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                                                                    Exhibit 10.7






PROCENTURY CORPORATION


2004 STOCK OPTION AND AWARD PLAN
(With Stock Appreciation Rights, Performance Units, Restricted
Stock, and Restricted Stock Units)

[To Be Dated the Effective Date of the IPO]





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                                TABLE OF CONTENTS

Section 1. Establishment, Purpose And Term Of Plan.............................1

         1.1      Establishment................................................1
         1.2      Purpose......................................................1
         1.3      Term of Plan.................................................1

Section 2. Definitions And Construction........................................1

         2.1      Definitions..................................................1
         2.2      Construction................................................10

Section 3. Administration.....................................................10

         3.1      Administration by the Board.................................10
         3.2      Delegation..................................................11

Section 4. Stock..............................................................11

         4.1      Maximum Aggregate Number of Shares..........................11
         4.2      Adjustments for Changes in Capital Structure................12

Section 5. Eligibility For And Terms And Conditions Of Awards.................13

         5.1      Eligibility  for Awards.....................................13
         5.2      Terms and Conditions of Awards..............................13
         5.3      Additional Terms and Conditions for Restricted Stock........16
         5.4      Incentive Stock Option Limitations..........................18

Section 6. Compliance With Securities Law.....................................20

         6.1      General.....................................................20
         6.2      Securities Act..............................................20

Section 7. Miscellaneous......................................................20

         7.1      Indemnification for Administration..........................20
         7.2      Termination and Amendment of the Plan.......................20
         7.3      Shareholder Approval........................................21
         7.4      No Special Employment Rights................................21
         7.5      Notices.....................................................21
         7.6      Governing Law...............................................21


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                             PROCENTURY CORPORATION
                        2004 STOCK OPTION AND AWARD PLAN

                                   SECTION 1.
                     ESTABLISHMENT, PURPOSE AND TERM OF PLAN

         1.1      ESTABLISHMENT. The ProCentury Corporation by action of its
Board has established this 2004 Stock Option And Award Plan effective as of
___________, 2003.

         1.2      PURPOSE. The purpose of the Plan is to promote the commonality
of the interests of employees, consultants and directors with the interests of
shareholders for the increased growth, value and profitability of the Company
and to provide incentive to attract, retain and reward employees, directors and
consultants performing services for the Company.

         1.3      TERM OF PLAN. The Plan shall continue in effect until the
earlier of its termination by the Board or the date on which all of the shares
of Stock available for issuance under the Plan have been granted and all
restrictions on such shares under the terms of the Plan and the instruments or
agreements evidencing Awards granted under the Plan have lapsed. However, all
Awards shall be granted, if at all, within ten (10) years from the earlier of
the date the Plan is adopted by the Board or the date the Plan is duly approved
by the shareholders of the Company.

                                   SECTION 2.
                          DEFINITIONS AND CONSTRUCTION

         2.1      DEFINITIONS. The following capitalized terms used in this Plan
shall, unless the context otherwise requires, have the following meaning:

         (a)      "$100,000 PER YEAR LIMITATION" means the limitation of section
                  422(d) of the Code with respect to the aggregate fair market
                  value of Stock with respect to which Incentive Stock Options
                  are exercisable for the first time by any individual during
                  any calendar year and any changes to such limitation as may be
                  made by any amendment of the Code during the term of this
                  Plan.

         (b)      "ACQUIRING CORPORATION" means, with respect to any Change in
                  Control, the surviving, continuing, successor, or purchasing
                  corporation or parent corporation thereof.

         (c)      "APPRECIATION" means, with respect to any Appreciation Right,
                  the appreciation, if any, measured by the excess of the Fair
                  Market Value of a share of Stock over (i) the Exercise Price
                  of shares subject to the Option if the Appreciation Right is
                  exercisable in exchange for that Option or (ii) the Base Price
                  in the Instrument evidencing the Appreciation Right if the
                  Appreciation Right is exercisable on a standalone basis.

         (d)      "APPRECIATION RIGHT" means a right that entitles a Participant
                  to receive the Appreciation with respect to certain shares, or
                  a designated number of shares, of Stock (subject to adjustment
                  as provided in Section 4.2) pursuant to the terms and


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                  conditions of the Plan and the Instrument evidencing the Award
                  of such Appreciation Right. An Appreciation Right may be
                  granted at any time: (1) in tandem with any Option entitling
                  the Participant upon exercise of the Appreciation Right to
                  surrender the Option and receive the Appreciation of the
                  shares of Stock purchasable upon exercise of the Option or
                  otherwise such that upon any exercise of the Appreciation
                  Right, the related Option shall be cancelled to the extent of
                  the exercise of the Appreciation Right and conversely upon any
                  exercise of the Option, the tandem Appreciation Right shall be
                  cancelled to the extent of the exercise of the related Option;
                  or (2) on a stand-alone basis independent of all Options
                  entitling the Participant upon exercise of the Appreciation
                  Right to receive the Appreciation of a number of shares of
                  Stock designated in the Instrument evidencing the Appreciation
                  Right. Upon exercise of the Appreciation Right, the
                  Appreciation shall be paid in shares of Stock equal in number
                  to the largest whole number (rounding down any fraction)
                  resulting from dividing the Appreciation by the Fair Market
                  Value of a share of Stock at the Date of Exercise or, if the
                  Instrument evidencing the Appreciation Right expressly so
                  provides, in cash or any combination of cash or such shares,
                  as provided in that Instrument. Each Appreciation Right shall
                  constitute an unfunded and unsecured obligation of the Company
                  to issue Stock or pay cash or to do a combination thereof as
                  provided in the Instrument evidencing that Appreciation Right.

         (e)      "AWARD" means any Option, Appreciation Right, Performance
                  Unit, Restricted Stock or Restricted Stock Unit.

         (f)      "BASE PRICE" means, with respect to any Appreciation Right,
                  (1) the per share price stated in the Instrument evidencing
                  the Appreciation Right for determining any Appreciation with
                  respect to that Appreciation Right or (2), if no Base Price
                  is stated, the Fair Market Value of a share of Stock at the
                  Date of Grant, as adjusted, in the case of either (1) or (2),
                  pursuant to Section 4.2 to such time.

         (g)      "BOARD" means the Company's Board of Directors or, to the
                  extent it delegates authority to the Committee, the Committee.
                  Notwithstanding anything to the contrary contained in this
                  Plan, if the Company is subject to section 162(m) of the Code,
                  any determination regarding any Award with respect to any
                  person constituting a "covered employee" within the meaning of
                  section 162(m) of the Code shall be made by the Committee.

         (h)      "CAUSE" means with respect to any award of any Participant,
                  unless otherwise defined in the Instrument evidencing the
                  Award, (1) being convicted of, pleading guilty to, or
                  confessing to any act of fraud, misappropriation or
                  embezzlement against the Company or being convicted of or
                  pleading guilty to a felony; (2) willfully, other than
                  pursuant to the advice of Company legal counsel, violating or
                  causing the Company to violate a law which, in the opinion of
                  Company legal counsel, is reasonable grounds for civil or
                  criminal penalties against the Company or its Board; (3) not
                  correcting within thirty (30) days after receipt of notice any
                  act or omission that, in the opinion of the Company's legal
                  counsel, gives rise to a


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                  cause of action by the Company or its Board personally against
                  the employee to specifically enforce or restrain some action
                  for purpose of avoiding some loss or damage, or to recover
                  losses or damages, for an amount in excess of $10,000; (4) not
                  correcting within thirty (30) days after receipt of notice any
                  act of dishonesty against the Company; (5) failing within
                  thirty (30) days after receipt of notice to cure any
                  violations of any covenants of the employee to maintain
                  confidentiality of Company information, properly use and
                  return when required Company property, not compete with
                  Company business, or not solicit Company agents, employees or
                  customers contained in any employment or other agreement with
                  the Company.

