AMERICA SERVICE GROUP INC /DE, DEF 14A, 1998-04-07

AMERICA SERVICE GROUP INC /DE
DEF 14A, 1998-04-07
MISC HEALTH & ALLIED SERVICES, NEC

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<PAGE> 1

SCHEDULE 14A
(RULE 14A-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )

Filed by the Registrant [X]

Filed by a Party other than the Registrant [ ]

Check the appropriate box:

<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>

AMERICA SERVICE GROUP INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)

- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

[X] No fee required.

[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

(1) Title of each class of securities to which transaction applies:

(2) Aggregate number of securities to which transaction applies:

(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):

(4) Proposed maximum aggregate value of transaction:

(5) Total fee paid:

[ ] Fee paid previously with preliminary materials:

[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.

(1) Amount Previously Paid:

(2) Form, Schedule or Registration Statement No.:

(3) Filing Party:

(4) Date Filed:
<PAGE> 2

AMERICA SERVICE GROUP INC.

105 WESTPARK DRIVE
SUITE 300
BRENTWOOD, TENNESSEE 37027

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

To the Stockholders of
America Service Group Inc.:

The Annual Meeting of Stockholders of America Service Group Inc. will be
held at the NationsBank Plaza, Third Floor, 414 Union Street, Nashville,
Tennessee, on Tuesday, May 19, 1998, at 10:00 a.m., local time, to consider and
vote on:

1. The election of directors for the ensuing year;

2. The ratification of the appointment of Ernst & Young LLP as
independent auditors for 1997;

3. An amendment to the Company's Amended Incentive Stock Plan which
increases the shares issuable pursuant to the Plan to 1,482,500 shares; and

4. Such other matters as may properly come before the meeting or any
adjournments thereof.

The close of business on March 25, 1998, has been fixed as the record date
for determination of stockholders entitled to notice of, and to vote at, the
Annual Meeting or any adjournments thereof. A list of stockholders entitled to
vote at the Annual Meeting will be maintained during the ten-day period
preceding the meeting at the offices of NationsBank of Tennessee in Nashville,
Tennessee. Your attention is directed to the proxy statement accompanying this
notice.

You are cordially invited to attend the Annual Meeting in person. EVEN IF
YOU PLAN TO ATTEND IN PERSON, YOU ARE REQUESTED TO SIGN, DATE AND RETURN THE
ENCLOSED PROXY AT YOUR EARLIEST CONVENIENCE. You may revoke your proxy at any
time prior to its use.

By Order of the Board of Directors,

/s/ Michael Catalano

MICHAEL CATALANO
Secretary

Brentwood, Tennessee
April 8, 1998
<PAGE> 3

AMERICA SERVICE GROUP INC.

105 WESTPARK DRIVE, SUITE 300
BRENTWOOD, TENNESSEE 37027

PROXY STATEMENT

---------------------

ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MAY 19, 1998

---------------------

This Proxy Statement is furnished to the holders of shares of the $.01 par
value per share Common Stock (the "Common Stock") of America Service Group Inc.
(the "Company") in connection with the solicitation by the Company's Board of
Directors of proxies for use at the Annual Meeting of Stockholders to be held at
the NationsBank Plaza, Third Floor, 414 Union Street, Nashville, Tennessee, on
May 19, 1998, at 10:00 a.m. local time, and at any adjournments thereof (the
"1998 Annual Meeting"). It is anticipated that this Proxy Statement and
accompanying form of proxy will be first sent to stockholders on or about April
8, 1998.

The cost of this solicitation will be borne by the Company. In addition to
solicitation by mail, certain officers and employees of the Company, who will
receive no compensation for their services other than their regular salaries,
may solicit proxies in person or by telephone or telegraph. The Company may also
make arrangements with brokerage houses, custodians, nominees and other
fiduciaries to send proxy material to their principals at the Company's expense.
The Company has retained Chase Mellon Shareholder Services to aid in
solicitation of proxies at a fee of approximately $6,500, plus certain expenses.

VOTING PROCEDURES

VOTING STOCK

Only holders of record of the Company's Common Stock, as of the close of
business on March 25, 1998 (the "Record Date") will be entitled to vote at the
1998 Annual Meeting. The Company had outstanding 3,528,645 shares of Common
Stock on the Record Date, each share being entitled to one vote on each matter
submitted to the stockholders.

Stockholders who do not expect to attend the 1998 Annual Meeting are urged
to execute and return the enclosed proxy card promptly. Any stockholder signing
and returning a proxy may revoke the same at any time prior to the voting of the
proxy by giving written notice to the Secretary of the Company or by voting in
person at the meeting. All properly executed proxy cards delivered by
stockholders and not revoked will be voted at the 1998 Annual Meeting in
accordance with the directions given. With respect to the proposal regarding
election of directors, stockholders may (a) vote in favor of all nominees, (b)
withhold their votes as to all nominees, or (c) withhold their votes as to
specific nominees by so indicating in the appropriate space on the enclosed
proxy card. With respect to each other proposal being submitted to the
stockholders for their consideration, stockholders may (i) vote "FOR" such
proposal, (ii) vote "AGAINST" such proposal, or (iii) abstain from voting on
such proposal. If no specific instructions are given with regard to the matters
to be voted upon, the shares represented by a signed proxy card will be voted
"FOR" the election of all nominees for director, "FOR" the appointment of Ernst
& Young LLP as independent accountants, and "FOR" the proposal to ratify the
amendment to the Company's Amended Incentive Stock Plan (the "Amendment").
Management knows of no other matters that may come before the meeting for
consideration by the stockholders. However, if any other matter properly comes
before the meeting, the persons named in the enclosed proxy card as proxies will
vote upon such matters in accordance with their judgment.
<PAGE> 4

QUORUM AND VOTING REQUIREMENTS

A quorum at the Annual Meeting will consist of a majority of the votes
entitled to be cast by the holders of all shares of Common Stock that are
outstanding and entitled to vote. A plurality of the votes entitled to be cast
by the holders of all shares of Common Stock that are present at the Annual
Meeting and entitled to vote will be necessary to elect the director-nominees
listed herein. A majority of the votes entitled to be cast by the holders of all
shares of Common Stock that are present at the meeting and entitled to vote will
be necessary to ratify the appointment of Ernst & Young LLP as independent
auditors, and to adopt the amendment to the Plan. Abstentions and proxies
relating to "street name" shares for which brokers have not received voting
instruction from the beneficial owner ("Broker Non-Votes") are counted in
determining whether a quorum is present. With respect to all matters submitted
to the stockholders for their consideration, other than the election of
directors, abstentions will be counted as part of the total number of votes cast
on such proposals in determining whether the proposals have received the
requisite number of favorable votes, whereas Broker Non-Votes will not be
counted as part of the total number of votes cast on such proposals. Thus
abstentions will have the same effect as votes against any given proposal,
whereas Broker Non-Votes will have no effect in determining whether any given
proposal has been approved by the stockholders. In the election of directors,
the nominees receiving the highest number of votes will be elected. Therefore,
withholding authority to vote for a director nominee will have no effect.

2
<PAGE> 5

INFORMATION AS TO DIRECTORS, NOMINEES AND EXECUTIVE OFFICERS

The following table sets forth certain information, including ownership of
the Company's Common Stock, as of March 25, 1998, with respect to: (i) each
director or nominee; (ii) each executive officer; and (iii) all directors and
executive officers as a group.

