<PAGE>   1

                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549

                                   FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
    ACT OF 1934 [Fee Required]
For the fiscal year ended              December 31, 1993
                         ----------------------------------------------------
                                     or
[  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
      EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from _____________________ to _____________________

Commission file number                                     1-9518
                       -------------------------------------------------------
                            THE PROGRESSIVE CORPORATION                    
- - - ------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)


<TABLE>
    <S>                                           <C>         
                 Ohio                                  34-0963169        
- - - -------------------------------------------------------------------------------
    (State or other jurisdiction of                (I.R.S. Employer
     incorporation or organization)               Identification No.)

   6300 Wilson Mills Road, Mayfield Village, Ohio            44143            
- - - ------------------------------------------------------------------------------  
      (Address of principal executive offices)             (Zip Code)
</TABLE>


                                (216) 461-5000
- - - ------------------------------------------------------------------------------  
              (Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

<TABLE>
<S>                                                     <C>
                                                          Name of each exchange on
    Title of each class                                      which registered

Common Shares, $1.00 Par Value                            New York Stock Exchange
- - - -------------------------------                         ---------------------------

9 3/8% Serial Preferred Shares, Series A (Cumulative,     
  Liquidation Preference $25.00 per share)                New York Stock Exchange
- - - ------------------------------------------------------  ---------------------------   
</TABLE>

Securities registered pursuant to Section 12(g) of the Act:

                                       None         
- - - ------------------------------------------------------------------------------  
                                 (Title of class)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
                                                            [X]  Yes    [  ]  No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.  [ ]

The aggregate market value of the voting stock held by non-affiliates of the
registrant at February 24, 1994:  $2,067,055,541.87.

The number of the registrant's Common Shares, $1.00 par value, outstanding as
of February 24, 1994: 72,160,372

                      DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's Annual Report to Shareholders for the year ended
December 31, 1993 are incorporated by reference in Parts I, II and IV hereof.
Portions of the registrant's Proxy Statement dated March 18, 1994, for the
Annual Meeting of Shareholders to be held on April 22, 1994, are incorporated
by reference in Part III hereof.

<PAGE>   2
INTRODUCTION


The Progressive Corporation and subsidiaries' (collectively, the "Company")
1993 Annual Report to Shareholders (the "Annual Report") contains portions of
the information required to be included in this Form 10-K, which are
incorporated herein by reference.  Cross references to relevant sections of the
Annual Report are included under the appropriate items of this Form 10-K.

Portions of the information included in The Progressive Corporation's Proxy
Statement dated March 18, 1994, for the Annual Meeting of Shareholders to be
held on April 22, 1994 (the "Proxy Statement"), have also been incorporated by
reference herein and are identified under the appropriate items in this Form
10-K.


                                     PART I

ITEM 1.  BUSINESS

 (a)  General Development of Business

The Progressive Corporation, an insurance holding company formed in 1965, has
52 operating subsidiaries and one mutual insurance company affiliate.  The
Progressive Corporation's insurance subsidiaries (collectively, the "Insurance
Group") provide personal automobile insurance and other specialty
property-casualty insurance and related services throughout the United States
and in Canada.  The Company's property-casualty insurance products protect its
customers against collision and physical damage to their motor vehicles and
liability to others for personal injury or property damage they caused.

Of the approximately 250 United States insurance company groups writing private
passenger auto, the Company estimates that Progressive ranks ninth in size.
Except as otherwise noted, all industry data and Progressive's market share or
ranking in the industry were derived either directly from data published or
reported by A.M. Best Company Inc. ("A.M. Best") or were estimated using A.M.
Best data as the primary source.  For 1993, the estimated industry premiums
written, which include personal auto insurance in the United States and
Ontario, Canada, as well as insurance for commercial vehicles, were $115
billion, and Progressive's share of this market was approximately 1.5%.

 (b)  Financial Information About Industry Segments

   Incorporated by reference from Note 11, SEGMENT INFORMATION, on page 46 of
the Company's Annual Report.

 (c)  Narrative Description of Business

INSURANCE SEGMENT

The Insurance Group underwrites a number of personal and commercial
property-casualty insurance products.  Net premiums written were $1,819.2
million in 1993, compared to $1,451.2 million and $1,324.6 million in 1992 and
1991, respectively.  The underwriting profit (loss) was 10.7% in 1993, compared
to 3.5% and (3.7)% in 1992 and 1991, respectively.

The Insurance Group's core business writes insurance for private passenger
automobiles and small commercial and recreational vehicles.  This business
frequently has more than one program in a single state, with each targeted to a
specific market segment.  The core business accounted for 93% of the Company's
1993 total net written premiums.





                                       1

<PAGE>   3
The bulk of the Insurance Group's Core business consists of nonstandard
insurance products for people cancelled and rejected by other insurers.  The
size of the nonstandard automobile insurance market changes with the insurance
environment.  Volume potential is influenced by the actions of direct
competitors, writers of standard and preferred automobile insurance and
state-mandated involuntary plans.  The total 1993 nonstandard automobile
insurance market was about $18 billion, compared to $17 billion in 1992 and $16
billion in 1991.  Approximately 125 independent specialty companies and more
than 25 subsidiaries of large insurance companies wrote nonstandard auto
premiums in 1993.  In this market, the Insurance Group ranked fourth in 1992 in
direct premiums written and near the top in underwriting performance.  It is
estimated that the 1993 ranking and underwriting performance will be consistent
with 1992.

The core business is continuing its experiment of writing standard and
preferred automobile risks in several states.  These experiments accounted for
4.5% of the Company's total private passenger auto premiums in 1993.  The
strategy is to build towards becoming a low-cost provider of a full line of
auto insurance and related services, distributed through whichever channel the
customer prefers.  The Insurance Group's goal is to compete in the standard and
preferred market, which comprises 81% of the personal automobile insurance
market.

The Insurance Group's specialty personal lines products are dominated by
motorcycle insurance.  Other products offered include recreational vehicle,
mobile home and boat insurance.  The Insurance Group's competitors are
specialty companies and standard insurance carriers.  Although industry figures
are not available, based on the Company's analysis of this market, the Company
believes that it is a significant participant in this market.

Nonstandard commercial vehicle insurance covers commercial vehicle risks that
are rejected or cancelled by other insurance companies.  Based on the Company's
analysis of this market, approximately 40 companies compete for this business
on a nationwide basis.  State assigned risk plans also provide this coverage.

The core business insurance products are marketed by thirteen divisions
headquartered in or near the markets served:  the Florida and Southeast
divisions in Tampa, Florida; the North East, New York, Central States, Ohio,
Commercial Vehicle and National Accounts divisions in Cleveland, Ohio; the
South Central division in Austin, Texas; the Mountain division in Colorado
Springs, Colorado; the Mid-Atlantic division in Richmond, Virginia; the Canada
division in Ontario, Canada; and the West division in Sacramento, California.
Each division is responsible for its own marketing, sales, processing and
claims.

In 1993, over 80% of the core business' net premiums were written through a
network of more than 30,000 independent insurance agents located throughout the
United States and in Canada.  Subject to compliance with certain
Company-mandated procedures, these independent insurance agents have the
authority to bind the Company to specified insurance coverages within
prescribed underwriting guidelines.  These guidelines prescribe the kinds and
amounts of coverage that may be written and the premium rates that may be
charged for specified categories of risk.  The agents do not have authority on
behalf of the Company to settle or adjust claims, establish underwriting
guidelines, develop rates or enter into other transactions or commitments.  The
Company also markets its products through intermediaries such as employers,
other insurance companies and national brokerage agencies, and direct to
customers through employed sales people and owned insurance agencies.  The core
business currently markets personal automobile insurance directly to the public
through its Miami and Tampa, Florida operations.  It is anticipated that this
activity may be expanded to other selected markets in Florida, Texas and Ohio.