         (i)      "CHANGE IN CONTROL" means unless otherwise defined in the
                  Instrument evidencing the Award: (1) A purchase or other
                  acquisition by any person, entity or group of persons (within
                  the meaning of section 13(d) or 14(d) of the Exchange Act,
                  directly or indirectly, which results in the beneficial
                  ownership (within the meaning of Rule 13d-3 promulgated under
                  the Exchange Act) of such person, entity or group of persons
                  equaling a majority or more of the combined voting power of
                  the then outstanding voting securities of the Company entitled
                  to vote generally in the election of directors, excluding,
                  however, any acquisition (i) by the Company or (ii) by any
                  employee benefit plan or related trust sponsored or maintained
                  by the Company; (2) a merger, reorganization or consolidation
                  to which the Company is a party or a sale or other disposition
                  of all or substantially all of the assets of the Company
                  (each, a "corporate transaction"), excluding, however, any
                  corporate transaction pursuant to which persons who were
                  security holders of the Company immediately prior to such
                  corporate transaction (solely because of their voting
                  securities owned immediately prior to such corporate
                  transaction) own immediately thereafter more than 50 percent
                  of the combined voting power entitled to vote in the election
                  of the Board of the then outstanding securities of the company
                  surviving the corporate transaction; or (3) approval by the
                  security-holders of the Company of a plan of complete
                  liquidation or dissolution of the Company.

         (j)      "CODE" means the Internal Revenue Code of 1986, as amended,
                  and any applicable regulations promulgated thereunder.

         (k)      "COMMITTEE" means the compensation committee, if any, or other
                  committee of the Board duly appointed to administer the Plan
                  and having such powers as shall be specified by the Board.
                  Notwithstanding anything to the contrary contained in this
                  Plan, if the Company is subject to section 162(m) of the Code,
                  the Committee shall be composed of, or otherwise any
                  determination regarding any Award with respect to, any person
                  constituting a "covered employee" within the meaning of
                  section 162(m) of the Code shall be made by, not less than two
                  directors, each of whom is intended to be an "outside
                  director" within the meaning of section 162(m) of the Code.
                  and a "non-employee director" under Rule 16b-3 of the Exchange
                  Act.



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         (l)      "COMPANY" means ProCentury Corporation, an Ohio corporation,
                  or any successor corporation thereto.

         (m)      "CONSULTANT" means any person, including an advisor, engaged
                  by the Company or any Subsidiary to render services other than
                  as an Employee or a Director.

         (n)      "DATE OF EXERCISE" means the date determined pursuant to
                  Section 5.2(b).

         (o)      "DATE OF EXPIRATION" means, with respect to any Award, (1) the
                  date stated in the Instrument evidencing the Award as the last
                  date on which the terms and conditions of the Award are to be
                  met in order to purchase Stock or receive Appreciation or
                  Stock pursuant to the Instrument evidencing the Award or (2),
                  if no date is so stated, the 10th anniversary of the Date of
                  Grant. In no event may the Date of Expiration be later than
                  the 15th anniversary of the Date of Grant; provided, however,
                  that the Date of Expiration of any Appreciation Right granted
                  in tandem with any Option shall be the Date of Exercise or
                  Date of Expiration of that Option.

         (p)      "DATE OF GRANT" means, with respect to any Award, the date
                  stated as the date of grant in the Instrument evidencing the
                  Award or, if no such date is stated, the date on which the
                  action authorizing the grant of the Award was taken under the
                  direction of the Board pursuant to Section 3.1.

         (q)      "DATE OF VESTING" means with respect to any Award subject to
                  any Service Vesting Schedule, Performance Vesting Schedule, or
                  other restriction imposed by this Plan or any Instrument
                  evidencing such Award, the date of satisfaction of all such
                  restrictions.

         (r)      "DIRECTOR" means a member of (1) the Board, or (2) the board
                  of directors of any Subsidiary or (3) any advisory board
                  advising the Board, the board of directors of any Subsidiary
                  or the executive officers of the Company or any Subsidiary.

         (s)      "DISABILITY" shall have the same meaning as defined in the
                  Company's long-term disability plan as in effect from time to
                  time or, if there is no such plan in effect at the applicable
                  time, a Participant's inability to discharge his/her
                  responsibilities to the Company by reason of physical or
                  mental illness or incapacity, whether arising out of sickness,
                  accident or otherwise, which shall be evidenced by the written
                  determination of a qualified medical doctor selected by the
                  Company specifying the date upon which such disability
                  commenced and that it has continued uninterrupted for at least
                  180 days. For this purpose, any person who qualifies for a
                  credit against income taxes under Section 22 of the Code shall
                  be considered disabled.

         (t)      "EMPLOYEE" means any person classified as an employee in the
                  records of the Company or any Subsidiary.

         (u)      "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
                  amended.



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<PAGE>

         (v)      "EXERCISE PERIOD" means, with respect to any Award, (1) the
                  period stated in the Instrument evidencing the Award as the
                  period during which the terms and conditions of the Award are
                  to be met in order to purchase Stock or receive Appreciation
                  or Stock pursuant to the Instrument evidencing the Award or
                  (2), if no period is so stated, shall be the period beginning
                  with the Date of Grant and ending with the Date of Expiration.
                  In no event may the Exercise Period begin before the Date of
                  Grant or extend beyond the Date of Expiration.

         (w)      "EXERCISE PRICE" means, with respect to any Option at any
                  time, (1) the price stated in the Instrument evidencing the
                  Option as the price at which the Option entitles the
                  Participant to purchase each share of Stock upon exercise of
                  the Option or (2), if no price is stated, the Fair Market
                  Value of a share of Stock at the Date of Grant, as adjusted,
                  in the case of either (1) or (2) pursuant to Section 4.2 to
                  such time.

         (x)      "FAIR MARKET VALUE" means, as of any date, the value of a
                  share of Stock or other property as determined by the Board,
                  in its sole discretion, or by the Company, in its sole
                  discretion, if such determination is expressly allocated to
                  the Company herein, subject to the following:

                  (1)      If the Stock is included for listing on Nasdaq or
                           such other national or regional securities exchange
                           or market system constituting the primary market for
                           the Stock, the Fair Market Value of a share of Stock
                           shall be the daily trading price as of the close of
                           market (or, if there is no such closing price, the
                           mean of the closing bid and asked prices) on such
                           date quoted by Nasdaq or such other national or
                           regional securities exchange or market system
                           constituting the primary market for the Stock, as
                           reported in the Wall Street Journal or such other
                           source as the Company deems reliable. If the relevant
                           date does not fall on a day on which the Stock was
                           traded, Fair Market Value shall be such closing price
                           (or the mean of the closing bid and asked prices)
                           quoted for the most recent day prior to such date on
                           which the Stock was so traded.

                  (2)      If the Stock is not included for listing on Nasdaq or
                           any national exchange, the Fair Market Value of a
                           share of Stock shall be as determined by the Board
                           without regard to any restriction other than a
                           restriction which, by its terms, will never lapse.

         (y)      "INCENTIVE STOCK OPTION" means an Option designated as such in
                  the Instrument covering such Option that qualifies as an
                  "incentive stock option" within the meaning of Section 422(b)
                  of the Code.

         (z)      "INSIDER" means any person whose transactions in the Stock are
                  subject to Section 16 of the Exchange Act.



