<PAGE>
 
                                  A.S.V., INC.
                      1996 INCENTIVE AND STOCK OPTION PLAN

Section 1.  Purpose.

     The purpose of this 1996 Incentive and Stock Option Plan (the "Plan") is to
promote the interests of A.S.V., Inc. (the "Company") and its shareholders by
aiding the Company in attracting and retaining employees and directors capable
of contributing to the growth and success of, and providing strategic direction
to, the Company, and by offering such employees and directors an opportunity to
acquire a proprietary interest in the Company, thereby providing them with
incentives to put forth maximum efforts for the success of the Company's
business and aligning the interests of such employees and directors with those
of the Company's shareholders.

Section 2.  Definitions.

     As used in the Plan, the following terms shall have the meanings set forth
below:

     (a) "Affiliate" shall mean (i) any entity that, directly or indirectly
through one or more intermediaries, is controlled by the Company and (ii) any
entity in which the Company has a significant equity interest, in each case as
determined by the Committee.

     (b) "Award" shall mean any Option, Restricted Stock or other award granted
under the Plan.

     (c) "Award Agreement" shall mean any written agreement, contract or other
instrument or document evidencing any Award granted under the Plan.

     (d) "Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time, and any regulations promulgated thereunder.

     (e) "Committee" shall mean a committee of the Board of Directors of the
Company designated by such Board to administer the Plan, which shall consist of
members appointed from time to time by the Board of Directors and shall be
composed solely of two or more "non-employee directors" within the meaning of
Rule 16b-3, each of whom is an "outside director" within the meaning of Section
162(m) of the Code to the extent required by such Section.

     (f) "Company" shall mean A.S.V., Inc., a Minnesota corporation, and any
successor corporation.

                                      -1-
<PAGE>
 
     (g) "Eligible Person" shall mean any employee, officer, director,
consultant or independent contractor providing services to the Company or any
Affiliate.

     (h) "Exchange Act" shall mean the Securities and Exchange Act of 1934, as
amended.

     (i) "Fair Market Value" shall mean, with respect to any property
(including, without limitation, any Shares or other securities), the fair market
value of such property determined by such methods or procedures as the Committee
shall establish in good faith from time to time.  Where there is a public market
for the Shares, the fair market value per Share on a given date shall be the
closing price of a Share in the over-the-counter market on such date, as
reported in The Wall Street Journal (or, if not so reported, as otherwise
reported by The Nasdaq Stock Market ("Nasdaq")) or, in the event the Shares are
traded on the Nasdaq National Market ("NMS") or listed on a stock exchange, the
fair market value per Share shall be the closing price on such system or
exchange on such date, as reported in The Wall Street Journal; if such market or
exchange is not open for trading on such date, the Fair Market Value shall be
determined as of the day closest to such date when such market or exchange is
open for trading.

     (j) "Incentive Stock Option" shall mean an option granted under Section
6(a) of the Plan that is intended to meet the requirements of Section 422 of the
Code or any successor provision.

     (k) "Non-Qualified Stock Option" shall mean an option granted under Section
6(a) of the Plan that is not intended to be an Incentive Stock Option.

     (l) "Option" shall mean an Incentive Stock Option or a Non-Qualified Stock
Option.

     (m) "Other Stock Grant" shall mean any right granted under Section 6(c) of
the Plan.

     (n) "Participant" shall mean an Eligible Person whom the Committee
designates to receive an Award under the Plan.

     (o) "Person" shall mean any individual, corporation, partnership,
association or trust.

     (p) "Restricted Stock" shall mean any Share granted under Section 6(c) of
the Plan.

     (q) "Rule 16b-3" shall mean Rule 16b-3 promulgated by the Securities and
Exchange Commission under the Exchange Act or any successor rule or regulation.

                                      -2-
<PAGE>
 
     (r) "Shares" shall mean shares of Common Stock, $.01 par value, of the
Company or such other securities or property as may become subject to Awards
pursuant to an adjustment made under Section 4(c) of the Plan.

