PENN-AMERICA GROUP, INC.

                            2002 STOCK INCENTIVE PLAN
                            -------------------------
             (f/k/a Amended and Restated 1993 Stock Incentive Plan)


         1. Purpose.  PENN-AMERICA  GROUP,  INC. (the "Company")  hereby adopts,
subject  to  shareholder  approval,  the  Penn-America  Group,  Inc.  2002 Stock
Incentive Plan (the "Plan"). The Plan is intended to recognize the contributions
made to the Company by employees  of the Company  (including  employees  who are
members of the Board of Directors) or by employees of any Affiliated Company (as
defined  below)  and  certain  consultants  or  advisors  to the  Company  or an
Affiliated Company, to provide such persons with additional  incentive to devote
themselves to the future success of the Company or an Affiliated Company, and to
improve the ability of the Company or an Affiliated Company to attract,  retain,
and motivate  individuals upon whom the Company's sustained growth and financial
success  depend,  by providing  such persons with an  opportunity  to acquire or
increase their proprietary  interest in the Company through receipt of rights to
acquire  the  Company's  Common  Stock,  par value $.01 per Share  (the  "Common
Stock"),  and through  the  transfer  or  issuance  of Common  Stock  subject to
conditions  of  forfeiture.  In addition,  the Plan is intended as an additional
incentive  to certain  directors  of the  Company who are not  employees  of the
Company  or an  Affiliated  Company  to serve on the Board of  Directors  and to
devote themselves to the future success of the Company by providing them with an
opportunity  to acquire or increase  their  proprietary  interest in the Company
through the receipt of rights to acquire Common Stock.


         2.  Definitions.  Unless the context clearly indicates  otherwise,  the
following terms shall have the following meanings:

<PAGE>


     (a) "Affiliate" and "Associate" shall have the respective meanings ascribed
to such terms in Rule 12b-2 of the General Rules and Regulations under the
Securities Exchange Act of 1934, as amended (the "Exchange Act").


     (b) "Affiliated Company" means a corporation which is a parent corporation
or a subsidiary corporation with respect to the Company within the meaning of
Section 424(e) or (f) of the Code, and in any event, Penn Independent.


     (c) "Award" shall mean a grant of Common Stock subject to conditions of
forfeiture made pursuant to the terms of the Plan.


     (d) "Award Agreement" shall mean the agreement between the Company and a
Grantee with respect to an Award made pursuant to the Plan.


     (e) "Awardee" shall mean a person to whom an Award has been granted
pursuant to the Plan.


     (f) A Person shall be deemed the "Beneficial Owner" of any securities:


                           (i)  that  such  Person  or  any  of  such   Person's
                  Affiliates  or  Associates,  directly or  indirectly,  has the
                  right  to  acquire   (whether   such   right  is   exercisable
                  immediately or only after the passage of time) pursuant to any
                  agreement,  arrangement  or  understanding  (whether or not in
                  writing) or upon the exercise of conversion  rights,  exchange
                  rights, rights,  warrants or options, or otherwise;  provided,
                  however,  that a Person  shall not be deemed  the  "Beneficial
                  Owner" of securities tendered pursuant to a tender or exchange
                  offer made by such Person or

                                       2

<PAGE>

                  any of such Person's Affiliates or Associates until such
                  tendered securities are accepted for payment, purchase or
                  exchange;

                           (ii)  that  such  Person  or  any  of  such  Person's
                  Affiliates  or  Associates,  directly or  indirectly,  has the
                  right to vote or dispose of or has  "beneficial  ownership" of
                  (as determined pursuant to Rule 13d-3 of the General Rules and
                  Regulations   under  the  Exchange  Act),   including  without
                  limitation   pursuant  to  any   agreement,   arrangement   or
                  understanding (whether or not in writing);  provided, however,
                  that a Person  shall not be deemed the  "Beneficial  Owner" of
                  any security under this subsection (ii) as a result of an oral
                  or written  agreement,  arrangement or  understanding  to vote
                  such security if such agreement,  arrangement or understanding
                  (A) arises solely from a revocable  proxy given in response to
                  a public proxy or consent  solicitation  made pursuant to, and
                  in accordance  with, the applicable  provisions of the General
                  Rules and  Regulations  under the Exchange Act, and (B) is not
                  then  reportable  by such  Person  on  Schedule  13D under the
                  Exchange Act (or any comparable or successor report); or

                           (iii)  that  are  beneficially  owned,   directly  or
                  indirectly, by any other Person (or any Affiliate or Associate
                  thereof)  with  which  such  Person  (or any of such  Person's
                  Affiliates or Associates)  has any  agreement,  arrangement or
                  understanding  (whether or not in writing)  for the purpose of
                  acquiring,  holding,  voting  (except  pursuant to a revocable
                  proxy as described in the proviso to subsection (ii) above) or
                  disposing of any voting  securities of the Company;  provided,
                  however,  that  nothing in this  Section  1(c)  shall  cause a
                  Person  engaged

                                       3

<PAGE>


                  in business as an underwriter of securities to be the
                  "Beneficial Owner" of any securities acquired through such
                  Person's participation in good faith in a firm commitment
                  underwriting until the expiration of forty days after the date
                  of such acquisition.


     (g) "Board of Directors" means the Board of Directors of the Company.


     (h) "Change in Control" shall have the meaning as set forth in Section 10
of the Plan.


     (i) "Code" means the Internal Revenue Code of 1986, as amended.


     (j) "Committee" shall have the meaning set forth in Section 3 of the Plan.