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<PAGE>

         (aa)     "INSTRUMENT" means a written agreement or instrument
                  evidencing the terms and conditions of any Award granted
                  pursuant to this Plan.

         (bb)     "MAXIMUM AGGREGATE NUMBER OF SHARES" shall mean __________(1)
                  shares of Stock, as determined in accordance with Section 4.1
                  and subject to adjustment in accordance with Section 4.2.

         (cc)     "NEW SHARES" means New Shares as defined in Section 4.2.

         (dd)     "NON-QUALIFIED STOCK OPTION" means an Option designated as
                  such in the Instrument covering such Option or that does not
                  otherwise constitute an Incentive Stock Option.

         (ee)     "OPTION" means a right to purchase Stock (subject to
                  adjustment as provided in Section 4.2) pursuant to the terms
                  and conditions of the Plan, subject to any Service Vesting
                  Schedule, Performance Vesting Schedule, or other restriction
                  imposed by this Plan or any Instrument evidencing such Award.
                  An Option may be either an Incentive Stock Option or a
                  Non-Qualified Stock Option.

         (ff)     "PARTICIPANT" means the Employee, Consultant or Director who
                  has been granted an Award or, in the case of death, such
                  person's heir, legatee or other distributee entitled to
                  exercise this Option pursuant to will or applicable laws of
                  descent and distribution pursuant to Section 5.2(e).

         (gg)     "PERFORMANCE UNIT" means a right to receive payment in cash
                  equal to the Fair Market Value of one share of Stock (subject
                  to adjustment as provided in Section 4.2) at the Date of
                  Vesting pursuant to the terms and conditions of the Plan and
                  any Instrument evidencing the Award of such Performance Unit,
                  subject to any Service Vesting Schedule, Performance Vesting
                  Schedule, or other restriction imposed by this Plan or any
                  Instrument evidencing such Award. If and only to the extent so
                  provided in the Instrument evidencing the Performance Unit, a
                  Performance Unit may include the equivalent of each cash
                  dividend declared or paid by the Company on a share of Stock
                  after the Performance Unit's Date of Grant, and all such
                  dividend equivalents shall accumulate and be deferred until
                  the payment of cash equal to the Fair Market Value of the
                  Stock pursuant to the Performance Unit. Unless otherwise
                  provided in the Instrument evidencing the Performance Unit,
                  any such accumulated dividend equivalents shall be payable in
                  cash or, if the Instrument evidencing the Restricted Stock
                  Unit expressly so provides, in shares of Stock equal in number
                  to the largest whole number (rounding down any fraction)
                  resulting from dividing the accumulated dividend equivalents
                  by the Fair Market Value of a share of Stock at the date of
                  issuance of the Stock pursuant to the Performance Unit, or any
                  combination of cash or such shares, No Participant or other
                  person shall have any right to any dividend

----------------------
(1) To be a number of shares of Stock equal to 9% of the shares of Stock
outstanding on a fully diluted basis (including shares subject to options or
restricted stock awards effective at the initial public offering) immediately
following the contemplated initial public offering.

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<PAGE>

                  equivalents with respect to any Performance Unit except upon
                  the payment of the Fair Market Value of the Stock pursuant to
                  the Performance Unit, and all such dividend equivalents, if
                  any, accumulated with respect to any Performance Unit shall
                  automatically be forfeited upon any forfeiture of such
                  Performance Unit and shall otherwise automatically expire upon
                  the Date of Expiration of such Performance Unit. Each
                  Performance Unit shall constitute an unfunded and unsecured
                  obligation of the Company to pay cash or, with respect to any
                  dividend equivalents, to pay cash or issue Stock or any
                  combination thereof as provided in the Instrument evidencing
                  that Performance Unit.

         (hh)     "PERFORMANCE VESTING SCHEDULE" means, unless a different
                  schedule is provided by the Instrument evidencing an Award,
                  (1) the vesting of such number or proportion of the Unvested
                  Shares designated as Performance Vesting Shares, or (2) the
                  accelerated vesting of such number or proportion of Unvested
                  Shares designated as Service Vesting Shares, for completion or
                  satisfaction of such milestones as may be identified by
                  management of the Company for the Participant and incorporated
                  in the Instrument.

         (ii)     "PERFORMANCE VESTING SHARES" means, with respect to any Award,
                  those shares of Stock designated by the Instrument evidencing
                  the Award as being subject to a Performance Vesting Schedule.

         (jj)     "PLAN" means at any time the plan evidenced by this document
                  as amended and in effect at such time.

         (kk)     "PURCHASE PRICE" means, with respect to any share of
                  Restricted Stock at any time, the (1) price, if any, stated in
                  the Instrument evidencing the Award of Restricted Stock as the
                  price which the Participant must pay in order to receive each
                  share of Restricted Stock subject to the Award, as adjusted
                  pursuant to Section 4.2 to such time.

         (ll)     "RELOAD FEATURE" means with respect to any Option the right,
                  if any, stated in the Instrument evidencing the Option,
                  entitling the optionee upon exercise of the Option (the
                  "original Option") to be granted a new Option, having a Date
                  of Grant as of the date of exercise of the original Option and
                  an Exercise Period commensurate with the remainder of the
                  Exercise Period of the original Option, to purchase a number
                  of shares of Stock equal to the number of shares purchased
                  upon that exercise of the original Option for an Exercise
                  Price equal to the Fair Market Value of the stock at that Date
                  of Grant; provided that no Reload Feature may obligate the
                  issuance of Stock that will cause the Maximum Aggregate Number
                  of Shares to be exceeded.

         (mm)     "RESTRICTED STOCK" means each share of Stock (subject to
                  adjustment as provided in Section 4.2) subject to any Service
                  Vesting Schedule, Performance Vesting Schedule, or other
                  restriction imposed by this Plan or any Instrument on the
                  right of a holder to offer for sale, sell, pledge, assign,
                  encumber, or otherwise transfer


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<PAGE>

                  or dispose of such share or any interest in such share. Unless
                  otherwise provided in the Instrument evidencing the terms and
                  conditions of the Stock Grant, each share granted as or issued
                  pursuant to an Award as Restricted Stock shall entitle the
                  record holder thereof to all rights and incidents of ownership
                  thereof, including all dividend and voting rights, provided,
                  however, that no such share shall entitle any person to offer
                  for sale, sell, pledge, assign, encumber, or otherwise
                  transfer or dispose of such share or any interest in such
                  share until satisfaction of all such restrictions imposed by
                  this Plan or the Instrument evidencing such Award other than
                  forfeiture and reversion to the Company pursuant to Section
                  5.3(c).

         (nn)     "RESTRICTED STOCK UNIT" means a right to receive one share of
                  Stock (subject to adjustment as provided in Section 4.2) at
                  the Date of Vesting pursuant to the terms and conditions of
                  the Plan and any Instrument evidencing the Award of such
                  Restricted Stock Unit, subject to any Service Vesting
                  Schedule, Performance Vesting Schedule, or other restriction
                  imposed by this Plan or any Instrument evidencing such Award.
                  Any Restricted Stock Unit shall include the equivalent of each
                  cash dividend declared or paid by the Company on a share of
                  Stock after the Restricted Stock Unit's Date of Grant, and all
                  such dividend equivalents shall accumulate and be deferred
                  until the issuance of Stock pursuant to the Restricted Stock
                  Unit. Unless otherwise provided in the Instrument evidencing
                  the Restricted Stock Unit, the accumulated dividend
                  equivalents shall be payable in shares of Stock equal in
                  number to the largest whole number (rounding down any
                  fraction) resulting from dividing the accumulated dividend
                  equivalents by the Fair Market Value of a share of Stock at
                  the date of issuance of the Stock pursuant to the Restricted
                  Stock Unit or, if the Instrument evidencing the Restricted
                  Stock Unit expressly so provides, in cash or any combination
                  of cash or such shares, as provided in that Instrument. No
                  Participant or other person shall have any right to any
                  dividend equivalents with respect to any Restricted Stock Unit
                  except upon the issuance of Stock pursuant to the Restricted
                  Stock Unit, and all such dividend equivalents, if any,
                  accumulated with respect to any unissued share of Stock shall
                  automatically be forfeited upon any forfeiture of such
                  Restricted Stock Unit and shall otherwise automatically expire
                  upon the Date of Expiration of such Restricted Stock Unit.
                  Each Restricted Stock Unit shall constitute an unfunded and
                  unsecured obligation of the Company to issue Stock or pay cash
                  or to do a combination thereof as provided in the Instrument
                  evidencing that Restricted Stock Unit.