Section 3.  Administration.

     (a) Power and Authority of the Committee.  The Plan shall be administered
by the Committee.  Subject to the express provisions of the Plan and to
applicable law, the Committee shall have full power and authority to: (i)
designate Participants; (ii) determine the type or types of Awards to be granted
to each Participant under the Plan; (iii) determine the number of Shares to be
covered by each Award; (iv) determine the terms and conditions of any Award or
Award Agreement; (v) amend the terms and conditions of any Award or Award
Agreement and accelerate the exercisability of Options or the lapse of
restrictions relating to Restricted Stock; (vi) interpret and administer the
Plan and any instrument or agreement relating to, or Award made under, the Plan;
(vii) establish, amend, suspend or waive such rules and regulations and appoint
such agents as it shall deem appropriate for the proper administration of the
Plan; and (viii) make any other determination and take any other action that the
Committee deems necessary or desirable for the administration of the Plan.
Unless otherwise expressly provided in the Plan, all designations,
determinations, interpretations and other decisions under or with respect to the
Plan or any Award shall be within the sole discretion of the Committee, may be
made at any time and shall be final, conclusive and binding upon any
Participant, any holder or beneficiary of any Award and any employee of the
Company or any Affiliate.

     (b) Delegation.  The Committee may delegate its powers and duties under the
Plan to one or more officers of the Company or any Affiliate or a committee of
such officers, subject to such terms, conditions and limitations as the
Committee may establish in its sole discretion; provided, however, that the
Committee shall not delegate its powers and duties under the Plan (i) with
regard to officers or directors of the Company or any Affiliate who are subject
to Section 16 of the Exchange Act or (ii) in such a manner as would cause the
Plan not to comply with the requirements of Section 162(m) of the Code to the
extent required by such Section.

     (c) Power and Authority of the Board of Directors.  Notwithstanding
anything to the contrary contained herein, the Board of Directors may, at any
time and from time to time, without any further action of the Committee,
exercise the powers and duties of the Committee under the Plan.

                                      -3-
<PAGE>
 
Section 4.  Shares Available for Awards.

     (a) Shares Available.  Subject to adjustment as provided in Section 4(c),
the aggregate number of Shares which may be issued under all Awards under the
Plan shall be 500,000.  Shares to be issued under the Plan shall be authorized
but previously unissued Shares.  If any Shares covered by an Award or to which
an Award relates are not purchased or are forfeited, or if an Award otherwise
terminates without delivery of any Shares, then the number of Shares counted
against the aggregate number of Shares available under the Plan with respect to
such Award, to the extent of any such forfeiture or termination, shall again be
available for granting Awards under the Plan.

     (b) Accounting for Awards.  For purposes of this Section 4, if an Award
entitles the holder thereof to receive or purchase Shares, the number of Shares
covered by such Award or to which such Award relates shall be counted on the
date of grant of such Award against the aggregate number of Shares available for
granting Awards under the Plan.

     (c) Adjustments.  In the event that the Committee shall determine that any
dividend or other distribution (whether in the form of cash, Shares, other
securities or other property), recapitalization, stock split, reverse stock
split, reorganization, merger, consolidation, split-up, spin-off, combination,
repurchase or exchange of Shares or other securities of the Company, issuance of
warrants or other rights to purchase Shares or other securities of the Company
or other similar corporate transaction or event affects the Shares such that an
adjustment is determined by the Committee to be appropriate in order to prevent
dilution or enlargement of the benefits or potential benefits intended to be
made available under the Plan, then the Committee shall, in such manner as it
may deem equitable, adjust any or all of (i) the number and type of Shares (or
other securities or other property) which thereafter may be made the subject of
Awards, (ii) the number and type of Shares (or other securities or other
property) subject to outstanding Awards and (iii) the purchase or exercise price
with respect to any Award; provided, however, that the number of Shares covered
by any Award or to which such Award relates shall always be a whole number.

