UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549




FORM
10-K




(Mark
One)




x
            ANNUAL
      REPORT UNDER SECTION 13 OR 15(d)
              OF
      THE SECURITIES EXCHANGE ACT OF 1934
              
              For
      the Fiscal Year Ended December 31, 2007o
            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:  001-33094
              
              AMERICAN
      CARESOURCE HOLDINGS, INC.(Exact
      Name of Registrant as Specified in Its Charter)


Delaware
            
            20-0428568(State
      or other jurisdiction of incorporation or organization)
            
            (I.R.S.
      Employer Identification No.)


5429
      Lyndon B. Johnson Freeway, Suite 700, Dallas, Texas
            75240(Address
      of principal executive offices)
            
            (Zip
      Code)(972)
      308-6830(Registrant’s
      telephone number, including area code)Securities
      registered pursuant to Section 12(b) of the Exchange
  Act:


Title
      of Each Class
            
            Name
      of Each Exchange on Which RegisteredCommon
      Stock, par value $.01 per share
            
            American
      Stock Exchange


Securities
      registered pursuant to Section 12(g) of the Exchange Act:
              NoneIndicate
      by checkmark if the Registrant is a well-known seasoned issuer, as defined
      in Rule 405 of the Securities Act of 1933 (the “Securities
      Act”).
            Yes o  No
      xIndicate
      by checkmark if the Registrant is not required to file reports pursuant to
      Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange
      Act”).
            Yes o   No
      xIndicate
      by checkmark whether the Registrant (1) has filed all reports required to
      be filed by Section 13 or 15(d) of the Exchange Act during the preceding
      12 months (or for such shorter period that the Registrant was required to
      file such reports) and (2) has been subject to such filing requirements
      for the past 90 days.
            Yes
      x No oIndicate
      by checkmark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained in this form, and will not be contained,
      to the best of Registrant’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-K or any
      amendment to this Form 10-K.
            o







Indicate
      by checkmark whether the Registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer, or a smaller reporting
      company.  See the definitions of “large accelerated filer,”
      “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
      Exchange Act.  (Check one):o Large
      Accelerated Filer    o Accelerated
      Filer    o  Non-Accelerated
      Filer    x Smaller Reporting
      Company


Indicate
      by checkmark whether the Registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).
            Yes o   No
      xThe
      aggregate market value of the voting and nonvoting Common Stock held by
      nonaffiliates of the Registrant was $12,556,145, computed by reference to
      the price at which the Common Stock was last sold on the American Stock
      Exchange on the last business day (June 29, 2007) of the Registrant’s most
      recently completed second fiscal quarter (June 30,
  2007).The
      number of shares of the Registrant’s Common Stock, par value $.01 per
      share, outstanding as of March 26, 2008 was 15,067,423.DOCUMENTS
      INCORPORATED BY REFERENCEPortions
      of the definitive proxy statement for the annual meeting of stockholders
      of American CareSource Holdings, Inc. to be held on May 20, 2008 and filed
      with the Securities and Exchange Commission pursuant to Regulation 14A not
      later than April 29, 2008, are incorporated by reference into Part III of
      this Form 10-K.




2




AMERICAN
CARESOURCE HOLDINGS, INC.




FORM
10-K




TABLE
OF CONTENTS




PART I
            
            5Item 1.
            Business
            5Item 1A.
            Risk Factors
            10Item 1B.
            Unresolved Staff Comments
            15Item 2.
            Properties
            16Item 3.
            Legal Proceedings
            16Item 4.
            Submission of Matters to a Vote of Security
      Holders
            16PART II
            
            16Item 5.
            Market for Registrant’s Common Equity, Related Stockholder
      Matters, and Issuer Purchases of Equity Securities
            16Item 7.
            Management’s Discussion and Analysis of Financial Condition and
      Results of Operation
            17Item 8.
            Financial Statements and Supplementary Data
            25Item 9.
            Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosure
            25Item 9A(T)
            Controls and Procedures
            25Item 9B
            Other Information
            26PART III
            
            27Item 10.
            Directors, Executive Officers, and Corporate
      Governance
            27Item 11.
            Executive Compensation
            27Item 12.
            Security Ownership of Certain Beneficial Owners and Management
      and Related Stockholder Matters
            28Item 13.
            Certain Relationships and Related Transactions, and Director
      Independence
            29Item 14.
            Principal Accounting Fees and Services
            29PART IV
            
            30Item 15.
            Exhibits and Financial Statement Schedules
            30Index
      to Financial StatementsReport of Independent Registered Public Accounting
      Firm
            F-1Consolidated Balance Sheets
            F-2Consolidated Statements of Operations
            F-3Consolidated Statements of Stockholders’
    Equity
            F-4Consolidated Statements of Cash Flows
            F-5Notes to Consolidated Financial Statements
            F-6




3




Special
Note Regarding Forward-Looking Statements




Some
information contained in this Annual Report on Form 10-K for the
year  ended December 31, 2007 constitutes forward-looking statements,
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
“Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”).  You can identify these statements by
forward-looking words such as “may,” “will,” “expect,” “intend”, “anticipate,”
“believe,” “contemplate,” “estimate” and “continue” or similar words. You should
read statements that contain these words carefully because they discuss our
future expectations, contain projections of our future operating results or of
our financial condition, or state other “forward-looking”
information.




We
believe it is important to communicate to our stockholders and potential
investors not only the Company’s current condition, but management’s forecasts
about our future opportunities, performance and results, including, for example,
information with respect to potential margin expansion, cash reserves and other
financial items, and our strategies and prospects.  However,
forward-looking statements are based on current expectations and assumptions and
are subject to substantial risks and uncertainties that could cause our actual
results to differ materially from the expectations we describe in our
forward-looking statements.  Events may occur in the future that we
cannot accurately predict or over which we have no control.  They
include, but are not limited to, risks of market acceptance of, or preference
for, the Company’s systems and services, competitive forces, the impact of
geopolitical events and regulatory changes, general economic conditions and
economic factors in the country and the healthcare industry. Therefore, in
evaluating such forward-looking statements, you should specifically consider the
various risks, uncertainties and events set forth in the section entitled “Risk
Factors” in Item 1A of Part 1 of this Annual Report on Form 10-K and cautionary
language appearing elsewhere in this report.




You are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date of this report.  All forward-looking
statements included herein are expressly qualified in their entirety by the
cautionary statements contained or referred to in this
section.  Unless otherwise indicated, the information in this annual
report is as of December 31, 2007.  Except to the extent required by
applicable securities laws and regulations, we undertake no obligation to update
or revise these forward-looking statements to reflect events or circumstances
after the date of this document or to reflect the occurrence of unanticipated
events.




4




PART I




Item
1.                      Business.




Overview




American
CareSource Holdings, Inc. (“ACS,” “Company,”  the “Registrant,” “we,”
“us,” or “our,”) is an ancillary healthcare services company that provides
patients access to its  network of ancillary service providers for the
benefit of healthcare payors.  The Company utilizes its comprehensive
network of ancillary healthcare service providers, unique contracting
capabilities, client service support and claims management services to assist
health benefits plan sponsors, including preferred provider organizations, third
party administrators, insurance companies, and large self-funded employers, to
reduce their overall ancillary healthcare costs.  Ancillary healthcare
services encompass a broad array of services that supplement or support the care
provided by hospitals and physicians.  Ancillary healthcare services
include non-hospital, non-physician services associated with surgery centers,
free-standing diagnostic imaging centers, home health and infusion, dialysis,
supply of durable medical equipment, orthotics and prosthetics, laboratory and
other services.




ACS was
incorporated under the laws of the State of Delaware on November 24, 2003 as a
wholly-owned subsidiary of Patient Infosystems, Inc. (“Patient Infosystems”) in
order to facilitate Patient Infosystems’ acquisition of substantially all of the
assets of American CareSource Corporation.  American CareSource
Corporation had been in operation since 1997.  The predecessor company
to American CareSource Corporation, Physician’s Referral Network, had been in
operation since 1995.  On December 23, 2005, the Company became an
independent company when Patient Infosystems distributed by dividend to its
stockholders substantially all of its shares of the Company. Ancillary Care
Services, Inc. is a wholly owned subsidiary of the Company.




On July
12, 2007, Wayne A. Schellhammer resigned as a member of the Board of Directors
and Chief Executive Officer of the Company. On September 23, 2007, David S.
Boone was promoted to President and Chief Executive Officer of the Company. More
recently, on October 25, 2007, Steven J. Armond joined the Company as Chief
Financial Officer.




The
Company’s principal executive offices are located at 5429 Lyndon B. Johnson
Freeway, Suite 700, Dallas, TX 75240. Our Common Stock is listed on the American
Stock Exchange under the symbol “XSI.” Our telephone number is (972)
308-6830.  Our Internet address is www.anci-care.com.




Products
and Capabilities




Ancillary
care services




Ancillary
healthcare services include a broad array of services that supplement or support
the care provided by hospitals and physicians, including the non-hospital,
non-physician services associated with surgery centers, free-standing diagnostic
imaging centers, home health and infusion, supply of durable medical equipment,
orthotics and prosthetics, laboratory and other services.




5


Ancillary
healthcare services include, but are not limited to, the following
categories:





·Outpatient Therapy/Rehab
            ·Orthotics and Prosthetics·Home Health Services
            ·Pain Management·Surgical Centers
            ·Pharmacy ( Infusion)·Laboratory Services
            ·Physical Therapy·Home Infusion Therapy
            ·Respiratory Services·Chiropractic Services
            ·Sleep Studies·Diagnostic Imaging/Radiology
            ·Sub-Acute and Skilled Nursing Facilities·Dialysis Services
            ·Hospice Services·Durable Medical Equipment
            ·Bone Growth Stimulators




The
Company has contracts with approximately 2,500 ancillary healthcare service
providers operating in approximately 25,000 sites nationwide.  The
Company is able to offer its clients direct cost savings in the form of
discounted rates for contracted services and administrative cost savings by
functioning as a single point of contact for managing a comprehensive array of
ancillary healthcare services.  The Company’s services include
processing the claims submitted by its covered healthcare service providers,
re-pricing the claims, submitting the claims to its client payors for payment,
receiving and disbursing claims payments and performing client service functions
for its clients and contracted providers.   Contracting with the
Company provides a preferred provider organization (“PPO”) or a third party
administrator (“TPA”) and similar clients a conduit for marketing comprehensive,
efficient and affordable ancillary healthcare services to their
participants.




Pursuant
to the Company’s processes and procedures for its ancillary healthcare claims
management services, clients and/or payors submit claims to us for services
performed by the service provider for the client’s members.  The
majority of these claims are submitted to us electronically by the
payor.  The Company then re-prices these claims under the relevant
payor fee schedule, performs electronic conversion and HIPAA formatting
services, and submits the re-priced claims to the appropriate
payors.  After review and adjudication of the claims by the payor, the
payor issues an Explanation of Benefits, Explanation of Payment and check for
each claim.  In most cases, these checks are sent to us.  We
then pay the service providers under the relevant provider fee
schedule.  The difference between the amounts received by us from our
client payors and the amounts paid by us to our contracted healthcare service
providers represents the Company’s gross margin on its ancillary healthcare
services.




The
Company may also receive a claims submission from a client either electronically
or via a paper based claim.  As part of its relationship with its
clients, the Company may pay an administrative fee to its clients for the
modifications that may be required to the client’s software program to create
electronic connectivity with the Company, as well as for the aggregation of
claims and the electronic transmission of those claims to us.




6


Value-Added
Services




Ancillary network
analysis.  The Company performs an analysis of the available
claims history from each client payor and develops a specific plan to meet each
client’s needs.  This analysis identifies high-volume service
providers that are not already in our network.  We attempt to contract
with such service providers to maximize discount levels and capture a larger
volume of out-of-network claims.




Ancillary custom
network.   ACS customizes its network to meet the needs of
each client.  In particular, we review the client’s “out-of-network”
claims history through our network analysis service and develop a strategy to
create a network that efficiently serves the client’s needs.  This may
involve adding additional service providers for a client or removing service
providers the client determines should be excluded from its
network.




Ancillary network
management.  The Company manages ancillary service provider
contracts, reimbursement and credentialing for its clients.  This not
only provides administrative benefits to our clients, but reduces the burden on
our contracted service providers who typically must supply credentialing
documentation to payors and engage in contract negotiations with separate
payors.




Ancillary systems
integration.  The Company has created a proprietary software
system that enables us to manage many different customized accounts and includes
the following modules:




·
            Provider
      network management


·
            Credentialing


·
            Data
      transfer management/electronic data
interface


·
            Multi-level
      reimbursement management


·
            Posting,
      Explanation of Benefits, check, and e-funds
  processes


·
            Client
      service management


·
            Claim
      re-pricing


·
            Advanced
      data reporting





Ancillary
reporting.  ACS offers a complete suite of reports to each
client on a monthly basis.  These reports cover contracting efforts
and capture rates, discount levels, referral volumes by service category and
complete claims and utilization reports.




Ancillary healthcare claims
management.  The Company can manage ancillary healthcare claims
flow, both electronic and paper based, and integrate with a client’s process
electronically or through re-priced paper claims.  The Company has the
capability of performing a number of customized processes that may add
additional value for each client.  As part of the claims management
process, we manage the documentation requirements specific to each
payor.  In the event claims are submitted to us by a service provider
without the required documentation, we will work with the service provider to
obtain the required documentation so that the claim will be accepted by the
payor.  This service provides a labor cost savings to our
clients.




7


Ancillary data
insights.  The Company has developed and continues to develop
an extensive data base of ancillary healthcare claims history.  The
data provides insights into utilization and pricing across a wide variety of
service categories, geographies, and service providers.  The Company
intends to market this data as a value added service to its clients in the
design of custom networks, and the development of ancillary healthcare
management programs.




Business
Strategy




The
Company’s focus is strictly on the ancillary healthcare service market, a market
that encompasses over $575 billion in total annual healthcare spending in the
United States (as derived from data from the Center for Medicare and Medicaid
Services, National Health Statistics Group, U.S. Department of Commerce, Bureau
of Economic Analysis and Census).  The ancillary healthcare service
market tends to be regionally focused and contracting with ancillary healthcare
service providers is difficult without a specific focus on the
market.  This is due to the disparate nature of ancillary healthcare
services and the fact that these services are provided by a wide array of
business types, ranging from small independent practitioners, regional specialty
practices as well as national providers.  Since this market is so
diverse, it has not been a focus of the major health plans and
payors.  The Company believes that it has an opportunity to create a
sustainable advantage in this market by becoming an aggregator of these services
for health plans as well as an aggregator of patients for these service
providers.