         (oo)     "RETIREMENT" means at any time, unless otherwise defined in
                  the Instrument, termination of a Participant's Service after
                  the sum of the Participant's (1) years of Service and (2)
                  years of age equals or exceeds seventy-five (75)

         (pp)     "SECURITIES ACT" means the Securities Act of 1933, as amended.

         (qq)     "SERVICE" means a Participant's employment or service with the
                  Company or any Subsidiary, whether in the capacity of an
                  Employee, a Director or a Consultant.


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<PAGE>

                  The Participant's Service shall not be deemed to have
                  terminated merely because of a change in the capacity in which
                  the Participant renders Service to the Company or any
                  Subsidiary or a change in the form of organization of the
                  Company or any Subsidiary for which the Participant renders
                  such Service. Furthermore, a Participant's Service shall not
                  be deemed to have terminated if the Participant takes any
                  military leave, sick leave, or other bona fide leave of
                  absence approved by the Company or, if applicable, the
                  Subsidiary, provided, however, that if any such leave exceeds
                  ninety (90) days, on the ninety-first (91st) day of such leave
                  the Participant's Service shall be deemed to have terminated
                  unless the Participant's right to return to Service with the
                  Company or is guaranteed by statute or contract.
                  Notwithstanding the foregoing, unless otherwise designated by
                  the Company or required by law, a leave of absence shall not
                  be treated as Service for purposes of determining vesting
                  under the Participant's Instrument. The Participant's Service
                  shall be deemed to have terminated either upon an actual
                  termination of Service or, if the Service is with a
                  Subsidiary, upon that organization's ceasing to be a
                  "Subsidiary" within the meaning of this Plan. Subject to the
                  foregoing, the Company, in its sole discretion, shall
                  determine whether the Participant's Service has terminated and
                  the effective date of such termination.

         (rr)     "SERVICE VESTING SCHEDULE" means, unless a different schedule
                  is provided by the Instrument evidencing an Award, the vesting
                  of 1/36th of the total number of Unvested Shares designated by
                  the Award as Service Vesting Shares for each calendar month of
                  Service of the Participant after the Date of Grant such that
                  the entire number of Service Vesting Shares shall be vested
                  after 36 calendar months of Service after the Date of Grant.

         (ss)     "SERVICE VESTING SHARES" means, with respect to any Award,
                  those shares of Stock designated by the Instrument evidencing
                  the Award as being subject to a Service Vesting Schedule.
                  Notwithstanding anything to the contrary herein, vesting of
                  Service Vesting Shares may be accelerated pursuant to a
                  Performance Vesting Schedule or otherwise for completion or
                  satisfaction of such milestones as may be identified by
                  management of the Company for the Participant and incorporated
                  in the Instrument.

         (tt)     "STOCK" means at any date the Common Shares of the Company, as
                  adjusted from time to time through such date in accordance
                  with Section 4.2.

         (uu)     "STOCK GRANT" means an Award of a certain number of shares of
                  Restricted Stock (subject to adjustment as provided in Section
                  4.2) pursuant to the terms and conditions of the Plan,
                  excluding any Option, Appreciation Right, Restricted Stock
                  Unit, or shares of Stock issuable upon exercise of an Option
                  or Appreciation Right or pursuant to a Restricted Stock Unit.

         (vv)     "SUBSIDIARY" means at any time any organization, corporate or
                  noncorporate, in an unbroken chain of organizations beginning
                  with the Company if, at the time,


                                       9
<PAGE>

                  each of the organizations to the last organization in the
                  chain owns 50 percent or more of the total combined voting
                  power of all classes' capital stock or other beneficial
                  interests of such organization.

         (ww)     "UNVESTED SHARES" means those shares of Stock granted as or
                  issued pursuant to an Award that pursuant to the terms and
                  conditions of such Award are subject to completion or
                  satisfaction of a Performance Vesting Schedule or Service
                  Vesting Schedule or that remain subject to a right of the
                  Company to reacquire those shares until completion of a period
                  of Service pursuant to a Service Vesting Schedule or until
                  completion or satisfaction of milestones resulting in vesting
                  or acceleration of vesting within the meaning of a Performance
                  Vesting Schedule.

         (xx)     "VESTED SHARES" means those shares of Stock granted as or
                  issued pursuant to an Award that pursuant to the terms and
                  conditions of such Award are not Unvested Shares.

         2.2      CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Terms defined in the singular shall include the plural,
and vice versa, and pronouns in any gender shall include the masculine, feminine
and neuter, as the context requires. Use of the term "or" is not intended to be
exclusive, unless the context clearly requires otherwise. All references to a
"section" or "sections" refer to this Plan unless the context otherwise
requires.

                                   SECTION 3.
                                 ADMINISTRATION

         3.1      ADMINISTRATION BY THE BOARD. The Plan shall be administered
under the direction of the Board, including but not limited to full authority
to:

         (a)      Determine the persons to whom, and the time or times at which,
                  Awards shall be granted and the number of shares of Stock to
                  be subject to each such Award;

         (b)      Designate Options as Incentive Stock Options or Non-Qualified
                  Stock Options;

         (c)      Determine the Fair Market Value of shares of Stock or other
                  property;

         (d)      Determine the terms, conditions and restrictions applicable to
                  each Award (which need not be identical to those of any other
                  Award) and any shares acquired upon the exercise thereof or
                  otherwise received in connection therewith, including, without
                  limitation, any - (1) Exercise Price; (2) Base Price; (3)
                  Exercise Period; (4) Date of Expiration; (5) method of
                  calculating an Appreciation or determining Fair Market Value;
                  (6) portion of the shares subject to the Award that are
                  Unvested Shares and Vested Shares; (7) any Reload Feature; (8)
                  portion of the Unvested Shares to be Performance Vesting
                  Shares and to be Service Vesting Shares; (9) Performance
                  Vesting Schedule and the Service Vesting Schedule; (10)
                  permitted method of payment for shares purchased upon the
                  exercise of any Option; (11) method for satisfaction of any
                  tax withholding obligation arising in


                                       10
<PAGE>

                  connection with the Award or such shares received in
                  connection therewith, including by the withholding or delivery
                  of shares of Stock - and all other terms, conditions and
                  restrictions applicable to the Award that are to be met in
                  order to purchase Stock or receive Appreciation or Stock
                  pursuant to the Instrument evidencing the Award, or applicable
                  to any Stock purchased or received, as long as not
                  inconsistent with the terms of the Plan;

         (e)      Approve one or more forms of Instrument evidencing the Awards
                  granted;

         (f)      (1) Amend, modify, extend, renew, or grant a new Award in
                  substitution for any Award, or (2) waive any restrictions or
                  conditions applicable to any Award or any shares acquired upon
                  the exercise thereof;

         (g)      Accelerate, continue, extend or defer the exercisability or
                  period for meeting conditions on the purchase of Stock or
                  receipt of Appreciation or Stock with respect to any Award or
                  the vesting of any shares so purchased or received;

         (h)      Determine all questions regarding, including making
                  interpretations of the language of, the Plan and any
                  Instrument as well as any Award evidenced thereby or granted
                  thereunder, with any such determination or interpretation by
                  the Board or under its direction being final and binding upon
                  all persons having an interest in the Plan or such Instrument
                  or Award;

         (i)      (1) Prescribe, amend or rescind rules, guidelines and policies
                  relating to the Plan, or (2) adopt supplements to, or
                  alternative versions of, the Plan;

         (j)      Correct any defect, supply any omission or reconcile any
                  inconsistency in the Plan or any Instrument and make all other
                  determinations and take such other actions with respect to the
                  Plan or any Award as deemed advisable to the extent consistent
                  with the Plan and applicable law.