     (k) "Company" means Penn-America Group, Inc., a Pennsylvania corporation.


     (l) "Disability" shall have the meaning set forth in Section 22(e) (3) of
the Code.


     (m) "Disinterested Director" shall mean a member of the Board of Directors
of the Company who is "disinterested" within the meaning of Rule 16b-3.


     (n) "Fair Market Value" shall have the meaning set forth in Subsection 8(b)
of the Plan.

                                       4

<PAGE>


     (o) "Formula Grant Date" with respect to a non-employee member of the Board
of Directors shall mean the date of each annual meeting of shareholders during
the term of the Plan at which such person is elected or reelected as a member of
the Board of Directors.


     (p) "Grantee" shall mean a person to whom an Option or an Award has been
granted pursuant to the Plan.


     (q) "Immediate Family" shall mean an Optionee's spouse, children,
grandchildren and/or any trust all the beneficiaries of which include such
Optionee and/or such persons, and any partnership all the partners of which
include such Optionee and/or such persons.


     (r) "ISO" means an Option granted under the Plan, which is intended to
qualify as an "incentive stock option" within the meaning of Section 422(b) of
the Code.


     (s) "Non-employee members of the Board of Directors" shall mean members of
the Board of Directors of the Company who are not employees of the Company or
any Affiliated Company.


     (t) "Non-qualified Stock Option" means an Option granted under the Plan
which is not intended to qualify, or otherwise does not qualify, as an
"incentive stock option" within the meaning of Section 422(b) of the Code.


     (u) "Option" means either an ISO or a Non-qualified Stock Option granted
under the Plan.

                                       5
<PAGE>


     (v) "Optionee" means a person to whom an Option has been granted under the
Plan, which Option has not been exercised and has not expired or terminated.


     (w) "Option Document" means the document described in Section 8 or Section
9 of the Plan, as applicable, which sets forth the terms and conditions of each
grant of Options.


     (x) "Option Price" means the price at which Shares may be purchased upon
exercise of an Option, as calculated pursuant to Subsection 8(b) or Subsection
9(a) of the Plan.


     (y) "Penn Independent" shall mean Penn Independent Corporation or any
affiliate or subsidiary of Penn Independent that at the time of a Change in
Control is the Beneficial Owner of a majority of the combined voting power of
the Company's Voting Securities.


     (z) "Person" shall mean any individual, entity or group within the meaning
of Section 13(d)(3) or 14(d)(2) of the Exchange Act, or any successor rule
thereto.


     (aa) "Restricted Stock" means Common Stock subject to conditions of
forfeiture and transfer granted to any person pursuant to an Award under the
Plan.


     (bb) "Rule 16b-3" means Rule 16b-3 promulgated under the Securities
Exchange Act of 1934, as amended.


     (cc) "Section 16 Officer" means any person who is an "officer" within the
meaning of Rule 16a-1(f) promulgated under the Securities Exchange Act of 1934,
as amended, or any successor rule.

                                       6
<PAGE>


     (dd) "Shares" means the shares of Common Stock of the Company, which are
the subject of Options or granted as Awards under the Plan.


     (ee) "Voting Securities" shall mean Common Stock and any other securities
of the corporation entitled to vote generally for the election of directors or
any security convertible into or exchangeable for or exercisable for the
purchase of Common Stock (other than employee stock options or other employee
stock purchase rights) or other securities of the corporation entitled to vote
generally for the election of directors; and "Voting Power" means with respect
to any Voting Security, the maximum number of votes that such security is or
would be entitled to cast generally for the election of directors, and in the
case of a convertible, exercisable or exchangeable Voting Security, considering
such security both on an unconverted, unexercised or unexchanged basis and a
converted, exercised or exchanged basis, as the case may be.


         3.  Administration  of the Plan. The Plan shall be  administered by the
Board of Directors  of the Company if all members of the Board of Directors  are
Disinterested Directors;  provided, however, that if all members of the Board of
Directors are  Disinterested  Directors,  the Board of Directors may designate a
committee  or  committee(s)  of the Board of  Directors  composed of two or more
directors  to  administer  the Plan with  respect to the  Section  16  Officers,
directors, and/or employees. If any of the members of the Board of Directors are
not  Disinterested  Directors,  the Board of  Directors  shall (i)  designate  a
committee  composed of two or more  directors,  each of whom is a  Disinterested
Director (the "Disinterested Director Committee"), to operate and administer the
Plan in its stead,  or (ii)  designate two  committees to operate and administer
the Plan in its  stead,  a  Disinterested  Director  Committee  to  operate  and
administer  the Plan with respect to the  Company's  Section 16 Officers and the
directors  who are

                                       7

not members of the Disinterested Director Committee, and another committee
composed of two or more directors (which may include directors who are not
Disinterested Directors) to operate and administer the Plan with respect to
persons other than Section 16 Officers or directors or (iii) designate a
Disinterested Director Committee to operate and administer the Plan with respect
to the Company's Section 16 Officers and directors (other than those directors
serving on the Disinterested Director Committee) and itself operate and
administer the Plan with respect to persons other than Section 16 Officers or
directors. Any of such committees designated by the Board of Directors, and the
Board of Directors itself in its administrative capacity with respect to the
Plan, is referred to as the "Committee." With the exception of the timing of
grants of Options, the price at which Shares may be purchased, and the number of
Shares covered by Options granted to each member of the Disinterested Director
Committee, all of which shall be as specifically set forth in Section 9, the
other provisions set forth herein, as they pertain to members of the
Disinterested Director Committee, shall be administered by the Board of
Directors.