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR
EMPLOYMENT (BY THE COMPANY DIRECTOR NUMBER OF SHARES OF
NAME AND AGE UNLESS OTHERWISE INDICATED) SINCE COMMON STOCK OWNED(1) PERCENTAGE
- ------------ --------------------------- -------- --------------------- ----------
<S> <C> <C> <C> <C>
Thomas F. Bogan, 46............... Vice President and General 1993 20,600 *
Manager of FQA Business
Unit, a division of
Rational Software, since
April 1997; President and
Chief Executive Officer of
FQA, Inc. from January to
May 1997; President and
Chief Executive Officer,
Pacific Data Products Co.,
Inc., supplier of data
communications products,
from 1993 to 1996;
President and Chief
Executive Officer of Avatar
Corporation, a supplier of
computer products from 1987
to 1993.
Jack O. Bovender, Jr., 51(2)...... President and Chief Operat- 1996 29,000 *
ing Officer of Colum-
bia/HCA Healthcare
Corporation since August
1997; retired from 1994 to
August 1997; Executive Vice
President and Chief Operat-
ing Officer of Hospital
Corporation of America from
1992 through 1994; Eastern
Group President of Hospital
Corporation of America from
1987 through 1992.
William D. Eberle, 74(3).......... Chairman of the Board of 1991 45,000 1.3%
the Company since March
1995; Chairman, Manchester
Associates, Ltd., an
international consulting
company, since 1977, and of
counsel to Kaye Scholer,
Fierman, Hays & Handler, a
law firm, since 1993.
John W. Gildea, 54(4)............. Managing Director, Gildea 1986 35,115 *
Management Co., an invest-
ment management company.
Carol R. Goldberg, 67(5).......... President, AVCAR Group, 1991 19,000 *
Ltd., a management consult-
ing firm.
</TABLE>

3
<PAGE> 6

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR
EMPLOYMENT (BY THE COMPANY DIRECTOR NUMBER OF SHARES OF
NAME AND AGE UNLESS OTHERWISE INDICATED) SINCE COMMON STOCK OWNED(1) PERCENTAGE
- ------------ --------------------------- -------- --------------------- ----------
<S> <C> <C> <C> <C>
Douglas L. Jackson, 51............ President, Di/Mac Technolo- 1986 85,155 2.4%
gies, Inc. since 1996;
Chairman, Legacy Fine
Jewelry Company, Inc., from
1994 to 1995; Chairman of
the Board of the Company
from 1987 to 1992; private
investor from 1991 to 1993.
Scott L. Mercy, 36................ President and Chief Execu- 1996 361,000(6) 10.2%
tive Officer of the Company
since April 1, 1996; Senior
Vice President -- Financial
Operations of Colum-
bia/HCA Healthcare Corpo-
ration from 1994 through
1995; Vice President -- Fi-
nancial Operations and
Director -- Financial
Operations Support of
Hospital Corporation of
America from 1987 to 1994.
OTHER EXECUTIVE OFFICERS(7)
Michael Catalano, 46.............. Executive Vice President of -- 24,700 *
Development, General Coun-
sel and Secretary of the
Company since July 1996;
Senior Vice President
Planning and Development
and Chief Legal Counsel of
Magellan Health Services,
Inc. (formerly Charter
Medical Corporation) from
1989 through February 1996.
Gerard F. Boyle, 43............... Executive Vice President of -- 0 *
the Company since March
1998; President and Chief
Executive Officer of Prison
Health Services, Inc. since
March 1998; Vice President
of Operations of EMSA -- a
division of MedPartners,
Inc. and InPhyNet Medical
Management, Inc. from
September 1996 to February
1998; Vice President and
Administrator of Sales for
EMSA Correctional Care,
Inc. from July 1994 to
August 1996; Regional
Administrator for
Operations (Southeast Vir-
ginia) for EMSA Correc-
tional Care, Inc. from
January 1993 to July 1994.
</TABLE>

4
<PAGE> 7

- ---------------

* Less than 1%
(1) Includes the following shares subject to options exercisable presently or
within 60 days: Mr. Bogan, 19,000 shares; Mr. Bovender, 19,000 shares; Mr.
Eberle, 44,000 shares; Mr. Gildea, 34,000 shares; Ms. Goldberg, 19,000
shares; Mr. Jackson, 64,000 shares; Mr. Mercy, 175,000 shares; Mr. Catalano,
20,000 shares; Mr. Teal, 5,667 shares; and all directors and executive
officers as a group 411,000 shares.
(2) Mr. Bovender also serves on the Boards of Directors of Southcap, Princeps,
Behavioral Healthcare Corporation and American Retirement Corporation. His
shares include 4,000 shares held in trust for the benefit of his son,
beneficial ownership of which he disclaims.
(3) Mr. Eberle also serves on the Boards of Directors of Ampco-Pittsburgh
Corporation, Barry's Jewelers, Inc., Mitchell Energy & Development
Corporation, Sirrom Capital Corporation, FAC Realty Trust, Inc., and
Showcase Entertainment, Inc.
(4) Mr. Gildea also serves on the Boards of Directors of General Chemical, FAC
Realty Trust, Inc., and Barry's Jewelers, Inc.
(5) Ms. Goldberg also serves on the Board of Directors of The Gillette Company;
Barry's Jewelers, Inc. and Selfcare, Inc.
(6) Includes 146,000 shares of Common Stock purchased by Mr. Mercy from ASG,
40,000 shares of Common Stock issued under his Employment Agreement (which
are presently held in the name of his spouse and beneficial ownership of
which he disclaims), and options to purchase 175,000 shares of Common Stock.
The shares of Common Stock purchased by Mr. Mercy and the shares of Common
Stock issued under his employment agreement are subject to certain
repurchase rights in favor of the Company and Mr. Mercy. See "Executive
Compensation -- Employment Agreements."
(7) Jeffery J. Bairstow served as Chief Operating Officer of the Company from
November 1996 to February 1998. As of March 25, 1998, Mr. Bairstow
beneficially owned 25,000 shares of Common Stock.

5
<PAGE> 8

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock, as of March 25, 1998, by
each person who was known by the Company to own beneficially more than 5% of the
Company's Common Stock as of such date, based on information furnished to the
Company. Except as otherwise indicated, each person has sole voting and
dispositive power with respect to the shares beneficially owned by such person.

<TABLE>
<CAPTION>
SHARES % OF SHARES
NAME AND ADDRESS BENEFICIALLY OWNED OUTSTANDING
- ---------------- ------------------ -----------
<S> <C> <C>
Scott L. Mercy.............................................. 361,000(1) 10.2%
105 Westpark Drive, Suite 300
Brentwood, Tennessee 37027
A group comprised of North American Private Equity Fund II,
North American II Entrepreneurs' Fund, Grid Venture
Partners, Inc., and Ronald L. Chez........................ 336,434(2) 9.5%
1603 Orrington Avenue, Suite 2050
Evanston, Illinois 60201
Value Partners, Ltd......................................... 332,175(3) 9.4%
4600 Texas Commerce Tower West
2200 Rose Avenue
Dallas, Texas 75201
Frontier Capital Management Company, Inc.................... 194,670(4) 5.5%
99 Summer Street
Boston, Massachusetts 02110
Sirach Capital Management, Inc.............................. 201,000(5) 5.7%
3323 One Union Square
Seattle, Washington 98101
A group comprised of Sandera Partners, L.P., Sandera Capital
Management, L.L.C., Sandera Capital, L.L.C., John A.
Bricker, Jr., Hunt Financial Partners, L.P. (collectively,
the "Sandera Group"), and Newcastle Partners, L.P. and
Mark Schwartz (collectively, the "Newcastle Group")(7).... 181,700(6) 5.1%
</TABLE>

- ---------------

(1) Includes 146,000 shares of Common Stock purchased by Mr. Mercy from ASG,
40,000 shares of Common Stock issued under his Employment Agreement (which
are presently held in the name of his spouse and beneficial ownership of
which he disclaims), and options to purchase 175,000 shares of Common Stock.
The shares of Common Stock purchased by Mr. Mercy and the shares of Common
Stock issued under his employment agreement are subject to certain
repurchase rights in favor of the Company and Mr. Mercy. See "Executive
Compensation -- Employment Agreements."
(2) Based upon an Amendment No. 2 to Schedule 13D filed with the Securities and
Exchange Commission ("SEC") on May 2, 1995, North American Private Equity
Fund II beneficially owns 192,776 shares of Common Stock and has sole voting
and investment power with respect to such shares; North American II
Entrepreneurs' Fund beneficially owns 20,622 shares of Common Stock and has
sole voting and dispositive power with respect to such shares; Grid Venture
Partners, Inc. beneficially owns 24,036 shares of Common Stock and has sole
voting and dispositive power with respect to such shares; and Ronald L. Chez
owns 99,000 shares of Common Stock and has sole voting and investment power
with respect to such shares. The reporting persons have disclaimed
membership in a group under item 2(b) of Schedule 13D.
(3) Based upon a Schedule 13G filed with the SEC on January 20, 1998. According
to such Schedule 13G, Ewing & Partners is the general partner of Value
Partners, Ltd. Timothy G. Ewing and Ewing Asset Management, Inc. are the
general partners of Ewing & Partners and may be deemed to share the power to
dispose of and to vote the shares held by Value Partners, Ltd.
6
<PAGE> 9

(4) Based upon a Schedule 13G filed with the SEC on February 27, 1998.
(5) Based upon a Schedule 13G filed with the SEC on January 28, 1998.
(6) Based upon a Schedule 13G filed with the SEC on March 16, 1998, the Sandera
Group beneficially owns 177,700 shares of Common Stock, Newcastle Partners
L.P. beneficially owns 4,000 shares and Mark Schwartz beneficially owns
181,700 shares.
(7) The address of each member of the Sandera Group is 1601 Elm Street, Suite
4000, Dallas, Texas 75205. The address of each member of the Newcastle Group
is 4650 Cole Avenue, Suite 331, Dallas, Texas 75205.