         3.2      DELEGATION. Except as otherwise required by law, the Board may
delegate any or all of its authority and responsibility for administration of
the Plan to any Committee or officer of the Company or any officer of any
Subsidiary, except that any such delegated authority shall remain subject to the
overall direction of the Board. Any such Committee or officer to whom authority
or responsibility is delegated shall have the authority to act on behalf of the
Company with respect to any matter, right, obligation, determination or election
which is the responsibility of, or which is delegated to, the Company herein,
provided the applicable Committee or officer has apparent authority with respect
to such matter, right, obligation, determination or election.

                                    SECTION 4.
                                      STOCK

         4.1      MAXIMUM AGGREGATE NUMBER OF SHARES. Subject to adjustment as
provided in Section 4.2, the number of shares of Stock that may be issued
pursuant to all Awards granted and outstanding at any time under this Plan shall
not exceed the Maximum Aggregate Number of Shares, and at no time may any Award
be granted under the Plan if the number of shares of


                                       11
<PAGE>

Stock issued through such time pursuant to all Awards granted under this Plan
when added to the aggregate number of shares of Stock issuable upon exercise of
all other Awards granted and outstanding at such time under this Plan at such
time exceeds the Maximum Aggregate Number of Shares. Notwithstanding anything to
the contrary in this Plan, if (a) an outstanding Award for any reason expires or
is terminated or canceled or (b) shares of Stock acquired upon exercise of an
Award are reacquired by the Company pursuant to a call right of the Company or
put right of the Participant that is part of the Award, the shares of Stock
allocable to the unexercised portion of such Award, or such reacquired shares of
Stock, shall again be available for issuance under the Plan, and any such
reacquired shares of Stock shall no longer be counted against the Maximum
Aggregate Number of Shares that may be issued upon exercise of Awards granted
under this Plan.

         4.2      ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. (a) If the
shares of Stock are split or if a dividend of shares of Stock is paid on the
Stock, the number of shares of Stock subject to each then outstanding Option (to
the extent unexercised) or otherwise by which each other outstanding form of
Award is based or otherwise measured and the Maximum Aggregate Number of Shares
shall be increased automatically by the ratio of the number of shares of Stock
outstanding immediately after such event to the number of shares of Stock
outstanding immediately before such event (ignoring for this purpose any
provision for the repurchase or cash payment of fractional shares), and the
Exercise Price, Base Price, or Purchase Price of each such outstanding Award
shall be decreased automatically by the reciprocal of such ratio. If the shares
of Stock are combined into a lesser number of shares, the number of shares of
Stock subject to each then outstanding Option (to the extent unexercised) or
otherwise by which each other outstanding form of Award is based or otherwise
measured and the Maximum Aggregate Number of Shares shall be decreased
automatically by such ratio (ignoring for this purpose any provision for the
repurchase or cash payment of fractional shares), and the Exercise Price, Base
Price, or Purchase Price of each such outstanding Award shall be increased
automatically by the reciprocal of such ratio.

         (b)      If any other change occurs in the shares of Stock through
recapitalization, merger, consolidation or exchange of shares or otherwise,
there shall automatically be substituted for each share of Stock subject to each
then outstanding Option (to the extent unexercised) or otherwise by which each
other outstanding form of Award is based or otherwise measured and for the
Maximum Aggregate Number of Shares shall be the number and kind of shares or
other securities or property into which each outstanding share of Stock was
changed, and the Exercise Price, Base Price, or Purchase Price of each such
outstanding Award shall be increased or decreased proportionally so that the
aggregate Exercise Price, Base Price or Purchase Price for the securities
subject to each Option shall remain the same as immediately before such event.
In addition, such further equitable adjustments may be made in the Plan and to
the then outstanding Awards as are deemed necessary and appropriate under
direction of the Board, in its sole discretion, including but not limited to
changing the number of shares reserved under the Plan or subject to or otherwise
measured by outstanding Awards as well as the Exercise Price, Base Price or
Purchase Price and the vesting conditions of outstanding Awards. Any such
equitable adjustments determined under direction of the Board pursuant to this
Section 4.2 shall be final, binding and conclusive.



                                       12
<PAGE>

                                   SECTION 5.
               ELIGIBILITY FOR AND TERMS AND CONDITIONS OF AWARDS

         5.1      ELIGIBILITY FOR AWARDS. Awards may be granted only to
Employees, Consultants, and Directors. For purposes of the foregoing sentence,
"Employees," "Consultants" and "Directors" shall include prospective Employees,
prospective Consultants and prospective Directors to whom Awards are granted in
connection with written offers retaining their Services, provided that no such
Award shall become effective if the offer is not accepted or the person
otherwise does not commence rendering such Services. More than one Award may be
granted from time to time to any eligible person.

         5.2      TERMS AND CONDITIONS OF AWARDS. Except for the limitations of
Section 5.3 applicable to Options granted or otherwise designated as Incentive
Stock Options, all terms and conditions of each Award granted under the Plan,
and of all shares of Stock issuable pursuant to such Award, shall be determined
under the direction of the Board pursuant to Section 3.1. All such terms and
conditions shall be set forth in the Instrument evidencing the Award. Not in
limitation of the foregoing, unless an Instrument provides otherwise:

         (a)      PAYMENT. The aggregate Exercise Price for the Stock purchased
                  upon exercise of any Option may be paid (1) in cash, by check,
                  or cash equivalent; (2) by tender to the Company of shares of
                  Stock owned by the Participant having a Fair Market Value (as
                  determined by the Company without regard to any restrictions
                  on transferability applicable to such Stock by reason of
                  federal or state securities laws or agreements with an
                  underwriter for the Company) not less than the aggregate
                  Exercise Price payable, provided that such tender of Stock
                  does not constitute a violation of the provisions of any law,
                  regulation or agreement restricting the redemption of the
                  Company's stock; (3) by the assignment of the proceeds of a
                  sale or loan with respect to some or all of the shares being
                  acquired upon the exercise of the Option (including, without
                  limitation, through an exercise complying with the provisions
                  of Regulation T as promulgated from time to time by the Board
                  of Governors of the Federal Reserve System), provided that the
                  Company reserves the right to decline payment by means of any
                  such assignment for any reason in its sole discretion; (4) by
                  exchanging such Options for an Appreciation Right; or (5) by
                  such combination of the forgoing or such other consideration
                  as may be approved by the Board from time to time to the
                  extent permitted by applicable law.

         (b)      DATE OF EXERCISE. Unless otherwise provided in the Instrument
                  evidencing the Award, the Date of Exercise of any Award shall
                  be the date as of which all terms and conditions of the Award
                  are to be met in order to purchase Stock or receive
                  Appreciation or Stock pursuant to the Instrument evidencing
                  the Award.