     (a) Meetings. The Committee shall hold meetings at such times and places as
it may determine. Acts approved at a meeting by a majority of the members of the
Committee or acts approved in writing by the unanimous consent of the members of
the Committee shall be the valid acts of the Committee.


     (b) Grants and Awards. Except with respect to Options granted to
non-employee members of the Board of Directors pursuant to Section 9, the
Committee shall from time to time at its discretion direct the Company to grant
Options and/or Awards pursuant to the terms of the Plan. The Committee shall
have plenary authority to (i) determine the persons

                                       8

<PAGE>


to whom, and the times at which, Options and Awards are to be granted as well as
the terms applicable to Options and Awards, (ii) determine the type of Option to
be granted and the number of Shares subject thereto, (iii) determine the
Awardees to whom, and the times at which, Restricted Stock is granted, the
number of Shares awarded, and the purchase price per Share, if any, and (iv)
approve the form and terms and conditions of the Option Documents and Award
Agreements; all subject, however, to the express provisions of the Plan. In
making such determinations, the Committee may take into account the nature of
the Grantee's services and responsibilities, the Grantee's present and potential
contribution to the Company's success and such other factors as it may deem
relevant. Notwithstanding the foregoing, grants of Options to all non-employee
members of the Board of Directors shall be made exclusively in accordance with
Section 9. The interpretation and construction by the Committee of any
provisions of the Plan or of any Option or Award granted under it shall be
final, binding and conclusive.


     (c) Exculpation. No member of the Committee shall be personally liable for
monetary damages as such for any action taken or any failure to take any action
in connection with the administration of the Plan or the granting of Options or
Awards thereunder unless (i) the member of the Committee has breached or failed
to perform the duties of his or her office under Subchapter B of Chapter 17 of
the Pennsylvania Business Corporation Law of 1988, as amended, and (ii) the
breach or failure to perform constitutes self-dealing, willful misconduct or
recklessness; provided, however, that the provisions of this Subsection 3(c)
shall not apply to the responsibility or liability of a member of the Committee
pursuant to any criminal statute or to the liability of a member of the
Committee for the payment of taxes pursuant to local, state or federal law.

                                       9
<PAGE>


     (d) Indemnification. Service on the Committee shall constitute service as a
member of the Board of Directors of the Company. Each member of the Committee
shall be entitled without further act on his or her part to indemnity from the
Company to the fullest extent provided by applicable law and the Company's
Articles of Incorporation and/or By-laws in connection with or arising out of
any action, suit or proceeding with respect to the administration of the Plan or
the granting of Options and Awards thereunder in which he or she may be involved
by reason of his or her being or having been a member of the Committee, whether
or not he or she continues to be such member of the Committee at the time of the
action, suit or proceeding.


     (e) Limitations on Grants of Options to Consultants and Advisors. With
respect to the grant of Options to consultants or advisors, bona fide services
shall be rendered by consultants or advisors and such services must not be in
connection with the offer or sale of securities in a capital-raising
transaction.


         4. Grants and Awards under the Plan.  Options  under the Plan may be in
the form of a Non-qualified Stock Option, and/or an ISO at the discretion of the
Committee, and Awards under the Plan shall be in the form of Restricted Stock.


         5. Eligibility.  All employees of the Company or an Affiliated Company,
and  members of the Board of  Directors,  and  consultants  or  advisors  to the
Company or an  Affiliated  Company  who satisfy  the  requirements  set forth in
Subsection  3(e),  shall be eligible  to receive  Options  hereunder,  provided,
however, that only employees may receive ISOs. However,  non-employee members of
the Board of Directors  may receive  Options  only  pursuant to Section 9 of the
Plan and are not eligible to receive Awards.  Only an employee of the Company

                                       10
<PAGE>


or an Affiliated Company shall be eligible to receive an Award. No Optionee may
receive Options pursuant to the Plan for more than 100,000 Shares in any one
year. The Committee, in its sole discretion, shall determine whether an
individual qualifies as an employee.


         6. Shares Subject to Plan.  The aggregate  maximum number of Shares for
which  Options  and  Awards may be granted  pursuant  to the Plan is  1,837,500,
subject to adjustment as provided in Section 11 of the Plan. The Shares shall be
issued from  authorized  and  unissued  Common  Stock or Common Stock held in or
hereafter  acquired for the treasury of the Company.  If an Option terminates or
expires without having been fully exercised for any reason, or if Shares granted
pursuant to an Award are forfeited for any reason,  such Shares may again be the
subject of one or more Options or Awards granted pursuant to the Plan.


         7. Term of the Plan. The Plan is effective as of May 15, 2002, the date
on which it was adopted by the Board of  Directors,  subject to the  approval of
the Plan on or before May 14, 2003 by the affirmative  vote of a majority of the
votes cast by all  shareholders  entitled  to vote at a duly  called  meeting of
shareholders   held  in  accordance  with  the  laws  of  the   Commonwealth  of
Pennsylvania.  No Option or Award may be  granted  under the Plan  after May 15,
2012.