Network
development is a critical component of the Company’s strategy.  We
develop our service provider network proactively and reactively to specific
client needs.  While we have a national footprint of service
providers, our intention is to focus on specific geographies where we can have a
significant impact on a service provider’s patient load.  With market
strength in a specific area, we believe that the Company can develop favorable
rates with service providers and create an attractive product offering
(healthcare cost savings) to regionally-based clients.




The
Company’s target client markets are the regional insurers, PPOs, and
TPAs.  The Company believes that there is an important market to be
served by providing an alternative to the major national insurers and payors in
select regional markets.  Our regionally specific networks of
providers and the contractual cost savings we are able to generate create a
competitive advantage for these regional insurers, TPAs and PPOs.




The
Company offers a suite of value added services, and continues to develop new
services, to enable regional service providers to lower their cost of doing
business with the Company.  These services include electronic claims
payment services, automated claim look up and research services, and customized
fee schedules for various services specific to individual payors.  The
Company believes that by becoming a favorable partner to the ancillary
healthcare service provider community it will continue to grow its ancillary
healthcare service provider network and continue to derive favorable contracting
terms from these service providers.




As an
aggregator of patient volume that can be directed towards specific service
providers, the Company believes that over time it will have the ability to
negotiate exclusive contracts with its clients that will allow the Company to
manage the spectrum of a client’s ancillary healthcare benefit
offerings.  This can be as simple as providing a dedicated, exclusive
service provider network to their patients to as complex as providing managed
care services for a specific subset of ancillary healthcare services such as
infusion services or diagnostic imaging.




8


Sales
and Marketing




Sales and
marketing efforts for the Company’s products and services are focused on PPOs,
TPAs, large self-funded organizations and Taft-Hartley plans (i.e., employee
benefit plans that are self-administered under collective bargaining
agreements).  The Company’s marketing efforts are conducted through
its dedicated sales force, executive officers, and a network of independent
brokers and consultants.




Customers




The
Company’s most significant clients include The Parker Group of Companies (“The
Parker Group”, which consists of HealthSmart, AAG, and Interplan Health Group
(“IHG”)), Med Partners d/b/a Lutheran (“Lutheran”), and Texas True Choice,
Inc.  For the year ended December 31, 2007, ACS derived 65% of its
total revenue from The Parker Group, 28% of its total revenue from Texas True
Choice, Inc., and 3% of its total revenue from Lutheran.  For the year
ended December 31, 2006, the Company derived 72% of its total revenue from The
Parker Group, 21% of its total revenue from Lutheran, and 4% of its total
revenue from ppoNext.




In
January 2007, Lutheran began to contract directly with certain service providers
which significantly reduced the Company’s claim volume for
Lutheran.  In 2007, Lutheran accounted for approximately $684,000 of
the Company’s net sales, while Lutheran accounted for approximately $2.4 million
in 2006 net sales.   In 2007, the Company added five new clients
including the Texas-based PPO, Texas True Choice, Inc.




Competition




The
Company faces competition primarily from existing health plans and
insurers.  These companies range from the large payors, such as United
HealthCare, Aetna, Cigna and the Blue Cross/Blue Shield plans, as well as
smaller regional PPOs and payors.  In addition, several niche players
that are attempting to aggregate various segments of the ancillary healthcare
service lines are potential competitors.




Research
and Development




The
company invests in its information technology infrastructure to enhance the
capabilities of its data bases, data retrieval tools, data exchange capabilities
and re-pricing engine.  In addition, the Company believes that its
extensive claims data base of ancillary healthcare services and costs is a
strategic asset.  The Company is investing to improve its ability to
utilize this data.  These investments are made in the normal course of
business and are not separately identified.




Government
Regulation




The
healthcare industry is extensively regulated by both the Federal and state
governments.  A number of states have extensive licensing and other
regulatory requirements applicable to companies that provide healthcare
services.  Additionally, services provided to health benefit plans in
certain cases are subject to the provisions of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA").




9


Furthermore, state laws govern the confidentiality of patient
information through statutes and regulations that safeguard privacy
rights.  The Company is subject to the Health Insurance Portability
and Accountability Act of 1996 (“HIPAA”), which provides national standards for
electronic health information transactions and the data elements used in such
transactions.  ACS and its clients may be subject to Federal and state
laws and regulations that govern financial and other arrangements among
healthcare providers.  Furthermore, the Company and its clients may be
subject to federal and state laws and regulations governing the submission of
false healthcare claims to the government and private
payors.  Possible sanctions for violations of these laws and
regulations include minimum civil penalties of between $5,000-$10,000 for each
false claim and treble damages.




The
Company must continually adapt to new and changing regulations in the healthcare
industry. If we fail to comply with these applicable laws, we may be subject to
fines, civil penalties, or criminal prosecution.  If an enforcement
action were to occur, our business and financial condition may be adversely
affected.




Employees




As of March 30, 2008, the Company had
38 full-time employees and no part-time employees.





Item
1A.                      Risk
Factors.




The
Company’s stockholders and any potential investor in the Company’s Common Stock
should carefully review and consider each of the following risk factors, as well
as all other information appearing in this Annual Report on Form 10-K, relating
to investment in our Common Stock.  The Company’s business faces
numerous risks and uncertainties, the most significant of which are described
below.  If any of the following risks actually occur, the business,
financial condition, results of operations or cash flows of the Company could be
materially adversely affected, the market price of the Company’s Common Stock
could decline significantly, and a stockholder could lose all or part of an
investment in the Company’s Common Stock.




The
Company has a history of losses and has never been profitable on an annual
basis.




The
Company has incurred losses in each year since our inception in December 2003
and has an accumulated deficit of approximately $7.4 million as of December 31,
2007.  The Company’s predecessor never achieved profitability
either.  The Company will require significant growth in either claims
volume for existing contracts, new contracts or both in order to generate
sufficient operational margin to become profitable and maintain profitability.
No assurances can be given that the Company will be able to generate additional
revenues or ever operate profitably in the future.  The Company’s
prospects must be considered in light of the numerous risks, expenses, delays
and difficulties frequently encountered in an industry characterized by intense
competition, as well as the risks inherent in the development of new programs
and the commercialization of new services, particularly given its failure to
date to operate profitably.




10


The
Company is dependent upon payments from third party payors who may reduce rates
of reimbursement.




The
Company’s profitability depends on payments provided by third-party
payors.  Competition for patients, efforts by traditional third-party
payors to contain or reduce healthcare costs and the increasing influence of
managed care payors, such as health maintenance organizations, have resulted in
reduced rates of reimbursement in recent years. If continuing, these trends
could adversely affect the Company’s results of operations unless it can
implement measures to offset the loss of revenues and decreased profitability.
In addition, changes in reimbursement policies of private and governmental
third-party payors, including policies relating to the Medicare and Medicaid
programs, could reduce the amounts reimbursed to the Company’s clients for the
Company’s services, and consequently, the amount these clients would be willing
to pay for the Company’s services.




The
Company has a limited number of clients, a few of which account for a
substantial portion of its business, and failure to retain such clients could
have a material adverse effect on its business and results of
operations.




Our three
largest clients accounted for approximately 96% of our revenues during 2007, and
65%of our revenue
during the fiscal year ended December 31, 2007 was from a single
client.  In 2006, our two largest clients accounted for 93% of our
revenue, and 72% of our revenue during 2006 was generated from a single client.
The loss of any one of these clients or significant declines in the level of use
of our services by one or more of these clients, without replacement by new
business, would have a material adverse effect on the Company’s business and
results of operations.  All of our client contracts may be terminated
for convenience by either party after a specified notice period, which varies
from as short as 60 days to as long as two years.  There can be no
assurance that any client will maintain its contract with us or that any client
will renew its contract upon expiration, or on terms favorable to
us.  Consequently, the Company’s failure to retain such clients could
have a material adverse effect on our business and results of
operations.  Additionally, an adverse change in the financial
condition of any of these clients, including an adverse change as a result of a
change in governmental or private reimbursement programs, could have a material
adverse effect on our business.




In
January 2007, Med Partners d/b/a Lutheran, which accounted for 21% of the
Company’s 2006 revenue, began to contract directly with certain ancillary
healthcare service providers.  This has resulted in a significant
reduction in our claim volume from Lutheran.  In 2006, Lutheran
accounted for approximately $2.4 million in net sales, but in 2007 Lutheran
accounted for approximately $684,000 in revenue.  No assurance can be
given that any of our current clients will not pursue a similar strategy and
reduce their use of our services.




11


The
Company is dependent upon discounted rates made available by ancillary
healthcare service providers which may be discontinued at any time.




We obtain
revenue from cost savings that we are able to receive from ancillary healthcare
service providers and pass on to our clients. Should the ancillary healthcare
service providers discontinue making a discount available to us, we will be
unable to recognize any gain from the sale of our services to client
payors.  If we are unable to recognize these margins, we will be
unable to continue our business as it is currently conducted.




Changes
in state and federal regulations could restrict our ability to conduct our
business.




Numerous
state and federal laws and regulations affect our business and operations. These
laws and regulations include, but are not necessarily limited to:




·
            healthcare
      fraud and abuse laws and regulations, which prohibit illegal referral and
      other payments;


·
            the
      Employee Retirement Income Security Act of 1974 and related regulations,
      which regulate many healthcare
plans;


·
            mail
      pharmacy laws and regulations;


·
            privacy
      and confidentiality laws and
regulations;


·
            consumer
      protection laws and regulations;


·
            legislation
      imposing benefit plan design
restrictions;


·
            various
      licensure laws, such as managed care and third party administrator
      licensure laws;


·
            drug
      pricing legislation; and


·
            Medicare
      and Medicaid reimbursement
regulations.





We
believe we are operating our business in substantial compliance with all
existing legal requirements material to the operation of our business. There
are, however, significant uncertainties regarding the application of many of
these legal requirements to our business, and there cannot be any assurance that
a regulatory agency charged with enforcement of any of these laws or regulations
will not interpret them differently or, if there is an enforcement action, that
our interpretation would prevail. In addition, there are numerous proposed
healthcare laws and regulations at the federal and state levels, many of which
could materially affect our ability to conduct our business or adversely affect
our results of operations.




If
the Company fails to comply with the requirements of HIPAA, it could face
sanctions and penalties.




HIPAA
provides safeguards to ensure the integrity and confidentiality of health
information. Violation of the standards is punishable by fines and, in the case
of wrongful disclosure of individually identifiable health information, fines or
imprisonment, or both. Although we intend to comply with all applicable laws and
regulations regarding medical information privacy, failure to do so could have
an adverse effect on our business.




12


Large
competitors in the healthcare industry could choose to compete against ACS,
reducing the Company’s margins.




Traditional
health insurance companies, specialty provider networks, and specialty
healthcare services companies are potential competitors of the
Company.  These companies include well-established companies which may
have greater financial, marketing and technological resources than we have.
Competition in the marketplace has caused many of these companies to reduce the
prices charged to clients for core services and to share with clients a larger
portion of the formulary fees and related revenues received from service
providers.  Increased price competition from such companies’ entry
into the market could reduce our margins and have a material adverse effect on
our financial condition and results of operations.




Limited
barriers to entry into the ancillary healthcare services market could result in
greater competition.




Although
we are not aware of any organization or company that currently provides similar
ancillary healthcare services, there are limited barriers to entering the
market. Major benefit management companies and healthcare companies not
presently offering ancillary healthcare services may decide to enter the market.
These companies may have greater financial, marketing and other resources than
are available to us.  Competition from other companies may have a
material adverse effect on our financial condition and results of
operations.




The
Company’s inability to react effectively to changes in the healthcare industry
could adversely affect its operating results.




In recent
years, the healthcare industry has undergone significant change driven by
various efforts to reduce costs, including trends toward managed care, cuts in
Medicare reimbursements, and horizontal and vertical consolidation within the
healthcare industry.  Proposed changes to the U.S. healthcare system,
including potential national healthcare reform, may increase governmental
involvement in healthcare and ancillary healthcare services, and otherwise
change the way payors, networks and service providers conduct their businesses.
Healthcare organizations may react to these proposals and the uncertainty
surrounding them by reducing or delaying purchases of cost control mechanisms
and related services such as those provided by the Company.  Other
legislative or market-driven changes in the healthcare system that the Company
cannot anticipate could also materially adversely affect our business. Our
inability to react effectively to these and other changes in the healthcare
industry could adversely affect our operating results. We cannot predict whether
any healthcare reform efforts will be enacted and what effect any such reforms
may have on our business or our clients. Our inability to react effectively to
changes in the healthcare industry may result in a material adverse effect on
our business.




The
continued services and leadership of the Company’s senior management is critical
to its ability to maintain growth and any loss of key personnel could adversely
affect its business.




The
future of our business depends to a significant degree on the skills and efforts
of our senior executives, in particular our Chief Executive Officer David S.
Boone.  If we lose the services of any of our senior executives, and
especially if any of our executives joins a competitor or forms a competing
company, our business and financial performance could be seriously
harmed.  We have an employment agreement with Mr. Boone, which
automatically renews on April 30th each
year for another one-year term.  A loss of any of our executive
officers’ skills, knowledge of the industry, contacts and expertise could cause
a setback to our operating plan and strategy.




13


The
Company may be unsuccessful in hiring and retaining skilled
employees.




The
future growth of our business depends on our ability to hire and retain skilled
employees.  The Company may be unable to hire and retain the skilled
employees needed to succeed in our business.  Qualified employees are
in great demand throughout the healthcare industry. Our failure to attract and
retain sufficient skilled employees may limit the rate at which our business can
grow, which will result in harm to our financial performance.




An
interruption of data processing capabilities and telecommunications could
negatively impact the Company’s operating results.




Our
business is dependent upon our ability to store, retrieve, process and manage
data and to maintain and upgrade our data processing capabilities.  An
interruption of data processing capabilities for any extended length of time,
loss of stored data, programming errors, other computer problems or
interruptions of telephone service could have a material adverse effect on our
business.




An
inability to adequately protect our intellectual property could harm the
Company’s competitive position.




We
consider our methodologies, processes and know-how to be proprietary. We seek to
protect our proprietary information through confidentiality agreements with our
employees, as well as our clients and contracted service
providers.  The Company’s policy is to have its employees enter into a
confidentiality agreement at the time employment begins, with the
confidentiality agreement containing provisions prohibiting the employee from
disclosing our confidential information to anyone outside of the Company,
requiring the employee to acknowledge, and, if requested, assist in confirming
the Company’s ownership of new ideas, developments, discoveries or inventions
conceived by the employee during his or her employment with the Company, and
requiring the assignment by the employee to the Company of proprietary rights to
such matters that are related to our business. There can be no assurance that
the steps taken by the Company to protect its intellectual property will be
successful. If the Company does not adequately protect its intellectual
property, its competitors may be able to use its technologies and erode or
negate the Company’s competitive advantage in the market.