         (c)      TAX WITHHOLDING. The Company shall have the right, but not the
                  obligation, to deduct from the shares of Stock issuable upon
                  the exercise of an Award, or to accept from the Participant
                  the tender of, a number of whole shares of Stock having a Fair
                  Market Value, as determined by the Company, equal to all or
                  any


                                       13
<PAGE>

                  part of the federal, state, local and foreign taxes, if any,
                  required by law to be withheld by the Company at the source
                  with respect to such Award or the shares acquired upon the
                  exercise thereof. Alternatively, or in addition, in its sole
                  discretion, the Company shall have the right to require the
                  Participant, through payroll withholding, cash payment or
                  otherwise, to make adequate provision for any such tax
                  withholding obligations of the Company or any Subsidiary
                  arising in connection with the Award or the shares acquired
                  upon the exercise thereof. The Company shall have no
                  obligation to deliver certificates evidencing shares of Stock
                  or to release such certificates or shares from any escrow
                  established pursuant to the Instrument until all federal,
                  state, local and foreign withholding obligations have been
                  satisfied.

         (d)      TERMINATION OF SERVICE. Unless otherwise provided in this Plan
                  or the Instrument evidencing any Award to any Participant, all
                  rights to exercise any Option or otherwise to purchase Stock
                  or receive Appreciation or Stock pursuant to the Instrument
                  evidencing the Award shall terminate three months after
                  termination of the Participant's Service. Notwithstanding any
                  other provision of the Plan to the contrary, if a
                  Participant's Service with the Company or applicable
                  Subsidiary is terminated for Cause, all Awards granted to that
                  Participant shall automatically expire and all rights pursuant
                  to that Award shall automatically terminate immediately upon
                  such termination of Service.

         (e)      TRANSFERABILITY. Each Award is not transferable except at
                  Participant's death, by will or applicable laws of descent and
                  distribution. During the lifetime of the Participant, an Award
                  shall be exercisable only by the Participant or, in the case
                  of incapacity, the Participant's guardian or legal
                  representative. Notwithstanding the foregoing, pursuant to
                  rules adopted by the Board or the Committee, an Award may be
                  transferred to and exercised by a trust that is for the
                  exclusive benefit of the Participant and, in the case of
                  death, the Participant's family.

         (f)      EFFECT OF CHANGE IN CONTROL. In the event of a Change in
                  Control, the Acquiring Corporation may either assume the
                  Company's rights and obligations under outstanding Awards or
                  substitute for outstanding Awards substantially equivalent
                  options for the Acquiring Corporation's stock. For purposes of
                  this Section 5.2(f), an Award shall be deemed assumed if
                  following the Change in Control, the Award confers the right
                  to purchase, in accordance with its terms and conditions, for
                  each share of Stock subject to the Award immediately prior to
                  the Change in Control, the consideration (whether stock, cash
                  or other securities or property) to which a holder of a share
                  of Stock on the effective date of the Change in Control was
                  entitled. In the event the Acquiring Corporation does not so
                  assume, or substitute for, the outstanding Awards in
                  connection with a Change in Control, the unexercisable portion
                  of any outstanding Awards shall be immediately exercisable in
                  full as of the date 10 days prior to the effective date of the
                  Change in Control. Any such acceleration of the exercise of
                  any Award pursuant to this Section 5.2(f) shall be conditioned
                  upon the consummation of the Change in Control. Any Award
                  which is neither (1) assumed, or substituted for, by the

                                       14
<PAGE>

                  Acquiring Corporation in connection with the Change in Control
                  nor (2) exercised as of the date of the Change in Control
                  shall terminate and cease to be outstanding effective as of
                  the date of the Change in Control. Notwithstanding the
                  foregoing, shares acquired upon exercise of an Award prior to
                  the Change in Control, and any consideration received pursuant
                  to the Change in Control with respect to such shares, shall
                  continue to be subject to all applicable provisions of the
                  Instrument evidencing such Award except as otherwise provided
                  in such Instrument.

         (g)      LOCK-UP AGREEMENT. In consideration for the grant of each
                  Award to a Participant and in order to facilitate future
                  financings of Company, the Participant -- by accepting any
                  Award granted-- agrees on behalf of that Participant and the
                  Participant's heirs, legal representatives successors and
                  assigns, including those by will or the laws of descent and
                  distribution, that in the event of any underwritten public
                  offering of any Company securities, including an initial
                  public offering of Stock, made by the Company pursuant to an
                  effective registration statement filed under the Securities
                  Act, neither the Participant nor any such heirs, legal
                  representatives successors and assigns will directly or
                  indirectly sell, offer to sell, solicit an offer to buy, grant
                  any option to purchase, contract to sell (including, without
                  limitation, any short sale), or otherwise dispose or offer to
                  dispose of any interest, equitable or beneficial, in any of
                  such shares for such period of time from and after the
                  effective date of such registration statement as may be
                  required by the underwriter of any such public offering;
                  provided, however, that such period of time shall not exceed
                  180 days from the effective date of the registration statement
                  filed in connection with such public offering or any other
                  period applicable in any lock-up agreement to which the
                  Company or the Participant as an affiliated of the Company is
                  subject. The foregoing limitation shall not apply to shares
                  registered in any public offering under the Securities Act. In
                  order to enforce the foregoing covenant, Company may impose
                  stop-transfer instructions with respect to the Company capital
                  stock held by the undersigned until the end of such period.
                  Notwithstanding the foregoing, the obligations described in
                  this letter shall not apply to a registration relating solely
                  to employee benefit plans on Form S-l or Form S-8 or similar
                  forms which may be promulgated in the future.

         (h)      SECURITIES LAW RESTRICTIONS.

                  (1)      INSTRUMENT EVIDENCING AWARDS. Each Award (other than
                           a share of Stock) shall be subject to the following
                           restriction with like effect as if the following
                           legend is conspicuously noted in the Instrument
                           evidencing the Award:

                                   "No Stock or other security shall be
                                   delivered, and no option or other right to
                                   acquire any stock or other security shall be
                                   exercisable, pursuant to this Award except
                                   upon effective registration under the
                                   Securities Act of 1933 as amended and the
                                   securities laws of each applicable state or
                                   other jurisdiction or upon



                                       15
<PAGE>

                                   acceptance by the Company of an opinion of
                                   counsel in such form and by such counsel as
                                   satisfactory to counsel for the Company that
                                   such registration is not required."

                  (2)      CERTIFICATES EVIDENCING STOCK. Unless registered
                           pursuant to an effective registration under the
                           Securities Act, all shares of Stock issued upon
                           exercise of any Award shall be subject to the
                           following restriction with like effect as if the
                           following legend is conspicuously noted in the
                           certificate evidencing such shares:

                                   "The securities represented by this
                                   certificate have not been issued in any
                                   transaction registered under the Securities
                                   Act of 1933, and, accordingly, may not be
                                   offered for sale, sold or otherwise
                                   transferred except upon effective
                                   registration under the Securities Act of 1933
                                   as amended and the securities laws of each
                                   applicable state or other jurisdiction or
                                   upon acceptance by the Company of an opinion
                                   of counsel in such form and by such counsel
                                   as satisfactory to counsel for the Company
                                   that such registration is not required."

                                   "The securities represented by this
                                   certificate are subject to certain
                                   restrictions contained in a certain plan
                                   known as the ProCentury Corporation 2004
                                   Stock Option And Award Plan and a certain
                                   Stock Instrument granted thereunder, copies
                                   of which are on file at the principal office
                                   of the issuer."