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth information concerning the compensation of
the Company's Chief Executive Officer and the three most highly compensated
executive officers other than the CEO (the "Named Executives") for each of the
years 1997 and 1996. None of such individuals was employed by the Company prior
to 1996.

<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
-------------------------------- COMPENSATION
OTHER -----------------------
NAME AND PRINCIPAL ANNUAL RESTRICTED STOCK ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION STOCK($) OPTIONS(#) COMPENSATION(1)
- ------------------ ---- -------- ------ ------------ ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Scott L. Mercy............. 1997 $190,000 $ -- $ -- -- -- $16,533
President and Chief 1996 138,846 -- -- 350,000 175,000 9,223
Executive Officer(2)
Michael Catalano........... 1997 $165,500 $ -- $56,000(3) -- -- $13,384
Executive Vice 1996 83,077 -- -- -- 60,000 4,452
President of Development,
General Counsel and
Secretary(4)
Jeffrey J. Bairstow........ 1997 $174,461 $ -- $ -- -- -- $ 9,841
Chief Operating 1996 22,884 5,000 -- -- 75,000 1,259
Officer(5)
Bruce A. Teal(6)........... 1997 $115,000 $ -- $ -- -- -- $ 102
Senior Vice President 1996 4,423 -- -- -- 17,000 9
and Chief Financial
Officer
</TABLE>

- ---------------

(1) Includes matching contributions by the Company to its 401(k) Profit Sharing
and life and health insurance premiums paid by the Company on behalf of the
Named Executives.
(2) Mr. Mercy became President and Chief Executive Officer of the Company on
April 1, 1996.
(3) Represents reimbursement for relocation costs.
(4) Mr. Catalano became Executive Vice President of Development, General Counsel
and Secretary of the Company on July 12, 1996.
(5) Mr. Bairstow became Chief Operating Officer of the Company on November 1,
1996. Mr. Bairstow resigned his position with the Company on February 13,
1998.
(6) Mr. Teal became Vice President, Controller and Treasurer of the Company on
December 10, 1996. Mr. Teal became Senior Vice President and Chief Financial
Officer of the Company on February 20, 1998.

STOCK OPTION GRANTS AND VALUES

The Company did not award any stock option grants to the Named Executives
during 1997.

7
<PAGE> 10

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES TABLE

The following table sets forth certain information with respect to option
exercises by the Named Executives during 1997 and the value of options owned by
the Named Executives at December 31, 1997.

<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FY-END(#) AT FY-END($)(1)
SHARES ------------------- ---------------------
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ------------------- ---------------------
<S> <C> <C> <C> <C>
Scott L. Mercy.................... -- $ -- 175,000/0 $1,104,250/0
Michael Catalano.................. -- -- 20,000/40,000 38,700/77,400
Jeffrey J. Bairstow............... -- -- 25,000/50,000 143,675/287,350
Bruce A. Teal..................... -- -- 5,610/11,390 32,243/65,458
</TABLE>

- ---------------

(1) Based on the closing price of the Company's Common Stock on the Nasdaq
National Market System on December 31, 1997 of $15.06 per share.

EMPLOYMENT AGREEMENTS

Scott L. Mercy has been employed as President and Chief Executive Officer
of the Company since April 1, 1996 pursuant to an employment agreement, which
was amended on June 30, 1997 (the "Mercy Agreement"), which establishes a
minimum annual base salary of $190,000 through December 31, 1998, an annual
bonus based upon performance objectives, and such additional compensation as may
be determined from time to time. Pursuant to the Mercy Agreement, Mr. Mercy
purchased 146,000 shares of Common Stock from the Company at $8.75 per share,
the mean between the high and low sale prices for the Company's Common Stock on
April 1, received 40,000 shares as a restricted stock award under the Company's
Incentive Stock Plan, and was awarded options to purchase 175,000 additional
shares of Common Stock, at $8.75 per share. The Mercy Agreement provides that
restricted stock and stock options vest in installments over four years, or
earlier in one-third installments when the closing price of the Common Stock
reaches $12, $14 and $16, respectively. Mr. Mercy's restricted stock and stock
options vested in 1996 when the closing price of the Common Stock exceeded $16
per share. Mr. Mercy will have the right to require the Company to purchase (and
the Company will have the right to require Mr. Mercy to sell ), at a price not
less than $9.90 per share, the purchased shares and the award shares, but not
the option shares, in the event of a change in control of the Company or upon
Mr. Mercy's termination of employment. The Mercy Agreement provides for an
initial employment term through December 31, 1998, one-year extensions
thereafter unless either party elects to terminate the agreement, and an
automatic extension in the event of a change in control. Upon termination,
including termination following a change in control, Mr. Mercy or his estate, is
entitled to two and one-half year's compensation and Mr. Mercy is subject to
certain non-competition and confidentiality commitments. The Employment
Agreement also provides that the Board of Directors shall take all necessary
actions to ensure that Mr. Mercy is slated as a management nominee to the Board
during his employment.

Michael Catalano has been employed as Executive Vice President of
Development, General Counsel and Secretary of the Company since July 12, 1996
pursuant to an employment agreement (the "Catalano Agreement") which establishes
a minimum annual base salary of $160,000 and such additional compensation as may
be determined by the Compensation Committee from time to time. The Catalano
Agreement may be terminated by either party upon thirty days notice. On July 12,
1996, the Company awarded to Mr. Catalano options to purchase 60,000 shares of
Common Stock at an exercise price of $13.125 per share pursuant to the Company's
Amended Incentive Stock Plan. The stock options vest ratably on each of the
succeeding three anniversaries of the date of the options and shall be
exercisable for a period of ten years from the date of the grant. If there is a
change of control of the Company, all unexercised stock options granted to Mr.
Catalano under the Company's Amended Incentive Stock Plan shall accelerate and
immediately vest. Also, in the event of a termination without cause, including
termination following a change in control, Mr. Catalano's options

8
<PAGE> 11

shall vest and his annual base salary as of the date of his termination shall be
continued for one year following such termination date.

On February 20, 1998, Bruce Teal entered into an employment agreement (the
"Teal Agreement") with the Company pursuant to which he was appointed Senior
Vice President and Chief Financial Officer of the Company. Mr. Teal had been
serving as Vice President, Controller and Treasurer of the Company since
December 1996; however, the Company and Mr. Teal had not entered into an
employment agreement for his service in that capacity. The Teal Agreement
provides for an annual base salary of $160,000 and such additional compensation
as may be determined by the Compensation Committee from time to time. The Teal
Agreement may be terminated by either party upon thirty days notice. On December
18, 1996, the Company awarded to Mr. Teal options to purchase 17,000 shares of
Common Stock at an exercise price of $9.3125 per share pursuant to the Company's
Amended Incentive Stock Plan. The stock options vest ratably on each of the
succeeding three anniversaries of the date of the options and shall be
exercisable for a period of ten years from the date of the grant. If there is a
change of control of the Company, all unexercised stock options granted to Mr.
Teal under the Company's Amended Incentive Stock Plan shall accelerate and
immediately vest. Also, in the event of a termination without cause, including
termination following a change in control, Mr. Teal's options shall vest and his
annual base salary as of the date of his termination shall be continued for one
year following such termination date.

Jeffrey Bairstow was employed as Chief Operating Officer of the Company
from November 1996 to February 1998 pursuant to an employment agreement (the
"Bairstow Agreement") which established an annual base salary of $170,000 and
provided for additional compensation as determined from time to time by the
Compensation Committee.

COMPENSATION OF DIRECTORS

During 1997, the Company granted each non-employee Director options to
purchase 4,000 shares of the Company's Common Stock at an exercise price of
$10.625 per share for serving on the Board and its committees. The Chairman of
the Board of Directors of the Company, Mr. William D. Eberle, received an
additional $25,000 for his service to the Company in such capacity. Directors
who are also employees of the Company receive no additional compensation from
the Company for attendance at Board or committee meetings. Under the terms of
the Company's Amended Incentive Stock Plan, any person who is not an employee or
independent contractor of the Company, and who becomes a Director will receive
an option to purchase 15,000 shares of the Company's Common Stock at an exercise
price equal to the fair market value of the Common Stock on the date such person
becomes a Director. Such options will vest with respect to 25% of the shares
covered thereby on each successive anniversary of the date of grant.