Fluctuations
in the number and types of claims processed by the Company could make it more
difficult to predict the Company’s revenues from quarter to
quarter.




Monthly
fluctuations in the number of claims we process and the types of claims we
process will impact the quarterly and annual results of the
Company.  Our discount rate varies depending on the type of ancillary
healthcare service provided and the overall mix of these claims will impact our
profitability.  Consequently, it will be difficult to predict our
revenue from one quarter to another quarter.




14


Future sales of the Company’s Common Stock, or the perception that
these sales may occur, could depress the price of the Company’s Common
Stock.




Sales of
substantial amounts of our Common Stock, or the perception in the public that
such sales may occur, could cause the market price of the Company’s Common Stock
to decline.  This could also impair the Company’s ability to raise
additional capital through the sale of equity securities.  As of March
26, 2008, the Company had 15,067,423 shares of its Common Stock
outstanding.  Of the outstanding shares, 10,317,334 are freely
tradable without restriction or further registration under the Securities Act,
unless the shares are held by one of our “affiliates” as such term is defined in
Rule 144 of the Securities Act.  An additional 4,750,089 shares are
“restricted shares” as that term is defined under the Securities Act and may be
sold from time to time pursuant to a registration statement on Form S-3 (No.
333-133110), which was declared effective on February 8, 2007 by the Securities
and Exchange Commission (the “SEC”), or in reliance upon an exemption from
registration available under the Securities Act.  At March 26, 2008,
warrants to purchase 2,122,502 shares of Common Stock of the Company were
outstanding, and options to purchase 2,041,556 shares of Common Stock of the
Company had been granted and were outstanding under the Company’s Amended and
Restated 2005 Stock Option Plan.  In addition, 508,559 shares of the
Common Stock of the Company remain available for future grants of options to
purchase shares of the Common Stock of the Company under the Company’s Amended
and Restated 2005 Stock Option Plan.  If all of the outstanding
warrants are exercised and all options available under the Company’s Amended and
Restated 2005 Stock Option Plan are issued and exercised, there will be
approximately 19,740,040 shares of Common Stock of the Company
outstanding.




Some
of our existing stockholders can exert control over us and may not make
decisions that further the best interests of all stockholders.




As of
March 26, 2008, our officers, directors and principal stockholders (greater than
5% stockholders) together control beneficially approximately 54.3% of the
outstanding Common Stock of the Company.  As a result, these
stockholders, if they act individually or together, may exert a significant
degree of influence over our management and affairs and over matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions.  Furthermore, the interests of
this concentration of ownership may not always coincide with our interests or
the interests of other stockholders and, accordingly, they could cause us to
enter into transactions or agreements which we would not otherwise
consider.  In addition, this concentration of ownership of the
Company’s Common Stock may delay or prevent a merger or acquisition resulting in
a change in control of the Company and might affect the market price of our
Common Stock, even when such a change in control may be in the best interest of
all of our stockholders.




Item
1B.                  
Unresolved Staff Comments.




None.




15


Item2.                      Properties.




The
Company’s principal executive offices, consisting of 9,349 square feet of space
located at 5429 Lyndon B. Johnson Freeway, Suite 700, Dallas, TX 75240, is
leased by the Company pursuant to a lease that expires on April 30,
2013.  The Company does not own or lease any other real property and
believes its offices are suitable to meet its current needs.




Item
3.                      Legal
Proceedings.




None.




Item
4.                      Submission
of Matters to a Vote of Security Holders.




No
matters were submitted to a vote of the Company’s stockholders during the
quarter ended December 31, 2007.




PART
II




Item
5.                      Market
for Registrant’s Common Equity, Related Stockholder Matters andIssuer Purchases
of Equity Securities.




Market
Information




The
Company’s Common Stock has traded on the American Stock Exchange (“Amex”) under
the symbol XSI since October 19, 2006.  Prior to the commencement of
trading on the Amex, public trading for our Common Stock commenced on December
28, 2005 on the OTC Bulletin Board. The following table sets forth, for the
fiscal periods indicated, the range of high and low bid quotations for our
Common Stock as quoted on the OTC Bulletin Board from January 1, 2006 through
October 19, 2006 and the high and low sales prices for our Common Stock on the
Amex from October 19, 2006 through December 31, 2007.  With respect to
the OTC quotations, the reported bid quotations reflect inter-dealer prices
without retail markup, markdown or commissions, and may not necessarily
represent actual transactions.




High
            
            Low2007Fourth
      Quarter Ended December 31(Amex)
            $4.30
            
            $2.32Third
      Quarter Ended September 30 (Amex)
            $2.60
            
            $1.40Second
      Quarter Ended June 30 (Amex)
            $2.10
            
            $1.56First
      Quarter Ended March 31 (Amex)
            $2.53
            
            $1.452006Fourth
      Quarter Ended December 31 (Amex)
            $2.75
            
            $1.47Third
      Quarter Ended September 30 (OTC)
            $4.15
            
            $2.46Second
      Quarter Ended June 30 (OTC)
            $6.10
            
            $3.16First
      Quarter Ended March 31 (OTC)
            $7.01
            
            $5.10




The
closing price on the Amex for our Common Stock on March 26, 2008 was
$3.29.




16


Holders




As of
March 26, 2008, in accordance with the records of our transfer agent, there were
174 record holders of ACS Common Stock.  The Company estimates that
the number of beneficial owners of our Common Stock is approximately
1,000.




Dividends




We have
not declared cash dividends on our Common Stock.  We intend to retain
all earnings to finance future growth and do not anticipate that we will pay
cash dividends for the foreseeable future.




Recent
Sales of Unregistered Securities; Use of Proceeds from Registered
Securities.




There
were no sales of unregistered securities by the Company during the fiscal year
ended December 31, 2007.




There
were no repurchases of the Common Stock of the Company by or on behalf of the
Company or any affiliated purchasers during the fourth quarter of the Company’s
fiscal year ended December 31, 2007.




Item
7.                      Management’s
Discussion and Analysis of Financial Condition and Results
ofOperations.




Management’s
discussion and analysis provides a review of the Company’s operating results for
the fiscal year ended December 31, 2007 and its financial condition at December
31, 2007.  The focus of this review is on the underlying business
reasons for significant changes and trends affecting the revenues, net losses
and financial condition of ACS.  This review should be read in
conjunction with the accompanying consolidated financial
statements.




Overview




ACS
provides ancillary healthcare services through its proprietary network of
ancillary healthcare service providers for the benefit of its healthcare payor
clients.  Our clients route healthcare claims to ACS after service has
been performed by participant providers in our network and ACS re-prices those
claims according to its contractual rate with the provider of
service.  In the process of re-pricing the claim, ACS is paid directly
by the client or the insurer for the service.  ACS then pays the
provider of service according to its contractual rate.  ACS assumes
the risk of generating positive margin, the difference between the payment it
receives for the service and the amount it is obligated to pay the original
provider of service or member of its proprietary network.




The
Company recognizes revenues for ancillary healthcare services when services by
providers have been authorized and performed and collections from payors are
reasonably assured.  Patient claims revenues are recognized by us as
services are provided. Cost of revenues for ancillary healthcare services
consist of amounts due to providers for providing patient services, client
administration fees paid to our client payors to reimburse them for the cost of
implementing and managing claims submissions, and the Company’s related direct
labor and overhead of processing invoices, collections and payments. The Company
is not liable for costs incurred by independent contract service providers until
payment is received by us from the payors. The Company recognizes actual or
estimated liabilities to independent contract service providers as the related
revenues are recognized. Patient claim costs of revenue consist of amounts due
the service providers as well as our direct labor and overhead to administer the
patient claims.




17


The
Company markets its products to insurance companies, third party administrators
and preferred provider organizations.




Although
we have never reported a profit for a full fiscal year and we incurred a loss of
$820,230 for the year ended December 31, 2007, we realized our first quarterly
profit during the second half of 2007, with net income of $188,211 and $318,742,
respectively, for each of the three month periods ended September 30, 2007 and
December 31, 2007.  Our improved performance during the second half of
2007 was attributable to the addition of five new clients during the year and
the expansion of services performed for existing clients. The Company is seeking
continuing growth in the number of client payor and service provider
relationships by focusing on providing in-network services for its payors and
aggressively pursuing additional preferred provider organizations and third
party administrators as its primary sales target. The Company believes that this
strategy should increase the volume of claims the Company can adjudicate as well
as the volume of patients it can direct through its service provider network. No
assurances can be given that the Company can expand its service provider or
payor relationships, nor that any such expansion will result in an improvement
in the results of operations of the Company.




2007
Summary Results of Operations (in thousands)




Three
      months ended
            
            
            200703/31/07
            
            
            06/30/07
            
            
            09/30/07
            
            
            12/31/07
            
            
            TotalNet
      Revenue
            
            $
            2,267
            
            
            $
            4,008
            
            
            $
            7,088
            
            
            $
            10,125
            
            
            $
            23,488Cost
      of Revenues
            
            
            2,102
            
            
            
            3,478
            
            
            
            6,092
            
            
            
            8,930
            
            
            
            20,602Contribution
      Margin
            
            
            165
            
            
            
            530
            
            
            
            996
            
            
            
            1,195
            
            
            
            2,886Selling,
      general and administrative
            
            
            702
            
            
            
            1,209
            
            
            
            767
            
            
            
            1,076
            
            
            
            3,754Depreciation
      and amortization
            
            
            78
            
            
            
            84
            
            
            
            86
            
            
            
            81
            
            
            
            329Operating
      Income (Loss)
            
            
            (615
            )
            
            
            (763
            )
            
            
            143
            
            
            
            38
            
            
            
            (1,197
            )Financing
      (income)
            
            
            (4
            )
            
            
            (47
            )
            
            
            (45
            )
            
            
            (48
            )
            
            
            (144
            )Income
      tax benefit
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (233
            )
            
            
            (233
            )Net
      Income (Loss)
            
            $
            (611
            )
            
            $
            (716
            )
            
            $
            188
            
            
            $
            319
            
            
            $
            (820
            )EPS,
      basic
            
            $
            (0.04
            )
            
            $
            (0.05
            )
            
            $
            0.01
            
            
            $
            0.02
            
            
            $
            (0.06
            )EPS,
      diluted
            
            $
            (0.04
            )
            
            $
            (0.05
            )
            
            $
            0.01
            
            
            $
            0.02
            
            
            $
            (0.06
            )




18


Year
Ended December 31, 2007 Compared to Year Ended December 31, 2006





ACS
statement of operations data for the years ended December 31,





2007
            
            
            2006Net
      Revenue
            
            $
            23,487,911
            
            
            $
            11,418,554Cost
      of Revenue
            
            
            20,601,600
            
            
            
            9,346,927Contribution
      Margin
            
            
            2,886,311
            
            
            
            2,071,627Selling,
      general and administrative
            
            
            3,754,175
            
            
            
            3,005,241Depreciation
      and amortization
            
            
            328,839
            
            
            
            316,304Operating
      loss
            
            
            (1,196,703
            )
            
            
            (1,249,918
            )Financing
      (income) expense
            
            
            (143,719
            )
            
            
            63,909Income
      tax benefit
            
            
            (232,754
            )
            
            
            -Net
      (loss)
            
            $
            (820,230
            )
            
            $
            (1,313,827
            )




Revenues
of American CareSource Holdings are comprised of revenues from ancillary
healthcare service claims. Revenues increased 106% to $23,487,911 from
$11,418,554 for the year ended December 31, 2007 from the year ended December
31, 2006. Approximately $8.7 million of the increase in revenues from ancillary
healthcare service claims was derived from five new clients which began with us
in 2007. In addition, revenue from established clients increased approximately
$5.1 million during 2007 due to our expansion of services for those clients.
Offsetting these increases, revenue from another one of our clients declined
during 2007 to approximately $0.7 million from approximately $2.4 million in
2006, as such client entered into agreements with certain service providers
independently from us, which we have described in reports previously filed by us
with the SEC.




The
Company will continue to attempt to increase the number of client payor and
service provider relationships by focusing on providing in-network services for
its payors and aggressively pursuing preferred provider organizations and third
party administrators as its primary sales target. The Company believes that this
strategy should increase the volume of claims the Company can adjudicate as well
as the volume of patients it can direct through its service provider network. No
assurances can be given that the Company can expand its service provider or
payor relationships, nor that any such expansion will result in an improvement
in the results of operations of the Company.




Costs and Expenses




Cost of
revenue is comprised of payments to our service providers, administration fees
paid to our client payors for converting claims to electronic data interchange
and routing them to both the Company for processing and to their payors for
payment, and the fixed costs of our network development and claims
administration organizations.  Cost of revenue increased from
$9,346,927 for the fiscal year ended December 31, 2006 to $20,601,600 for the
fiscal year ended December 31, 2007.  This represents an increase of
120% over the prior year.  Cost of revenue directly related to
provider services in 2007 increased by 150% compared to 2006.  This
increase reflects increased amounts paid to providers for their services as a
result of our increased revenue, and fluctuation in the mix of services provided
by the Company.  Administration fees increased 183% in 2007 over the
prior year due to the addition of five new clients and expanded relationships
with existing clients.  Fixed costs increased 5% in 2007 over the
prior year reflecting continued scale of our existing
infrastructure.




19


Contribution
margin (net revenue less cost of revenue) for the year ended December 31, 2007
was $2,886,311 compared to $2,071,627 for the year ended December 31, 2006.
Contribution margin as a percentage of net revenue for the year ended December
31, 2007 was 12.3% compared to 18.1% for the year ended December 31, 2006. The
decline in contribution margin is attributable primarily to more aggressive
pricing by the Company, fluctuations in the mix of services provided by the
Company and increased administration fees payable to clients. The Company
anticipates that it will experience margin expansion as the rate of client
volume increases over time as a result of leveraging its fixed cost
infrastructure.