Section 5.  Eligibility.

     Any Eligible Person, including any Eligible Person who is an officer or
director of the Company or any Affiliate, shall be eligible to be designated a
Participant.  In determining which Eligible Persons shall receive an Award and
the terms of any Award, the Committee may take into account the nature of the
services rendered by the respective Eligible Persons, their present and
potential contributions to the success of the Company or such other factors as
the Committee, in its discretion, shall deem relevant.  Notwithstanding the
foregoing, an Incentive Stock Option may only be granted to full or part-time
employees (which term as used

                                      -4-
<PAGE>
 
herein includes, without limitation, officers and directors who are also
employees), and an Incentive Stock Option shall not be granted to an employee of
an Affiliate unless such Affiliate is also a "subsidiary corporation" of the
Company within the meaning of Section 424(f) of the Code or any successor
provision.

Section 6.  Awards.

     (a) Options.  The Committee is hereby authorized to grant Options to
Participants with the following terms and conditions and with such additional
terms and conditions not inconsistent with the provisions of the Plan as the
Committee shall determine:

          (i) Exercise Price.  The purchase price per Share purchasable under an
     Option shall be determined by the Committee; provided, however, that the
     purchase price per Share purchasable under an Incentive Stock Option shall
     not be less than 100% of the Fair Market Value of a Share on the date of
     grant of such Option.

          (ii) Option Term.  The term of each Option shall be fixed by the
     Committee; provided, however, that the term of an Incentive Stock Option
     may not extend more than ten years from the date of grant of such Incentive
     Stock Option.

          (iii) Time and Method of Exercise.  The Committee shall determine the
     time or times at which an Option may be exercised in whole or in part and
     the method or methods by which, and the form or forms (including, without
     limitation, cash, Shares, other securities or other property, or any
     combination thereof, having a Fair Market Value on the exercise date equal
     to the relevant exercise price) in which, payment of the exercise price
     with respect thereto may be made or deemed to have been made.

          (iv) Certain Options to be Treated as Non-Qualified Stock Options.  If
     the aggregate Fair Market Value of all Shares subject to Incentive Stock
     Options granted to a Participant under all plans of the Company and its
     parent and subsidiary corporations (as described in Section 422(d) of the
     Code) that are exercisable for the first time during any calendar year
     exceeds $100,000 at the time an Option is granted to such Participant, then
     such Option shall be treated as an Option that does not qualify as an
     Incentive Stock Option.

          (v) Ten Percent Shareholder Rule.  Notwithstanding any other provision
     in the Plan, if at the time an Option is otherwise to be granted pursuant
     to the Plan to a Participant who owns, directly or indirectly (within the
     meaning of Section 424(d) of the Code), Common Stock of the Company
     possessing more than 10% of the total combined voting power of all classes
     of stock of the Company or its parent or any subsidiary, then any Incentive
     Stock

                                      -5-
<PAGE>
 
     Option to be granted to such Participant pursuant to the Plan shall satisfy
     the requirements of Section 422(c)(5) of the Code, and the exercise price
     of such Option shall be not less than 110% of the Fair Market Value of the
     Shares covered, and such Option by its terms shall not be exercisable after
     the expiration of five years from the date such Option is granted.

          (vi) Option Limitations Under the Plan For Purposes of Section 162(m).
     No Eligible Person who is an employee of the Company at the time of grant
     may be granted any Option, the value of which is based solely on an
     increase in the value of the Shares after the date of grant of such Option,
     covering more than 500,000 Shares in the aggregate in any calendar year.
     The foregoing annual limitation specifically includes the grant of any
     Option representing "qualified performance-based compensation" within the
     meaning of Section 162(m) of the Code to the extent required by such
     Section.