The Insurance Group's diversified businesses - the Financial Services, Risk
Management Services and Motor Carrier divisions, as well as the run-off of the
former Transportation division - accounted for 7% of total volume in 1993.
These divisions, which are organized by customer group, are headquartered in
Cleveland, Ohio.  The choice of distribution channel is driven by each customer
group's buying preference and service needs.  Distribution channels include
financial institutions, equipment lessors and vehicle dealers.  Distribution
arrangements are individually negotiated between





                                       2

<PAGE>   4
such intermediaries and the Company and are tailored to the specific needs of
the customer group and the nature of the related financial or purchase
transactions.  The diversified businesses also market their products directly
to their customers through company-employed sales forces.

The Financial Services division provides physical damage, property and flood
insurance and related tracking services to protect the commercial or retail
lender's interest in collateral which is not otherwise insured against these
risks.  The principal product is collateral protection for automobile lenders,
which is sold to financial institutions and/or their customers.  Commercial
banks are Financial Services' largest customer group for these services.  This
division also serves savings and loans, finance companies and credit unions.
Based on the Company's analysis of this market, numerous companies offer these
products, and none of them has a dominant market share.

Risk Management Services' principal customers are community banks.  Its
principal products are liability insurance for directors and officers and
employee dishonesty insurance.  Progressive shares the risk and premium on
these coverages with a small mutual insurer controlled by its bank customers.
The program is sponsored by the American Bankers Association.  This program
represented less than 1% of total 1993 net premiums written.

The Motor Carrier division provides insurance and related services, on a
heavily reinsured basis, to a few excellent regional customers retained from
the defunct Transportation business, as well as a growing number of
intermediate-size trucking companies.  The Motor Carrier division also manages  
involuntary Commercial Auto Insurance Plans.  See SERVICE OPERATIONS on page 5
for further discussion.

COMPETITIVE FACTORS

The automobile insurance and other property-casualty markets in which the
Company operates are highly competitive.  Property-casualty insurers generally
compete on the basis of price, consumer recognition, coverages offered, claim
handling, financial stability, customer service and geographic coverage.
Vigorous competition is provided by large well-capitalized national companies,
some of which have broad distribution networks of employed or captive agents,
and by smaller regional insurers.  While the Company relies heavily on
technology and extensive data gathering and analysis to segment and price
markets according to risk potential, some competitors merely price their
coverage at rates set lower than the Company's published rates.  By avoiding
extensive data gathering and analysis, these competitors incur lower
underwriting costs.  The Company has remained competitive by closely managing
expenses and achieving operating efficiencies, and by refining its risk
measurement and price segmentation skills.  In addition, the Company offers
prices for a wide spectrum of risks and seeks to offer a wider array of payment
plans, limits of liability and deductibles than its competitors.  Superior
customer service and claim adjustment are also important factors in its
competitive strategy.

LICENSES

The insurance group operates under licenses issued by various state or
provincial insurance authorities.  Such licenses may be of perpetual duration
or renewable periodically, provided the holder continues to meet applicable
regulatory requirements.  The licenses govern the kind of insurance coverages
which may be written or the nature of the insurance-related services which may
be provided in the issuing state.  Such licenses are normally issued only after
the filing of an appropriate application and the satisfaction of prescribed
criteria.  All licenses which are material to the Company's business are in
good standing.

INSURANCE REGULATION

The insurance subsidiaries are generally subject to regulation and supervision
by insurance departments of the jurisdictions in which they are domiciled or
licensed to transact business.  One or more of the subsidiaries are licensed
and subject to regulation in each of the 50 states, in each Canadian province
and by Canadian federal authorities.  The nature and extent of such regulation
and





                                       3

<PAGE>   5
supervision varies from jurisdiction to jurisdiction.  Generally, an insurance
company is subject to a higher degree of regulation and supervision in its
state of domicile.  The Company's principal insurance subsidiaries are
domiciled in the states of Florida, Mississippi, New York, Ohio, Pennsylvania,
Texas, Washington and Wisconsin.  State insurance departments have broad
administrative power relating to licensing insurers and agents, regulating
premium rates and policy forms, establishing reserve requirements, prescribing
accounting methods and the form and content of statutory financial reports and
regulating the type and amount of investments permitted.  Rate regulation
varies from "file and use" to prior approval to mandated rates.  Most
jurisdictions prohibit rates that are "excessive, inadequate or unfairly
discriminatory."

Insurance departments are charged with the responsibility to ensure that
insurance companies maintain adequate capital and surplus and comply with a
variety of operational standards.  Insurance companies are generally required
to file detailed annual and other reports with the insurance department of each
jurisdiction in which they conduct business.  Insurance departments are
authorized to make periodic and other examinations of regulated insurers'
financial condition, adherence to statutory accounting principles and
compliance with state insurance laws and regulations.

Insurance holding company laws enacted in many jurisdictions grant to insurance
authorities the power to regulate acquisitions and certain other transactions
involving insurers and to require periodic disclosure of certain information.
These laws impose prior approval requirements for certain transactions between
regulated insurers and their affiliates and generally regulate dividend and
other distributions, including loans and cash advances, from regulated insurers
to their affiliates.  See the "Dividends" discussion in Item 5(c) for further
information on such dividend limitations.

Under state insolvency and guaranty laws, regulated insurers can be assessed
for, or be required to contribute to state guaranty funds to cover policyholder
losses resulting from insurer insolvencies.  Insurers are also required by many
states to provide coverage to certain risks as a condition of doing business in
the state.  Such programs generally specify the types of insurance and the
level of coverage which must be offered to such involuntary risks, as well as
the allowable premium.

Many states have laws and regulations that limit a company's ability to exit a
market.  For example, certain states limit an automobile insurer's ability to
cancel and non-renew policies.  Furthermore, certain states prohibit an insurer
from withdrawing one or more lines of business from the state, except pursuant
to a plan that is approved by the state insurance department.  The state
insurance department may disapprove a plan that may lead to market disruption.
Laws and regulations that limit cancellation and non-renewal and that subject
program withdrawals to prior approval requirements may restrict an insurer's
ability to exit unprofitable markets.

Regulation of insurance constantly changes as real or perceived issues and
developments arise.  Some changes may be due to technical factors, such as
changes in investment laws made to recognize new investment vehicles; other
changes result from such general pressures as consumer resistance to price
increases and concerns relating to insurer solvency.  In recent years,
legislation and voter initiatives have been introduced which deal with
insurance rate development, rate determination and the ability of insurers to
cancel or renew insurance policies, reflecting concerns about availability,
prices and alleged discriminatory pricing.

In some states, such as California and Georgia, the automobile insurance
industry has been under pressure in recent years from regulators, legislators
or special interest groups to reduce, freeze or set rates at levels that are
not necessarily related to underlying costs, including initiatives to roll back
automobile and other personal lines rates.  This activity has adversely
affected, and may in the future adversely affect, the profitability and growth
of the subsidiaries' automobile insurance business in those jurisdictions, and
may limit the subsidiaries' ability to increase rates to compensate for
increases in costs.  Adverse legislative and regulatory activity limiting the
subsidiaries' ability to adequately price automobile insurance may occur in the
future.  The impact of these regulatory changes on the subsidiaries' businesses
cannot be predicted.