Selling,
general and administrative expense increased to $3,754,175 for the fiscal year
ended December 31, 2007 from $3,005,241 for the fiscal year ended December 31,
2006. These costs consist primarily of salaries and related benefits, travel
costs, sales commissions, sales materials, other marketing related expenses,
costs of corporate operations, finance and accounting, human resources and other
general operating expenses of the Company. Included in the expense for the
fiscal year ended December 31, 2007 is a severance charge of $329,981 for our
former CEO, Wayne Schellhammer, who resigned effective as of June 30, 2007. The
increase in selling and administrative expenses is primarily related to the
accrual of bonuses in 2007 and increased stock option compensation expense
during the year ended December 31, 2007.  In addition, the Company
incurred increased sales commissions associated with our higher
sales.




Depreciation
and amortization expense remained relatively stable at $328,839 for the fiscal
year ended December 31, 2007 compared to $316,304 for the fiscal year ended
December 31, 2006.  These expenses include $213,581 of amortization of
intangibles that includes $85,516 in amortization of certain software
development costs and $128,065 in amortization of the capitalized value of
provider contracts that were acquired as part of the acquisition of American
CareSource Corporation’s assets by Patient Infosystems (now CareGuide, Inc.) in
2003.




The
on-going value of these acquired contracts are re-evaluated each quarter to test
for any potential impairment to these assets.  As of December 31,
2007, the Company’s analysis of its goodwill and related intangibles did not
indicate any impairment.




Financing
(Income)/Expense is comprised of financing costs, interest expenses and other
expenses.  The totals are as follows for the fiscal years ended
December 31, 2007 and 2006:




December
      31, 2007
            
            
            December
      31, 2006Interest
      (income)
            
            $
            (200,719
            )
            
            $
            (194,097
            )Interest
      expense
            
            
            10,700
            
            
            
            72,806Debt
      issuance cost
            
            
            46,300
            
            
            
            185,200Total
      other (income) expense
            
            $
            (143,719
            )
            
            $
            63,909





20


Interest
expense decreased to $10,700 for the fiscal year ended December 31, 2007 from
$72,806 for the fiscal year ended December 31, 2006.  The decrease
resulted from the repayment of the Company’s Wells Fargo line of credit during
2006 and the lack of any other significant debt for the Company. In addition,
retirement of debt payable to Patient Infosystems (now CareGuide, Inc.) in
February 2007 further contributed to the decline. The Company has fully
amortized the debt issuance costs related to its line of credit with Wells Fargo
Bank, and as a result, debt issuance costs for the fiscal year ended December
31, 2007 were $46,300 as compared to $185,200 for the fiscal year ended December
31,2006.




Taxes




The
Company realized a tax benefit of $232,754 in 2007 and none in
2006.  The 2007 income tax benefit is the result of the Company filing
for the Texas margin tax credit carryforward that is available due to the change
in the Texas taxation method.  Based on the method upon which the new
tax is calculated and the credit that is available, the Company now believes
that this amount will be realized for financial statement
purposes.  The Company has recorded a full valuation allowance to
reduce all other deferred tax assets.  The Company’s deferred tax
assets consist primarily of the tax benefit associated with its net operating
loss carryforwards.




Our
management has evaluated the available evidence about future taxable income and
other possible sources of realization of deferred tax assets.  The
valuation allowance reduces deferred tax assets to approximately $256,000 in
2007 and to zero in 2006, which represents management’s best estimate of the
amount of such deferred tax assets that more likely than not will be
realized.




Loss




The
Company reported a net loss of $820,230 ($0.06 per share) for the year ended
December 31, 2007 as compared to a net loss of $1,313,827 ($0.09 per share) for
the year ended December 31, 2006.  The net loss decreased by $493,597
due to increases in net revenues offset by corresponding service provider cost
increases, increased client administration fees, the severance expense for our
former CEO and increased selling, general and administrative costs.




Goodwill
impairment analysis




The
Company evaluated its annual impairment assessment of its goodwill and related
intangibles value at December 31, 2007.  As part of its annual
goodwill impairment test, the Company prepares a cash flow valuation of its
intangibles and the enterprise in total.  There was no indication of
impairment in 2007.




Liquidity and Capital
Resources




At
December 31, 2007, the Company had a working capital surplus of $3,613,135, as
compared to a surplus of $4,202,027 at December 31, 2006.  Since its
inception, the Company has incurred losses and has relied on external sources of
capital, including its capital line of credit for its operational, working
capital and capital expenditure needs.




21


In March
2006, the Company raised approximately $10.0 million in a private placement of
approximately two million shares of its Common Stock.  A portion of
the proceeds was used to re-pay the $3,650,000 balance of the Wells Fargo Bank,
NA $5.0 million credit line.  The Company’s $5.0 million line of
credit expired on March 31, 2007 and, as planned, was not
renewed.  The remainder of the proceeds from the March 2006 private
placement are being used by the Company to fund working capital and for other
general corporate purposes.




The
Company incurred losses of $820,230 for the fiscal year ended December 31, 2007.
These losses were funded by the Company’s available capital. If the Company is
unable to reduce its losses, it will continue to reduce its available capital
and may be required to identify alternative sources of financing including
indebtedness or selling equity. Any such financing would likely be dilutive to
current stockholders and could result in significant additional
costs.




The
Company anticipates that its available cash reserves will be sufficient to fund
its operating needs for at least the next twelve months.




Off-balance sheet
arrangements




The
Company does not have any material off-balance sheet arrangements at December
31, 2007 or December 31, 2006, or for the periods then ended.




Critical
Accounting Policies




Critical
accounting policies are those that require application of management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and may
change in subsequent periods.




The
Company’s significant accounting policies are described in Note 1 to the
financial statements located at the end of this Annual Report on Form 10-K. Not
all of these significant accounting policies require management to make
difficult, subjective or complex judgments or estimates. However, the following
accounting policies are deemed to be critical by our management:




Use of
Estimates.In preparing the
financial statements, the Company uses estimates in determining the economic
useful lives and possible impairments of its assets, provisions for doubtful
accounts, tax valuation allowances and various other recorded or disclosed
amounts. Estimates require management to use its judgment. While we believe our
estimates for these matters are reasonable, if the actual amount is
significantly different than the estimated amount, the Company’s assets,
liabilities or results of operations may be overstated or
understated.




Intangible
Assets.The
value of the Company’s intangible assets was derived from the allocation of the
purchase price from the December 31, 2003 acquisition of the assets of American
CareSource Corporation by Patient Infosystems (now CareGuide, Inc.). The
allocation of the purchase price was based on an independent appraisal of the
acquired assets. The amounts assigned to each asset are being amortized on a
straight line basis over the expected life of the asset, 5 years for software
and 15 years for the service provider contracts. The service provider contracts
do not have a specified contract period. Our experience to date demonstrates
attrition of approximately 3% per year, implying a greater than twenty year
life; however, we believe that 15 years represents a more realistic estimate.
Accordingly, the Company has elected to amortize the value of these contracts
over 15 years. The on going value of these acquired contracts are re-evaluated
each quarter using the discounted cashflow method to test for any potential
impairment to this asset that would result from either reduced cash flows or a
shorter than anticipated useful life. The contracts are accounted for as a pool
of contracts. There will be no additions to the capitalized amounts that were
established at the time of the acquisition.  The cost of adding
additional providers is considered an ongoing operating expense.




22


Impairment of
Long-Lived Assets.The Company records
impairment losses on long-lived assets used in operations when events and
circumstances indicate that the assets might be impaired and the undiscounted
future cash flows estimated to be generated by those assets are less than the
carrying amount of those assets. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of the asset to future net cash
flows expected to be generated by the asset. If the asset is considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the asset exceeds the fair value of the asset. If the actual
value is significantly less than the estimated value, our assets may be
overstated.




Revenue
recognition.The Company evaluates
its service provider contracts using the indicators of EITF No. 99-19 "Reporting
Gross Revenue as a Principal vs. Net as an Agent" (EITF 99-19) to determine
whether the Company is acting as a principal or an agent in the fulfillment of
services to be rendered.  Revenues are recorded gross when services by
providers have been authorized and performed and collections from third party
payors are reasonably assured. The Company acts as a principal under EITF 99-19
when settling claims for service providers through its contracted service
provider network for the following reasons:




·
            The
      Company negotiates a contract with the service provider and also
      negotiates separate contracts with client payors. Neither the service
      provider nor the payor can look through the Company and claim directly
      against the other party.  Each service provider contracts with
      the Company only, and not with the payor.  Likewise, each payor
      contracts with the Company only and not with the service
      provider.  Each party deals directly with the Company and does
      not deal with each other directly.




·
            The
      Company determines through negotiations which service provider will be
      included or excluded in the network to be offered to the client payor,
      based on price, access, etc.




·
            The
      Company does not earn a fixed dollar amount per client transaction
      regardless of the amount billed to clients or earn a stated percentage of
      the amount billed to its clients.




·
            The
      Company is responsible to its service providers for processing the claims
      and managing the claims its adjustor
processes.




·
            The
      Company sets prices to be settled with payors and separately negotiates
      the prices to be settled with its service
  providers.




·
            The
      Company may realize a positive or negative margin represented by the
      difference between the negotiated fees received from a payor and the
      negotiated amount paid to a service
provider.




23


When
claims are recorded gross, the payor's payment to the Company is recorded as
revenue and the Company's payment to the service provider is recorded as cost of
revenue in the statement of operations. The Company does, however, record
revenue on a net basis when an agency relationship exists. When the Company
receives a fee for claims processing and there are no financial risks to the
Company, then only the claims processing fee is recorded as
revenue.




The
Company does not have responsibility to collect co-payments to be made or
co-insurance claims to be received. Accordingly, co-payments or co-insurance
claims collected are not recorded as either revenue or cost of
sales.




Pending
Accounting Pronouncements





In
September 2006, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 157, “Fair Value Measurements.”  This Statement defines fair
value, establishes a framework for measuring fair value, and expands disclosures
about fair value measurements.   Statement No. 157 also
emphasizes that fair value is a market-based measurement, not an entity-specific
measurement, and sets out a fair value hierarchy with the highest priority being
quoted prices in active markets.  Under Statement No. 157, fair value
measurements are disclosed by level within that hierarchy.  The
requirements of Statement No. 157 are first effective for our fiscal year
beginning January 1, 2008.  However, in February 2008, the FASB
decided that an entity need not apply this standard to nonfinancial assets and
liabilities that are recognized or disclosed at fair value in the financial
statements on a nonrecurring basis until the subsequent
year.  Accordingly, our adoption of this standard on January 1, 2008
is limited to financial assets and liabilities, and any nonfinancial assets and
liabilities recognized or disclosed at fair value on a recurring
basis.  The Company is currently assessing the potential effect of
Statement No. 157 on its financial position, results of operations and cash
flows.




In
February 2007, the FASB issued FASB Statement No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities – Including an Amendment of FASB Statement No.
115,” which provides all entities, including not-for-profit
organizations, with an option to report selected financial assets and
liabilities at fair value.  The objective of the Statement is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in earnings caused by measuring related assets and
liabilities differently without having to apply the complex provisions of hedge
accounting.  Certain specified items are eligible for the irrevocable
fair value measurement option as established by Statement No.
159.  Statement No. 159 is effective as of the beginning of an
entity’s first fiscal year beginning after November 15, 2007.  Early
adoption is permitted as of the beginning of a fiscal year that begins on or
before November 15, 2007 provided the entity also elects to apply the provisions
of Statement No. 157,“Fair
Value Measurements.”  The Company is currently evaluating the
impact that the adoption of this Statement will have on its financial position,
results of operation and cash flows.




24


Item
8.                      Financial
Statement and Supplementary Data.




The
Company’s financial statement and supplementary data required to be filed
pursuant to this Item 8 are located at the end of this Annual Report on Form
10-K, beginning on page F-1.




Item
9.                      Changes
in and Disagreements with Accountants on Accounting and
FinancialDisclosure.




None.




Item
9A(T).              Controls
and Procedures.





Evaluation
of Disclosure Controls and Procedures




Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of our disclosure controls
and procedures as of December 31, 2007.  Based upon this evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures (as defined in Rules 13a-15(e) and
15(d)-15(e) under the Exchange Act) are effective for the recording, processing,
summarizing and reporting of the information that the Company is required to
disclose in the reports it files under the Exchange Act, within the time periods
specified in the SEC’s rules and forms.




Management’s
Annual Report on Internal Control over Financial Reporting




The
management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting by the
Company.  “Internal
control over financial reporting”is defined in Rule
13a-15(f) and Rule 15d-15(f) under the Exchange Act, as amended, as a process
designed by, or under the supervision of, the Company’s principal executive and
principal financial officers, or persons performing similar functions, and
effected by the Company’s Board of Directors, management and other personnel to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles and includes those policies and
procedures that:




·
            Pertain
      to the maintenance of records that in reasonable detail accurately and
      fairly reflect the transactions and dispositions of the assets of the
      Company;




·
            Provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditure of the issuer are
      being made only in accordance with authorizations of management and
      directors of the Company; and




·
            Provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of the Company’s assets that
      could have a material effect on the financial
  statements.




25


Internal control over financial reporting has inherent limitations
and may not prevent or detect misstatements.  Also, projections of any
evaluation of effectiveness to future periods are subject to the risks that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.




Our
management assessed the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2007.  Management based its
assessment on criteria for effective internal control over financial reporting
described in the Securities and Exchange Commission’s Commission Guidance Regarding
Management’s Report on Internal Control over Financial
Reporting.  Management reviewed the results of its assessment
with the Audit Committee of our Board of Directors.




Based on
this assessment, management believes that, as of December 31,
2007,  the Company’s internal control over financial reporting is
effective.




This
Annual Report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management’s report in this Annual Report.




Changes
in Internal Control over Financial Reporting




There
were no significant changes in the Company’s internal controls over financial
reporting or in other factors that have materially affected our internal
controls over financial reporting or are reasonably likely to materially affect
our internal controls over financial reporting subsequent to the date of their
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.




Item
9B.     Other Information





On March
26, 2008, in accordance with the recommendation of the Compensation Committee,
the Board of Directors of the Company approved a management bonus plan (the
“Bonus Plan”) for its Chief Executive Officer, Chief Financial Officer, Vice
President of Network Development, Vice President of Operations, Vice President
of Information Technology and other key director level employees of the Company
to be identified by the Chief Executive Officer.  The Bonus Plan ties
payment of future bonuses to the achievement of measurable performance metrics,
including two key financial measurements and individual
objectives.  Target bonus payouts range from 20% to 60% of base
salary.  Maximum bonus payouts for employees at the director and Vice
President level are 125% and 150% of base salary, respectively.  The
Chief Executive Officer and Vice President/Officers are not subject to a maximum
bonus payout.