     (b) Restricted Stock.  The Committee is hereby authorized to grant Awards
of Restricted Stock to Participants with the following terms and conditions and
with such additional terms and conditions not inconsistent with the provisions
of the Plan as the Committee shall determine:

          (i) Restrictions.  Shares of Restricted Stock shall be subject to such
     restrictions as the Committee may impose (including, without limitation,
     any limitation on the right to vote a Share of Restricted Stock or on the
     right to receive any dividend or other right or property with respect
     thereto), which restrictions may lapse separately or in combination, at
     such time or times, in such installments or otherwise as the Committee may
     deem appropriate.

          (ii) Stock Certificates.  Any Restricted Stock granted under the Plan
     shall be evidenced by issuance of a stock certificate or certificates,
     which certificate or certificates shall be held by the Company. Such
     certificate or certificates shall be registered in the name of the
     Participant and shall bear an appropriate legend referring to the terms,
     conditions and restrictions applicable to such Restricted Stock.

          (iii) Forfeiture; Delivery of Shares.  Except as otherwise determined
     by the Committee, upon termination of employment (as determined under
     criteria established by the Committee) during the applicable restriction
     period, all Shares of Restricted Stock at such time subject to restriction
     shall be forfeited and become authroized but unissued Shares; provided,
     however, that the Committee, when it finds that a waiver would be in the
     best interests of the Company, may waive in whole or in part any or all
     remaining restrictions with respect to Shares of Restricted Stock. Any
     Share representing Restricted Stock that is no longer subject to
     restrictions shall be delivered to the holder thereof promptly after the
     applicable restrictions lapse or are waived.

                                      -6-
<PAGE>
 
     (c) Other Stock Grants.  The Committee is hereby authorized, subject to the
terms of the Plan and any applicable Award Agreement, to grant to Participants
Shares without restrictions thereon as are deemed by the Committee to be
consistent with the purpose of the Plan; provided, however, that such grants
must comply with Rule 16b-3 and applicable law.

     (d) General.

          (i) No Cash Consideration for Awards.  Awards shall be granted for no
     cash consideration or for such minimal cash consideration as may be
     required by applicable law.

          (ii) Grant of Additional Awards.  An Eligible Person who has been 
     granted an Award under this Plan may be granted additional Awards under the
     Plan if the Committee shall so determine.

          (iii) Forms of Payment under Awards.  Subject to the terms of the Plan
     and of any applicable Award Agreement, payments or transfers to be made by
     the Company or an Affiliate upon the grant, exercise or payment of an Award
     may be made in such form or forms as the Committee shall determine
     (including, without limitation, cash, Shares, other securities or other
     property or any combination thereof), and may be made in a single payment
     or transfer, in installments or on a deferred basis, in each case in
     accordance with rules and procedures established by the Committee.

          (iv) Limits on Transfer of Awards.  No Award and no right under any 
     such Award shall be transferable by a Participant otherwise than by will or
     by the laws of descent and distribution; provided, however, that, if so
     determined by the Committee, a Participant may, in the manner established
     by the Committee, designate a beneficiary or beneficiaries to exercise the
     rights of the Participant and receive any property distributable with
     respect to any Award upon the death of the Participant; and provided,
     further, except in the case of an Incentive Stock Option, Awards may be
     transferable as specifically provided in any applicable Award Agreement
     pursuant to terms determined by the Committee. Except as otherwise provided
     in any applicable Award Agreement (other than an Award Agreement relating
     to an Incentive Stock Option), pursuant to terms determined by the
     Committee, each Award or right under any Award shall be exercisable during
     the Participant's lifetime only by the Participant or, if permissible under
     applicable law, by the Participant's guardian or legal representative.

                                      -7-
<PAGE>
 
          (v) Term of Awards.  The term of each Award shall be for such period 
     as may be determined by the Committee and the Committee shall be under no
     duty to provide terms of like duration for Awards granted under the Plan.