         (i)      SS.162(M) CONSIDERATIONS. The intent is that Awards granted
                  will not to the extent possible result in loss of a deduction
                  by the Company under Section 162(m) of the Code, and to the
                  extent that the Company is subject to such Section 162(m), the
                  terms and amounts of Awards granted to employees constituting
                  covered employees within the meaning of Section 162(m) shall
                  take into account the limits on deduction of that Section.
                  Notwithstanding anything to the contrary in this Plan or the
                  Instrument evidencing any Award, the Committee shall have the
                  right to modify the terms and conditions of any outstanding
                  Award to the extent necessary to preserve the Company's tax
                  deduction for the payment or exercise of Awards under Section
                  162(m) of the Code, including, but not limited to, deferring
                  the issuance of any shares of Stock or payment of any cash
                  until the first day of the first calendar year after the
                  employee ceases to be such a covered employee.

         5.3      ADDITIONAL TERMS AND CONDITIONS FOR RESTRICTED STOCK.
Contemporaneously with or as soon as possible after each Award constituting a
Stock Grant, the Company shall cause to be issued one or more certificates
evidencing the shares of Restricted Stock granted or issued pursuant to such
Award in the name of the Participant as the record holder thereof. Each
certificate evidencing any shares of Restricted Stock (including each
certificate evidencing any security issued or distributed with respect to any
share of Restricted Stock as a stock dividend, stock split, reverse stock split,
recapitalization, combination, reclassification or similar change in


                                       16
<PAGE>

the capital structure of the Company) shall be held by an appropriate officer of
the Company with executed stock transfer powers to be in transferable form for
as long as such shares are subject to any Service Vesting Schedule, Performance
Vesting Schedule, or other restriction imposed by this Plan or any Instrument on
the right of a holder to offer for sale, sell, pledge, assign, encumber, or
otherwise transfer or dispose of such share or any interest in such share as
follows:

         (a)      Until satisfaction of all such restrictions imposed by this
                  Plan or the Instrument evidencing such Award, in addition to
                  any other restrictions required by the Plan or the Instrument
                  to be noted in the certificate, the certificate shall be
                  subject to the following restriction with like effect as if
                  the following legend is conspicuously noted in the
                  certificate:

                           "Neither the securities represented by this
                           certificate nor any interest therein may be offered
                           for sale, sold, pledged, assigned, encumbered, or
                           otherwise transferred or disposed of until
                           satisfaction of certain restrictions imposed by a
                           certain plan known as the ProCentury Corporation 2004
                           Stock Option And Award Plan and a certain Instrument
                           granted thereunder, copies of which are on file at
                           the principal office of the issuer."

                  In addition, the certificate shall be subject to such
                  stop-transfer orders and other restrictions as the Company may
                  deem advisable to enforce such restrictions.

         (b)      Upon satisfaction of all such restrictions imposed by this
                  Plan or the Instrument evidencing such Award and upon
                  satisfaction pursuant to Section 5.2(c) of all federal, state,
                  local and foreign taxes required by law to be withheld by the
                  Company, the Company shall cause a new certificate without any
                  notation of the foregoing restrictions to be delivered to the
                  Participant upon surrender and cancellation of the certificate
                  containing such notation, and each share represented by such
                  new certificate shall no longer constitute a share of
                  Restricted Stock.

         (c)      Upon termination of the Participant's Service prior to
                  satisfaction of all such restrictions imposed by this Plan or
                  the Instrument evidencing such Award or otherwise upon failure
                  of all such restrictions to be satisfied prior to the Date of
                  Expiration, if any, then, except to the extent otherwise
                  provided in the Instrument evidencing the Award, the
                  Participant shall forfeit all rights and incidents of
                  ownership in and to all shares represented by the certificate,
                  and the certificate shall be cancelled and the shares
                  represented by such certificate shall revert to the Company.
                  Any such forfeiture shall apply not only to the Participant,
                  but also to the Participant's estate, heirs, legatees,
                  successors, assigns, executors, administrators, legal
                  representatives or any other person who may make a claim
                  through or on behalf of such Participant.



                                       17
<PAGE>

         5.4      INCENTIVE STOCK OPTION LIMITATIONS. Each Option granted as an
Incentive Stock Option, or thereafter designated as an Incentive Stock Option,
shall comply with the following limitations:

         (a)      DATE OF ISSUANCE. No Option may be granted or otherwise
                  designated as an Incentive Stock Option after the 10-year
                  period beginning with the date of adoption of this Plan by the
                  Company's shareholders.

         (b)      EXERCISE PERIOD AND EXPIRATION DATE. No Option granted or
                  otherwise designated as an Incentive Stock Option shall be
                  exercisable on or after the 10th anniversary of the Date of
                  Grant or, if later, date of designation as an Incentive Stock
                  Option.

         (c)      EXERCISE PRICE. The Exercise Price of any Option granted or
                  otherwise designated as an Incentive Stock Option may not be
                  less than the Fair Market Value of the Stock at the Date of
                  Grant or, if later, date of designation, as adjusted
                  thereafter pursuant to Section 4.2.

         (d)      TRANSFER. Each Option granted or otherwise designated as an
                  Incentive Stock Option shall, by its terms, not be
                  transferable by Participant otherwise than by will or the laws
                  of descent and distribution, and shall be exercisable during
                  the Participant's lifetime only by the Participant.

         (e)      10% SHAREHOLDER. No Incentive Stock Option may be granted to
                  any person, and no Option of any person may be designated as
                  an Incentive Stock Option, if the person at the Date of Grant
                  or designation owns stock possessing more than 10 percent of
                  the total combined voting power of all classes of stock of the
                  Company or any Subsidiary or of any parent of the Company
                  unless the Exercise Price of the Option is at least 110
                  percent of the Fair Market Value of such Stock at the Date of
                  Grant or designation, and such Option by its terms is not
                  exercisable after the expiration of 5 years from the Date of
                  Grant.

         (f)      EMPLOYEE. No Incentive Stock Option may be granted to any
                  person, and no Option of any person may be designated as an
                  Incentive Stock Option, unless the person is an Employee at
                  the Date of Grant or date of designation, except that an
                  Incentive Stock Option may be granted to a prospective
                  Employee upon the condition that such person becomes an
                  Employee and the Exercise Price of that Option is determined
                  as of commencement date of employment. In addition, no Option
                  granted or otherwise designated as an Incentive Stock Option
                  shall be exercisable by or on behalf of any Participant unless
                  at all times during the period beginning on the Date of Grant
                  or date of designation and ending on the day 3 months before
                  the date of exercise, such Participant was an Employee of
                  either the Company or a parent or subsidiary of the Company;
                  provided, however, that if termination of employment as an
                  Employee is due to Disability or death, the Option may remain
                  exercisable for a period of one-year from the date of
                  termination or, if sooner, until Date of Expiration, and by
                  the Participant, in the


                                       18
<PAGE>

                  case of death, by the Participant's legal representative or
                  other person who acquired the right to exercise the Option by
                  reason of the Participant's death. A Participant's employment
                  as an Employee shall be deemed to have terminated due to death
                  if the Participant's death occurs within 3 months after the
                  termination of employment as an Employee. Notwithstanding the
                  foregoing, if a purchase of Stock within the applicable time
                  periods set forth in this Section 5.4(f) would subject the
                  Participant to liability under Section 16(b) of the Exchange
                  Act, the Option shall remain exercisable until the earliest to
                  occur of (i) the tenth (10th) day following the date on which
                  purchase of Stock would no longer subject the Participant to
                  such liability, (ii) one year from the date of termination of
                  the Participant's employment as an Employee, or (iii) the Date
                  of Expiration.