26


On March26, 2008, the Board of Directors of the Company approved
the compensation of certain members of senior management, in accordance with the
recommendations of the Compensation Committee, consisting of 2008 base salary
levels, cash bonuses for the year ended December 31, 2007, 2008 annual bonus
target percentages, and awards of stock options to purchase shares of the
Company’s Common Stock.  Our Chief Executive Officer David S. Boone’s
base salary was increased from $265,000 to $300,000 and he received a cash bonus
of $86,449 for the year ended December 31, 2007.  Steven J. Armond,
Chief Financial Officer, and Kurt Fullmer, Vice President of Operations and
Information Technology, received base salary increases of not more than $25,000
each and cash bonuses for the year ended December 31, 2007 of not more than
$20,000 each.  The 2008 target bonus percentage for Mr. Boone is 60%
of base salary.  The target bonus percentage for Messrs. Armond and
Fullmer and Ms. Cornelia Outten, Vice President of Network Development, is
50%  of base salary.  In addition, options to purchase
135,000, 75,000, 60,000 and 45,000 shares of the Company’s Common Stock were
granted to Messrs. Boone, Armond, Fullmer and Ms. Outten,
respectively.  The stock options were awarded pursuant to the terms of
the Company’s Amended and Restated 2005 Stock Option Plan, are exercisable at
the closing price of the Company’s Common Stock on March 26, 2008 (the grant
date), and vest 25% on the first anniversary of the grant date and thereafter
1/36th per
month over the following three years.




On March 26, 2008, in accordance with
the recommendation of the Compensation Committee, the Board of Directors
approved a base salary for its Executive Chairman, Edward B. Berger, retroactive
to February 1, 2008, of $120,000 per year, and also approved the payment of a
$20,000 cash bonus to the Executive Chairman for the year ended December 31,
2007.




In addition, on March 26, 2008, the
Board approved the payment of a director’s fee of $1,000 per meeting to be paid
to each member of the Board of Directors and an additional annual fee for the
Chairman of the Audit Committee of $2,500.




PART III




Item
10.                     
Directors, Executive Officers and Corporate Governance





Apart
from certain information concerning our Code of Ethics which is set forth below,
the information required by this Item 10 is incorporated herein by reference to
the applicable information contained in the definitive proxy statement for our
annual meeting of stockholders to be held on or about May 20, 2008, which will
be filed with the SEC pursuant to Regulation 14A not later than 120 days after
the Company’s fiscal year ended December 31, 2007.




The Board
of Directors of the Company has adopted a Code of Ethics, attached hereto as
Exhibit 14.1, which defines the ethical principles which govern the conduct of
all senior officers of the Company, including our chief executive officer, chief
operating officer, chief financial officer and principal accounting
officer.  The Code of Ethics is available to stockholders at our
website, www.anci-care.com.




Item
11.                      Executive
Compensation




The
information required by this Item 11 is incorporated herein by reference to the
applicable information contained in the definitive proxy statement for our
annual meeting of stockholders to be held on or about May 20, 2008, which will
be filed with the SEC pursuant to Regulation 14A not later than 120 days after
the Company’s fiscal year ended December 31, 2007.




27


Item
12.                      Security
Ownership of Certain Beneficial Owners and Management and RelatedStockholder
Matters




The
following table provides information with respect to the equity securities that
are authorized for issuance under our equity compensation plans as of December
31, 2007:




Equity Compensation
      Plan Information at December 31, 2007Number
      of securities to be issued upon the exercise of outstanding options,
      warrants and rights, (a)
            
            
            Weighted-average
      exercise price of outstanding options, warrants and rights
              (b)
            
            
            Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column
      (a))Equity
      compensation plans approved by security holders
            
            2,000,563
            
            
            $1.41
            
            
            948,559Equity
      compensation plans not approved by security holders
            
            0
            
            
            0
            
            
            0Total
            
            2,000,563
            
            
            $1.41
            
            
            948,559




In addition, warrants to purchase
2,122,502 shares of Common Stock of the Company are issued and outstanding as
compensation to certain guarantors (including two of our directors) of Company
debt that has since been retired by the Company, as part of compensation to the
placement agent in connection with a March 2006 private placement of the
Company’s Common Stock, and to a client of the Company as partial compensation
for services performed by the client under the Company’s agreement with the
client.




Shares
      of Common Stock issuable under outstanding warrants
            
            
            Weighted-average
      exercise price of outstanding warrantsSeries  A
      (1)
            
            
            1,096,491
            
            
            $
            0.40Series  B
      (2)
            
            
            641,059
            
            
            $
            0.49Series  C
      (3)
            
            
            159,952
            
            
            $
            5.50Series
      D (4)
            
            
            225,000
            
            
            $
            1.84Total
      Warrants Outstanding
            
            
            2,122,502
            
            
            $
            0.96




(1)
            Series
      A warrants were granted on January 20, 2005 to John Pappajohn and Derace
      L. Schaffer in conjunction with the personal guarantees associated with
      the Company’s $3,000,000 line of credit with Wells Fargo Bank,
      NA.




(2)
            Series
      B warrants were granted on August 9, 2005 to John Pappajohn, Derace L.
      Schaffer and Matthew P. Kinley in conjunction with increasing the
      Company’s line of credit with Wells Fargo Bank, NA from $3,000,000 to
      $4,000,000 and the associated increase in the personal
      guarantees.




28


(3)
            Service warrants were granted as part of the compensation to
      Laidlaw and Company in connection with the Company’s March 2006 private
      placement.




(4)
            These
      warrants were granted on May 21, 2007 to Corporate Health Plans of
      America, Inc., an affiliate of the Company’s client, Texas True Choice,
      Inc. (“Texas True Choice”), as partial compensation to Texas True Choice
      for services to be performed by it pursuant to an ancillary care services
      network access agreement between the Company and Texas True
      Choice.




The other
information required by this Item 12 is incorporated herein by reference to the
applicable information contained in the definitive proxy statement for our
annual meeting of stockholders to be held on or about May 20, 2008, which will
be filed with the SEC pursuant to Regulation 14A not later than 120 days after
the Company’s fiscal year ended December 31, 2007.




Item
13.                      Certain
Relationships and Related Transactions, and Director Independence




The
information required by this Item 13 is incorporated herein by reference to the
applicable information contained in the definitive proxy statement for our
annual meeting of stockholders to be held on or about May 20, 2008, which will
be filed with the SEC pursuant to Regulation 14A not later than 120 days after
the Company’s fiscal year ended December 31, 2007.




Item
14.                      Principal
Accounting Fees and Services




The
information required by this Item 14 is incorporated herein by reference to the
applicable information contained in the definitive proxy statement for our
annual meeting of stockholders to be held on or about May 20, 2008, which will
be filed with the SEC pursuant to Regulation 14A not later than 120 days after
the Company’s fiscal year ended December 31, 2007.




29


PART
IV





Item15.                      Exhibits
and Financial Statement Schedules




(a)           The
following documents are filed as part of this Annual Report on Form
10-K:




(1)           Financial
Statements




The
following financial statements are set forth in Item 8 hereof:




Document
            PagesReport
      of Independent Registered Public Accounting Firm
            F-1Consolidated
      Balance Sheets as of December 31, 2007 and 2006
            F-2Consolidated
      Statements of Operations for the Years Ended December 31, 2007 and
      2006
            F-3Consolidated
      Statements of Stockholders’ Equity for the Years Ended December 31, 2007
      and 2006
            F-4Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2007 and
      2006
            F-5Notes
      to Consolidated Financial Statements
            F-6




(2)           Financial
Statement Schedules




None.




(3)           Exhibits




Reference is made to the Exhibit Index
following this Annual Report on Form 10-K.




30


Report
of Independent Registered Public Accounting Firm




To the
Board of Directors and Stockholders


American
CareSource Holdings, Inc.




We have
audited the consolidated balance sheets of American CareSource Holdings, Inc.
and subsidiaries as of December 31, 2007 and 2006, and the related consolidated
statements of operations, stockholders’ equity and cash flows for the years then
ended.  These financial statements are the responsibility of the
Company’s management.  Our responsibility is to express an opinion on
these financial statements based on our audits.




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




In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of American CareSource
Holdings, Inc. and subsidiaries as of December 31, 2007 and 2006, and the
results of their operations and their cash flows for the years then ended, in
conformity with U.S. generally accepted accounting principles.




We were
not engaged to examine management’s assertion about the effectiveness of
American CareSource Holdings, Inc. and subsidiaries’ internal control over
financial reporting as of December 31, 2007 included in the Company’s Annual
Report on Form 10-K for the year then ended and, accordingly, we do not express
an opinion thereon.







Des
Moines, Iowa


March 31,
2008




F-1
 
  AMERICAN CARESOURCE HOLDINGS, INC.
                  CONSOLIDATED
      BALANCE SHEETS
                  DECEMBER
      31, 2007 AND 2006


December 31, 2007
            
            
            December 31, 2006ASSETSCURRENT
      ASSETSCash
      and cash equivalents
            
            $
            4,272,498
            
            
            $
            5,025,380Accounts
      receivable
            
            
            3,651,203
            
            
            
            1,334,950Prepaid
      and other current assets
            
            
            409,445
            
            
            
            33,515Total
      current assets
            
            
            8,333,146
            
            
            
            6,393,845NET
      PROPERTY AND EQUIPMENT
            
            
            332,450
            
            
            
            266,555OTHER
      ASSETSCertificate
      of deposit restricted
            
            
            145,000
            
            
            
            145,000Deferred
      taxes
            
            
            255,731
            
            
            
            -Other
      non-current assets
            
            
            237,246
            
            
            
            -Net
      intangible assets
            
            
            1,494,238
            
            
            
            1,707,819Goodwill
            
            
            4,361,299
            
            
            
            4,361,299Total
      other assets
            
            
            6,493,514
            
            
            
            6,214,118Total
      assets
            
            $
            15,159,110
            
            
            $
            12,874,518LIABILITIES
      AND STOCKHOLDERS’ EQUITYCURRENT
      LIABILITIESDue
      to service providers
            
            $
            3,344,278
            
            
            $
            1,077,174Accounts
      payable and other accrued liabilities
            
            
            1,320,036
            
            
            
            761,926Current
      maturities of long-term debt
            
            
            55,697
            
            
            
            352,718Total
      current liabilities
            
            
            4,720,011
            
            
            
            2,191,818LONG-TERM
      DEBT
            
            
            50,348
            
            
            
            101,541Total
      liabilities
            
            
            4,770,359
            
            
            
            2,293,359STOCKHOLDERS’
      EQUITYCommon
      stock, par value $0.01, 40,000,000 shares authorized and 14,668,416 and
      14,484,115 issued and outstanding as of December 31, 2007 and
      December 31, 2006, respectively
            
            
            146,684
            
            
            
            144,841Preferred
      stock, par value .01, 10,000,000 shares authorized and none outstanding as
      of December 31, 2007 and 2006
            
            
            -
            
            
            
            -Additional
      paid-in-capital
            
            
            17,613,880
            
            
            
            17,034,201Deferred
      debt issuance cost
            
            
            -
            
            
            
            (46,300
            )Accumulated
      (deficit)
            
            
            (7,371,813
            )
            
            
            (6,551,583
            )Total
      stockholders’ equity
            
            
            10,388,751
            
            
            
            10,581,159Total
      liabilities and stockholder’s equity
            
            $
            15,159,110
            
            
            $
            12,874,518


See Notes
to Consolidated Financial Statements




F-2
 
  AMERICAN
      CARESOURCE HOLDINGS, INC.
                    CONSOLIDATED
      STATEMENTS OF OPERATIONS
                    FOR
      THE YEARS ENDED DECEMBER 31, 2007 AND
2006


2007
            
            
            2006Revenues:Ancillary
      health
            
            $
            23,487,911
            
            
            $
            11,323,217Patient
      claims processing
            
            
            -
            
            
            
            95,337Total
      revenues
            
            
            23,487,911
            
            
            
            11,418,554Total
      costs of revenues
            
            
            20,601,600
            
            
            
            9,346,927Contribution
      margin
            
            
            2,886,311
            
            
            
            2,071,627Selling,
      general and administrative expense
            
            
            3,754,175
            
            
            
            3,005,241Depreciation
      and amortization
            
            
            328,839
            
            
            
            316,304Total
      operating expenses
            
            
            4,083,014
            
            
            
            3,321,545Operating
      (loss)
            
            
            (1,196,703
            )
            
            
            (1,249,918
            )Financing
      (income) expenses:Interest
      (income)
            
            
            (200,719
            )
            
            
            (194,097
            )Interest
      expense
            
            
            10,700
            
            
            
            72,806Debt
      issuance cost
            
            
            46,300
            
            
            
            185,200Total
      financing (income)/expenses
            
            
            (143,719
            )
            
            
            63,909Net
      (loss) before income taxes
            
            
            (1,052,984
            )
            
            
            (1,313,827
            )Income
      tax benefit
            
            
            (232,754
            )
            
            
            -Net
      (Loss)
            
            $
            (820,230
            )
            
            $
            (1,313,827
            )Net
      (Loss) per share – basic and diluted
            
            $
            (0.06
            )
            
            $
            (0.09
            )Weighted
      Average Shares Outstanding – basic and diluted
            
            
            14,546,796
            
            
            
            14,129,762




See Notes
to Consolidated Financial Statements.




