##### 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 March 31, 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




---



##### 



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 March 31, 2008 and December 31, 2007
    
    
    3Condensed Consolidated Statements of Income for the quarters ended March 31, 2008 and 2007
    
    
    4Condensed Consolidated Statements of Cash Flows for the quarters ended March 31, 2008 and 2007
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    35Item 4. Controls and Procedures
    
    
    35PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    36Item 1A. Risk Factors
    
    
    40Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    40Item 3. Defaults Upon Senior Securities
    
    
    40Item 4. Submission of Matters to a Vote of Security Holders
    
    
    40Item 5. Other Information
    
    
    40Item 6. Exhibits
    
    
    41Signatures
    
    
    42EX-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




---



##### 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)
 March 31,
    
    
    December 31,2008
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    11,106
    
    
    $
    8,969Accounts receivable, net of allowance for doubtful accounts of $571 and $689, respectively
    
    
    67,661
    
    
    
    62,663Inventories
    
    
    3,035
    
    
    
    2,999Prepaid expenses and other current assets
    
    
    12,058
    
    
    
    10,727Current deferred tax assets
    
    
    5,465
    
    
    
    5,442Total current assets
    
    
    99,325
    
    
    
    90,800Property and equipment, net
    
    
    5,231
    
    
    
    5,055Goodwill, net
    
    
    40,772
    
    
    
    40,772Contracts, net
    
    
    3,497
    
    
    
    3,911Other intangibles, net
    
    
    327
    
    
    
    384Other assets
    
    
    8,746
    
    
    
    9,182Noncurrent deferred tax assets
    
    
    84
    
    
    
    816Total assets
    
    $
    157,982
    
    
    $
    150,920LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    21,353
    
    
    $
    20,264Accrued medical claims liability
    
    
    23,882
    
    
    
    22,184Accrued expenses
    
    
    38,455
    
    
    
    33,860Deferred revenue
    
    
    12,813
    
    
    
    11,996Revolving credit facility
    
    
    7,500
    
    
    
    7,500Total current liabilities
    
    
    104,003
    
    
    
    95,804Noncurrent portion of accrued expenses
    
    
    12,696
    
    
    
    15,466Total liabilities
    
    
    116,699
    
    
    
    111,270Commitments and contingenciesStockholders equity:Preferred stock, $0.01 par value, 2,000,000 shares authorized at March 31, 2008 and
December 31, 2007; no shares issued or outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value, 20,000,000 shares authorized at March 31, 2008 and
December 31, 2007; 9,328,038 and 9,316,014 shares issued and outstanding at March 31,
2008 and December 31, 2007, respectively
    
    
    93
    
    
    
    93Additional paid-in capital
    
    
    38,136
    
    
    
    37,485Retained earnings
    
    
    3,054
    
    
    
    2,072Total stockholders equity
    
    
    41,283
    
    
    
    39,650Total liabilities and stockholders equity
    
    $
    157,982
    
    
    $
    150,920
 
 3




---



##### Table of Contents



AMERICA SERVICE GROUP INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 (shown in 000s except share and per share amounts)
 (UNAUDITED)
 Quarter endedMarch 31,2008
    
    
    2007Healthcare revenues
    
    $
    126,671
    
    
    $
    119,104Healthcare expenses
    
    
    117,077
    
    
    
    110,832Gross margin
    
    
    9,594
    
    
    
    8,272Selling, general and administrative expenses
    
    
    6,479
    
    
    
    7,330Audit Committee investigation and related expenses
    
    
    58
    
    
    
    14Depreciation and amortization
    
    
    921
    
    
    
    1,030Income (loss) from operations
    
    
    2,136
    
    
    
    (102
    )Interest, net
    
    
    272
    
    
    
    362Income (loss) from continuing operations before income tax provision (benefit)
    
    
    1,864
    
    
    
    (464
    )Income tax provision (benefit)
    
    
    802
    
    
    
    (176
    )Income (loss) from continuing operations
    
    
    1,062
    
    
    
    (288
    )Income (loss) from discontinued operations, net of taxes
    
    
    (80
    )
    
    
    1,648Net income
    
    $
    982
    
    
    $
    1,360Net income (loss) per common share  basic:Income (loss) from continuing operations
    