         (g)      $100,000 PER YEAR LIMITATION. As long as the $100,000 Per Year
                  Limitation remains applicable under the Code to Incentive
                  Stock Options granted to any person, to the extent that
                  options designated as Incentive Stock Options (granted under
                  all stock option plans of the Company or any Subsidiary
                  including, but not limited to, this Plan) become exercisable
                  by a Participant for the first time during any calendar year
                  for Stock having a Fair Market Value greater than the $100,000
                  Per Year Limitation, the portion of such Options which exceeds
                  the $100,000 Per Year Limitation shall be treated as
                  Non-Qualified Stock Options. For purposes of this Section
                  5.4(g), Options designated as Incentive Stock Options shall be
                  taken into account in the order in which they were granted,
                  and the Fair Market Value of Stock shall be determined as of
                  the Date of Grant of Option covering that Stock. If an Option
                  is treated as an Incentive Stock Option in part and as a
                  Non-Qualified Stock Option in part by reason of the $100,000
                  Per Year Limitation, the Participant may designate which
                  portion of such Option the Participant is exercising. In the
                  absence of such designation, the Participant shall be deemed
                  to have exercised the Incentive Stock Option portion of the
                  Option first.

         (h)      REDESIGNATION LIMITATION. If any Option is redesignated after
                  its Date of Grant as an Incentive Stock Option, then
                  notwithstanding any other provision to the contrary in this
                  Plan, the terms of such Option shall automatically be deemed
                  amended to be consistent with the foregoing limitations of
                  this Section 5.3 such that the Expiration Date of such Option
                  shall not extend beyond the 10th anniversary of the date of
                  designation to be consistent with Section 5.4(b); the Exercise
                  Price shall be the Fair Market Value on the date of
                  redesignation, as adjusted thereafter to be consistent with
                  Sections 5.4(c) and, if applicable, 5.4(d); and holding period
                  based upon the granting of the Option for purpose of
                  determining any disqualifying disposition under Section 421(b)
                  of the Code shall be based upon the date of redesignation with
                  like effect as if that redesignation constituted the granting
                  of the Incentive Stock Option.

Notwithstanding anything to the contrary contained in this Plan, if any Option
designated as an Incentive Stock Option fails for any reason, including because
of failure of any of the forgoing terms, to qualify or continue its
qualification as an Incentive Stock Option under the Code, the


                                       19
<PAGE>

Option shall automatically and without any act on the part of any party become
and be a Non-Qualified Stock Option.

                                   SECTION 6.
                         COMPLIANCE WITH SECURITIES LAW

         6.1      GENERAL. The grant of Awards and the issuance of shares of
Stock upon exercise of Awards shall be subject to compliance with all applicable
requirements of federal, state or foreign law with respect to such securities.
Awards may not be exercised if the issuance of shares of Stock upon exercise
would constitute a violation of any applicable federal, state or foreign
securities laws or other law or regulations or the requirements of any stock
exchange or market system upon which the Stock may then be listed.

         6.2      SECURITIES ACT. No Award may be exercised unless (a) a
registration statement under the Securities Act shall at the time of exercise of
the Award be in effect with respect to the acquisition of the shares issuable
upon exercise of the Award or (b) in the opinion of legal counsel to the
Company, the shares issuable upon exercise of the Award may be granted in
accordance with the terms of an applicable exemption from the registration
requirements of the Securities Act. In addition, as a condition to the exercise
of any Award, the Company may require the Participant to satisfy any
qualifications that may be necessary or appropriate, to evidence compliance with
any applicable law or regulation and to make any representation or warranty with
respect thereto as may be requested by the Company.

                                   SECTION 7.
                                  MISCELLANEOUS

         7.1      INDEMNIFICATION FOR ADMINISTRATION. In addition to such other
rights of indemnification as they may have as members of the Board or officers
or employees of the Company or any Subsidiary, members of the Board and any
officers or employees of the Company or any Subsidiary to whom responsibility or
authority is exercised under direction of the Board shall be indemnified by the
Company against all reasonable expenses, including attorneys fees, actually and
necessarily incurred in connection with the defense of any action, suit or
proceeding, or in connection with any appeal therein, to which they or any of
them may be a party by reason of any action taken or failure to act under or in
connection with the Plan, or any right granted hereunder, and against all
amounts paid by them in settlement thereof (provided such settlement is approved
by independent legal counsel selected by the Company) or paid by them in
satisfaction of a judgment in any such action, suit or proceeding, except in
relation to matters as to which it shall be adjudged in such action, suit or
proceeding that such person is liable for gross negligence, bad faith or
intentional misconduct in duties; provided, however, that within sixty (60) days
after the institution of such action, suit or proceeding, such person shall
offer to the Company, in writing, the opportunity at its own expense to handle
and defend the same.

         7.2      TERMINATION AND AMENDMENT OF THE PLAN. The Board may terminate
or amend the Plan at any time. However, subject to changes in applicable law,
regulations or rules that would permit otherwise, without the approval of the
Company's shareholders, there shall be (a)


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no increase in the maximum aggregate number of shares of Stock that may be
granted under the Plan (except by operation of the provisions of Section 4.2,
(b) no change in the class of persons eligible to receive Incentive Stock
Options, and (c) no other amendment of the Plan that would require approval of
the Company's shareholders under any applicable law, regulation or rule. In any
event, no termination or amendment of the Plan may adversely affect any then
outstanding Award or any unexercised portion thereof, without the consent of the
Participant unless such termination or amendment is required to enable an Option
designated as an Incentive Stock Option to qualify as an Incentive Stock Option
or is necessary to comply with any applicable law, regulation or rule.

         7.3      SHAREHOLDER APPROVAL. The Plan shall be approved by the
shareholders of the Company within twelve (12) months of the date of adoption
thereof by the Board. Awards granted prior to shareholder approval of the Plan
shall become exercisable no earlier than the date of shareholder approval.

         7.4      NO SPECIAL EMPLOYMENT RIGHTS. Nothing contained in this Plan
shall be construed as a contract of employment or deemed to give any Participant
the right to be retained in the employ of the Employer or any equity or other
interest in the assets, business, or affairs of the Employer. A Participant
hereunder shall not have a security interest in assets of the Employer used to
make contributions or pay benefits.

         7.5      NOTICES. Any notice or other communications required or
permitted hereunder shall, unless otherwise expressly provided, be in writing
and be deemed to have been properly given, served and received (a) if delivered
by messenger, when delivered, (b) if mailed, on the third business day after
deposit in the United States mail, certified or registered, postage prepaid,
return receipt requested, (c) if emailed, telexed, telegraphed or faxed, two
hours after being dispatched by email, telex, telegram or fax if such second
hour falls on a business day within the hours of 9:00 a.m. through 5:00 p.m. of
the time in effect at the place of receipt, or at 9:00 a.m. on that business day
if the second hour is before 9:00 a.m., or at 9:00 a.m. on the next business day
thereafter if such second hour is later than 5:00 p.m. or other than on a
business day, or (d) if delivered by commercial overnight express courier,
freight prepaid, the next business day after delivery to such courier; in every
case addressed to the party, if to the Company, to the attention of Company's
Chief Executive Officer at the address of the Company's principal executive
office and, if to or on behalf of a Participant, the address most recently
designated by such Participant for such purpose.

         7.6      GOVERNING LAW. This Plan, including all rights and obligations
of the Company, Participants and their legal representatives, heirs, successors
and assigns, shall be governed by and construed under the laws of the State of
Ohio.



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