CERTAIN TRANSACTIONS

There are no relationships or transactions to disclose pursuant to Item 404
of Regulation S-K.

REPORT OF THE COMPENSATION COMMITTEE

The Compensation Committee (the "Committee") of the Board of Directors
consists of five non-employee members of the Board of Directors. The Incentive
Stock Committee (the "Stock Committee"), which is responsible for administering
the Company's Amended Incentive Stock Plan, is comprised of Ms. Goldberg, Mr.
Jackson, Mr. Bogan, Mr. Gildea and Mr. Bovender.

EXECUTIVE COMPENSATION POLICIES

Generally, the Company's executive compensation program is designed to be
competitive with that offered by other companies against which the Company
competes for executive resources. At the same time, the Company links a
significant portion of executive compensation to the achievement of the
Company's short and long-term financial and strategic objectives and to the
performance of the Company's Common Stock. The Company's executive compensation
program consists of three primary elements: base salary, annual

9
<PAGE> 12

incentive bonus and stock options or other stock benefits. Base salary is
intended to be competitive in the marketplace. However, although the Committee
considers competitive data, salaries are determined subjectively by the
Committee rather than by reference to any specific target group of companies.
Base salary is reviewed at a minimum annually and adjusted based on changes in
competitive pay levels, the executive's performance as measured against
individual, business group, and Company-wide goals, as well as changes in the
executive's role in the Company. The Committee awards incentive bonuses to the
Named Executives based on the achievement of certain targets and objectives
which are set at the beginning of each year. The Company does not make annual
stock option or other stock benefit grants to all executives. Rather, the Stock
Committee determines each year which, if any, executives will receive benefits,
based on individual performance and each executive's existing stock option
position.

EXECUTIVE OFFICER COMPENSATION

During 1996, the Company replaced all of its executive officers. The
persons recruited to become the Chief Executive Officer, Chief Operating Officer
and Executive Vice President and General Counsel of the Company entered into
employment agreements with the Company during 1996. The base compensation,
incentive bonus and stock option agreements entered into by the Company with
such individuals were determined by arm's-length negotiations between the
Compensation Committee and other members of the Board of Directors and such
individuals. Compensation of these executive officers during 1997 was based on
the employment agreements entered into with such executive officers during 1996.
The Company did not enter into an employment agreement in 1996 with the
individual recruited to become Vice President, Controller and Treasurer of the
Company. The terms of such individual's employment with the Company were
determined by arm's length negotiations by the Committee and officers of the
Company and such individual. The Compensation Committee believes that the
specific base compensation, incentive bonus and stock option arrangements were
necessary to attract management of the caliber sought by the Board. Future
adjustments of such arrangements will be made in accordance with the general
principles outlined above.

The Company did not pay bonuses to any of its executive officers during
1997 because the Company's performance did not meet the performance targets
established by the Board for the year. The Company did not award stock options
to its executive officers during 1997 other than those awarded to individuals
recruited to become executive officers during the year.

COMPENSATION OF THE PRESIDENT AND CHIEF EXECUTIVE OFFICER

On April 1, 1996, Scott L. Mercy entered into an employment agreement with
the Company as described above. See "Executive Compensation -- Employment
Agreements." The terms of the agreement, including the restricted stock awards
and stock options issued pursuant to the agreement, were approved by the
Committee, the Stock Committee and subsequently by the stockholders. The
employment agreement provides for the payment of an annual bonus to Mr. Mercy in
an amount to be determined by the Compensation Committee based upon the
performance of the Company against defined objectives. The target amount of the
bonus is an amount equal to Mr. Mercy's base compensation; in no event shall the
annual bonus exceed an amount equal to twice Mr. Mercy's base salary. Amounts
less than the target amount may be paid for performance less than the
pre-approved performance targets, and cash bonuses in excess of the target
amount will be paid for performance in excess of the pre-approved targets, or
otherwise at the discretion of the Committee. Mr. Mercy did not receive a bonus
for 1997. The Committee believes that the incentive bonus provisions of Mr.
Mercy's employment agreement create an appropriate relationship between Mr.
Mercy's level of compensation and the Company's performance.

10
<PAGE> 13

This report by the Committee shall not be deemed to be incorporated by
reference by any general statement incorporating by reference this Proxy
Statement into any filing under the Securities Act of 1933 or the Securities
Exchange Act of 1934 and shall not otherwise be deemed filed under such Acts.

Respectfully submitted by
The Compensation Committee:

CAROL R. GOLDBERG, Chair
THOMAS F. BOGAN
WILLIAM D. EBERLE
JOHN W. GILDEA
DOUGLAS L. JACKSON
JACK O. BOVENDER, JR.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

None of the members of the Compensation Committee at any time during the
last fiscal year served as an officer of, or was employed by, the Company.
Furthermore, none of the executive officers of the Company currently serves as a
director or member of the compensation committee of any other entity or any
other committee of the board of directors of another entity performing similar
functions.

11
<PAGE> 14

PERFORMANCE GRAPH

The following graph sets forth the total return (stock price plus
dividends) on a $100 investment in each of (i) the Company's Common Stock, (ii)
the Wilshire 5000 Index and (iii) the NASDAQ Health Care Services Index, from
December 31, 1992 through December 31, 1997. The NASDAQ Health Care Services
Index is produced by the Center for Research in Securities Prices, University of
Chicago.

AMERICA SERVICE GROUP INC.

STOCK PERFORMANCE GRAPH

<TABLE>
<CAPTION>
NASDAQ HEALTH
MEASUREMENT PERIOD AMERICA SERVICE CARE SERVICES WILSHIRE 5000
(FISCAL YEAR COVERED) GROUP INC. INDEX INDEX
<S> <C> <C> <C>
12/31/92 $100 $100 $100
12/31/93 59 115 111
12/31/94 105 124 111
12/31/95 160 157 152
12/31/96 215 157 184
12/31/97 317 160 241
</TABLE>

12
<PAGE> 15

ELECTION OF DIRECTORS (PROPOSAL NO. 1)

A board of six directors will be elected at the 1998 Annual Meeting. The
Board of Directors has nominated: Thomas F. Bogan, William D. Eberle, John W.
Gildea, Carol R. Goldberg, Jack O. Bovender, Jr. and Scott L. Mercy to serve as
directors until the next annual meeting of stockholders or until their
successors are elected and qualified. Each of the nominees is currently a member
of the Board of Directors. Each nominee has consented to serve on the Board
until the next annual meeting of stockholders or until his or her successor is
duly elected and qualified. If any of the nominees should be unable to serve for
any reason (which management has no reason to anticipate at this time), the
Board of Directors may designate a substitute nominee or nominees (in which case
the persons named as proxies in the enclosed proxy card will vote all valid
proxy cards for the election of such substitute nominee or nominees), allow the
vacancy or vacancies to remain open until a suitable candidate or candidates are
located, or eliminate the vacancy. The affirmative vote of holders of a
plurality of the issued and outstanding shares of Common Stock having voting
power present, in person or by proxy, at the 1998 Annual Meeting is required to
elect the persons nominated.

Mr. Mercy, the President and Chief Executive Officer of the Company, has
entered into an Employment Agreement with the Company. Such Employment Agreement
provides, among other things, that the Board shall, during the term of such
Employment Agreement, take all necessary steps to ensure that Mr. Mercy is
slated as a management nominee to the Board. See "Executive
Compensation -- Employment and Severance Agreements."

The Board of Directors recommends a vote FOR each nominee for director.

RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS (PROPOSAL NO. 2)

The Board of Directors appointed Ernst & Young LLP as independent
accountants of the Company for 1997. Although stockholder ratification is not
required, the Board of Directors has directed that such appointment be submitted
to the stockholders for ratification. A representative of Ernst & Young LLP is
expected to attend the 1998 Annual Meeting. Such representative will be given
the opportunity to make a statement and will be available to respond to
appropriate questions.

On October 4, 1996, the Company dismissed Price Waterhouse LLP as its
independent accountants. The Company's Audit Committee participated in and
approved the decision to change independent accountants. The reports of Price
Waterhouse LLP on the financial statements for the two fiscal years prior to the
year of dismissal contained no adverse opinion or disclaimer of opinion and were
not qualified or modified as to uncertainty, audit scope or accounting
principles. In connection with audits for the two fiscal years prior to the year
of dismissal and through October 4, 1996, there were no disagreements with Price
Waterhouse LLP on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreements, if not
resolved to the satisfaction of Price Waterhouse LLP, would have caused them to
make reference thereto in their report on the financial statements for such
years. During the two fiscal years prior to the year of dismissal and through
October 4, 1996, there were no "reportable events" (as defined in the rules of
the Securities and Exchange Commission).