    $
    0.12
    
    
    $
    (0.03
    )Income (loss) from discontinued operations, net of taxes
    
    
    (0.01
    )
    
    
    0.17Net income
    
    $
    0.11
    
    
    $
    0.14Net income (loss) per common share  diluted:Income (loss) from continuing operations
    
    $
    0.12
    
    
    $
    (0.03
    )Income (loss) from discontinued operations, net of taxes
    
    
    (0.01
    )
    
    
    0.17Net income
    
    $
    0.11
    
    
    $
    0.14Weighted average common shares outstanding:Basic
    
    
    9,179,805
    
    
    
    9,945,304Diluted
    
    
    9,198,540
    
    
    
    9,945,304
 
 4




---



##### Table of Contents



AMERICA SERVICE GROUP INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (shown in 000s)
 (UNAUDITED)
 Quarter endedMarch 31,2008
    
    
    2007Cash flows from operating activities:Net income
    
    $
    982
    
    
    $
    1,360Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    928
    
    
    
    1,052Loss on retirement of fixed assets
    
    
    8
    
    
    
    22Finance cost amortization
    
    
    13
    
    
    
    29Deferred income taxes
    
    
    709
    
    
    
    919Share-based compensation expense
    
    
    577
    
    
    
    1,173Changes in operating assets and liabilities:Accounts receivable, net
    
    
    (4,998
    )
    
    
    4,688Inventories
    
    
    (36
    )
    
    
    1,086Prepaid expenses and other current assets
    
    
    (1,331
    )
    
    
    (444
    )Other assets
    
    
    423
    
    
    
    192Accounts payable
    
    
    1,089
    
    
    
    (4,304
    )Accrued medical claims liability
    
    
    1,698
    
    
    
    (2,257
    )Accrued expenses
    
    
    1,825
    
    
    
    169Deferred revenue
    
    
    817
    
    
    
    (1,010
    )Net cash provided by operating activities
    
    
    2,704
    
    
    
    2,675Cash flows from investing activities:Capital expenditures, net
    
    
    (641
    )
    
    
    (824
    )Net cash used in investing activities
    
    
    (641
    )
    
    
    (824
    )Cash flows from financing activities:Share repurchases
    
    
    
    
    
    
    (7,887
    )Issuance of common stock
    
    
    74
    
    
    
    198Net cash provided by (used in) financing activities
    
    
    74
    
    
    
    (7,689
    )Net increase (decrease) in cash and cash equivalents
    
    
    2,137
    
    
    
    (5,838
    )Cash and cash equivalents at beginning of period
    
    
    8,969
    
    
    
    13,736Cash and cash equivalents at end of period
    
    $
    11,106
    
    
    $
    7,898
 
 5




---



##### Table of Contents



AMERICA SERVICE GROUP INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2008
  1. Basis of Presentation
   2. Description of Business
   6




---



##### 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




---



##### Table of Contents



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, March 31, 2008
    
    
    1,117,311
    
    
    $
    17.54
    
    
    
    6.04
    
    
    $
    67Exercisable, March 31, 2008
    
    
    889,213
    
    
    $
    17.95
    
    
    
    5.55
    
    
    $
    67
 
 (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
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Nonvested, March 31, 2008
    
    
    141,230
    
    
    $
    15.44
 6. Discontinued Operations
 Accounting for the Impairment
or Disposal of Long-Lived Assets
  Quarter endedMarch 31,2008
    
    
    2007Healthcare revenues
    
    $
    1,697
    
    
    $
    27,349Healthcare expenses
    
    
    1,825
    
    
    
    24,548Gross margin
    
    
    (128
    )
    
    
    2,801Depreciation and amortization
    
    
    7
    
    
    
    22Income (loss) from discontinued operations before taxes
    
    
    (135
    )
    
    
    2,779Income tax provision (benefit)
    
    
    (55
    )
    
    
    1,131Income (loss) from discontinued operations, net of taxes
    
    $
    (80
    )
    
    $
    1,648
 8




---



##### Table of Contents



7. Accounts Receivable
  March 31,
    
    
    December 31,2008
    
    
    2007Billed accounts receivable
    
    $
    47,917
    
    
    $
    36,199Unbilled accounts receivable
    
    
    22,297
    
    
    
    28,439Other accounts receivable
    
    
    558
    
    
    
    1,25470,772
    
    
    