         8. Option Documents and Terms. Each Option granted under the Plan shall
be a  Non-qualified  Stock  Option  unless  the  Option  shall  be  specifically
designated at the time of grant to be an ISO for federal income tax purposes. If
any Option  designated an ISO is determined  for any reason not to qualify as an
incentive  stock  option  within the  meaning of Section  422 of the Code,  such
Option shall be treated as a  Non-qualified  Stock Option for all purposes under
the  provisions  of the Plan.  Options  granted  pursuant  to the Plan  shall be
evidenced by the Option  Documents in such form as the Committee shall from time
to time approve,  which Option

                                       11

<PAGE>


Documents shall comply with and be subject to the following terms and conditions
and such other terms and conditions as the Committee shall from time to time
require which are not inconsistent with the terms of the Plan. However, the
provisions of this Section 8 shall not be applicable to Options granted to the
non-employee members of the Board of Directors, except as otherwise provided in
Subsection 9(c).


     (a) Number of Option Shares. Each Option Document shall state the number of
Shares to which it pertains. An Optionee may receive more than one Option, which
may include Options which are intended to be ISO's and Options which are not
intended to be ISO's, but only on the terms and subject to the conditions and
restrictions of the Plan.


     (b) Option Price. Each Option Document shall state the Option Price which,
for a Non-qualified Stock Option, may be less than, equal to, or greater than
the Fair Market Value of the Shares on the date the Option is granted and, for
an ISO, shall be at least 100% of the Fair Market Value of the Shares on the
date the Option is granted as determined by the Committee in accordance with
this Subsection 8(b); provided, however, that if an ISO is granted to an
Optionee who then owns, directly or by attribution under Section 424(d) of the
Code, shares possessing more than ten percent of the total combined voting power
of all classes of stock of the Company or an Affiliated Company, then the Option
Price shall be at least 110% of the Fair Market Value of the Shares on the date
the Option is granted. If the Common Stock is traded in a public market, then
the Fair Market Value per Share shall be, if the Common Stock is listed on a
national securities exchange or included in the New York Stock Exchange System,
the last reported sale price thereof on the relevant date, or, if the Common
Stock is not so listed or included, the mean between the last reported "bid" and
"asked" prices thereof on the relevant

                                       12

date, as reported on the NYSE or, if not so reported, as reported by the
National Daily Quotation Bureau, Inc. or as reported in a customary financial
reporting service, as applicable and as the Committee determines. The Option
Price, with respect to Options granted effective the date of determination of
the offering price for the Common Stock in the Company's initial public
offering, shall be such offering price, which shall be deemed to constitute the
Fair Market Value per share of the Common Stock.


     (c) Exercise. No Option shall be deemed to have been exercised prior to the
receipt by the Company of written notice of such exercise and of payment in full
of the Option Price for the Shares to be purchased. Each such notice shall
specify the number of Shares to be purchased and shall (unless the Shares are
covered by a then current registration statement or a Notification under
Regulation A under the Securities Act of 1933, as amended (the "Act")), contain
the Optionee's acknowledgment in form and substance satisfactory to the Company
that (a) such Shares are being purchased for investment and not for distribution
or resale (other than a distribution or resale which, in the opinion of counsel
satisfactory to the Company, may be made without violating the registration
provisions of the Act), (b) the Optionee has been advised and understands that
(1) the Shares have not been registered under the Act and are "restricted
securities" within the meaning of Rule 144 under the Act and are subject to
restrictions on transfer and (ii) the Company is under no obligation to register
the Shares under the Act or to take any action which would make available to the
Optionee any exemption from such registration, (c) such Shares may not be
transferred without compliance with all applicable federal and state securities
laws, and (d) an appropriate legend referring to the foregoing restrictions on
transfer and any other restrictions imposed under the Option Documents may be
endorsed on the certificates. Notwithstanding the foregoing, if the Company
determines that

                                       13

<PAGE>


issuance of Shares should be delayed pending (A) registration under federal or
state securities laws, (B) the receipt of an opinion of counsel satisfactory to
the Company that an appropriate exemption from such registration is available,
(C) the listing or inclusion of the Shares on any securities exchange or an
automated quotation system or (D) the consent or approval of any governmental
regulatory body whose consent or approval is necessary in connection with the
issuance of such Shares, the Company may defer exercise of any Option granted
hereunder until any of the events described in this sentence has occurred.


     (d) Medium of Payment. An Optionee shall pay for Shares (i) in cash, (ii)
by certified or cashier's check payable to the order of the Company, or (iii) by
such other mode of payment as the Committee may approve, including payment
through a broker in accordance with procedures permitted by Regulation T of the
Federal Reserve Board. Furthermore, the Committee may provide in an Option
Document that payment may be made in whole or in part in shares of the Company's
Common Stock held by the Optionee. If payment is made in whole or in part in
shares of Common Stock, then the Optionee shall deliver to the Company
certificates registered in the name of such Optionee representing the shares of
Common Stock owned by such Optionee, free of all liens, claims and encumbrances
of every kind and having an aggregate Fair Market Value on the date of delivery
that is at least as great as the Option Price of the shares (or relevant portion
thereof) with respect to which such Option is to be exercised by the payment in

                                       14
<PAGE>


shares of Common Stock, endorsed in blank or accompanied by stock powers duly
endorsed in blank by the Optionee. In the event that certificates for shares of
Common Stock delivered to the Company represent a number of shares of Common
Stock in excess of the number of shares of Common Stock required to make payment
for the Option Price of the Shares (or relevant portion thereof) with respect to
which such Option is to be exercised by payment in shares of Common Stock, the
stock certificate issued to the Optionee shall represent (i) the Shares in
respect of which payment is made, and (ii) such excess number of shares of
Common Stock. Notwithstanding the foregoing, the Committee may impose from time
to time such limitations and prohibitions on the use of shares of Common Stock
to exercise an Option as it deems appropriate.


     (e) Termination of Options.