The affirmative vote of the holders of a majority of the shares of Common
Stock present in person or represented by proxy and voting at the 1998 Annual
Meeting is required to adopt the proposal. The Board of Directors has also
appointed Ernst & Young LLP as independent accountants of the Company for 1997.
If the proposal is not adopted, the Board of Directors may reconsider the
appointment.

The Board of Directors recommends a vote FOR this proposal.

AMENDMENT TO THE COMPANY'S INCENTIVE STOCK PLAN (PROPOSAL NO. 3)

At the 1998 Annual Meeting, the stockholders will be asked to approve an
amendment (the "Amendment") to the Company's Amended and Restated Incentive
Stock Plan (the "Plan") increasing the number of shares of Common Stock
authorized under the Plan from the 1,182,500 previously authorized to 1,482,500
shares. The Company is proposing the amendment to the Plan because, at December
31, 1997, only 75,750 shares were available for grants. Additional shares are
needed in order for the Company to continue to offer long-term incentive
compensation to its employees, independent contractors and newly elected
directors and to align their interests with those of stockholders. Set forth
below is a summary of the material provisions

13
<PAGE> 16

of the Plan. The summary is qualified by reference to the actual text of the
Plan which reflects the Amendment and is attached hereto as Exhibit A.

The Plan currently authorizes the award of benefits covering 1,182,500
shares. As of December 31, 1997, options for 585,950 shares had been exercised
of which 113,500 shares had been restored to the Plan. In addition, 40,000 stock
awards and options for 594,300 shares were outstanding, leaving a balance of
75,750 shares available for new awards. By increasing the shares reserved under
the Plan from the 1,182,500 shares presently reserved to 1,482,500 shares, the
proposed amendment adds 300,000 new shares. If there is a lapse, expiration,
termination or cancellation of any option or right prior to the issuance of
shares or the payment of the cash equivalent thereunder, or if shares are issued
and thereafter are reacquired by the Company without consideration pursuant to
rights reserved upon issuance thereof, those shares may again be used for new
awards under the Plan.

The Plan provides for the grant of options and other benefits to key
employees, directors and independent contractors providing consulting services
to the Company. "Key employees" are those employees who, in the opinion of the
Stock Committee, have demonstrated a capacity for contributing a substantial
measure to the success of the Company. As of April 1, 1998, 50 employees, six
non-employee directors and no independent contractors held options under the
Plan.

Subject to the express provisions of the Plan, the Stock Committee is
authorized to determine, among other things, the key employees and independent
contractors to whom, and the times at which, options and other benefits are to
be granted, the number of shares subject to each benefit and its term, and the
applicable vesting schedule, except that no participant may receive options or
stock appreciation rights for more than 250,000 shares in any year. An option to
purchase 15,000 shares of the Company's Common Stock will be automatically
granted to any person who is not an employee or independent contractor and who
becomes a director of the Company in the future. The Stock Committee determines
the exercise price, if any, of each benefit, but the exercise price for options
may not be less than the fair market value of the Common Stock at the time the
option is granted. Fair market value is determined by averaging the highest and
lowest price of the Common Stock as reported on the NASDAQ National Market
System on the date the option is granted. Options granted under the Plan may be
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code ("Incentive Stock Options") or options which do not constitute
Incentive Stock Options ("Nonqualified Stock Options"). All options granted to
date under the Plan are Nonqualified Stock Options.

Stock appreciation rights may be granted with respect to options granted
concurrently or previously under the Plan. Each stock appreciation right will
permit the holder thereof to receive cash or Common Stock (valued at fair market
value) in an amount equal to a percentage, up to 100%, as set by the Stock
Committee, of the difference between the fair market value on the date of
exercise of the shares to which it relates and the option price thereof. Common
Stock may also be awarded or issued at prices below fair market value, or
without payment, as a bonus or as additional compensation for services to the
Company. Such shares will be subject to restrictions on transferability for
stated periods and/or forfeiture under stated circumstances. Such restrictions
and risk of forfeiture will normally lapse at stated intervals or in the event
indicated performance goals are not satisfied by stated dates.

The Plan contains customary provisions with respect to adjustments for
stock splits and similar transactions and rights of optionees upon mergers and
other business combinations. Benefits may be granted in substitution, exchange
or cancellation of benefits then held under the Plan and options may include a
provisions for replacement options if options are exercised by the surrender of
other shares of the Company. No benefit may be granted under the Amended Plan
after March 1, 2006. Except for an annual limit of 250,000 options and stock
appreciation rights which may be granted to any participant, the Plan does not
limit the benefits issuable to any employee or other participant or the number
of employees or other persons who may participate, and additional benefits may
be granted to previous recipient of benefits.

The Plan provides that awards shall not be transferable otherwise than by
will or the laws of descent and distribution. The Stock Committee shall
determine the treatment to be afforded to a participant in the event of
termination of employment for any reason including death, disability or
retirement. Notwithstanding the

14
<PAGE> 17

foregoing, the Stock Committee may permit the transferability of an award by a
participant to members of the participant's immediate family or trusts or family
partnerships for the benefit of such person.

Generally, the Board of Directors of the Company may amend, modify or
terminate the Plan at any time. Stockholder approval is required to increase
materially the total number of shares which may be made subject to benefits
under the Plan (except those attributable to adjustment as described above), to
increase materially the benefits available under the Plan or to modify
materially the requirements as to eligibility, or for any other change which may
require stockholder approval for the Plan to remain qualified under Rule 16b-3
of the rules and regulations under the Securities Exchange Act of 1934.

The mean between the high and low sale prices for the Company's Common
Stock on April 6, 1998, as reported on the NASDAQ National Market System was
$13.625 per share.

The following summary describes the U.S. federal income tax consequences
generally applicable to awards under the Plan:

No income will be recognized by an optionee at the time of grant of an
Incentive Stock Option or a Nonqualified Stock Option, and no corresponding
deduction will be available to the Company at such time. On exercise of a
Nonqualified Stock Option, the amount by which the fair market value of the
Common Stock on the date of exercise exceeds the exercise price will be
taxable to the optionee as ordinary income and the Company will be entitled
to a corresponding deduction. The subsequent disposition of shares acquired
upon exercise of a Nonqualified Stock Option will ordinarily result in
capital gain or loss to the optionee equal to the difference between the
sales proceeds and the fair market value of the Common Stock on the date of
exercise.

On exercise of an Incentive Stock Option, the optionee will not
recognize any income. However, for purposes of the alternative minimum tax,
the exercise of an Incentive Stock Option will be treated as an exercise of
a Nonqualified Stock Option and may result in an alternative minimum tax
liability. The disposition of shares acquired upon exercise of an Incentive
Stock Option will ordinarily result in capital gain or loss equal to the
difference between the sales proceeds and the exercise price paid for the
shares. However, if the optionee disposes of shares acquired upon exercise
of an Incentive Stock Option within two years after the date of grant or
one year after the date of exercise (a "Disqualifying Disposition"), the
optionee will recognize ordinary income in the amount of the excess of the
fair market value of the Common Stock on the date the option was exercised
over the exercise price (or, in certain circumstances, the gain on sale, if
less). The Company may be entitled to a deduction for the amount treated as
ordinary income. Any excess of the amount realized by the holder on the
Disqualifying Disposition over the fair market value of the shares on the
date of exercise of the option will generally be treated as capital gain.

The amount of any cash (or the fair market value of any Common Stock)
received upon the exercise of a stock appreciation right will be includable
in the recipient's ordinary income at the time of receipt.

Unless a Section 83(b) election is made within 30 days of receipt, as
described below, no taxable income will generally be recognized by the
recipient of a restricted stock award until the shares are no longer
subject to transfer restrictions or the risk of forfeiture. When either the
transfer restrictions or the risk of forfeiture lapse, the recipient will
recognize ordinary income in an amount equal to the excess of the fair
market value of the Common Stock on the date of lapse over the amount paid,
if any, for the shares. Under Section 83(b) of the Internal Revenue Code, a
recipient may elect to include in ordinary income, as compensation at the
time restricted stock is first issued, the excess of the fair market value
of the shares at the time of issuance over the amount paid, if any, for the
shares. Absent a Section 83(b) election, any cash dividends or other
distributions paid with respect to the restricted stock prior to the lapse
of the restrictions or risk of forfeiture will be included in the
recipient's ordinary income as compensation at the time of receipt. The
Company will generally be entitled to a deduction corresponding to the
amount of ordinary income recognized by the recipient.