    65,892Less: Allowances
    
    
    (571
    )
    
    
    (689
    )70,201
    
    
    
    65,203Less: Receivables reclassified as noncurrent
    
    
    (2,540
    )
    
    
    (2,540
    )$
    67,661
    
    
    $
    62,663
     9




---



##### Table of Contents



10




---



##### Table of Contents



8. Prepaid Expenses and Other Current Assets
  March 31,
    
    
    December 31,2008
    
    
    2007Prepaid insurance
    
    $
    5,584
    
    
    $
    5,637Prepaid cash deposits for professional
liability claims losses
    
    
    5,600
    
    
    
    4,500Prepaid performance bonds
    
    
    100
    
    
    
    114Prepaid other
    
    
    774
    
    
    
    476$
    12,058
    
    
    $
    10,727
 9. Property and Equipment
  March 31,
    
    
    December 31,
    
    
    Estimated2008
    
    
    2007
    
    
    Useful LivesLeasehold improvements
    
    $
    96
    
    
    $
    96
    
    
    5 yearsEquipment and furniture
    
    
    9,571
    
    
    
    9,356
    
    
    5 yearsComputer software
    
    
    3,462
    
    
    
    3,075
    
    
    3-5 yearsMedical equipment
    
    
    1,059
    
    
    
    1,047
    
    
    5 yearsAutomobiles
    
    
    60
    
    
    
    70
    
    
    5 years14,248
    
    
    
    13,644Less: Accumulated depreciation
    
    
    (9,017
    )
    
    
    (8,589
    )$
    5,231
    
    
    $
    5,055
  10. Other Assets
  March 31,
    
    
    December 31,2008
    
    
    2007Deferred financing costs
    
    $
    340
    
    
    $
    334Less: Accumulated amortization
    
    
    (254
    )
    
    
    (241
    )86
    
    
    
    93Excess deposits for professional liability claims
    
    
    1,731
    
    
    
    2,160Prepaid insurance deposits
    
    
    4,273
    
    
    
    4,273Long-term receivables
    
    
    2,540
    
    
    
    2,540Other refundable deposits
    
    
    116
    
    
    
    116$
    8,746
    
    
    $
    9,182
 11. Contracts and Other Intangible Assets
  March 31,
    
    
    December 31,2008
    
    
    2007Contracts:Gross value
    
    $
    15,870
    
    
    $
    15,870Less: Accumulated amortization
    
    
    (12,373
    )
    
    
    (11,959
    )$
    3,497
    
    
    $
    3,911Non-compete agreements:Gross value
    
    $
    2,400
    
    
    $
    2,400Less: Accumulated amortization
    
    
    (2,073
    )
    
    
    (2,016
    )$
    327
    
    
    $
    384
  11




---



##### Table of Contents



12. Accrued Expenses
  March 31,
    
    
    December 31,2008
    
    
    2007Salaries and employee benefits
    
    $
    19,085
    
    
    $
    16,940Professional liability claims
    
    
    20,023
    
    
    
    19,693Accrued workers compensation claims
    
    
    7,116
    
    
    
    7,022Other
    
    
    4,927
    
    
    
    5,67151,151
    
    
    
    49,326Less: Noncurrent portion of professional
liability and workers compensation claims.
    
    
    (12,696
    )
    
    
    (15,466
    )$
    38,455
    
    
    $
    33,860
 13. Reserve for Loss Contracts
   14. Banking Arrangements
  12




---



##### Table of Contents



Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements
that Include Both a Subjective Acceleration Clause and a Lock-Box Arrangement
   15. Income Taxes
 Accounting for Income Taxes
 13




---



##### Table of Contents



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




---



##### Table of Contents



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.
 Prison Health Services, Inc. v. Hillsborough County Sheriffs Office.
 15




---



##### Table of Contents



Matters involving PHS and Baltimore County, Maryland.
   16




---



##### Table of Contents



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




---



##### Table of Contents



Delaware Department of Justice Inquiry
 Other Matters
  Performance Bonds
  18. Net Income (Loss) Per Share
  Earnings Per Share,
 Quarter endedMarch 31,2008
    
    
    2007Numerator:Income (loss) from continuing operations
    
    $
    1,062
    
    
    $
    (288
    )Income (loss) from discontinued operations, net of taxes
    
    
    (80
    )
    