                           (1) No Option shall be exercisable after the first to
occur of the following:


                                    (A) Expiration of the Option term specified
in the Option Document, which, in the case of an ISO, shall not occur after ten
(10) years from the date of grant, or (2) five years from the date of grant of
an ISO if the Optionee on the date of grant owns, directly or by attribution
under Section 424(d) of the Code, shares possessing more than ten percent (10%)
of the total combined voting power of all classes of stock of the Company or of
an Affiliated Company;


                                    (B) In the case of a Non-qualified Stock
Option unless otherwise provided in the Option Document, and in the case of an
ISO, expiration of three months from the date the Optionee's employment or
service with the Company or its Affiliated Companies terminates for any reason
other than Disability or death or as otherwise specified in Subsection
8(e)(i)(D) or 8(e)(i)(E) below;

                                       15

<PAGE>

                                    (C) In the case of a Non-qualified Stock
Option unless otherwise provided in the Option Document, and in the case of an
ISO, expiration of one year from the date such employment or service with the
Company or its Affiliated Companies terminates due to the Optionee's disability
or death;


                                    (D) A finding by the Committee, after full
consideration of the facts presented on behalf of both the Company and the
Optionee, that the Optionee has breached his or her employment or service
contract with the Company or an Affiliated Company, or has been engaged in
disloyalty to the Company or an Affiliated Company, including, without
limitation, fraud, embezzlement, theft, commission of a felony or proven
dishonesty in the course of his or her employment or service, or has disclosed
trade secrets or confidential information of the Company or an Affiliated
Company. In such event, in addition to immediate termination of the Option, the
Optionee shall automatically forfeit all Shares for which the Company has not
yet delivered the share certificates upon refund by the Company of the Option
Price. Notwithstanding anything herein to the contrary, the Company may withhold
delivery of share certificates pending the resolution of any inquiry that could
lead to a finding resulting in a forfeiture; or


                                    (E) The date, if any, set by the Board of
Directors as an accelerated expiration date in the event of a Change in Control.


                                    (ii) Notwithstanding the foregoing, the
Committee may extend the period during which all or any portion of an Option may
be exercised to a date no later than the Option term specified in the Option
Document pursuant to Subsection 8(e)(i)(A), provided that any change pursuant to
this Subsection 8(e)(ii) which would cause an ISO to

                                       16
<PAGE>


become a Non-qualified Stock Option may be made only with the consent of the
Optionee. The terms of an executive severance agreement or other agreement
between the Company and an Optionee, approved by the Committee, whether entered
into prior or subsequent to the grant of an Option, which provide for Option
exercise dates later than those set forth in Subsection 8(e)(i) but permitted by
this Subsection 8(e)(ii) shall be deemed to be Option terms approved by the
Committee and consented to by the Optionee.


     (f) Transfers. An ISO granted under the Plan may not be transferred, except
by will or by the laws of descent and distribution. A Non-qualified Stock Option
granted under the Plan may not be transferred, except by will or by the laws of
descent and distribution, except as follows: If the terms of the Non-qualified
Stock Option specifically so permit, a Non-qualified Stock Option may be
transferred by the Optionee by bona fide gift, with no consideration for the
transfer, to a member of such person's Immediate Family. If the Optionee
receiving such an Option, or having an outstanding Option amended to provide for
such transferability, is a Section 16 Officer, such Option or Option amendment
must be approved by the committee of disinterested persons (as defined in Rule
16b-3) which administers the Plan with respect to Section 16 Officers.
Notwithstanding the foregoing, a Non-qualified Stock Option may be transferred
pursuant to the terms of a "qualified domestic relations order," within the
meaning of Sections 401(a)(13) and 414(p) of the Code or within the meaning of
Title I of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"). During the lifetime of the person to whom an Option is granted (or
the member of the Immediate Family if such Option has been transferred in
accordance with the above provisions), such Option may be exercised only by such
person.

                                       17

<PAGE>

     (g) Limitation on ISO Grants. In no event shall the aggregate Fair Market
Value of the Shares of Common Stock (determined at the time the ISO is granted)
with respect to which ISOs under all incentive stock option plans of the Company
or its Affiliated Companies are exercisable for the first time by the Optionee
during any calendar year exceed $100,000.


     (h) Other Provisions. Subject to the provisions of the Plan, the Option
Documents shall contain such other provisions including, without limitation,
provisions authorizing the Committee to accelerate the exercisability of all or
any portion of an Option granted pursuant to the Plan, additional restrictions
upon the exercise of the Option or additional limitations upon the term of the
Option, as the Committee shall deem advisable.


     (i) Amendment. Subject to the provisions of the Plan, the Committee shall
have the right to amend Option Documents issued to an Optionee, subject to the
Optionee's consent if such amendment is not favorable to the Optionee, except
that the consent of the Optionee shall not be required for any amendment made
pursuant to Subsection 8(e) (i) (E) or Section 10 of the Plan, as applicable.


         9.  Special  Provisions  Relating to Grants of Options to  Non-Employee
Members  of the Board of  Directors.  Options  granted  pursuant  to the Plan to
non-employee  members of the Board of  Directors  shall be granted,  without any
further action by the Committee, in accordance with the terms and conditions set
forth in this  Section 9.  Options  granted  pursuant to this Section 9 shall be
evidenced  by  Option  Documents  in  such  form  as the  Committee  shall  from
time-to-time approve, which Option Documents shall comply with and be subject to
the following  terms and  conditions  and such other terms and conditions as the
Committee shall from  time-to-time  require which are not inconsistent  with the
terms of the Plan.