F-3


AMERICAN
      CARESOURCE HOLDINGS, INC.
                  CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ EQUITY
                  FOR
      THE YEARS ENDED DECEMBER 31, 2007 AND
2006


Shares
            
            
            Amount
            
            
            Additional
              Paid-In
              Capital
            
            
            Deferred
              Debt
              Issuance Cost
            
            
            Accumulated
              (Deficit)
            
            
            TotalBalance,
      December 31, 2005
            
            
            12,368,809
            
            
            $
            123,688
            
            
            $
            7,734,825
            
            
            $
            (231,500
            )
            
            $
            (5,237,756
            )
            
            $
            2,389,257Issue
      of 1,999,400 common stock shares
            
            
            1,999,400
            
            
            
            19,994
            
            
            
            8,585,993
            
            
            
            -
            
            
            
            -
            
            
            
            8,605,987Issue
      of common stock warrants
            
            
            -
            
            
            
            -
            
            
            
            463,861
            
            
            
            -
            
            
            
            -
            
            
            
            463,861Exercise
      of stock options
            
            
            115,906
            
            
            
            1,159
            
            
            
            35,943
            
            
            
            -
            
            
            
            -
            
            
            
            37,102Option
      compensation expense
            
            
            -
            
            
            
            -
            
            
            
            213,579
            
            
            
            -
            
            
            
            -
            
            
            
            213,579Amortization
      of warrants associated with deferred debt
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            185,200
            
            
            
            -
            
            
            
            185,200Net
      (loss)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,313,827
            )
            
            
            (1,313,827
            )Balance,
      December 31, 2006
            
            
            14,484,115
            
            
            
            144,841
            
            
            
            17,034,201
            
            
            
            (46,300
            )
            
            
            (6,551,583
            )
            
            $
            10,581,159Issuance
      of 225,000 common stock warrants for payment of client management
      fees
            
            
            -
            
            
            
            -
            
            
            
            105,825
            
            
            
            -
            
            
            
            -
            
            
            
            105,825Exercise
      of stock options
            
            
            184,301
            
            
            
            1,843
            
            
            
            55,796
            
            
            
            -
            
            
            
            -
            
            
            
            57,639Option
      compensation expense
            
            
            -
            
            
            
            -
            
            
            
            418,058
            
            
            
            -
            
            
            
            -
            
            
            
            418,058Amortization
      of warrants associated with debt
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            46,300
            
            
            
            -
            
            
            
            46,300Net
      (loss)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (820,230
            )
            
            
            (820,230
            )Balance,
      December 31, 2007
            
            
            14,668,416
            
            
            $
            146,684
            
            
            $
            17,613,880
            
            
            $
            -
            
            
            $
            (7,371,813
            )
            
            $
            10,388,751









F-4


AMERICAN
      CARESOURCE HOLDINGS, INC.
                CONSOLIDATED
      STATEMENTS OF CASH FLOWS
                FOR
      THE YEARS ENDED DECEMBER 31, 2007 AND
2006


2007
            
            
            2006CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      (loss)
            
            $
            (820,230
            )
            
            $
            (1,313,827
            )Adjustments
      to reconcile net loss to net cash(used
      in) operating activitiesDepreciation
      and amortization
            
            
            328,839
            
            
            
            316,304Compensation
      expense related to warrants
            
            
            46,300
            
            
            
            185,200Stock
      option compensation
            
            
            418,058
            
            
            
            213,579Client
      management fee expense related to warrants
            
            
            35,276
            
            
            
            -Deferred
      taxes
            
            
            (255,731
            )
            
            
            -Gain
      on disposal of assets
            
            
            -
            
            
            
            (32,755
            )Changes
      in operating assets and liabilitiesAccounts
      receivable
            
            
            (2,316,253
            )
            
            
            (852,791
            )Prepaid
      and other assets
            
            
            (542,626
            )
            
            
            (3,364
            )Due
      to service providers
            
            
            2,267,104
            
            
            
            690,957Accounts
      payable and other accrued liabilities
            
            
            558,110
            
            
            
            409,543Net
      cash used in operating activities
            
            
            (281,153
            )
            
            
            (387,154
            )CASH
      FLOWS FROM INVESTING ACTIVITIESPurchase
      of property and equipment
            
            
            (181,153
            )
            
            
            (234,376
            )Proceeds
      from sales of equipment
            
            
            -
            
            
            
            73,462Purchase
      of Certificate of Deposit
            
            
            -
            
            
            
            (145,000
            )Net
      cash used in investing activities
            
            
            (181,153
            )
            
            
            (305,914
            )CASH
      FLOWS FROM FINANCING ACTIVITIESPayments
      on line of credit, net
            
            
            -
            
            
            
            (3,450,000
            )Proceeds
      from long term debt
            
            
            -
            
            
            
            135,000Payments
      on long term debt
            
            
            (348,215
            )
            
            
            (96,901
            )Net
      proceeds from the sale of capital stock
            
            
            -
            
            
            
            9,069,848Net
      proceeds from the exercise of stock options
            
            
            57,639
            
            
            
            37,102Net
      cash provided by (used in) financing activities
            
            
            (290,576
            )
            
            
            5,695,049Net
      increase (decrease) in cash and cash equivalents
            
            
            (752,882
            )
            
            
            5,001,981Cash
      and cash equivalents at beginning of year
            
            
            5,025,380
            
            
            
            23,399Cash
      and cash equivalents at end of year
            
            $
            4,272,498
            
            
            $
            5,025,380SUPPLEMENTAL
      CASH FLOW INFORMATION, cash paid for interest
            
            $
            30,101
            
            
            $
            52,532SUPPLEMENTAL
      DISCLOSURE OF NON-CASH OPERATING AND FINANCIAL ACTIVITIESWarrants
      issued in payment of client management fees
            
            
            105,825
            
            
            
            -Warrants
      issued for stock issuance
            
            
            -
            
            
            
            463,861


See Notes
to Consolidated Financial Statements







F-5
 
  AMERICAN
      CARESOURCE HOLDINGS, INC.
                  NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS


Note
1.  Summary of Significant Accounting Policies




Organization and Description
of business:  Essentially all of the outstanding shares of
common stock of American CareSource Holdings, Inc. (the “Company” or “American
CareSource Holdings”), a Delaware corporation, were distributed by dividend to
the stockholders of Patient Infosystems, Inc. (“Patient Infosystems”) on
December 23, 2005.  Public trading of the Company’s common stock
commenced on December 28, 2005 under the symbol ACSH.OB on the Over the Counter
Bulletin Board Market (“OTC Bulletin Board”).  The Company’s common
stock was listed for trading on the American Stock Exchange on October 19, 2006
under the symbol XSI.




American
CareSource Holdings has one wholly owned subsidiary, Ancillary Care Services,
Inc.




The
Company’s predecessor was formed as Physician’s Referral Network in 1995 and
merged into Health Data Solutions, Inc. in October 1997.  At the time
of such merger, Health Data Solutions changed its name to American CareSource
Corporation.  American CareSource Corporation was acquired by Patient
Infosystems on December 31, 2003.  The Company was incorporated on
November 24, 2003 as a wholly-owned subsidiary of Patient Infosystems in order
to facilitate Patient Infosystems’ acquisition of substantially all of the
assets of American CareSource Corporation.




The
Company is in the business of delivering ancillary healthcare services for
employment groups through its national network of ancillary care
providers.  The Company markets its products to insurance companies,
third party administrators, and preferred provider organizations.




Segment:  The
Company uses the “management approach” for reporting information about segments
in annual and interim financial statements.  The management approach is
based on the way the chief operating decision-maker organizes segments within a
company for making operating decisions and assessing performance. 
Reportable segments are based on products and services, geography, legal
structure, management structure and any other manner in which management
disaggregates a company.  Based on the “management approach” model, the
Company has determined that its business is comprised of a single operating
segment.




Principles of
consolidation:  The consolidated financial statements include
the accounts of the Company and its subsidiaries, all of which are wholly
owned.  All material inter-company accounts and transactions are
eliminated in consolidation.




Use of estimates in the
preparation of financial statements:  The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.  Actual amounts could differ from those
estimates.




F-6
 
  AMERICAN
      CARESOURCE HOLDINGS, INC.
                NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS


Cash and cash
equivalents:  The Company considers all highly liquid
investments with original maturities of three months or less to be cash
equivalents. Cash and cash equivalents include amounts in deposit accounts in
excess of federally insured limits.  The Company has not experienced any
losses in such accounts.




Revenue
recognition:  The Company evaluates its service provider
contracts using the indicators of EITF No. 99-19 “Reporting Gross Revenue as a
Principal vs. Net as an Agent” (EITF 99-19) to determine whether the Company is
acting as a principal or an agent in the fulfillment of services to be
rendered.




Revenues
are recorded gross when services by providers have been authorized and performed
and collections from third party payors are reasonably assured.  The
Company acts as principal under EITF 99-19 when settling claims for service
providers through its contracted service provider network for the following
reasons:




The
Company negotiates a contract with the service provider and also negotiates a
separate contract with the client payor.  Neither the service provider
nor the payor can look through the Company and claim directly against the other
party.  Each service provider contracts with the Company only, and not
with the payor. Likewise, each payor contracts with the Company only and not
with the service provider.  Each party deals directly with the Company
and does not deal with each other directly.





The
Company determines through negotiations which service providers will be included
or excluded in the network to be offered to the client payor based on price,
access, etc.




The
Company does not earn a fixed dollar amount per customer transaction regardless
of the amount billed to customers or earn a stated percentage of the amount
billed to its customers.




The
Company is responsible to the service provider for processing claims and
managing the claims its adjustors process.




The
Company sets prices to be settled with payors and separately negotiates the
prices to be settled with the service providers.




The
Company may realize a positive or negative margin represented by the difference
between the negotiated fees received from the payor and the negotiated amount
paid to the service providers.




When
claims are recorded gross, the payor’s payment to be Company is recorded as
revenue and the Company’s payment to the service provider is recorded as cost of
revenue in the statement of operations.




The
Company does not have responsibility to collect co-payments to be made or
co-insurance claims to be received.  Accordingly, co-payments or
co-insurance claims collected are not recorded as either revenue or cost of
sales.




F-7
 
  AMERICAN
      CARESOURCE HOLDINGS, INC.
                NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS


The
Company does record an allowance on all sales reported as gross to arrive at a
net revenue number.  Copayments, deductibles and co-insurance can all
impact the collectability of each individual claim.  While the Company
is able to re-price a claim and accurately estimate what it should be paid for
the service, the presence of co-pays, deductibles and coinsurance can all affect
the ultimate collectability of the claim.  In addition, the Company’s
collection experience with each payor varies.  The Company records an
allowance against gross revenue to better estimate
collectability.  This allowance is applied specifically for each payor
and is adjusted to reflect the Company’s collection experience each
quarter.




Accounts
receivable:  Accounts receivable are reported at amounts
expected to be received from third party payors and other
customers.  These amounts are net of an allowance to adjust for
expected collectability.




Fair value of financial
instruments:  The Company’s financial instruments consist
primarily of cash and cash equivalents, a certificate of deposit, accounts
receivable, accounts payable, accrued expenses and long-term
debt.  The fair value of instruments is determined by reference to
various market data and other valuation techniques, as
appropriate.  Unless otherwise disclosed, the fair value of short-term
financial instruments approximates their recorded values due to the short-term
nature of the instruments.  Based on the borrowing rates currently
available to the Company for bank loans with similar terms and average
maturities, the fair value of long-term debt approximates its carrying
value.




Property and
equipment:  Property and equipment are stated at cost less
accumulated depreciation and amortization.  Depreciation and
amortization is computed over the estimated useful lives of the assets using the
straight-line method for financial reporting purposes and on the straight-line
and accelerated methods for tax purposes.  Leasehold improvements are
amortized using the straight-line method over their estimated useful lives or
the lease term, whichever is shorter.  Ordinary maintenance and
repairs are charged to operations.  Expenditures that extend the
physical or economic life of property and equipment are
capitalized.




The
estimated useful lives of property and equipment are as follows:




Leasehold
      improvements
            5
      yearsComputer
      equipment
            3
      yearsFurniture
      and fixtures
            7
      yearsSoftware
            3
      - 5 years





Costs of
revenues:  Costs of ancillary health revenues consist of
expenses due to providers for providing patient services, the related direct
labor and administrative fees for providing the service, direct labor and
overhead to administer the patient claims processing and
administration.  The Company is not liable for costs incurred by
independent contract service providers until payment is received by the Company
from the respective payors.  The Company recognizes actual or
estimated liabilities to independent contract service providers as related
revenues are recognized.




F-8
 
  AMERICAN
      CARESOURCE HOLDINGS, INC.
                NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS


Issuance of
Warrants:  The Company has issued warrants to stockholders and
directors in exchange for a guarantee of Company debt.  The warrants
were valued at $376,646 as of the dates of the grants using the fair value
method.  The exercise price of these warrants ranges from $0.40 -
$0.49.  These deferred debt issuance costs were amortized to expense
over the life of the guarantee.




The
Company also issued warrants to purchase up to 159,952 shares of common stock
with an exercise price of $5.50, in connection with the Private Placement
financing completed in March of 2006, to Laidlaw as part of their compensation
for the financing.  These warrants were valued at $463,861 as of the
date of the grant using the fair value method.




On July
2, 2007, the Company announced that it had signed an Ancillary Care Services
Network Access Agreement (the “Ancillary Care Services Agreement”) effective as
of May 21, 2007 (the “Effective Date”) with a new customer, Texas True Choice,
Inc. (“Texas True Choice”), a Texas-based preferred provider organization
network, and certain subsidiaries of Texas True Choice. As partial compensation
to Texas True Choice under the Ancillary Care Services Agreement, the Company
issued to Corporate Health Plans of America, Inc., an affiliate of Texas True
Choice, warrants to purchase a total of 225,000 shares of the Company’s common
stock at an exercise price of $1.84, the closing price of the common stock of
the Company as reported on the American Stock Exchange on the Effective Date.
These warrants vested as to 25% of the shares on the Effective Date, shall vest
an additional 25% on each anniversary date of the Effective Date, and have an
expiration date of May 20, 2012. In the event of an early termination of the
Ancillary Care Services Agreement, the warrants terminate with respect to all
unvested shares at the time of such early termination.




Concentration of
revenues:  The Company has three customers that each comprise a
significant portion of the Company’s revenue.  The following is a
summary of the approximate amounts of the Company’s revenue and accounts
receivable contributed by each of these customers:




Twelve Months Ended December 31,
      2007
            
            
            Twelve Months Ended December 31,
      2006Accounts
              Receivable
            
            
            Revenue
            
            
            %
      of Total
              Revenue
            
            
            Accounts
              Receivable
            
            
            Revenue
            
            
            %
      of Total
              RevenueCustomer
      A
            
            $
            1,964,000
            
            
            $
            15,195,000
            
            
            
            65
            %
            
            $
            826,000
            
            
            $
            8,183,000
            
            
            
            72
            %Customer
      B
            
            
            1,473,000
            
            
            
            6,633,000
            
            
            
            28
            %
            
            
            -
            
            
            
            -
            
            
            
            0
            %Customer
      C
            
            
            42,000
            
            
            
            684,000
            
            
            
            3
            %
            
            
            287,000
            
            
            
            2,442,000
            
            
            
            21
            %All
      Others
            
            
            172,000
            
            
            
            976,000
            
            
            
            4
            %
            
            
            222,000
            
            
            
            794,000
            
            
            
            7
            %$
            3,651,000
            
            
            $
            23,488,000
            
            
            
            100
            %
            
            $
            1,335,000
            
            
            $
            11,419,000
            
            
            
            100
            %




Stock-Based
Compensation:




At
December 31, 2007, the Company has a stock based compensation plan, which is
described more fully in Note 6.  Prior to January 1, 2006, the Company
accounted for the plans under the recognition and measurement provisions of
APB25, and related Interpretations, as permitted by SFAS
123.  Effective January 1, 2006, the Company adopted the fair value
recognition provisions of SFAS 123R using the modified prospective transition
method.  Under this transition
method, compensation cost recognized in the year ended December 31, 2006,
included: (a) compensation expense of all share-based payments granted prior to,
but not yet vested as of January 1, 2006 (based on the grant-date fair value
estimated in accordance with the original provisions for SFAS 123), and (b)
compensation cost for all share-based payments granted subsequent to January 1,
2006 (based on the grant-date fair value estimated in accordance with the
provisions of SFAS 123R).  Results for prior periods have not been
restated.