                                       4

<PAGE>   6
The state insurance regulatory framework has come under increased federal
scrutiny, and certain state legislatures have considered or enacted laws that
alter and, in many cases, expand state authority to regulate insurance
companies and insurance holding company systems.  Further, the National
Association of Insurance Commissioners and state insurance regulators are
re-examining existing laws and regulations, specifically focusing on insurance
company investments, issues relating to the solvency of insurance companies,
risk-based capital guidelines and further limitations on the ability of
regulated insurers to pay dividends.  In addition, the United States Congress
and certain federal agencies are investigating the current condition of the
insurance industry to determine whether federal regulation is necessary, and
the Clinton administration is in the process of considering changes to the
nation's health care system.  Changes in the health care system may have an
effect on the medical coverage included in auto insurance policies.  It is
currently not possible to predict the outcome of any of these matters, or their
potential impact on the Company.

STATUTORY ACCOUNTING PRINCIPLES

The Insurance Group's results are reported in accordance with generally
accepted accounting principles (GAAP), which differ from amounts reported under
statutory accounting principles (SAP) prescribed by insurance regulatory
authorities.  Specifically, under GAAP:

1.  Commissions, premium taxes and other costs incurred in connection with
    writing new and renewal business are deferred and amortized over the period
    in which the related premiums are earned, rather than expensed as incurred,
    as required by SAP.

2.  Direct response advertising costs, which consist primarily of direct mail
    expenses, are capitalized and amortized over the estimated period of the
    benefits, rather than expensed as incurred, as required by SAP.

3.  Estimated salvage and net subrogation recoverables are reflected in the
    financial statements at the time the related loss reserves are established,
    rather than when actually recovered, as permitted by SAP.  Salvage is the
    amount recovered when the property against which a claim is made is
    recovered and sold by the insurance company.  Subrogation is the amount of
    claim cost recovered from the party at fault.

4.  Certain assets are included in the consolidated balance sheets, rather than
    charged against retained earnings, as required by SAP.  These assets
    consist primarily of premium receivables over 90 days old and furniture and
    fixtures.

5.  Amounts related to ceded reinsurance are shown gross as prepaid reinsurance
    premiums and reinsurance recoverables, rather than netted against unearned
    premium reserves and loss and loss adjustment expense reserves, as required
    by SAP.


The differing treatment of income and expense items results in a corresponding
difference in Federal income tax expense.

SERVICE OPERATIONS

The Motor Carrier division currently manages involuntary commercial auto
insurance plans (CAIP) in 29 states.  As a CAIP servicing carrier, the division
processes about one third of the premiums in the involuntary commercial market,
without assuming the indemnity risk.  It competes with approximately 14 other
providers nationwide.  The Company's subsidiaries also provide claim services
to fleet owners and other insurance companies.  Revenues from all service
businesses are derived primarily from fees and commissions.  Total service
revenues were $43.7 million in 1993, compared to $53.3 million and $54.0
million in 1992 and 1991, respectively.





                                       5

<PAGE>   7
INVESTMENTS

The Company's approach to investing is consistent with its need to maintain
capital adequate to support the insurance premiums written.  The Company's
portfolio is invested primarily in short-term and intermediate-term,
investment-grade fixed-income securities.  The Company's investment portfolio,
at market value, was $2,805.2 million at December 31, 1993, compared to
$2,407.4 million at December 31, 1992.  Investment income is affected by shifts
in the types of investments in the portfolio, changes in interest rates and
other factors.  Investment income, including net realized gains (losses) on
security sales, before expenses and taxes was $242.4 million in 1993, compared
to $153.5 million in 1992 and $152.2 million in 1991.  See MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,
beginning on page 12 herein for additional discussion.

EMPLOYEES

The number of employees, excluding temporaries, at December 31, 1993, was 6,101.

LIABILITY FOR PROPERTY-CASUALTY LOSSES AND LOSS ADJUSTMENT EXPENSES

The consolidated financial statements include the estimated liability for
unpaid losses and loss adjustment expenses ("LAE") of the Company's
property-casualty and life insurance subsidiaries.  The life insurance
operations are in run-off.  In order to assure safety of capital and
conservatism of the balance sheet, total loss reserves are set at a level that
is intended to provide confidence that they are adequate.  The liabilities for
losses and LAE are determined using actuarial and statistical procedures and
represent undiscounted estimates of the ultimate net cost of all unpaid losses
and LAE incurred through December 31 of each year.  These estimates are subject
to the effect of future trends on claim settlement.  These estimates are
continually reviewed and adjusted as experience develops and new information
becomes known.  Such adjustments, if any, are reflected in the current results
of operations.

The accompanying tables present an analysis of property-casualty losses and
LAE.  The following table:  (1) provides a reconciliation of beginning and
ending estimated liability balances for 1993, 1992 and 1991, and (2) shows the
difference between the estimated liability in accordance with GAAP and that
reported in accordance with SAP.





                                       6

<PAGE>   8
RECONCILIATION OF NET RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES


<TABLE>                              
<CAPTION>                            
 (millions)                                        1993                 1992                  1991
                                                 ----------------------------------------------------
 <S>                                             <C>                   <C>                   <C>
 Balance, January 1                              $  956.4              $ 861.5               $ 791.6
 Incurred losses and LAE:            
       Current accident year                      1,126.7                981.7                 903.2
       Prior accident years                         (98.5)               (51.5)                (42.8)
                                                 ----------------------------------------------------
                                                  1,028.2                930.2                 860.4
                                                 ----------------------------------------------------
 Paid losses and LAE:                
       Current accident year                        605.4                481.9                 468.1
       Prior accident years                         366.8                353.4                 322.4
                                                 ----------------------------------------------------
                                                    972.2                835.3                 790.5
                                                 ----------------------------------------------------
 Balance, December 31                             1,012.4                956.4                 861.5
 Add: Reinsurance recoverable on     
       unpaid losses and LAE1                       334.8                   --                    --
                                                 ----------------------------------------------------
 Balance, December 31, GAAP                       1,347.2                956.4                 861.5
 Adjust: Reinsurance recoverable on  
       unpaid losses and LAE1                      (334.8)                  --                    --
    Net salvage and subrogation                      39.9                 37.2                  38.3
                                                 ----------------------------------------------------
 Balance, December 31, SAP                       $1,052.3               $993.6                $899.8
                                                 ====================================================

- - - ----------------                                     
<FN>
1 In 1993, the Company adopted Statement of Financial Accounting Standards
(SFAS) 113, "Accounting and Reporting for Reinsurance of Short- Duration and
Long-Duration Contracts"; prior years were not restated.

</TABLE>


The reconciliation above shows a $98.5 million redundancy, which emerged during
1993, in the 1993 liability and a $51.5 million redundancy in the 1992
liability, based on information known as of December 31, 1993 and December 31,
1992, respectively.  Current reserves reflect conservatism of the liability
established for potential adverse development.

The anticipated effect of inflation is explicitly considered when estimating
liabilities for losses and LAE.  While anticipated increases due to inflation
are considered in estimating the ultimate claim costs, the increase in average
severities of claims is caused by a number of factors that vary with the
individual type of policy written.  Future average severities are projected
based on historical trends adjusted for anticipated changes in underwriting
standards, inflation, policy provisions and general economic trends.  These
anticipated trends are monitored based on actual development and are modified
if necessary.

The Company has not entered into any loss reserve transfers or similar
transactions having a material effect on earnings or reserves.