The affirmative vote of a majority of the shares present in person or
represented by proxy and voting at the 1998 Annual Meeting (including
abstentions as present and voting, but excluding broker non-votes) is required
to approve the Amended Plan.

The Board of Directors recommends a vote FOR the approval of the Amended
Plan.

15
<PAGE> 18

ADDITIONAL INFORMATION

PROPOSALS FOR 1999 MEETING

Any proposal of stockholders that are intended to be presented at the
Company's 1999 Annual Meeting of Stockholders must be received at the Company's
principal executive offices no later than December 9, 1998 and must comply with
all other applicable legal requirements in order to be included in the Company's
proxy statement and form of proxy for that meeting.

COMMITTEES AND MEETINGS

The Board of Directors of the Company held nine meetings during the year
ended December 31, 1997. The Audit Committee, which consists of Messrs. Bogan,
Bovender, Eberle, Gildea and Jackson, and Ms. Goldberg, held one meeting during
the year ended December 31, 1997. The functions of the Audit Committee are (i)
to recommend the appointment of the Company's independent accountants, (ii) to
meet periodically with the Company's management and its independent accountants
on matters relating to the annual audit, internal controls, and accounting
principles of the Company, and the Company's financial reporting and (iii) to
review potential conflict of interest situations, where appropriate. The
Compensation Committee, which consists of Messrs. Bogan, Bovender, Eberle,
Gildea and Jackson, and Ms. Goldberg, held one meeting during the year ended
December 31, 1997. The functions of the Compensation Committee are (i) to review
and approve all employment and termination of executive officers, (ii) to
monitor compensation of all management staff and (iii) to review and approve
compensation of the Chief Executive Officer and other senior management. The
Stock Committee, which consists of Messrs. Bogan, Bovender, Gildea and Jackson
and Ms. Goldberg, held two meetings. The function of the Stock Committee is to
administer the Company's Amended Incentive Stock Plan and the Employee Stock
Purchase Plan. The Company does not have a standing nominating committee. The
Executive Committee, which consists of Messrs. Mercy and Eberle, met four times
during 1997. The function of the Executive Committee is to exercise all powers
and authority of the Board of Directors in the management of the business and
affairs of the Company except as may be limited by the Delaware General
Corporation Law. During 1997, each director, except Mr. Bovender, attended more
than 75% of all meetings of the Board of Directors and the committees on which
he or she served.

ANNUAL REPORT

The Company's 1997 Annual Report on Form 10-K is being mailed with this
Proxy Statement. It is not to be deemed a part of the proxy solicitation
material and is not incorporated herein by reference.

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT

Section 16(a) of the Securities Exchange Act requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership on Forms 3, 4 and 5 with the Securities and
Exchange Commission. Officers, directors and greater than ten percent
shareowners are required by law to furnish the Company copies of all Forms 3, 4
and 5 they file. Based solely on the Company's review of the copies of such
forms it has received and representations from certain reporting persons that
they were not required to file Forms 5 for specified fiscal years, the Company
believes that its officers, directors and greater than ten percent beneficial
owners complied with all filing requirements applicable to them with respect to
transactions during 1997 except as noted below.

In April 1997, Messrs. Bogan, Bovender, Eberle, Gildea, and Jackson and Ms.
Goldberg were each granted options to purchase 4,000 shares of the Company's
common stock. No Form 4's were filed with respect to these grants; however, the
granting of these options has been reported on Form 5's filed with the
Securities and Exchange Commission by each of the above-named persons on
February 17, 1998.

16
<PAGE> 19

EXHIBIT A

AMERICA SERVICE GROUP INC.

AMENDED AND RESTATED INCENTIVE STOCK PLAN

1. Purpose. The America Service Group Inc. Amended and Restated Incentive
Stock Plan (the "Plan") is intended to provide incentives which will attract and
retain highly competent persons as officers, key employees and non-employee
directors of America Service Group Inc. and its subsidiaries (the "Company"), as
well as independent contractors providing consulting or advisory services to the
Company, by providing them opportunities to acquire shares of Common Stock of
the Company ("Common Stock") or to receive monetary payments based on the value
of such shares pursuant to the Benefits described herein.

2. Administration. The Plan will be administered by the Incentive Stock
Committee (the "Committee") appointed by the Board of Directors of the Company
from among its member which shall be comprised of not less than two non-employee
members of the Board provided, however, that as long as the Common Stock of the
Company is registered under the Securities Exchange Act of 1934, members of the
Committee must qualify as non-employee Directors within the meaning of
Securities and Exchange Commission Regulation sec. 240.16b-3(b)(3). The
Committee is authorized, subject to the provisions of the Plan, to establish
such rules and regulations as it deems necessary for the proper administration
of the Plan and any Benefits granted hereunder as it deems necessary or
advisable. All determinations and interpretations made by the Committee shall be
binding and conclusive on all participants and their legal representatives. The
Committee is authorized, subject to the provisions of the Plan, from time to
time to delegate to the President and Chief Executive Officer of the Company the
authority to grant stock options to present or future key employees of the
Company who are not subject to Section 16 of the Securities Exchange Act of
1934, such options to be in such amounts and on such terms, consistent with the
terms of the Plan, as the President and Chief Executive Officer shall determine.

3. Participants. Participants will consist of such key employees
(including officers) and non-employee directors of the Company, and independent
contractors providing consulting or advisory services to the Company, as the
Committee in its sole discretion determines to be significantly responsible for
the success and future growth and profitability of the Company and whom the
Committee may designate from time to time to receive Benefits under the Plan.
Designation of a participant in any year shall not require the Committee to
designate such person to receive a Benefit in any other year or, once designated
to receive the same type or amount of Benefit as granted to the participant in
any year. The Committee shall consider such factors as it deems pertinent in
selecting participants and in determining the type and amount of their
respective Benefits.

4. Types of Benefits. Benefits under the Plan may be granted in any one or
a combination of (a) Stock Options, (b) Stock Appreciation Rights, and (c) Stock
Awards, all as described below (collectively "Benefits").

5. Shares Reserved under the Plan. There is hereby reserved for issuance
under the Plan an aggregate of 1,482,500 shares of Common Stock, which may be
authorized but unissued or treasury shares, including shares of Common Stock
subject to options originally outstanding under the Company's Employee's 1986
Stock Option Plan, as amended, (the "1986 Plan"). Any shares subject to Stock
Options or Stock Appreciation Rights or issued under such options or rights or
as Stock Awards under the 1986 Plan or this Plan may thereafter be subject to
new options, rights or awards under this Plan if there is a lapse, expiration or
termination of any such options or rights prior to issuance of the shares or the
payment of the equivalent or if shares are issued under such options or rights
or as such awards, and thereafter are reacquired by the Company without
consideration pursuant to rights reserved by the Company upon issuance thereof
or otherwise. No participant hereunder may receive in any calendar year Stock
Options and Stock Appreciation Rights for more than 250,000 shares of Common
Stock hereunder.

A-1
<PAGE> 20

6. Stock Options. Stock Options will consist of awards from the Company,
in the form of agreements, which will enable the holder to purchase a specific
number of shares of Common Stock, at set terms and at a fixed purchase price.
Stock Options may be "incentive Stock Options" within the meaning of Section 422
of the Internal Revenue Code ("Incentive Stock Options") or Stock Options which
do not constitute Incentive Stock Options ("Nonqualified Stock Options"). Each
Stock Option shall be subject to such terms and conditions consistent with the
Plan as the Committee may impose from time to time, subject to the following
limitations:

(a) Option-Price. Stock Options granted hereunder shall have such
per-share option price as the Committee may determine at the date of grant
provided, however, that the per-share option price for Stock Options shall
not be less than 100% of the Fair Market Value of the Common Stock on the
date the option is granted.

(b) Payment of Option Price. The option purchase price may be paid by
check or, in the discretion of the Committee, by the delivery of shares of
Common Stock of the Company then owned by the participant. In the
discretion of the Committee, payment may also be made by any other means
(including cashless exercise as permitted under Federal Reserve Board
Regulation T) consistent with the Plan's purpose and applicable law. To
facilitate the foregoing, the Company may enter into agreements for
coordinated procedures with one or more brokerage firms.