F-9
 
  AMERICAN
      CARESOURCE HOLDINGS, INC.
                NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS


Intangible
assets:  Intangible assets consist of provider contracts and
internally developed claims payment and billing software.  Each of
these items is being amortized using the straight line method over its expected
useful life, 5 years for the software and 15 years for the provider
contracts.  Our experience to date is that we have approximately 3%
annual turnover or attrition of provider contracts.  The provider
contracts are being accounted for on a pooled basis and the actual cancellation
rates of provider contracts that were acquired will be monitored for potential
impairment or amortization adjustment, if warranted.  As of December
31, 2007, there is no impairment of this intangible asset.  The cost
of adding additional providers is considered an ongoing operating
expense.




The
following is a summary of the intangible assets as of December 31, 2007 and
2006:




2007
            
            
            2006Gross
      Carrying Amount
            
            
            Accumulated
              Amortization
            
            
            Accumulated
      AmortizationSoftware
            
            $
            427,581
            
            
            $
            342,065
            
            
            $
            256,549Provider
      Contracts
            
            
            1,920,984
            
            
            
            512,262
            
            
            
            384,197$
            2,348,565
            
            
            $
            854,327
            
            
            $
            640,746




Amortization
expense was approximately 214,000 for each of the years ended December 31, 2007
and 2006.




Estimated
aggregated amortization expenses for the next five years are as
follows:




Estimated
              Amortization
              ExpenseYear
      ending December 31:2008
            
            $
            214,0002009
            
            
            128,0002010
            
            
            128,0002011
            
            
            128,0002012
            
            
            128,000$
            726,000





Goodwill
is tested annually for impairment based on the valuation of the Company’s
stock.  Management deemed there was no impairment as of December 31,
2007 and 2006.




F-10
 
  AMERICAN
      CARESOURCE HOLDINGS, INC.
                NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS


Research and
development:  Research and development costs are expensed as
incurred.  The Company capitalizes costs associated with internal
software development.  Capitalized internal software is depreciated
over a period of 5 years.




Earnings per common
share:  Basic earnings per share is computed by dividing net
loss by the weighted average number of shares outstanding during each of the
periods.  Diluted earnings per share is the same amount because all
outstanding stock equivalents have been excluded from the calculation of diluted
earnings per share since they are anti-dilutive.




Income
taxes:  Deferred taxes are provided on a liability method
whereby deferred tax assets are recognized for deductible temporary differences
and operating loss and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences.  Temporary differences
are the differences between the reported amounts of assets and liabilities and
their tax bases.  Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management it is more likely than not that
some portion or all of the deferred tax assets will not be
realized.  Deferred tax assets and liabilities are adjusted for all
the effects of changes in tax laws and rates on the date of enactment. Prior to
December 16, 2005, the Company filed consolidated tax returns with Patient
Infosystems.  The Company recorded its tax expense using the separate
company method.




On
January 1, 2007, the Company adopted Financial Accounting Standards Board
(FASB) Interpretation (FIN) 48, “Accounting for Uncertainty in Income
Taxes.” FIN 48, an interpretation of Statement of Financial Accounting Standard
(SFAS) 109, “Accounting for Income Taxes,” clarifies the accounting and
disclosure requirements for uncertainty in tax positions as defined by the
standard. In connection with the adoption of FIN 48, the Company has
analyzed its filing positions in all significant jurisdictions where it is
required to file income tax returns for the open tax years in such
jurisdictions. The Company has identified three states as major tax
jurisdictions, as defined by FIN 48, its federal income tax return and its
state income tax..  The Company’s income tax returns in major state
income tax jurisdictions remain subject to examination for various periods
subsequent to December 31, 2003. The Company currently believes that all
significant filing positions are highly certain and that, more likely than not,
all of its income tax filing positions and deductions would be sustained.
Therefore, the Company has no significant reserves for uncertain tax positions
and no adjustments to such reserves were required upon the adoption of
FIN 48. If interest and penalties are assessed, interest costs will be
recognized in interest expense and penalties will be recognized in operating
expenses.




Pending Accounting
Pronouncements:




In
September 2006, FASB issued FASB Statement No. 157, “Fair Value Measurements”.
 This Statement defines fair value, establishes a framework for measuring
fair value, and expands disclosures about fair value
measurements.   Statement No. 157 also emphasizes that fair value
is a market-based measurement, not an entity-specific measurement, and sets out
a fair value hierarchy with the highest priority being quoted prices in active
markets.  Under Statement No. 157, fair value measurements are
disclosed by level within that hierarchy.  The requirements of
Statement No. 157 are first effective for our fiscal year beginning January 1,
2008.  However, in February 2008, the FASB decided that an entity need
not apply this standard to nonfinancial assets and liabilities that are
recognized or disclosed at fair value in the financial statements on a nonrecurring
basis until the subsequent year.  Accordingly, our adoption of this
standard on January 1, 2008 is limited to financial assets and liabilities, and
any nonfinancial assets and liabilities recognized or disclosed at fair value on
a recurring basis.  The Company is currently assessing the potential
effect of Statement No. 157 on its financial position, results of operations and
cash flows.




F-11
 
  AMERICAN
      CARESOURCE HOLDINGS, INC.
                NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS


In
February 2007, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities – Including an Amendment of FASB Statement No. 115”, which provides
all entities, including not-for-profit organizations, with an option to report
selected financial assets and liabilities at fair value.  The
objective of the Statement is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in earnings caused by
measuring related assets and liabilities differently without having to apply the
complex provisions of hedge accounting.  Certain specified items are
eligible for the irrevocable fair value measurement option as established by
Statement No. 159.  Statement No. 159 is effective as of the beginning
of an entity’s first fiscal year beginning after November 15,
2007.  The Company is currently evaluating the impact that the
adoption of this Statement will have on its financial position, results of
operation and cash flows.




Note
2.   Property and Equipment




Property
and equipment consist of the following:




2007
            
            
            2006Computer
      equipment
            
            $
            257,938
            
            
            $
            184,071Software
            
            
            231,948
            
            
            
            132,051Furniture
      and fixtures
            
            
            122,382
            
            
            
            116,275Leasehold
      improvements
            
            
            33,149
            
            
            
            31,867645,417
            
            
            
            464,264Less
      accumulated depreciation and amortization
            
            
            (312,967
            )
            
            
            (197,709
            )$
            332,450
            
            
            $
            266,555




Included
in property and equipment is equipment held under capitalized leases as
follows:




2007
            
            
            2006Computer
      Equipment
            
            $
            47,179
            
            
            $
            47,179Less
      accumulated amortization
            
            
            (43,248
            )
            
            
            (27,521
            )$
            3,931
            
            
            $
            19,658




F-12
 
  AMERICAN
      CARESOURCE HOLDINGS, INC.
                NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS


Note
3.  Long-Term Debt




Long-term
debt consists of the following:




2007
            
            
            2006Note
      payable to CareGuide, Inc. (formerly Patient Infosystems,
      Inc.)
            
            $
            0
            
            
            $
            300,505Note
      payable due in monthly installments of approximately $4,200 including
      interest at 6.5%, maturing in September 2009. Debt is secured by a CD held
      with lender
            
            
            81,939
            
            
            
            121,263Capital
      lease obligations
            
            
            24,106
            
            
            
            32,491106,045
            
            
            
            454,259Less
      current maturities
            
            
            (55,697
            )
            
            
            (352,718
            )Long-term
      debt, less current maturities
            
            $
            50,348
            
            
            $
            101,541







Approximate
scheduled payments in each of the next five years and thereafter on the debt and
capital lease obligations are as follows:




Year
      ending December 31:2008
            
            $
            56,0002009
            
            
            47,0002010
            
            
            3,000$
            106,000




Note
4. Income Taxes




Income
tax expense for the years ended December 31 differed from the U.S. federal
income tax rate of 34% as a result of approximately the following:


2007
            
            
            2006Computed
      “expected” tax benefit
            
            $
            (365,000
            )
            
            $
            (447,000
            )Change
      in the valuation allowance for deferred tax assets
            
            
            456,000
            
            
            
            588,000Tax
      benefit of stock options exercised
            
            
            (85,000
            )
            
            
            (187,000
            )Texas
      margin tax credit carryforward
            
            
            (262,000
            )
            
            
            -State
      taxes
            
            
            29,000
            
            
            
            -Other
            
            
            (6,000
            )
            
            
            46,000Total
      income tax (benefit)
            
            $
            (233,000
            )
            
            $
            -




Differences
between financial accounting principles and tax laws cause differences between
the bases of certain assets and liabilities for financial reporting purposes and
tax purposes. The current year income tax benefit is the result of the Company
filing for the Texas margin tax credit that is available due to the change in
the Texas taxation method.  Based on the method that the new tax is
calculated and the credit that is available the Company now believes that this
amount will be realized for financial statement purposes.




F-13
 
  AMERICAN
      CARESOURCE HOLDINGS, INC.
                NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS


The tax
effects of these differences, to the extent they are temporary, are recorded as
deferred tax assets and liabilities under SFAS 109 and consisted of the
following components:




2007
            
            
            2006Deferred
      tax assets:Operating
      loss carryforward
            
            $
            2,107,000
            
            
            $
            1,904,000Accounts
      receivable allowance
            
            
            64,000
            
            
            
            -Fixed
      assets
            
            
            4,000
            
            
            
            -Warrants
            
            
            143,000
            
            
            
            115,000Texas
      tax credit carryforward
            
            
            256,000
            
            
            
            -Stock
      option compensation
            
            
            205,000
            
            
            
            73,000Accrued
      expenses
            
            
            194,000
            
            
            
            39,000Total
      deferred tax assets
            
            
            2,973,000
            
            
            
            2,131,000Deferred
      tax liabilities:Goodwill
            
            
            (195,000
            )
            
            
            (78,000
            )Fixed
      assets
            
            
            -
            
            
            
            (4,000
            )Prepaid
      expense
            
            
            (21,000
            )
            
            
            (4,000
            )Total
      deferred tax liabilities
            
            
            (216,000
            )
            
            
            (86,000
            )Net
      deferred tax assets
            
            
            2,757,000
            
            
            
            2,045,000Valuation
      allowance
            
            
            (2,501,000
            )
            
            
            (2,045,000
            )Deferred
      tax assets, net of valuation allowance
            
            $
            256,000
            
            
            $
            -




The
valuation allowance increased $456,000 and $588,000 during the year ended
December 31, 2007 and 2006, respectively.




The
Company has a net operating loss carryforward of approximately $6,197,000 which
expires in 2024 through 2027.




The
income tax expense (benefit) shown on the statement of operations for the years
ended December 31, 2007 and 2006 consisted of the following:




2007
            
            
            2006Current
            
            $
            22,977
            
            
            $
            -Deferred
            
            
            (255,731
            )
            
            
            -$
            (232,754
            )
            
            $
            -




F-14
 
  AMERICAN
      CARESOURCE HOLDINGS, INC.
                NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS


Note
5.   Commitments and Contingencies




Operating
leases:  The Company leases certain equipment and office space under
noncancelable lease agreements, which expire at various dates through March
2013.




At
December 31, 2007 minimum annual lease payments for operating and capital leases
are approximately as follows:




Capital Leases
            
            
            Operating Leases
            
            
            Total2008
            
            $
            12,000
            
            
            $
            169,000
            
            
            $
            181,0002009
            
            
            12,000
            
            
            
            200,000
            
            
            
            212,0002010
            
            
            3,000
            
            
            
            202,000
            
            
            
            205,0002011
            
            
            --
            
            
            
            197,000
            
            
            
            197,0002012
            
            
            --
            
            
            
            196,000
            
            
            
            196,000Thereafter
            
            
            --
            
            
            
            49,000
            
            
            
            49,000Total
      minimum lease payments
            
            
            27,000
            
            
            
            1,013,000
            
            
            
            1,040,000Less
      amount representing interest at 9.5%
            
            
            (3,000
            )
            
            
            ---
            
            
            
            (3,000
            )$
            24,000
            
            
            $
            1,013,000
            
            
            $
            1,037,000




Rent
expense related to operating leases was approximately $172,000 and $143,000 for
the years ended December 31, 2007 and 2006, respectively.




Employment
agreements:  The Company has executed employment agreements
with two employees effective through various dates from April 2008 to October
2010, providing for minimum annual salaries and incentives.  In
addition, the Company had employment agreements providing for general terms of
employment in effect with two additional employees effective through January
2008 which were not renewed upon their expiration.




Note
6.   Stock Options and Warrants




Stock
Option Incentive Plan




American
CareSource Holdings, Inc. has an Employee Stock Option Plan (the “Stock Option
Plan”) for the benefit of certain employees, non-employee directors, and key
advisors.  On May 16, 2005, the stockholders approved the Stock Option
Plan which (i) authorized 2,249,329 (split adjusted ) options and (ii)
established the class of eligible participants to include employees, nominees to
the Board of Directors of American CareSource Holdings and consultants engaged
by American CareSource Holdings, limited to 50,000 the number of shares of
Common Stock underlying the one-time grant of a Non-Qualified Option to which
non-employee directors or non-employee nominees of the Board of Directors may be
entitled.  The Company filed a Form S-8 registering 2,249,329 of the
Stock Option Plan shares on April 7, 2006. Stock options granted under the Stock
Option Plan may be of two types:  (1) incentive stock options and (2)
nonqualified stock options.  The option price of such grants shall be
determined by a Committee of the Board of Directors (the “Committee”), but shall
not be less than the estimated fair market value of the common stock at the date
the option is granted.  The Committee shall fix the terms of the
grants with no option term lasting longer than ten years.  The ability
to exercise such options shall be determined by the Committee when the options
are granted.