                                       7

<PAGE>   9
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSES DEVELOPMENT
(millions)

<TABLE>                   
<CAPTION>                 
YEAR ENDED                      1983     1984     1985     1986    1987     1988      1989     1990     1991    1992     1993
<S>                            <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>
LIABILITY FOR UNPAID      
- - - ---------------------     
LOSSES AND LAE                 $121.8   $146.5   $215.3   $323.8   $471.0   $651.0   $748.6   $791.6   $861.5   $956.4   $1,012.4   
- - - --------------                                                                                                         
                          
PAID (CUMULATIVE) AS OF:  
- - - -----------------------   
  One year later                 60.0     68.6    104.7    142.7    195.0    283.1    293.1    322.4    353.4    366.8
  Two years later                85.9    101.4    151.9    204.4    294.9    393.7    446.8    490.8    518.8       --
  Three years later             102.3    121.3    175.4    238.9    339.5    465.0    539.8    570.4       --       --
  Four years later              111.6    128.8    187.2    255.7    369.9    514.0    588.2       --       --       --
  Five years later              115.2    132.8    194.1    264.3    383.5    540.7       --       --       --       --
  Six years later               116.5    135.8    197.7    268.7    389.1       --       --       --       --       --
  Seven years later             117.6    136.8    200.7    270.1       --       --       --       --       --       --
  Eight years later             118.3    138.9    201.3       --       --       --       --       --       --       --
  Nine years later              119.1    139.1       --       --       --       --       --       --       --       --
  Ten years later               119.3       --       --       --       --       --       --       --       --       --
LIABILITY RE-ESTIMATED    
- - - -----------------------   
AS OF:                    
- - - -----                     
  One year later                124.5    146.9    218.7    300.6    446.6    610.3    684.5    748.8    810.0    857.9
  Two years later               127.9    150.2    213.6    293.6    422.2    573.4    677.9    726.5    771.9       --
  Three years later             128.6    144.0    205.3    282.8    402.4    581.3    668.6    712.7       --       --
  Four years later              123.2    140.4    203.4    274.1    403.9    575.1    667.1       --       --       --
  Five years later              120.2    139.0    200.9    275.6    399.6    578.4       --       --       --       --
  Six years later               119.3    139.3    204.4    275.8    400.2       --       --       --       --       --
  Seven years later             120.1    142.0    205.2    277.5      --        --       --       --       --       --
  Eight years later             122.6    142.9    206.7       --       --       --       --       --       --       --
  Nine years later              123.0    144.5       --       --       --       --       --       --       --       --
  Ten years later               124.7       --       --       --       --       --       --       --       --       --

CUMULATIVE REDUNDANCY 
- - - ---------------------
(DEFICIENCY)                   $ (2.9)  $  2.0   $  8.6   $ 46.3   $ 70.8   $ 72.6   $ 81.5   $ 78.9   $ 89.6   $ 98.5
- - - ------------                   ------   ------   ------   ------   ------   ------   ------   ------   ------   ------
PERCENTAGE1                      (2.4)     1.4      4.0     14.3     15.0     11.2     10.9     10.0     10.4     10.3
- - - -----------------
<FN>

1 Cumulative redundancy/(deficiency) divided by liability for unpaid losses 
  and LAE.
            
</TABLE>


The above table presents the development of balance sheet liabilities for 1983
through 1992. The top line of the table shows the estimated liability for
unpaid losses and LAE recorded at the balance sheet date for each of the
indicated years for the property-casualty insurance subsidiaries only.  Similar
reserves for the life insurance subsidiary, which are immaterial, are excluded.
This liability represents the estimated amount of losses and LAE for claims
arising in all prior years that are unpaid at the balance sheet date, including
losses that had been incurred but not reported.

The upper section of the table shows the cumulative amount paid with respect to
the previously recorded liability as of the end of each succeeding year.  The
lower portion of the table shows the re-estimated amount of the previously
recorded liability based on experience as of the end of each succeeding year.
The estimate is increased or decreased as more information becomes known about
the frequency and severity of claims for individual years.  For example, as of
December 31, 1993, the companies had paid $139.1 million of the currently
estimated $144.5 million of losses and LAE that had been incurred through the
end of 1984; thus an estimated $5.4 million of losses incurred through 1984
remain unpaid as of the current financial statement date.


                                       8

<PAGE>   10
The "Cumulative Redundancy (Deficiency)" represents the aggregate change in the
estimates over all prior years.  For example, the 1983 liability has developed
a $2.9 million deficiency over ten years.  That amount has been reflected in
income over the ten years and did not have a significant effect on the income
of any one year.  The effects on income during the past three years due to
changes in estimates of the liabilities for losses and LAE is shown in the
reconciliation table on page 7 as the "prior years" provision for incurred
losses and LAE.

In evaluating this information, note that each cumulative redundancy
(deficiency) amount includes the effects of all changes in amounts during the
current year for prior periods.  For example, the amount of the redundancy
related to losses settled in 1986, but incurred in 1983, will be included in
the cumulative deficiency or redundancy amount for years 1983, 1984 and 1985.
Conditions and trends that have affected development of the liability in the
past may not necessarily occur in the future.  Accordingly, it may not be
appropriate to extrapolate future redundancies or deficiencies based on this
table.

The data in the Analysis of Loss and Loss Adjustment Expenses Development table
on page 8 are constructed slightly differently than the data in the Current
Estimate of Total Redundancy column in the chart on page 54 of the Company's
Annual Report.  The data in the former table are based on Schedule P from the
1993, 1992, 1991 and 1990 Consolidated Annual Statement, as filed with state
insurance departments, and Schedules O and P filed for years prior to 1989.
The reserve accuracy percentages reported in this table differ from the
percentages reported in the Annual Report.  The primary reason for the
difference is the method of apportioning loss adjustment expenses to accident
years.  The Consolidated Annual Statement, Schedule P, Part-1,  specifies how
to distribute unallocated loss adjustment expenses to accident years.  The
Company disagrees with this arbitrary approach and, therefore, uses a different
approach for the Annual Report.  It believes that both apportionment methods
give the same result when viewed over several years.

A second reason is that the data reported in the Annual Report includes results
for life insurance products sold by the Company's life insurance subsidiary.
Life insurance reserves are less than 1% of total reserves.  Given the
uncertainty inherent in establishing insurance loss reserves, its reserves have
proven to be quite accurate.

The Company's Consolidated Annual Statement Schedule P for 1993, 1992 and 1991
includes $14.5 million, $27.2 million, and $17.2 million, respectively, of paid
LAE for non-indemnity business which is excluded for GAAP and, therefore, not
included in the reconciliation shown on page 7.

There are two significant differences between the development table on page 8
and The Company's Consolidated Annual Statement, Schedule P.  Schedule P
includes cumulative payments from a company purchased in September 1990 and an
affiliate consolidated in March 1991, which are not included for GAAP reporting
for periods prior to the dates of acquisition.  Also, the development displayed
in Schedule P, Part-2, excludes unallocated loss adjustment expenses which are
included in the preceding development table.

      (d)    Financial Information about Foreign and Domestic Operations

The Company operates throughout the United States and in Canada.  The amount of
Canadian revenues and assets are approximately two percent of the Company's
consolidated revenues and assets.  The amount of operating income (loss)
generated by its Canadian operations is immaterial with respect to the
Company's consolidated operating income (loss).