(c) Exercise Period. Stock Options granted under the Plan shall be
exercisable not later than ten years after the date they are granted. All
Stock Options shall terminate at such earlier times and upon such
conditions or circumstances as the Committee shall in its discretion set
forth in such option at the date of grant. The Committee may provide,
either at the time of grant or subsequently, that a Stock Option include
the right to acquire a replacement Stock Option upon exercise of the
original Stock Option (in whole or in part) prior to termination of
employment of the participant and through payment of the exercise price in
shares of Common Stock. The terms and conditions of a replacement option
shall be determined by the Committee in its sole discretion.

(d) Limitations on Incentive Stock Options. Incentive Stock Options
may be granted only to participants who are employees of the Company at the
date of grant. The aggregate Fair Market Value (determined as of the time
the option is granted) of the Common Stock with respect to which Incentive
stock options are exercisable for the first time by a participant during
any calendar year (under all options plans of the Company) shall not exceed
$100,000. Incentive Stock Options may not be granted to any participant
who, at the time of grant, owns stock possessing (after the application of
the attribution rules of Section 424(d) of the Code) more than 10% of the
total combined voting power of all classes of stock of the Company, unless
the option price is fixed at not less than 110% of the Fair Market Value of
the Common Stock on the date of grant and the exercise of such option is
prohibited by its terms after the expiration of five years from the date of
grant of such option.

(e) Automatic Grants to Non-Employee Directors. Each non-employee
director of the Company who first becomes a member of the Board on or after
May 1, 1996 shall, subject to the number of shares remaining available
under this Plan, automatically receive, on the date he or she first becomes
a director of the Company, a Nonqualified Stock Option to purchase 15,000
shares of Common Stock, at an exercise price per share equal to 100% of the
Fair Market Value of the Common Stock on the date of receipt of such
option. For purposes of this Plan, a non-employee director is any person
who is a member of the Board of the Company and who is not an employee of
or an independent contractor providing consulting or advisory services to
the Company.

A-2
<PAGE> 21

7. Stock Appreciation Rights. The Committee may, in its discretion, grant
Stock Appreciation Rights to the holders of any Stock Options granted hereunder.
In addition, Stock Appreciation Rights may be granted independently of and
without relation to options. Each Stock Appreciation Right shall be subject to
such terms and conditions consistent with the Plan as the Committee shall impose
from time to time, including the following:

(a) A Stock Appreciation Right relating to a Stock Option may be made
part of such option at the time of its grant or at any time thereafter up
to six months prior to its expiration.

(b) Each Stock Appreciation Right will entitle the holder to elect to
receive the appreciation in the Fair Market Value of the shares subject
thereto up to the date the right is exercised. In the case of a right
issued in relation to a Stock Option, such appreciation shall be measured
from not less than the option price and in the case of a right issued
independently of any Stock Option, such appreciation shall be measured from
not less than the Fair Market Value of the Common Stock on the date the
right is granted. Payment of such appreciation shall be made in cash or in
Common Stock, or a combination thereof, as set forth in the award, but no
Stock Appreciation Right shall entitle the holder to receive, upon exercise
thereof, more than the number of shares of Common Stock (or cash of equal
value) with respect to which the right is granted.

(c) Each Stock Appreciation Right will be exercisable at the times and
to the extent set forth therein, but no Stock Appreciation Right may be
exercisable earlier than six months after the date it was granted or later
than the earlier of (i) the remaining term of the related option, if any,
or (ii) ten years after it was granted. Exercise of a Stock Appreciation
Right shall reduce the number of shares issuable under the Plan (and the
related option, if any) by the number of shares with respect to which the
right is exercised.

8. Stock Awards. Stock Awards will consist of Common Stock transferred to
participants for such consideration as the Committee shall determine (or for no
consideration) as additional compensation for services to the Company. Stock
Awards shall be subject to such terms and conditions as the Committee determines
appropriate, including, without limitation, restrictions on the sale or other
disposition of such shares, and rights of the Company to reacquire such shares
upon termination of the participant's employment within specified periods and/or
if performance goals established by the Committee are not achieved.

9. Adjustment Provisions.

(a) If the Company shall at any time change the number of issued
shares of Common Stock without new consideration to the Company (such as by
stock dividends or stock splits), the total number of shares reserved for
issuance under this Plan and the number of shares covered by each
outstanding Benefit shall be adjusted so that the aggregate consideration
payable to the Company and the value of each such Benefit shall not be
changed. The Committee may also provide for the continuation of Benefits or
for other equitable adjustments after changes in the Common Stock resulting
from reorganization, sale, merger, consolidation or similar occurrence.

(b) Notwithstanding any other provision of this Plan, and without
affecting the number of shares otherwise reserved or available hereunder,
the Committee may authorize the issuance or assumption of Benefits in
connection with any merger, consolidation, acquisition of property or
stock, or reorganization upon such terms and conditions as it may deem
appropriate.

(c) In the case of any merger, consolidation or combination of the
Company with or into another corporation, other than a merger,
consolidation or combination in which the Company is the continuing
corporation and which does not result in the outstanding Common Stock being
converted into or exchanged for different securities, cash or other
property, or any combination thereof (an "Acquisition"):

(i) any participant to whom a Stock Option has been granted under
the Plan shall have the right (subject to the provisions of the Plan and
any limitation applicable to such option) thereafter and during the term
of such option, to receive upon exercise thereof the Acquisition
Consideration (as defined below) receivable upon such Acquisition by a
holder of the number of shares of

A-3
<PAGE> 22

Common Stock which might have been obtained upon exercise of such option
or portion thereof, as the case may be, immediately prior to such
Acquisition; and

(ii) any participant to whom a Stock Appreciation Right has been
granted under the Plan shall have the right (subject to the provisions
of the Plan and any limitation applicable to such right) thereafter and
during the term of such right to receive upon exercise thereof the
difference between the aggregate Fair Market Value of the Acquisition
Consideration receivable upon such Acquisition by a holder of the number
of shares of Common Stock which might have been obtained upon exercise
of the Stock Option related thereto or any portion thereof, as the case
may be, immediately prior to such Acquisition and the aggregate option
price of the related option, or the aggregate Fair Market Value on the
date of grant of the right, whichever is applicable.

The term "Acquisition Consideration" shall mean the kind and amount of
shares of the surviving or new corporation, cash, securities, evidence of
indebtedness, other property or any combination thereof receivable in
respect of one share of Common Stock of the Company upon consummation of an
Acquisition.

(d) If there is a change in control of the Company, then all current
Stock Options shall vest and become exercisable by participants in
accordance with their terms. For such purpose, a "change in control of the
Company" shall mean a change in control of a nature that would be required
to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A
promulgated under the Securities Exchange Act of 1934 ("Exchange Act");
provided however, that without limitation, such a change in control shall
be deemed to have occurred if: (i) any "person" (as such term is used in
Section 13(d) and 14(d) (2) of the Exchange Act) other than an Employee or
any other person currently the beneficial owner of 10% or more of the
outstanding common stock of the Company, becomes the beneficial owner,
directly or indirectly, of securities of the Company representing 30% or
more of the combined voting power of the Company's then outstanding
securities; (ii) during any period of two consecutive years, individuals
who at the beginning of such period constituted the Board of Directors of
the Company cease for any reason to constitute at least a majority thereof
(unless the election of each director, who was not a director at the
beginning of the period, was approved by a vote of at least two-thirds of
the directors then still in office who were directors at the beginning of
the period); or (iii) approval by the stockholders of the Company of (A) a
complete liquidation of the Company; (B) an agreement for the sale or other
disposition of all or substantially all of the assets of the Company to any
"person;" or (C) a merger, consolidation or reorganization involving the
Company, unless (1) the stockholders of the Company immediately before such
merger, consolidation or reorganization own, directly or indirectly
immediately following such merger, consolidation or reorganization, at
least two-thirds of the combined voting power of the outstanding voting
securities of the corporation resulting from such merger or consolidation
or reorganization or its parent company (the "Surviving Corporation") in
substantially the same proportion as their ownership of the voting shares
immediately before such merger, consolidation or reorganization; or (2) the
individuals who were members of the Board immediately prior to the
execution of the agreement for such merger, consolidation or reorganization
constitute at least two-thirds of the members of the board of directors of
the Surviving Corporation.