          (vi) Restrictions; Securities Exchange Listing.  All certificates for
     Shares or other securities delivered under the Plan pursuant to any Award
     or the exercise thereof shall be subject to such stop transfer orders and
     other restrictions as the Committee may deem advisable under the Plan or
     the rules, regulations and other requirements of the Securities and
     Exchange Commission and any applicable federal or state securities laws,
     and the Committee may cause a legend or legends to be placed on any such
     certificates to make appropriate reference to such restrictions. If the
     Shares or other securities are quoted on Nasdaq, traded on NMS or listed on
     a stock exchange, the Company shall not be required to deliver any Shares
     or other securities covered by an Award unless and until such Shares or
     other securities have been admitted for quotation or trading on NMS or such
     stock exchange.

Section 7.  Income Tax Withholding; Tax Bonuses.

     (a) Withholding.  In order to comply with all applicable federal or state
income tax laws or regulations, the Company may take such action as it deems
appropriate to ensure that all applicable federal or state payroll, withholding,
income or other taxes, all of which are and shall remain the sole and absolute
responsibility of a Participant, are withheld or collected from such
Participant.  In order to assist a Participant in paying all or a portion of the
federal and state taxes to be withheld or collected upon exercise or receipt of
(or the lapse of restrictions relating to) an Award, the Committee, in its
discretion and subject to such additional terms and conditions as it may adopt,
may permit the Participant to satisfy such tax obligation by (i) electing to
have the Company withhold a portion of the Shares otherwise to be delivered upon
exercise or receipt of (or the lapse of restrictions relating to) such Award
with a Fair Market Value equal to the amount of such taxes or (ii) delivering to
the Company Shares other than Shares issuable upon exercise or receipt of (or
the lapse of restrictions relating to) such Award with a Fair Market Value equal
to the amount of such taxes.  The election, if any, must be made on or before
the date that the amount of tax to be withheld is determined.

     (b) Tax Bonuses.  The Committee, in its discretion, shall have the
authority, at the time of grant of any Award under this Plan or at any time
thereafter, to approve cash bonuses to designated Participants to be paid upon
their exercise or receipt of (or the lapse of restrictions relating to) Awards
in order to provide funds to pay all or a portion of the federal and state taxes
due as a result of such exercise or receipt (or the lapse of such restrictions).
The Committee shall have full authority in its discretion to determine the
amount of any such tax bonus.

                                      -8-
<PAGE>
 
Section 8.  General Provisions.

     (a) No Rights to Awards.  No Eligible Person, Participant or other Person
shall have any claim to be granted any Award under the Plan, and there is no
obligation for uniformity of treatment of Eligible Persons, Participants or
holders or beneficiaries of Awards under the Plan.  The terms and conditions of
Awards need not be the same with respect to any Participant or with respect to
different Participants.

     (b) Award Agreements.  No Participant will have rights under an Award
granted to such Participant unless and until an Award Agreement shall have been
duly executed on behalf of the Company and, if requested by the Company, signed
by the Participant.

     (c) No Limit on Other Compensation Arrangements.  Nothing contained in the
Plan shall prevent the Company or any Affiliate from adopting or continuing in
effect other or additional compensation arrangements, and such arrangements may
be either generally applicable or applicable only in specific cases.

     (d) No Right to Employment.  The grant of an Award shall not be construed
as giving a Participant the right to be retained as an employee or director of
the Company or any Affiliate, nor will it affect in any way the right of the
Company or an Affiliate to terminate such employment or directorship at any
time, with or without cause.  In addition, the Company or an Affiliate may at
any time dismiss a Participant from employment or directorship free from any
liability or any claim under the Plan, except as otherwise expressly provided in
the Plan or in any Award Agreement.

     (e) Governing Law.  The validity, construction and effect of the Plan or of
any Award, and any rules and regulations relating to the Plan or any Award,
shall be determined in accordance with the laws of the State of Minnesota.