                                       9

<PAGE>   11

I
TEM 2.      PROPERTIES

OWNED PROPERTIES

The Company's central data processing facility occupies a modern, three-story
brick building containing approximately 107,000 square feet of office space, on
an approximately 40-acre parcel in Mayfield Village, Ohio, owned by a
subsidiary.  In spring 1992, construction began on the Company's new corporate
office complex on this parcel, and in December 1993, the Company began
occupying a portion of this complex.  Construction is expected to be completed
in 1994.  The new facility will consist of approximately 520,000 square feet of
space and will replace office space held under leases in a number of locations
in the Cleveland, Ohio area.  The cost of the project is currently estimated at
$74.8 million and is being funded through operating cashflows.  As of December
31, 1993, $50.5 million of the project's costs had been paid.

The Company owns a modern three-story building containing approximately 96,700
square feet of office space in Mayfield Heights, Ohio.  The property was
purchased in December 1993, for approximately $6.5 million, and is occupied by
the Company's Northeast Division.

The Company's Florida Division is headquartered in a modern, two-story building
containing approximately 60,000 square feet of office space in Tampa, Florida.
The property was financed with, and is held subject to a mortgage granted in
connection with, industrial development revenue bonds bearing interest equal to
79.45% of a specified prime commercial lending rate.  The remaining annual
principal amounts payable are $368,000 in each of 1994 through 1997 and $92,000
in 1998.

The Company owns a modern, two-story building containing approximately 39,000
square feet of office space in Tampa, Florida; this building is leased to a
non-affiliated tenant.

The Company also owns a one-story brick building containing approximately
92,000 square feet of training facilities, office and warehouse space in
Mayfield Village, Ohio.

LEASED PROPERTIES

The Company leases approximately 681,000 square feet of modern office space at
various locations throughout the United States for its other business units and
staff functions.  In addition, the Company leases approximately 225 processing
and claim offices at various locations throughout the United States.  Two
offices are leased in Canada.  These leases are generally short-term to
medium-term leases of standard commercial office space.



ITEM 3.      LEGAL PROCEEDINGS

Incorporated by reference from Note 6, LITIGATION, on page 43 of the Company's
Annual Report.



ITEM 4.      SUBMISSION OF MATTERS TO A VOTE OF
             SHAREHOLDERS

None.


EXECUTIVE OFFICERS OF THE REGISTRANT

Incorporated by reference from information with respect to executive officers
of The Progressive Corporation and its subsidiaries set forth in Item 10 of
this Annual Report on Form 10-K.





                                       10

<PAGE>   12

                                    PART II



ITEM 5.      MARKET FOR REGISTRANT'S COMMON EQUITY
             AND RELATED STOCKHOLDER MATTERS

  (a)        Market Information

The Company's Common Shares are traded on the New York Stock Exchange under the
symbol PGR.  The high and low prices set forth below are as reported on the New
York Stock Exchange.  All stock prices and dividends per share have been
adjusted to reflect the December 8, 1992 3-for-1 stock split.


<TABLE>                     
<CAPTION>                   
                                                                               Dividends
Year            Quarter                 High                   Low             Per Share
- - - ------------------------------------------------------------------------------------------
<S>             <C>                 <C>                   <C>                     <C>
1993            1                   $ 36 1/8              $ 26 5/8                $ .050
                2                     36 1/4                27 1/2                  .050
                3                     44 1/4                31 3/4                  .050
                4                     46 1/8                38 3/8                  .050
                             -------------------------------------------------------------
                                    $ 46 1/8              $ 26 5/8                $ .200
                             =============================================================
                            
                            
1992            1                   $ 18 7/8              $ 14 3/4                $ .047
                2                     19                    15 5/8                  .047
                3                     22                    18 7/8                  .047
                4                     29 3/8                21 3/8                  .050
                             -------------------------------------------------------------
                                    $ 29 3/8              $ 14 3/4                $ .191
                             =============================================================
</TABLE>
                    
                               



The closing price of the Company's Common Shares on February 24, 1994 was
$34 5/8.


  (b)        Holders

There were 4,849 shareholders of record on February 24, 1994.


  (c)        Dividends

Statutory policyholders' surplus was $703.6 million and $658.3 million at
December 31, 1993 and 1992, respectively.  Generally, under state insurance
laws, the net admitted assets of insurance subsidiaries available for transfer
to a corporate parent are limited to those net admitted assets, as determined
in accordance with SAP, which exceed minimum statutory capital requirements.
At December 31, 1993, $91.5 million of statutory policyholders' surplus
represents net admitted assets of the insurance subsidiaries that are not
transferable in the form of dividends, loans or advances to the parent.
Furthermore, state insurance laws limit the amount that can be paid as a
dividend or other distribution in any given year without prior regulatory
approval and adequate policyholders' surplus must be maintained to support
premiums written.  Under current regulations, subsidiary dividends of $117.1
million in the aggregate may be paid in 1994 out of statutory policyholders'
surplus, without such approval by regulatory authorities.  The regulations may
change during 1994, which could affect the dividends permitted to be paid by a
regulated subsidiary without prior approval.

 



                                       11

<PAGE>   13

ITEM 6.      SELECTED FINANCIAL DATA


<TABLE>
(millions - except per share  amounts)

<CAPTION>
                                                  For the years ended December 31,
                               1993             1992               1991                 1990            1989
<S>                          <C>              <C>                <C>                  <C>             <C>
Total revenues 1             $1,954.8         $1,738.9           $1,493.1             $1,376.2        $1,392.7
Net income 2                    267.3            153.8               32.9                 93.4            78.0
Per share:
 Net income 2,3                  3.58             2.05                .41                 1.19             .94
 Dividends                       .200             .191               .172                 .160            .147
Total assets 2,4              4,011.3          3,440.9            3,317.2              2,912.4         2,643.7
Funded debt
 outstanding                    477.1            568.5              644.0                644.4           645.9

<FN>

All per share amounts have been adjusted for the December 8, 1992 3-for-1 stock
split.

1 Total revenues for 1992 include $106.0 million ($70.0 million after taxes), or
$.97 per share, for the Company's California Proposition 103 reserve reduction.
See MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS set forth in Item 7 of this Annual Report on Form 10-K for further
discussion.

2 Effective January 1, 1992, the Company adopted SFAS 109 and was able to
demonstrate that the benefit of deferred tax assets was fully realizable.  The
cumulative effect of adopting SFAS 109 increased net income $14.2 million, or
$.20 per share.  In 1991, the deferred tax asset writedown, as required under
SFAS 96, was included in the Federal income tax provision.

3 Presented on a fully diluted basis.

4 Pursuant to SFAS 113, amounts for 1990 through 1992 were restated.

</TABLE>


ITEM 7.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
             CONDITION AND RESULTS OF OPERATIONS

FINANCIAL CONDITION

The Progressive Corporation is a holding company and does not have any revenue
producing operations of its own.  It receives cash through borrowings, equity
sales, subsidiary dividends and other transactions, and may use the proceeds to
contribute to the capital of its insurance subsidiaries in order to support
premium growth, to repurchase its Common Shares and other outstanding
securities, to redeem debt, and for other business purposes.  In 1993, the
Company sold 4,950,000 Common Shares for net proceeds of $177.0 million, $150.0
million of its 7% Notes due 2013 and filed a shelf registration for $200.0
million of its debt securities (in January 1994, the Company sold $200.0
million of its 6.60% Notes due 2004 under the shelf registration statement).
During 1993, the Company repurchased .4 million of its Serial Preferred Shares,
Series A, at a cost of $9.8 million, repaid $170.0 million borrowed under its
credit facilities and redeemed the entire $70.0 million of its 8 3/4%
Debentures.