10. Nontransferability. Each Benefit granted under the Plan to a
participant shall not be transferable by him otherwise than by law or by will or
the laws of descent and distribution, and shall be exercisable, during his
lifetime, only by him. In the event of the death of a participant while the
participant is rendering services to the Company, each Benefit theretofore
granted to him shall be exercisable during such period after his death as the
Committee shall in its discretion set forth in such Benefit at the date of grant
(but not beyond the stated duration of the Benefit) and then only:

(a) By the executor or administrator of the estate of the deceased
participant or the person or persons to whom the deceased participant's
rights under the Benefit shall pass by will or the laws of descent and
distribution; and

(b) To the extent that the deceased participant was entitled to do so
at the date of his death.

A-4
<PAGE> 23

Notwithstanding the foregoing, at the discretion of the Committee, a
Benefit may permit the transfer of the Benefit by the participant solely to
members of the participant's immediate family or trusts or family partnerships
for the benefit of such persons subject to such terms and conditions as may be
established by the Committee.

11. Other Provisions. The award of any Benefit under the Plan may also be
subject to such other provisions (whether or not applicable to the Benefit
awarded to any other participant) as the Committee determines appropriate,
including without limitation, provisions for the installment purchase of Common
Stock under Stock Options, provisions for the installment exercise of Stock
Appreciation Rights, provisions to assist the participant in financing the
acquisition of Common Stock, provisions for the forfeiture of, or restrictions
on resale or other disposition of Shares acquired under any form of Benefit,
provisions for the acceleration of exercisability of Benefits in the event of a
change of control of the Company, provisions for the payment of the value of
Benefits to participants in the event of a change of control of the Company,
provisions for the forfeiture of, or provisions to comply with Federal and state
securities laws, or understandings or conditions as to the participant's
employment in addition to those specifically provided for under the Plan.

12. Fair Market Value. For purposes of this Plan and any Benefits awarded
hereunder, Fair Market Value of Common Stock shall be the mean between the
highest and lowest sale prices for the Company's Common Stock as reported in The
Wall Street Journal under the heading "NASDAQ National Market" (or equivalent
recognized source of quotations) on the date of calculation (or on the next
preceding trading date if Common Stock was not traded on the date of
calculation), provided, however, that if the Company's Common Stock is not at
any time listed for trading on the NASDAQ National Market System, Fair Market
Value mean the amount determined in good faith by the Committee as the fair
market value of the Common Stock of the Company.

13. Withholdings. All payments or distributions made pursuant to the Plan
shall be net of any amounts required to be withheld pursuant to applicable
federal, state and local tax withholding requirements. If the Company proposes
or is required to distribute Common Stock pursuant to the Plan, it may require
the recipient to remit to it an amount sufficient to satisfy such tax
withholding requirements prior to the delivery of any certificates for such
Common Stock. The Committee may, in its discretion and subject to such rules as
it may adopt, permit an optionee or award or right holder to pay all or a
portion of the federal, state and local withholding taxes arising in connection
with (a) the exercise of a Nonqualified Stock Option or Stock Appreciation Right
or (b) the receipt of Stock Awards, by electing to have the Company withhold
shares of Common Stock having a Fair Market Value equal to the amount to be
withheld.

14. Tenure. A participant's right, if any, to continue to serve the
Company as an officer, employee, director, independent contractor, or otherwise,
shall not be enlarged or otherwise affected by his designation as a participant
under the Plan.

15. Duration. Amendment and Termination. No Benefit shall be granted after
March 1, 2006; provided, however, that the terms and conditions applicable to
any Benefit granted prior to such date may at any time before such date or
thereafter be amended or modified by mutual agreement between the Company and
the participant or such other persons as may then have an interest therein.
Also, by mutual agreement between the Company and a participant hereunder, under
this Plan or under any other present or future plan of the Company, Benefits may
be granted to such participant in substitution and exchange for, and in
cancellation of, any Benefits previously granted such participant under this
Plan, or any Benefit previously granted to him under the 1986 Plan or any other
present or future plan of the Company. The Board of Directors may amend the Plan
from time to time or terminate the Plan at any time provided, however, that
Paragraph 6(e) of this Plan may not be amended more frequently than once every
six months. However, no action authorized by this paragraph shall reduce the
amount of any existing Benefit or change the terms and conditions thereof
without the participant's consent. No amendment of the Plan shall, without
approval of the stockholders of the Company, (i) materially increase the total
number of shares which may be issued under the Plan; (ii) materially increase
the amount or type of Benefits that may be granted under the Plan; (iii)
materially modify the requirements as to eligibility for Benefits under the
Plan; (iv) result in any member of the Committee losing his or her status as a
non-employee Director under Securities and Exchange

A-5
<PAGE> 24

Commission Regulation sec. 240.16b-3(b)(3); or (v) result in the Plan losing its
status as a protected plan under Securities and Exchange Commission Rule 16b-3.

16. Stockholder Approval. The Plan was adopted by the Board of Directors
of the Company on March 19, 1996. The Plan and any Benefits granted thereunder
shall be null and void (to the extent the Plan and such Benefits incorporate
provisions and/or utilize shares of Common Stock not provided for in, or
available under, the Plan prior to such adoption by the Board of Directors) if
stockholders approval is not obtained within twelve (12) months of the adoption
of the Plan by the Board of Directors.

A-6
<PAGE> 25
APPENDIX A

AMERICA SERVICE GROUP INC.
PROXY
PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR THE
ANNUAL MEETING OF STOCKHOLDERS ON MAY 19, 1998

The undersigned hereby appoints SCOTT L. MERCY and MICHAEL CATALANO and
each of them, proxies, with full power of substitution and resubstitution, for
and in the name of the undersigned, to vote all shares of stock of America
Service Group Inc. (the "Company"), which the undersigned would be entitled to
vote if personally present at the Annual Meeting of Stockholders to be held on
Tuesday, May 19, 1998, at 10:00 a.m., Central Daylight Time, at the NationsBank
Plaza, 414 Union Street, 3rd Floor, Nashville, Tennessee 37219, and at any
adjournment thereof, upon the matters described in the accompanying Notice of
Annual Meeting of Stockholders and Proxy Statement, receipt of which is hereby
acknowledged, and upon any other business that may properly come before the
meeting or any adjournment thereof. Said proxies are directed to vote on matters
described in the Notice of Annual Meeting and Proxy Statement as follows, and
otherwise in their discretion upon such other business as may properly come
before the meeting or any adjournment thereof.

(CONTINUED, AND TO BE SIGNED, ON THE OTHER SIDE)

- --------------------------------------------------------------------------------
-FOLD AND DETACH HERE-

THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO DIRECTION IS
INDICATED, THE PROXY WILL BE VOTED FOR THE PROPOSALS.
Please mark
your votes as [X]
indicated in
this example
<TABLE>
<S> <C> <C>
1. To elect six (6) directors: Thomas F. Bogan, Jack O. Bovender, Jr., 2. To ratify the appointment of Ernst
For all nominees WITHHOLD William D. Eberle, John W. Gildea, & Young LLP as independent auditors
listed to the right AUTHORITY Carol R. Goldberg and Scott L. Mercy for 1997.
(except as marked to vote for all
to the contrary) nominees listed (INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR AGAINST ABSTAIN
to the right FOR ANY INDIVIDUAL NOMINEE, STRIKE A LINE [ ] [ ] [ ]
[ ] [ ] THROUGH THE NOMINEE'S NAME IN THE LIST ABOVE.)

3. To approve an amendment to the Company's Amended Incentive Stock Plan 4. In the discretion of the proxies, on any other
which modifies the Company's existing plan to increase the shares matter that may properly come before the meeting
issuable pursuant to the Plan (the "Plan") to 1,482,500 shares. or any adjournment thereof.

FOR AGAINST ABSTAIN Date: , 1998
[ ] [ ] [ ] ----------------------------

-------------------------------------

Please sign exactly as your name appears hereon. Where
more than one owner is shown above, each should sign.
When signing in a fiduciary or representative capacity,
please give full title. If this proxy is submitted by a
corporation; it should be executed in the full corporate
name by a duly authorized officer. If a partnership,
please sign in partnership name by authorized person.

PLEASE COMPLETE, DATE AND SIGN THIS PROXY AND RETURN IT
PROMPTLY IN THE ENCLOSED ENVELOPE, WHETHER OR NOT YOU
PLAN TO ATTEND THE ANNUAL MEETING. IF YOU ATTEND THE
MEETING, YOU MAY VOTE IN PERSON IF YOU WISH, EVEN IF
YOU HAVE PREVIOUSLY RETURNED YOUR PROXY.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-FOLD AND DETACH HERE-