                                       18

<PAGE>


     (a) Timing of Grants; Number of Shares Subject of Options; Exercisability
of Options; Option Price. Each non-employee member of the Board of Directors
shall be granted on his or her Formula Grant Date an Option to purchase Five
Thousand (5,000) Shares. Each such Option shall be a Non-qualified Stock Option
becoming exercisable on the first anniversary of the date of grant. The Option
Price shall be equal to the Fair Market Value of the Shares on the date the
Option is granted.


     (b) Termination of Options Granted Pursuant to Section 9. All Options
granted pursuant to this Section 9 shall be exercisable until the first to occur
of the following:


                           (i) Expiration of six (6) years from the date of
                  grant;


                           (ii) Expiration of three (3) months from the date the
                  Optionee's service as a member of the Board of Directors
                  terminates for any reason other than Disability or death;


                           (iii) Expiration of one (1) year from the date the
                  Optionee's service as a member of the Board of Directors
                  terminates due to the Optionee's Disability or death; or


                           (iv) Expiration of three (3) months after the date of
                  a Change in Control.


     (c) Applicability of Provisions of Section 8 to Options Granted Pursuant to
Section 9. The following provisions of Section 8 shall be applicable to Options
granted pursuant to this Section 9: Subsection 8(a) (provided that all Options
granted pursuant to this Section 9 shall be Non-qualified Stock Options); the
definition of Fair Market Value contained in Subsection 8(b); Subsection 8(c);
Subsection 8(d) (provided that Option Documents relating to Options granted
pursuant to this Section 9 shall provide that payment may be made in whole or

                                       19
<PAGE>


in part in shares of Company Common Stock); Subsection 8(f); and Subsection 8(i)
(but only to the extent that the application of such subsection to Options
granted under this Section 9 would not cause a Disinterested Director no longer
to qualify as a Disinterested Director)


         10.  Change  in  Control.  In the  event of a Change  in  Control,  the
Committee may take whatever  action it deems necessary or desirable with respect
to the Options and Awards  outstanding  (other than Options granted  pursuant to
Section 9),  including,  without  limitation,  accelerating  the  expiration  or
termination  date in the respective  Option  Documents to a date no earlier than
thirty (30) days after notice of such acceleration is given to the Optionees. In
addition to the foregoing, in the event of a Change in Control,  Options granted
pursuant to Section 9 of the Plan and Options granted pursuant to the Plan which
are held by Optionees who are employees of the Company or an Affiliated  Company
at the time of a Change in Control  shall,  and in the case of  consultants  and
advisors  to  the  Company  or  an   Affiliated   Company   shall   (unless  the
exercisability  of the Options held by such persons is subject to some condition
other  than the lapse of time  (including  within  the term  "lapse of time" the
provisions of Sections 8(e) and 9(b) of the Plan)),  automatically accelerate to
the date of the Change in Control and become  immediately  exercisable  in full,
and the restrictions  applicable to Restricted Stock awarded to Awardees who are
employees  at the time of a Change in Control  shall  immediately  lapse and the
Restricted  Stock held by the Company  shall be  delivered to the  Grantees.  An
Option  granted to a consultant  or advisor who is also a member of the Board of
Directors shall be deemed for purposes of the preceding sentence to be an Option
granted to a consultant or advisor and not to a member of the Board of Directors
if such Option is granted for services as a consultant or advisor.

                                       20

<PAGE>


         A  "Change  in  Control"   shall  mean  a  transaction   or  series  of
transactions  (including any cash tender or securities exchange offer, merger or
other  business  combination,   or  contested  election  of  directors,  or  any
combination thereof) as the result of which:


                           (i) any Person (other than Penn Independent or any of
                  its shareholders as of the effective date of this Plan, the
                  Company, any Affiliated Company, any employee benefit plan of
                  Penn Independent, the Company or of any Affiliated Company,
                  any Person or entity organized, appointed or established by
                  the Company for or pursuant to the terms of any such employee
                  benefit plan or eligible Plan participants or any Affiliate or
                  Associate of eligible Plan participants or any group of which
                  eligible Plan participants are members and in which they
                  participate in their capacity as shareholders of the Company)
                  together with all Affiliates and Associates of such Person,
                  shall become the Beneficial Owner of a percentage ownership in
                  the aggregate combined voting power of all Voting Securities
                  of the Company then outstanding that is greater than the then
                  current percentage ownership of Penn Independent in the
                  aggregate combined voting powers of all Voting Securities of
                  the Company then outstanding; or


                           (ii) any Person (other than Penn Independent or any
                  of its shareholders as of the date of this Agreement, the
                  Company, any Affiliated Company, any employee benefit plan of
                  Penn Independent, the Company or of any Affiliated Company,
                  any Person or entity organized, appointed or established by
                  the Company for or pursuant to the terms of any such employee
                  benefit plan or eligible Plan participants or any Affiliate or
                  Associate

                                       21

<PAGE>


                  of eligible Plan participants or any group of which eligible
                  Plan participants are members and in which they participate in
                  their capacity as shareholders of the Company) together with
                  all Affiliates and Associates of such Person, shall become the
                  Beneficial Owner of 30% or more of the aggregate combined
                  voting power of all Voting Securities of the Company then
                  outstanding, irrespective of Penn Independent's then current
                  percentage ownership in such Voting Securities; provided that
                  during any period of two consecutive calendar years there is a
                  change of 25% or more in the composition of the Board in
                  office at the beginning of such period, except for changes
                  approved by at least two-thirds of the directors then in
                  office who were directors at the beginning of the period; or