During the three-year period ended December 31, 1993, the Company also sold
4,000,000 Serial Preferred Shares, Series A, for net proceeds of $96.4 million,
of which .4 million were repurchased as discussed above, repurchased 4.0
million Common Shares (not adjusted for the December 1992 three-for-one stock
split) at a total cost of $215.6 million, and decreased its aggregate
borrowings $167.3 million.  During the same period, The Progressive Corporation
received $393.3 million from its insurance subsidiaries, net of capital
contributions made to these subsidiaries.  The regulatory restrictions on
subsidiary dividends are described in Item 5(c) DIVIDENDS, on page 11.





                                       12

<PAGE>   14
The Company has substantial capital resources and is unaware of any trends,
events or circumstances that are reasonably likely to affect its capital
resources in a material way.  The Company also has available a $20.0 million
revolving credit agreement.  The Company believes it has sufficient borrowing
capacity and other capital resources to support current and anticipated growth.

The Company's insurance operations create liquidity by collecting and investing
premiums written from new and renewal business in advance of paying claims.
For the three years ended December 31, 1993, operations generated a positive
cash flow of $664.7 million, and cash flow is expected to be positive in both
the short-term and reasonably foreseeable future.  The Company's substantial
investment portfolio is highly liquid, consisting almost entirely of readily
marketable securities.  The Company does not expect any material changes in its
cash requirements and is not aware of any trends, events or uncertainties that
are reasonably likely to have a material effect on its liquidity.

Total capital expenditures for the three years ended December 31, 1993,
aggregated $122.6 million.  In spring 1992, construction began on the Company's
new corporate office complex in Mayfield Village, Ohio, and in December 1993,
the Company began occupying a portion of this complex.  Construction is
expected to be completed in 1994.  The new facility will consist of
approximately 520,000 square feet of space and will replace office space held
under leases in a number of locations in the Cleveland, Ohio area.  The cost of
the project is currently estimated at $74.8 million, and is being funded
through operating cash flows.  As of December 31, 1993, $50.5 million of the
project's cost had been paid.

In June 1992, the Company reached an agreement with the California Department
of Insurance to refund approximately $50 million of premiums (including
interest) on business written between November 8, 1988 and November 7, 1989 to
approximately 260,000 policyholders, thereby settling all rollback and refund
exposure since Proposition 103 was adopted in November 1988.  As a result, the
Proposition 103 premium refund and rollback reserve was reduced by $106.0
million.

During the second quarter 1992, the Company changed its financial arrangement
with Progressive Partners Limited Partnership (Progressive Partners), its
investment manager, as part of its strategy to compete more effectively for
private passenger auto insurance by lowering costs.  Under the new arrangement,
Progressive Partners' people, now employed by a wholly-owned Progressive
subsidiary, continue to provide the Company with investment and capital
management.  The transaction involved paying Progressive Partners a one-time
fee for terminating the investment management contract, and an additional
incentive fee for the period ended June 30, 1992, in the aggregate amount of
$54.6 million.  This transaction reduced the Company's costs for investment and
capital management.

In December 1992, Mr. Alfred Lerner, then Chairman of the Company, converted
his $75.0 million Floating Rate Convertible Subordinated Debenture due 2008
into 9,000,000 Common Shares and sold 5,175,000 of those Common Shares in an
underwritten public offering.  The public offering was completed pursuant to
the registration rights provisions of the convertible debenture, under which
the Company paid $5.1 million in underwriting and other expenses of the
offering.  These expenses were charged directly to shareholders' equity in
accordance with generally accepted accounting principles.  On the same date,
Mr. Lerner agreed to a termination of his employment agreement with the
Company, and, in connection with these transactions, the Company paid Mr.
Lerner $10.0 million.





                                       13

<PAGE>   15
RESULTS OF OPERATIONS

Direct premiums written increased 20 percent to $1,966.4 million in 1993,
compared to $1,636.8 million in 1992 and $1,536.8 million in 1991.  These
amounts include premiums written under state-mandated involuntary Commercial
Auto Insurance Plans (CAIP), for which the Company retains no indemnity risk,
of $98.0 million in 1993, $142.2 million in 1992 and $180.0 million in 1991.
In 1993, the Company provided policy and claim processing services to 28 state
CAIPs, compared to 26 in 1992 and 25 in 1991; the size of the CAIP market
continues to decrease.  Net premiums written increased 25 percent to $1,819.2
million, compared to $1,451.2 million in 1992 and $1,324.6 million in 1991.
Premiums earned, which are a function of the amount of premiums written in the
current and prior periods, increased 17 percent in 1993, compared to 11 percent
in 1992 and 8 percent in 1991.  In 1989, the Company established a reserve for
potential premium rollbacks and refunds under provisions of California
Proposition 103 and added to the reserve in subsequent years; the reserve
reduced premiums written and earned $10.2 million and $49.7 million in 1992 and
1991, respectively.  In 1992, the Company settled its financial responsibility
under Proposition 103 and reduced its reserve as described above.

In 1993, the Company's Core business' net premiums written grew 25 percent,
driven by an increase in unit sales.  The Company anticipates continued growth
in its Core business in 1994; however, the Company prices business to achieve a
four percent underwriting margin.  As a result, in the short run, operating
earnings may not increase in proportion to volume growth.

Claim costs, the Company's most significant expense, represent actual payments
made and changes in estimated future payments to be made to or on behalf of its
policyholders, including expenses required to settle claims and losses.  These
costs include a loss estimate for future assignments and assessments, based on
current business, under state-mandated involuntary automobile programs.  Claims
costs are influenced by inflation and loss severity and frequency, the impact
of which is mitigated by adequate pricing.  Increases in the rate of inflation
increase loss payments, which are made after premiums are collected.
Accordingly, anticipated rates of inflation are taken into account when the
Company establishes premium rates and loss reserves.  Claim costs, expressed as
a percentage of premiums earned, were 62 percent in 1993, compared to 65
percent in 1992 and 67 percent in 1991.  The personnel reductions in late 1991
and early 1992, along with other cost-cutting measures and the favorable
run-off of the Transportation business, reduced the Company's losses and loss
adjustment expenses.

Policy acquisition and other underwriting expenses as a percentage of premiums
earned were 28 percent in 1993, compared to 31 percent in 1992 and 37 percent
in 1991.  The decrease reflects the cost-cutting measures discussed above, as
well as process improvements, changed workflows and lower commission programs.

Service revenues were $43.7 million in 1993, compared to $53.3 million in 1992
and $54.0 million in 1991; the decrease in revenues reflects the decrease in
CAIP premiums written.  Service businesses generated a pretax operating profit
of $6.8 million in 1993, compared to a pretax loss of $4.3 million in 1992 and
a pretax loss of $2.1 million in 1991.  During 1992, loss adjustment expense
reserves were increased $6.2 million.


Recurring investment income (interest and dividends) decreased 3 percent to
$134.5 million in 1993, 4 percent to $139.0 million in 1992 and 5 percent to
$144.8 million in 1991, primarily due to lower prevailing interest rates.  Net
realized gains on security sales were $107.9 million in 1993, $14.5 million in
1992 and $7.4 million in 1991.  A significant portion of the 1993 realized
gains resulted from the sale of certain equity securities held in the Company's
investment portfolio.