F-15
 
  AMERICAN
      CARESOURCE HOLDINGS, INC.
                NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS


On May
24, 2007, the Company amended the Stock Option Plan to increase the maximum
number of shares of Common Stock that may be issued pursuant to the Stock Option
Plan.  The American CareSource Holdings, Inc. Amended and Restated
2005 Stock Option Plan (the “Amended and Restated Plan”) increased the shares
available for issue under the Stock Option Plan by 1,000,000 shares to a total
of 3,249,329 shares.  The Company filed a Form S-8 registering the
additional shares on June 14, 2007.




Shares of
common stock reserved for future grants under the plan were 948,559 and 285,231
December 31, 2007 and 2006 respectively.




Under the
Stock Option incentive plan, the compensation cost that has been charged against
income for the year ended December 31, 2007 and 2006 was $418,058 and $213,579,
respectively.  No income tax benefit has been recognized in the
consolidated statement of operations for share-based compensation arrangements
for the years ended December 31, 2007 and 2006 due to the fact that the Company
has net operating loss carryforwards for which a full valuation allowance has
been established.  At the time the tax benefit of those net operating
loss carryforwards is realized, approximately $84,000 of such benefit related to
the share based compensation deduction will be credited directly to additional
paid in capital.




The
non-qualified options granted to employees and outside directors under American
CareSource Holdings, Inc.’s Stock option incentive plan become exercisable in
cumulative installments over periods of one to four years and expire after 10
years.  The fair value of each option award granted is estimated on
the date of grant using the Black-Scholes-Merton valuation model that uses the
assumptions noted in the following table.  Volatility is calculated
using an analysis of historical volatility.  The Company believes that
the historical volatility of the Company’s stock is the best method for
estimating future volatility.  The expected lives of options are
determined based on the Company’s historical share option exercise experience
using a rolling one-year average.  The Company believes the historical
experience method is the best estimate of future exercise patterns currently
available.  The risk-free interest rates are determined using the
implied yield currently available for zero-coupon U.S. government issues with a
remaining term equal to the expected life of the options.  The
expected dividend yields are based on the approved annual dividend rate in
effect and current market price of the underlying common stock at the time of
grant.




2007
            
            
            2006Weighted
      average grant date fair value
            
            $1.17
            
            
            $2.53Weighted
      average assumptions usedExpected
      volatility
            
            66.0%
            
            
            111.0%Expected
      lives
            
            3.2
      years
            
            
            5
      yearsRisk
      free interest rate
            
            5.7%
            
            
            6.5%Forfeiture
      rate
            
            24.3%
            
            
            3.8%




F-16
 
  AMERICAN
      CARESOURCE HOLDINGS, INC.
                NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS


A summary
of stock option activity follows:




Outstanding
            
            
            Weighted-AverageOptions
            
            
            Exercise PriceOptions
      outstanding at December 31, 2005
            
            
            1,608,738
            
            
            $0.33Options
      granted during the year ended December 31, 2006
            
            
            408,000
            
            
            $3.22Options
      forfeited by holders during the yearended
      December 31, 2006
            
            
            (52,640)
            
            
            $2.56Options
      exercised during the year ended December 31, 2006
            
            
            (115,906)
            
            
            $0.32Options
      outstanding at December 31, 2006
            
            
            1,848,192
            
            
            $0.90Options
      granted during the year ended December 31, 2007
            
            
            779,488
            
            
            $2.38Options
      forfeited by holders during the yearended
      December 31, 2007
            
            
            (442,816)
            
            
            $1.45Options
      exercised during the year ended December 31, 2007
            
            
            (184,301)
            
            
            $0.31Options
      outstanding at December 31, 2007
            
            
            2,000,563
            
            
            $1.41Options
      exercisable at December 31, 2007
            
            
            1,290,298
            
            
            $0.93




The
following table summarizes information concerning outstanding and exercisable
options at December 31, 2007:




Options
      Outstanding
            
            
            
            Options
      ExercisableWeightedAverage
            
            Weighted
            
            
            
            
            WeightedOutstanding
            
            Average
            
            
            
            
            AverageRange
      of
            
            
            Number
            
            
            Contractual
            
            Exercise
            
            Number
            
            
            ExerciseExercise Price
            
            
            Outstanding
            
            
            Life
            
            Price
            
            Exercisable
            
            
            PriceUnder
      $1.00
            
            
            
            1,029,146
            
            
            
            7.4
            
            
            $0.33
            
            
            
            
            904,734
            
            
            $0.33$1.00
      - $2.00
            
            
            
            492,000
            
            
            
            9.2
            
            
            $1.86
            
            
            
            
            297,912
            
            
            $1.87$2.01
      - $3.00
            
            
            
            235,750
            
            
            
            9.3
            
            
            $2.54
            
            
            
            
            30,708
            
            
            $2.55$3.01
      - $4.00
            
            
            
            193,667
            
            
            
            9.7
            
            
            $3.53
            
            
            
            
            26,389
            
            
            $3.72Greater
      than $4.01
            
            
            
            50,000
            
            
            
            8.2
            
            
            $5.60
            
            
            
            
            30,555
            
            
            $5.60




The total
intrinsic value of options outstanding at December 31, 2007 and 2006 was
$3,583,650 and $2,232,320, respectively.  The total intrinsic value of
the options that are exercisable at December 31, 2007 and 2006 was $2,925,782
and $1,263,572, respectively.  The total intrinsic value of options
exercised during the year ended December 31, 2007 and 2006 was $296,562 and
$550,789, respectively.




F-17
 
  AMERICAN
      CARESOURCE HOLDINGS, INC.
                NOTES
      TO CONSOLIDATED FINANCIAL
STATEMENTS


As of
December 31, 2007, there was approximately $910,000 of total unrecognized
compensation cost related to non-vested share based compensation arrangements
granted under the plan.  The cost is expected to be recognized over a
weighted average period of 2.4 years.




American
CareSource has warrants outstanding and exercisable for the purchase of
1,953,752 shares of common stock at December 31, 2007, with warrants for another
56,250 shares scheduled to vest on May 21, 2008, 2009 and
2010.  American CareSource valued the warrants using the
Black-Scholes-Merton method.  As of December 31, 2007, there was
approximately $316,000 of total unrecognized cost related to non-vested
warrants.  The weighted average exercise price at December 31, 2007
was $0.89. These warrants expire five years after issuance.  The
weighted average remaining life of the warrants is 2.5 years.




Note
7.   Related Party Transactions




In 2007,
the Company engaged the services of Michael McComb, who has a familial
relationship with Director and Chairman Edward Berger.  The Company
paid Mr. McComb approximately $10,000 for management consulting
services.




American
CareSource Holdings reimbursed a Director, John Pappajohn, approximately $12,000
for business related expenses in 2007.  The Company made similar
payments of approximately $20,000 to Mr. Pappajohn in 2006.




In 2006,
the Company issued 100,000 options with a fair value of $113,028 to David
George, who was at the time a Director of the company, for consulting services
through 2007.  The strike price of the options was set at the market
price of the stock at the date of grant.  The options vested over 12
months.




F-18




SIGNATURES




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




AMERICAN
      CARESOURCE HOLDINGS, INC.By:
      /s/ David S. Boone
            
            March
      31, 2008David S. Boone
              Chief Executive
      Officer
              (Principal Executive
      Officer)
            
            DatePursuant
      to the requirements the Securities Exchange Act of 1934, this report has
      been signed below by the following persons on behalf of the Registrant and
      in the capacities and on the dates indicated.By: 
      /s/ Edward B. Berger
            
            March
      31, 2008Edward B. Berger
              Executive Chairman and
      Director
            
            DateBy: 
      /s/ David S. Boone
            
            March
      31, 2008David S. Boone
              Chief Executive
      Officer
              (Principal Executive
      Officer)
            
            DateBy: 
      /s/ Steven J. Armond
            
            March
      31, 2008Steven J. Armond
              Chief Financial
      Officer
              (Principal Financial
      Officer)
            
            DateBy: 
      /s/ Steven M. Phillips
            
            March
      31, 2008Steven M. Phillips
              Controller, Principal Accounting
      Officer
              (Principal Accounting
      Officer)
            
            DateBy: 
      /s/ Kenneth S. George
            
            March
      31, 2008Kenneth S. George
              Director
            
            DateBy: 
      /s/ John N. Hatsopoulos
            
            March
      31, 2008John N. Hatsopoulos
              Director
            
            DateBy: 
      /s/ Derace L. Schaffer
            
            March
      31, 2008Derace L. Schaffer
              Director
            
            DateBy: 
      /s/ John Pappajohn
            
            March
      31, 2008John Pappajohn
              Director
            
            DateBy: 
      /s/ John W. Colloton
            
            March
      31, 2008John W. Colloton
              Director
            
            Date




48


EXHIBIT
INDEX




Exhibit
      #
            Description
      of Exhibits3.1(1)
            Certificate
      of Incorporation of American CareSource Holdings, Inc.3.2(1)
            By-Laws3.3(2)
            Amendment
      to the Certificate of Incorporation of American CareSource Holdings, Inc.,
      dated May 25, 20053.4(2)
            Amendment
      to the Certificate of Incorporation of American CareSource Holdings, Inc.,
      dated June 2, 20053.5(3)
            Amendment
      to the Certificate of Incorporation of American CareSource Holdings, Inc.,
      dated November 14, 20053.6(4)
            Certificate
      of Incorporation of Ancillary Care Services – Group Health,
      Inc.3.7(4)
            Certificate
      of Incorporation of Ancillary Care Services – Medicare,
    Inc.3.8(4)
            Certificate
      of Incorporation of Ancillary Care Services – Worker’s Compensation,
      Inc.3.9(4)
            Certificate
      of Incorporation of Ancillary Care Services, Inc.4.1(6)
            Amended
      and Restated 2005 Stock Option Plan4.2(2)
            Specimen
      Stock Certificate10.01(2)*
            Employment
      Agreement dated October 11, 2004 between American CareSource Holdings,
      Inc. and Wayne A. Schellhammer10.02(2)*
            Employment
      Agreement dated May 1, 2005, between American CareSource Holdings, Inc.
      and David Boone10.03(7)*
            Employment
      Agreement dated September 1, 2006 between American CareSource Holdings,
      Inc. and Kurt Fullmer10.04(7)*
            Employment
      Agreement dated February 19, 2007 between American CareSource Holdings,
      Inc. and Maria Baker10.05(7)*
            Employment
      Agreement dated February 19, 2007 between American CareSource Holdings,
      Inc. and Jennifer Boone10.06(9)*
            Employment
      Agreement dated October 12, 2007 between American CareSource Holdings,
      Inc. and Steven J. Armond10.07(8)*
            Separation
      Agreement and General Release dated July 12, 2007 between American
      CareSource Holdings, Inc. and Wayne Schellhammer10.08*
            Employment
      Letter dated January 29, 2008 between American CareSource Holdings, Inc.
      and Cornelia Outten10.09*
            Employment
      Letter dated March 6, 2008 between American CareSource Holdings, Inc. and
      Rost Ginevich10.10(4)
            Form
      of Registration Rights Agreement used in March 2006 private
      placement10.11(4)
            Form
      of Subscription Agreement used in March 2006 private
    placement




49


10.12(4)
            Amended
      and Restated Stock Purchase Warrant dated March 30, 2006 by and among
      American CareSource Holdings, Inc. and John Pappajohn (amends Stock
      Purchase Warrant dated January 27, 2005).10.13(4)
            Amended
      and Restated Stock Purchase Warrant dated March 29, 2006 by and among
      American CareSource Holdings, Inc. and Derace L. Schaffer (amends Stock
      Purchase Warrant dated January 27, 2005).10.14(4)
            Amended
      and Restated Stock Purchase Warrant dated March 29, 2006 by and among
      American CareSource Holdings, Inc. and John Pappajohn (amends Stock
      Purchase Warrant dated August 15, 2005).10.15(4)
            Amended
      and Restated Stock Purchase Warrant dated March 29, 2006 by and among
      American CareSource Holdings, Inc. and Derace L. Schaffer (amends Stock
      Purchase Warrant dated August 15, 2005).10.16(4)
            Amended
      and Restated Stock Purchase Warrant dated March 30, 2006 by and among
      American CareSource Holdings, Inc. and Matthew P. Kinley (amends Stock
      Purchase Warrant dated August 15, 2005).10.17(5)
            Lease
      dated June 14, 2006, between American CareSource Holdings, Inc. and TR LBJ
      Campus Partners, L.P.14.1
            Code
      of Ethics20.1(5)
            Governance
      and Nominating Committee Charter20.2(5)
            Audit
      Committee Charter20.3(5)
            Compensation
      Committee Charter21.1
            Subsidiaries23.1
            Consent
      of McGladrey & Pullen LLP31.1
            Certification
      of the Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
            Certification
      of the Chief Financial Officer and Chief Operating Officer pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002.31.3
            Certification
      of the Principal Accounting Officer and Controller pursuant to Section 302
      of the Sarbanes-Oxley Act of 2002.32.1
            Certification
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.







*Designates
a management contract or compensatory plan or arrangement required to be filed
as an exhibit to this report pursuant to Item 15(a)(3) of this
report.




(1)
            Previously
      filed with the Securities and Exchange Commission as an exhibit
      toAmendment No. 1 to the Form SB-2 filed May 13, 2005 and incorporated
      herein byreference.




50


(2)
            Previously
      filed with the Securities and Exchange Commission as an exhibit to
      Amendment No. 5 to the Form SB-2 filed August 12, 2005 and incorporated
      herein by reference.




(3)
            Previously
      filed with the Securities and Exchange Commission as an exhibit to
      Amendment No. 8  to the Form SB-2 filed November 18, 2005 and
      incorporated herein by reference.




(4)
            Previously
      filed with the Securities and Exchange Commission as an exhibit to the
      Form 10-KSB filed March 31, 2006 and incorporated herein by
      reference.




(5)
            Previously
      filed with the Securities and Exchange Commission as an exhibit to the
      Form 10-QSB filed August 11, 2006 and incorporated herein by
      reference.




(6)
            Previously
      filed with the Securities and Exchange Commission as Exhibit A to
      Amendment No. 1 to the Proxy Statement for the 2007 Annual Meeting of
      Stockholders filed May 1, 2007 and incorporated herein by
      reference.




(7)
            Previously
      filed with the Securities and Exchange Commission as an exhibit to the
      Form 10-QSB filed May 15, 2007 and incorporated herein by
      reference.




(8)
            Previously
      filed with the Securities and Exchange Commission as an exhibit to the
      Form 8-K filed July 17, 2007 and incorporated herein by
      reference.




(9)
            Previously
      filed with the Securities and Exchange Commission as an exhibit to the
      Form 10-QSB filed November 13, 2007 and incorporated herein by
      reference.