 109 Accounting for Income Taxes
 Fair Value Measurement. Fair Value Measurement
  35




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
   36




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##### Table of Contents



PART II:
 OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 Lake Professional Liability Suit.
 EMSA lease matter. th
  Albert Einstein Healthcare Network v. The City of Philadelphia and Prison Health Services,
Inc.
 37




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##### Table of Contents



The Health and Hospital Corporation of Marion County, Indiana v. 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.
 Matters involving PHS and Baltimore County, Maryland.
 38




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##### Table of Contents



Matters
Related to the Audit Committee Investigation and Shareholder
Litigation
  39




---



##### Table of Contents



SEC and United States Attorney Informal Inquiries.
 Shareholder Litigation.
  Delaware Department of Justice Inquiry
 Other Matters.
 40




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##### Table of Contents



ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  (d) Maximum Number (or(c) Total Number of Shares
    
    Approximate Dollar Value)Purchased as Part of
    
    of shares that May Yet Be(a) Total of Number of
    
    (b) Average Price
    
    Publicly Announced Plans
    
    Purchased Under the PlansPeriod
    

Shares Purchased
    
Paid per Share
    
    or Programs
    
    or Programs (1)April 2007 (4/1/07
to 4/30/07)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    May 2007 (5/1/07 to
5/31/07)
    
    
    353,400
    
    
    $
    16.31
    
    
    
    353,400
    
    
    $
    June 2007 (6/1/07
to 6/30/07)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
   41




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##### Table of Contents



ITEM 3.
    
    DEFAULTS UPON SENIOR SECURTIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  Director
    
    Votes For
    
    Votes WithheldMichael Catalano
    
    
    7,681,411
    
    
    
    121,327William D. Eberle
    
    
    7,593,553
    
    
    
    209,185Burton C. Einspruch, M.D.
    
    
    7,763,211
    
    
    
    39,527William M. Fenimore, Jr.
    
    
    7,763,211
    
    
    
    39,527John W. Gildea
    
    
    7,763,211
    
    
    
    39,527William E. Hale
    
    
    7,763,211
    
    
    
    39,527John
C. McCauley
    
    
    7,763,211
    
    
    
    39,527Richard
D. Wright
    
    
    7,763,211
    
    
    
    39,527
  Votes For
    
    Votes Against
    
    Votes Abstained7,699,453
    
    
    102,664
    
    
    
    621
 
 ITEM 5. OTHER INFORMATION
  42




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##### Table of Contents



ITEM 6. EXHIBITS
 2.1 
    
    Asset Purchase Agreement, dated as of April 12, 2007, by and among Maxor National Pharmacy
Services Corporation, Secure Pharmacy Plus, LLC and Prison Health Services, Inc., as guarantor
(incorporated herein by reference to Exhibit 2.1 to the Companys Current Report on Form 8-K filed
on April 18, 2007).
 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 3.2 to the Companys Quarterly Report on Form 10-Q for the three-month
period ended June 30, 2002).
 4.1 
    
    Specimen Common Stock Certificate (incorporated herein by reference to Exhibit 4.1 to the
Companys Quarterly Report on 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).
 10.1 
    
    Pharmacy Service Agreement, dated as of May 1, 207, by and among Prison Health Service,
Inc., Correctional Health Services, LLC and Maxor National Pharmacy Services Corporation.+
 10.2 
    
    Form of Stock Grant Certificate under the America Service
Group Inc. Amended and Restated 1999 Incentive Stock Plan (supersedes
previous form filed as Exhibit 10.24 to the Companys Annual
Report on Form 10-K for the year ended December 31, 2004 (Commission
File No. 000-19673) filed with the Commission on March 14, 2005).*
 10.3 
    
    Form of Employee Stock Grant Certificate under the America
Service Group Inc. Amended and Restated 1999 Incentive Stock Plan.*
 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.
 
 *
    
    Data required by SFAS No. 128, Earnings Per Share, is provided in Note 18 to the condensed
consolidated financial statements in this report.+
    
    Indicates that portions of this agreement have been omitted and filed separately with the SEC in
a confidential treatment request pursuant to Rule 24b-2 of the Exchange Act. 43




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