President Clinton signed the Omnibus Budget Reconciliation Act of 1993, which,
among other items, increased the statutory tax rate to 35 percent.  Effective
January 1, 1992, the Company adopted SFAS 109 and was able to demonstrate that
the benefit of deferred tax assets was fully realizable.  The cumulative effect
of adopting SFAS 109 increased net income $14.2 million, or $.20 per share.  In
1991, the deferred tax asset write-down, as required under SFAS 96, was
included in the Federal income tax provision.





                                       14

<PAGE>   16
INVESTMENTS

The Company invests in fixed maturity, short-term and equity securities.  The
Company's investment strategy recognizes its need to maintain capital adequate
to support its insurance operations.  Therefore, the Company evaluates the
risk/reward trade-offs of investment opportunities, measuring their effects on
stability, diversity, overall quality and liquidity of the investment
portfolio.  The majority ($2,135.1 million, or 76.6%, in 1993 and $1,779.4
million, or 74.6%, in 1992) of the portfolio at December 31, 1993 and 1992, was
in short-term and intermediate- term, investment-grade fixed-income securities.
A relatively small portion ($453.9 million, or 16.3% in 1993 and $398.6
million, or 16.7% in 1992) of the investment portfolio was invested in
preferred and common equity securities providing risk/reward balance and
diversification.  The remainder of the portfolio was invested in long-term
investment-grade fixed-income securities ($77.6 million, or 2.8% in 1993 and
$122.7 million, or 5.1% in 1992) and non-investment-grade fixed-income
securities ($119.8 million, or 4.3% in 1993 and $85.4 million, or 3.6% in
1992).  The non-investment-grade fixed-income securities, although constituting
only a small portion of the portfolio, offer the Company high returns and added
diversification without a significant adverse effect on the stability and
quality of the investment portfolio as a whole.  These securities may involve
greater risks often related to creditworthiness, solvency and relative
liquidity of the secondary trading market.  The weighted average fully taxable
equivalent yield of the portfolio was 8.7%, 8.6% and 9.4% as of December 31,
1993, 1992 and 1991, respectively.

As of December 31, 1993, the Company elected to early adopt Statement of
Financial Accounting Standards (SFAS) 115 "Accounting for Certain Investments
in Debt and Equity Securities."  For 1993, the adoption of SFAS 115 did not
have any effect on the Company's results of operations or financial position.

Fixed maturity securities which are held-to-maturity and short-term securities
are reported at amortized cost; amortized cost of short-term securities
approximates market.  Available-for-sale securities are held for indefinite
periods of time and include fixed maturities and equity securities.  The
available-for-sale securities are reported at market value with the changes in
market value, net of deferred income taxes, reported directly in shareholders'
equity as unrealized appreciation or depreciation.

The quality distribution of the fixed-income portfolio is as follows:


<TABLE>                                               
<CAPTION>                                             
         Standard & Poor's          Percentage at              Percentage at
              Rating               December 31, 1993         December 31, 1992
              ------               -----------------         -----------------
          <S>                            <C>                       <C>
                AAA                      61.8%                     77.2%
                 AA                      23.6                      10.1
                  A                       8.4                       6.3
                BBB                       0.6                       0.6
          Non Rated/Other                 5.6                       5.8
                                        -----                     -----
                                        100.0 %                   100.0%
                                        =====                     ===== 
</TABLE>
                                              
                                                      
As of December 31, 1993, the Company held $122.5 million of Collateralized
Mortgage Obligations ("CMOs"), which represented 4.4% of the total investment
portfolio.  There are four types of securities held in the CMO Portfolio.  As
of December 31, 1993, sequential bonds represented 51.0% of the portfolio
($62.5 million) and had an average life of 1.5 years.  Planned  Amortization
Class ("P.A.C.") bonds represented 25.9% of the portfolio ($31.7 million) and
had an average life of 1.6 years.  P.A.C. Principal Only and Interest Only
bonds represented the remaining 23.1% of the portfolio ($28.3 million) and had
an average life of 1.8 years.  The portfolio contains no residual interests.

CMOs held by the Company are highly liquid with readily available quotes and,
at December 31, 1993, had an average life of 1.6 years.  Eighty- nine percent
of the CMOs held by the Company are rated AAA by Moody's or Standard & Poor's.
As of December 31, 1993, the Company's total CMO portfolio had an unrealized
loss of $3.7 million.  The single largest unrealized loss in any CMO security
was $1.3 million, or only 1.1% of such position.





                                       15

<PAGE>   17
Investments in the Company's portfolio have varying degrees of risk.  Equity
securities generally have greater risks than the non-equity portion of the
portfolio since these securities are subordinate to rights of debt holders and
other creditors of the issuer.  As of December 31, 1993, the mark-to-market net
gains in the Company's equity portfolio were $20.7 million ($13.5 million, net
of taxes), as compared to $88.3 million ($58.3 million, net of taxes) in 1992.

As of December 31, 1993 and 1992, the marketable equity portfolio of the
Company was $453.9 million, or 16.3% and $398.6 million, or 16.7%,
respectively, of the total investment portfolio.  The 1993 marketable equity
portfolio consisted of three principal components:  (i) $73.0 million, or
16.1%, of standard adjustable rate preferreds (ARPS), (ii) $283.4 million, or
62.4%, of perpetual preferreds with mechanisms that may provide an opportunity
to liquidate at par, and (iii) $97.5 million, or 21.5%, of common stocks.  The
1992 marketable equity portfolio consisted of three principal components; (i)
$138.9 million, or 34.8%, of standard adjustable rate preferred (ARPS), (ii)
$64.1 million, or 16.1% of perpetual preferreds with mechanisms that may
provide an opportunity to liquidate at par, and (iii) $195.6 million, or 49.1%,
of common stocks.

The Company continually evaluates the creditworthiness of each issuer for all
securities held in its portfolio.  Changes in market value are evaluated to
determine the extent to which such changes are attributable to:  (i) interest
rates, (ii) market-related factors other than interest rates and (iii)
financial conditions, business prospects and other fundamental factors specific
to the issuer.

Declines attributable to issuer fundamentals are reviewed in further detail.
Available evidence is considered to estimate the realizable value of the
investment.  Evidence reviewed may include the recent operating results and
financial position of the issuer, information about its industry, recent
announcements and other information.  The Company retains a staff of
experienced security analysts to compile, review and evaluate such information.

When a security in the Company's investment portfolio has a decline in market
value which is other than temporary, the Company is required by GAAP to reduce
the carrying value of such security to its net realizable value.  It is the
Company's general policy to dispose of securities when the Company
determines that the issuer is unable to reverse its deteriorating financial
condition and the prospects for its business within a reasonable period of
time.  In less severe circumstances, the Company may decide to dispose of a
portion of its holdings in a specific issuer when the risk profile of the
investment becomes greater than its tolerance for such risk.

ENVIRONMENTAL AND PRODUCT LIABILITY EXPOSURES

Because the Company has been primarily an insurer of motor vehicles, it has
limited exposure for environmental, product and general liability claims.  The
Company has established reserves for these exposures, in amounts which it
believes to be adequate based on information currently known by it and, in
addition, has a supplemental reserve that is in an amount substantially in
excess of the potential exposure for such claims.  The Company does not believe
that these claims will have a material impact on the Company's liquidity,
results of operations or financial condition.

However, the ultimate costs of the environmental and product liability claims
are inherently difficult to project due to numerous uncertainties, including
causation and policy coverage issues, the possible uncollectability of related
reinsurance and third-party indemnity arrangements, unsettled and sometimes
conflicting case law, difficulties in determining the scope of any
contamination or injury and the nature and cost of the appropriate remedial
action and the number and financial condition of responsible parties and their
insurers, among other factors.