    
    1,648Numerator for basic and diluted net income per share
    
    $
    982
    
    
    $
    1,360Denominator:Denominator for basic net income (loss) per share 
weighted average shares
    
    
    9,179,805
    
    
    
    9,945,304Effect of dilutive securities:Employee stock options and restricted shares
    
    
    18,735
    
    
    
    Denominator for diluted net income (loss) per share 
adjusted weighted average shares and assumed
conversions
    
    
    9,198,540
    
    
    
    9,945,304Net income (loss) per common share  basic:Income (loss) from continuing operations
    
    $
    0.12
    
    
    $
    (0.03
    )Income (loss) from discontinued operations, net of taxes
    
    
    (0.01
    )
    
    
    0.17Net income
    
    $
    0.11
    
    
    $
    0.14Net income (loss) per common share  diluted:Income (loss) from continuing operations
    
    $
    0.12
    
    
    $
    (0.03
    )Income (loss) from discontinued operations, net of taxes
    
    
    (0.01
    )
    
    
    0.17Net income
    
    $
    0.11
    
    
    $
    0.14
 18




---



##### Table of Contents



Quarter endedMarch 31,2008
    
    
    2007Options excluded from computation of diluted
income per share as effect would be anti-dilutive
    
    
    1,100,707
    
    
    
    1,360,841Weighted average exercise price of excluded options
    
    $
    17.86
    
    
    $
    17.46
 19. Comprehensive Income
  20. Segment Data
    Correctional
    
    
    Pharmaceutical
    
    
    Elimination ofHealthcare
    
    
    Distribution
    
    
    IntersegmentServices
    
    
    Services
    
    
    Sales
    
    
    ConsolidatedQuarter ended March 31, 2007:Healthcare revenues
    
    $
    116,418
    
    
    $
    14,405
    
    
    $
    (11,719
    )
    
    $
    119,104Healthcare expenses
    
    
    107,919
    
    
    
    14,632
    
    
    
    (11,719
    )
    
    
    110,832Gross margin
    
    $
    8,499
    
    
    $
    (227
    )
    
    $
    
    
    
    $
    8,272Depreciation and amortization expense
    
    $
    847
    
    
    $
    183
    
    
    $
    
    
    
    $
    1,030
 21. Share Repurchases
  19




---



##### 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;
    
    risks arising from governmental budgetary pressures and funding;
 20




---



##### Table of Contents




    
    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
  21




---



##### 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;
    
    amortizable life of contract intangibles;
    
    income taxes; and
    
    share-based compensation.
   Revenue and Cost Recognition
      22




---



##### Table of Contents



Percentage of Revenue fromContinuing OperationsFor the Quarter
    
    For the QuarterContract Category
    
    Ended March 31, 2008
    
    Ended March 31, 2007Fixed Fee
    
    
    14.4
    %
    
    
    15.3
    %Population Based
    
    
    60.1
    %
    
    
    57.7
    %Cost Plus a Fee
    
    
    25.5
    %
    
    
    24.7
    %Pharmacy Revenue*
    
    
    0.0
    %
    
    
    2.3
    %
 
 *
    
    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.    23




---



##### Table of Contents



Allowance for Doubtful Accounts
     24




---



##### Table of Contents



25




---



##### Table of Contents



Loss Contracts
   Professional and General Liability Self-Insurance Retention
   26




---



##### Table of Contents



Other Self-Funded Insurance Reserves
  Legal Contingencies
  Impairment of Intangible Assets and Goodwill
 Goodwill and Other
Intangible Assets,
 27




---



##### Table of Contents




    
    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
 28




---



##### Table of Contents



Share-Based Compensation
 Share-Based Payment
 29




---



##### Table of Contents



Results of Operations
  Quarter endedMarch 31,Percentage of Healthcare Revenues
    
    2008
    
    
    2007Healthcare revenues
    
    
    100.0
    %
    
    
    100.0
    %Healthcare expenses
    
    
    92.4
    
    
    
    93.1Gross margin
    
    
    7.6
    
    
    
    6.9Selling, general and administrative expenses
    
    
    5.1
    
    
    
    6.2Audit Committee investigation and related expenses
    
    
    0.1
    
    
    
    Depreciation and amortization
    
    
    0.7
    
    
    