     (f) Severability.  If any provision of the Plan or any Award is or becomes
or is deemed to be invalid, illegal or unenforceable in any jurisdiction or
would disqualify the Plan or any Award under any law deemed applicable by the
Committee or the Board of Directors, such provision shall be construed or deemed
amended to conform to applicable law, or if it cannot be so construed or deemed
amended without, in the determination of the Committee or the Board of
Directors, materially altering the purpose or intent of the Plan or the Award,
such provision shall be stricken as to such jurisdiction or Award, and the
remainder of the Plan or any such Award shall remain in full force and effect.

     (g) No Trust or Fund Created.  Neither the Plan nor any Award shall create
or be construed to create a trust or separate fund of any kind or a fiduciary
relationship between the Company or any Affiliate and a Participant or any other

                                      -9-
<PAGE>
 
Person.  To the extent that any Person acquires a right to receive payments from
the Company or any Affiliate pursuant to an Award, such right shall be no
greater than the right of any unsecured general creditor of the Company or any
Affiliate.

     (h) No Fractional Shares.  No fractional Shares shall be issued or
delivered pursuant to the Plan or any Award, and the Committee shall determine
whether cash shall be paid in lieu of any fractional Shares or whether such
fractional Shares or any rights thereto shall be canceled, terminated or
otherwise eliminated.

     (i) Headings.  Headings are given to the Sections and subsections of the
Plan solely as a convenience to facilitate reference.  Such headings shall not
be deemed in any way material or relevant to the construction or interpretation
of the Plan or any provision thereof.

     (j) Other Benefits.  No compensation or benefit awarded to or realized by
any Participant under the Plan shall be included for the purpose of computing
such Participant's compensation under any compensation-based retirement,
disability, or similar plan of the Company unless required by law or otherwise
provided by such other plan.

Section 9.  Amendment and Termination; Adjustments.

     Except to the extent prohibited by applicable law and unless otherwise
expressly provided in an Award Agreement or in the Plan:

     (a) Amendments to the Plan.  The Board of Directors of the Company may
amend, alter, suspend, discontinue or terminate the Plan; provided, however,
that, notwithstanding any other provision of the Plan or any Award Agreement,
without the approval of the shareholders of the Company, no such amendment,
alteration, suspension, discontinuation or termination shall be made that,
absent such approval, would:

          (i) violate the rules or regulations of Nasdaq, NMS or any stock 
     exchange that are applicable to the Company; or

          (ii) cause the Company to be unable, under the Code, to grant 
     Incentive Stock Options under the Plan.

     (b) Amendments to Awards.  The Committee may waive any conditions or rights
of the Company under any outstanding Award, prospectively or retroactively.  The
Committee may not amend, alter, suspend, discontinue or terminate any
outstanding Award in any way which would adversely affect the rights,
expectancies or benefits of the Participant thereunder, prospectively or
retroactively, without the consent of the Participant or holder or beneficiary
thereof, except as otherwise provided herein or in the Award Agreement.

                                      -10-
<PAGE>
 
     (c) Correction of Defects, Omissions and Inconsistencies.  The Committee
may correct any defect, supply any omission or reconcile any inconsistency in
the Plan or any Award in the manner and to the extent it shall deem desirable to
carry the Plan into effect.

Section 10.  Effective Date; Term.

     (a) Effective Date.  The Plan shall be effective as of December 21, 1996
(the "Effective Date"); provided, however, that if the Company's shareholders do
not approve the Plan at the next meeting of Shareholders, the Plan shall be null
and void and all Awards granted prior to the date of such Special Meeting shall
be of no force or effect.

     (b) Term.  Awards shall be granted under the Plan only during a 10-year
period beginning on the Effective Date.  Unless otherwise expressly provided in
the Plan or in an applicable Award Agreement, however, any Award theretofore
granted may extend beyond the end of such 10-year period, and the authority of
the Committee provided for hereunder with respect to the Plan and any Awards,
and the authority of the Board of Directors of the Company to amend the Plan,
shall extend beyond the termination of the Plan.

                                      -11-