                           (iii) any Person (other than Penn Independent or any
                  of its shareholders as of the date of this Agreement, the
                  Company, any Affiliated Company, any employee benefit plan of
                  Penn Independent, the Company or of any Affiliated Company,
                  any Person or entity organized, appointed or established by
                  the Company for or pursuant to the terms of any such employee
                  benefit plan or eligible Plan participants or any Affiliate or
                  Associate of eligible Plan participants or any group of which
                  eligible Plan participants are members and in which they
                  participate in their capacity as shareholders of the Company)
                  together with all Affiliates and Associates of such Person,
                  shall become the Beneficial Owner of greater than 50% of the
                  aggregate combined voting power of all Voting Securities of
                  Penn Independent; or


                           (iv) during any period of two consecutive calendar
                  years there is a change of 25% or more in the composition of
                  the Board in office at the beginning of such period except

                                       22

<PAGE>


                  for changes approved by at least two-thirds of the directors
                  then in office who were directors at the beginning of the
                  period; or


                           (v) 80% or more of the assets of the Company and its
                  Affiliated Companies shall be sold or transferred to any
                  Person (other than an Affiliated Company of the Company); or


                           (vi) the Board makes a determination that such
                  transaction or transactions constitute a Change in Control for
                  purposes of this Plan.


         For purposes of this Plan, a Change in Control  shall be deemed to have
occurred on the date upon which any of the foregoing is  consummated  or becomes
effective.


         11. Adjustments on Changes in  Capitalization.  The aggregate number of
Shares  and  class of shares  as to which  Options  and  Awards  may be  granted
hereunder, the number and class or classes of shares covered by each outstanding
Option and the Option Price thereof shall be appropriately adjusted in the event
of a stock dividend, stock split, recapitalization or other change in the number
or class of issued and outstanding  equity  securities of the Company  resulting
from a subdivision or consolidation of the Common Stock and/or,  if appropriate,
other outstanding  equity  securities,  or a  recapitalization  or other capital
adjustment  (not  including  the issuance of Common Stock on the  conversion  of
other  securities  of the  Company  which are  convertible  into  Common  Stock)
affecting the Common Stock which is effected without receipt of consideration by
the Company.  The Committee shall have authority to determine the adjustments to
be made under this Section, and any such determination by the Committee shall be
final, binding and conclusive.

                                       23

<PAGE>


         12. Terms and Conditions of Awards. Awards granted pursuant to the Plan
shall be evidenced by written  Award  Agreements  in such form as the  Committee
shall from time-to-time approve, which Award Agreements shall comply with and be
subject  to the  following  terms  and  conditions  and  such  other  terms  and
conditions  as the  Committee  shall  from  time to time  require  which are not
inconsistent  with  the  terms  of the  Plan.  The  Committee  may,  in its sole
discretion,  shorten or waive any term or  condition  with respect to all or any
portion of any Award.  Notwithstanding  the foregoing,  all  restrictions  shall
lapse or terminate with respect to Restricted Stock upon the death or Disability
of the Awardee.


     (a) Number of Shares. Each Award Agreement shall state the number of Shares
of Common Stock to which it pertains.


     (b) Purchase Price. Each Award Agreement shall specify the purchase price,
if any, which applies to the Award. If the Board specifies a purchase price, the
Awardee shall be required to make payment on or before the date specified in the
Award Agreement. An Awardee shall pay for such Shares (i) in cash, (ii) by
certified check payable to the order of the Company, or (iii) by such other mode
of payment as the Committee may approve.


     (c) Restrictions on Transfer and Forfeitures. A stock certificate
representing the Restricted Stock granted to an Awardee shall be registered in
the Awardee's name but shall be held in escrow by the Company's General Counsel,
together with an undated stock power executed by the Awardee with respect to
each stock certificate representing Restricted Stock Registered in such
Awardee's name. The Awardee shall generally have the rights and privileges of a
shareholder as to such Restricted Stock including the right to vote such
Restricted Stock and to receive and retain all cash dividends with respect to
them, except that the following

                                       24
<PAGE>


restrictions shall apply: (i) the employee shall not be entitled to delivery of
the certificate until the expiration or termination of any period designated by
the Committee ("Restricted Period") and the satisfaction of any other conditions
prescribed by the Committee; and (ii) all distributions with respect to the
Restricted Stock other than cash dividends, such as stock dividends, stock
splits or distributions of property, and any distributions (other than cash
dividends) subsequently made with respect to other distributions, shall be
delivered to the General Counsel of the Company, together with appropriate stock
powers or other instruments of transfer signed and delivered to the General
Counsel by the Grantee, to be held by the General Counsel and released to either
the Grantee or the Company, as the case may be, together with the Shares to
which they relate; (iii) the Grantee will have no right to sell, exchange,
transfer, pledge, hypothecate or otherwise dispose of any of the Restricted
Stock or distributions (other than cash dividends) with respect thereto; and
(iv) all of the Restricted Stock shall be forfeited and all rights of the
Awardee with respect to such Restricted Stock shall terminate without further
obligation on the part of the Company unless the Awardee has remained an
employee of the Company, any of its Affiliated Companies or any combination
thereof until the expiration or termination of the Restricted Period and the
satisfaction of any other conditions prescribed by the Committee applicable to
such Restricted Stock. Upon the forfeiture of any Restricted Stock, such
forfeited shares shall be transferred to the Company without further action by
the Awardee.