    0.8Income from operations
    
    
    1.7
    
    
    
    (0.1
    )Interest, net
    
    
    0.2
    
    
    
    0.3Income (loss) from continuing operations before income
tax provision (benefit)
    
    
    1.5
    
    
    
    (0.4
    )Income tax provision (benefit)
    
    
    0.7
    
    
    
    (0.2
    )Income (loss) from continuing operations
    
    
    0.8
    
    
    
    (0.2
    )Income (loss) from discontinued operations, net of taxes
    
    
    
    
    
    
    1.3Net income
    
    
    0.8
    %
    
    
    1.1
    %
 Quarter Ended March 31, 2008 Compared to Quarter Ended March 31, 2007
 Healthcare revenues.
 Healthcare
expenses.
 Selling, general and administrative expenses.
 Audit Committee investigation and related expenses.
 30




---



##### 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.
 Liquidity and Capital Resources
 Overview
      31




---



##### 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
  32




---



##### Table of Contents



Other Financing Transactions
  Contractual Obligations and Commercial Commitments
  Current
    
    
    2-3 years
    
    
    4-5 years
    
    
    After 5 yearsOperating leases
    
    $
    891
    
    
    $
    1,020
    
    
    $
    612
    
    
    $
    1,614Revolving credit facility
    
    
    7,500
    
    
    
    
    
    
    
    
    
    
    
    Workers compensation claims
    
    
    2,749
    
    
    
    3,317
    
    
    
    956
    
    
    
    Professional and general liability claims
    
    
    11,694
    
    
    
    7,433
    
    
    
    781
    
    
    
    115Total
    
    $
    22,834
    
    
    $
    11,770
    
    
    $
    2,349
    
    
    $
    1,729
  Off-Balance Sheet Transactions
  Inflation
  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
 33




---



##### Table of Contents



Liabilities
  34




---



##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
   35




---



##### 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.
 36




---



##### Table of Contents



Matters involving PHS and Baltimore County, Maryland.
   37




---



##### Table of Contents



Matters Related to the Audit Committee Investigation and Shareholder Litigation
  SEC and United States Attorney Informal Inquiries.
 Shareholder Litigation.
 38




---



##### Table of Contents



Delaware Department of Justice Inquiry
 Other Matters.
 39




---



##### Table of Contents



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
  
 ITEM 5. OTHER INFORMATION
  40




---



##### 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).10.1
    
    
    
    Renewal, effective as of January 1, 2008, to an Agreement dated January 1, 2005, as
amended, effective July 1, 2005 (incorporated herein by reference to Exhibit 99.1 to the
Companys Current Report on Form 8-K filed on January 4, 2008).10.2
    
    
    
    Contract Modification Agreement No. 3 to Medical Services Agreement between Commonwealth
of Pennsylvania Department of Corrections and Prison Health Services, Inc. (incorporated
herein by reference to Exhibit 99.1 to the Companys Current Report on Form 8-K filed on
February 6, 2008).10.3
    
    
    
    Second Amended and Restated Revolving Credit and Security Agreement dated February 22,
2008 between America Service Group Inc., a Delaware corporation, Prison Health Services, Inc.,
a Delaware corporation, EMSA limited partnership, a Florida limited partnership, Prison Health
Services of Indiana, LLC, an Indiana limited liability company, Secure Pharmacy Plus, LLC, a
Tennessee limited liability company, and Correctional Health Services, LLC, a New Jersey
limited liability company, and CapitalSource Finance LLC, a Delaware limited liability
company, as lender and collateral and administrative agent (incorporated herein by reference
to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on February 28, 2008).10.4
    
    
    
    Amendment No. 1 to Second Amended and Restated Revolving Credit and Security Agreement
dated February 22, 2008 between America Service Group Inc., a Delaware corporation, Prison
Health Services, Inc., a Delaware corporation, EMSA limited partnership, a Florida limited
partnership, Prison Health Services of Indiana, LLC, an Indiana limited liability company,
Secure Pharmacy Plus, LLC, a Tennessee limited liability company, and Correctional Health
Services, LLC, a New Jersey limited liability company, and CapitalSource Finance LLC, a
Delaware limited liability company, as lender and collateral and administrative agent
(incorporated herein by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K
filed on March 4, 2008).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. 41




---



##### Table of Contents



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)  42