     (d) Lapse of Restrictions. Upon the expiration or termination of the
Restricted Period and the satisfaction of any other conditions prescribed by the
Committee time as provided for in the Plan, the restrictions applicable to the
Restricted Stock shall lapse and a stock certificate for the number of shares of
Common Stock with respect to which the restrictions have lapsed shall be
delivered, free of all such restrictions, except any that may be imposed

                                       25

<PAGE>


by law, to the Awardee or the beneficiary or estate, as the case may be. The
Company shall not be required to deliver any fractional share of Common Stock
but will pay, in lieu thereof, the fair market value (determined as of the date
the restrictions lapse) of such fractional share to the Awardee or the Awardee's
beneficiary or estate, as the case may be. The Award may provide for the lapse
of restrictions on transfer and forfeiture conditions in installments.


     (e) Section 83(b) Elections. An Awardee who files an election with the
Internal Revenue Service to include the fair market value of any Restricted
Stock in gross income while they are still subject to restrictions shall
promptly furnish the Company with a copy of such election together with the
amount of any federal, state, local or other taxes required to be withheld to
enable the Company to claim an income tax deduction with respect to such
election.


     (f) Upon a finding by the Committee, after full consideration of the facts
presented on behalf of both the Company and the Awardee, that the Awardee has
breached his or her employment or service contract with the Company or an
Affiliated Company, or has been engaged in disloyalty to the Company or an
Affiliated Company, including, without limitation, fraud, embezzlement, theft,
commission of a felony or proven dishonesty in the course of his or her
employment or service, or has disclosed trade secrets or confidential
information of the Company or an Affiliated Company, Awardee shall automatically
forfeit all Restricted Stock for which (i) the Company has not yet delivered the
Share certificates to the Awardee; (ii) the Restricted Period has not expired or
(iii) any restrictions applicable to the Restricted Stock have not lapsed.
Notwithstanding anything herein to the contrary, the Company may withhold

                                       26
<PAGE>


delivery of Restricted Stock certificates pending the resolution of any inquiry
that could lead to a finding resulting in a forfeiture.


     (g) Amendment. Subject to the provisions of the Plan, the Committee shall
have the right to amend Awards issued to an Awardee, subject to the Awardee's
consent if such amendment is not favorable to the Awardee, except that the
consent of the Awardee shall not be required for any amendment made pursuant to
Section 10 of the Plan.


         13.  Amendment  of the Plan.  The Board of Directors of the Company may
amend  the Plan  from  time-to-time  in such  manner  as it may deem  advisable.
Nevertheless,  the Board of Directors of the Company may not change the class of
individuals  eligible to receive an ISO or increase the maximum number of Shares
as to which  Options  may be granted  without  obtaining  the  approval  of such
change(s),  within twelve months before or after such action, by the affirmative
vote of a majority of the votes cast by all  shareholders  entitled to vote at a
duly called meeting of the shareholders  held in accordance with the laws of the
Commonwealth of Pennsylvania  (provided,  however, that if Rule 16b-3 requires a
greater vote of  shareholders,  then the Board may not take such action  without
obtaining  the minimum vote  required by Rule  16b-3).  No amendment to the Plan
shall adversely  affect any outstanding  Option or Award,  however,  without the
consent of the  Grantee.  Notwithstanding  anything  to the  contrary  contained
herein,  the  provisions  of the Plan  contained  in Section 9  relating  to the
granting  of Options to  non-employee  members  of the Board of  Directors  that
determine (i) who is to be granted  Options under such Section,  (ii) the number
of Shares subject to such Options,  (iii) the Option Price of such Options,  and
(iv) the timing of grants of such Options shall not be amended

                                       27

<PAGE>

more than once in any six month period, other than to comply with changes in the
Code or ERISA.


         14. No Commitment to Retain.  The grant of an Option or Award  pursuant
to the Plan shall not be  construed  to imply or to  constitute  evidence of any
agreement,  express or  implied,  on the part of the  Company or any  Affiliated
Company to retain the  Grantee  in the  employ of the  Company or an  Affiliated
Company  and/or as a member of the Company's  Board of Directors or in any other
capacity.


         15. Withholding of Taxes.  Whenever the Company proposes or is required
to deliver or transfer  Shares in  connection  with the exercise of an Option or
Award, the Company shall have the right to (a) require the recipient to remit or
otherwise  make  available  to the Company an amount  sufficient  to satisfy any
federal,  state and/or local withholding tax requirements  prior to the delivery
or  transfer  of any  certificate  or  certificates  for such Shares or (b) take
whatever  other action it deems  necessary to protect its interests with respect
to tax liabilities. The Company's obligation to make any delivery or transfer of
Shares shall be  conditioned  on the  Optionee's  compliance,  to the  Company's
satisfaction, with any withholding requirement.


         16.  Interpretation.  The Plan is intended to enable transactions under
the Plan with respect to directors  and officers  (within the meaning of Section
16(a)  under the  Securities  Exchange  Act of 1934,  as amended) to satisfy the
conditions  of Rule 16b-3;  to the extent that any  provision  of the Plan would
cause a conflict with such conditions or would cause the  administration  of the
Plan as provided in Section 3 to fail to satisfy the  conditions  of Rule 16b-3,
such  provision  shall  be  deemed  null  and void to the  extent  permitted  by
applicable  law.  This

                                       28

<PAGE>

Section shall not be applicable if no class of the Company's equity securities
is then registered pursuant to Section 12 of the Securities Exchange Act of
1934, as amended.



                                       29