Most of the Company's exposure for such claims results from Progressive's
acquisition in 1985 of American Star Insurance Company, since renamed National
Continental Insurance Company.  When American Star was acquired, the seller
agreed to administer all claims asserted under policies previously written by
American Star and to pay all losses incurred under such policies, including
those covered by reinsurance then in place on some of the policies.  The seller
encountered major financial difficulties as a result of losses in Hurricane
Andrew and, despite having paid all losses and





                                       16

<PAGE>   18
adjusted all claims on the old business since 1985, has contested its
obligation to administer these claims and to pay the losses not being paid by
some of the reinsurers.  The dispute has been submitted to arbitration and is
scheduled to be heard by an arbitration panel during the second quarter.  If it
is determined that the seller is responsible for all of these losses, the
amounts could be material to it.  According to a recent study by independent
actuaries for the seller, aggregate reserves on this business are about $19.2
million.  Of that amount, about $6.3 million is being contested in the
arbitration, $7.8 million is the admitted obligation of the seller and the
balance is the responsibility of reinsurance sources that are paying their
obligations.

The Company will continue to monitor these exposures, adjust the related
reserves appropriately as additional information becomes known and disclose any
material developments.





I
TEM 8.          FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


The Consolidated Financial Statements of the Company, along with the related
notes, supplementary data and report of independent accountants, are
incorporated by reference from the Company's 1993 Annual Report, pages 33
through 46 and pages 50 through 55.



ITEM 9.      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.



                                    PART III


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

A description of the directors, including those nominated for election as
directors at the 1994 Annual Meeting of Shareholders of the Registrant, is
incorporated herein by reference from the section entitled "Election of
Directors" in the Proxy Statement, pages 1 through 3.

A description of the executive officers of the Registrant and its subsidiaries
follows.  These descriptions reflect the Company's termination of its
officership program and consequent elimination of many officer positions,
effective December 31, 1993.


<TABLE>
<CAPTION>
                                                        Offices Held and
    Name                          Age          Last Five Years Business Experience
    ----                          ---          -----------------------------------
<S>                               <C>    <C>
Peter B. Lewis                    60     Chairman since April 1993; President, Chief Executive Officer and a director of the 
                                         Registrant and Progressive Casualty Insurance Company ("Progressive Casualty"), the
                                         principal subsidiary of the Registrant.

Charles B. Chokel                 40     Chief Financial Officer of the Registrant since April 1991; Senior Vice President - 
                                         Finance of Progressive Casualty from April 1991 to December 1993;  President of the 
                                         California Division and  Vice President of Progressive Casualty prior to April 1991.
</TABLE>






                                       17

<PAGE>   19

<TABLE>
<S>                               <C>    <C>
Allan W. Ditchfield               56     Chief Information Officer of the Registrant since March 1991; Senior Vice President - 
                                         Information Services of Progressive Casualty from March 1991 to December 1993; Senior 
                                         Vice President of Systems Engineering at MCI Telecommunications Corporation, Washington, 
                                         D.C. (telecommunications) from July 1988 to March 1991.

Daniel R. Lewis                   47     President of the Central States Division since November 1989; President of the Consumer 
                                         Finance Division prior to September 1989; Treasurer of the Registrant; Senior Vice 
                                         President of Progressive Casualty prior to December 1993.

Bruce W. Marlow                   45     Chief Operating Officer of the Registrant; Executive Vice President of Progressive 
                                         Casualty prior to December 1993.

Michael C. Murr                   42     Chief Investment and Capital Officer of the Registrant since February 1993; President of 
                                         Progressive Partners, Inc., a subsidiary of the Registrant since July 1992; President of 
                                         Progressive Partners Limited Partnership prior to July 1992.

David M. Schneider                56     Chief Legal Officer and Secretary of the Registrant since May 1989; Senior Vice President 
                                         of Progressive Casualty from May 1989 to December 1993; Partner and Area Chair of 
                                         National Business Practice, Baker & Hostetler, Cleveland, Ohio (attorneys) prior to 
                                         May 1989.

Tiona M. Thompson                 43     Chief Human Resources Officer of the Registrant since December 1993; Vice President - 
                                         Human Resources of Progressive Casualty from September 1991 to December 1993; Vice 
                                         President of Progressive Casualty prior to September 1991.
</TABLE>

SECTION 16(A) REPORTING

Under the Federal securities laws, the directors and certain officers of the
Company, and holders of 10% or more of the Company's Common Shares, are
required to report their ownership of the Company's Common Shares, and any
changes in such ownership, to the Securities and Exchange Commission and New
York Stock Exchange within specified time frames.  The Company is required to
report in this Form 10-K any failure on the part of any such individual to
timely file any such report.  The Form 5 filed for Daniel R. Lewis for 1992
inadvertently omitted to disclose two gifts totalling 100 of the Company's
Common Shares received by his two minor children in January 1992.  A
supplemental filing was made with the Securities and Exchange Commission and
the New York Stock Exchange promptly after this oversight was discovered.
Norman S.  Matthews' Form 5 for 1993, reporting charitable gifts totalling 250
Common Shares, was filed 29 days late.  The total of all charitable gifts
reported for David M. Schneider on his December 1993 Form 4 inadvertently
omitted 4 Common Shares.  An amended Form 4 was filed promptly after this
omission was discovered.


ITEM 11.   EXECUTIVE COMPENSATION


Incorporated by reference from the section of the Proxy Statement entitled
"Executive Compensation," pages 7 through 15.





                                       18

<PAGE>   20

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
               OWNERS AND MANAGEMENT



Incorporated by reference from the section of the Proxy Statement entitled
"Security Ownership of Certain Beneficial Owners and Management," pages 4
through 6.



ITEM 13.   CERTAIN RELATIONSHIPS AND
               RELATED TRANSACTIONS


Incorporated by reference from the section of the Proxy Statement entitled
"Election of Directors - Certain Related Transactions," page 3.


                                    PART IV


ITEM 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
               AND REPORTS ON FORM 8-K.


         (a)(1)  Listing of Financial Statements

                 The following consolidated financial statements
                 of the Registrant and its subsidiaries, included
                 in the Registrant's Annual Report, are
                 incorporated by reference in Item 8:

                          Report of Independent Accountants

                          Consolidated Statements of Income -
                          December 31, 1993, 1992 and 1991

                          Consolidated Balance Sheets - December 31, 1993
                          and 1992

                          Consolidated Statements of Changes in Shareholders'
                          Equity - December 31, 1993, 1992 and 1991

                          Consolidated Statements of Cash Flows -
                          December 31, 1993, 1992 and 1991


                          Notes to Consolidated Financial Statements

                          Supplemental Information*

                 *Not covered by Report of Independent Accountants.





                                       19

<PAGE>   21
         (a)(2)  Listing of Financial Statement Schedules

                 The following financial statement schedules of the Registrant
                 and its subsidiaries, Report of Independent Accountants and
                 Consent of Independent Accountants are included in Item 14(d):

                          Schedules

 
                         Report of Independent Accountants

                          Consent of Independent Accountants

                          Schedule I - Summary of Investments -
                          Other than Investments in Related Parties

                          Schedule II - Amounts Receivable from Related
                          Parties and Underwriters, Promoters, and Employees
                          other than Related Parties

                          Schedule III - Condensed Financial
                          Information of Registrant

                          Schedule V - Supplementary Insurance
                          Information

                          Schedule VI - Reinsurance

                          Schedule X - Supplemental Information Concerning
                          Property-Casualty Insurance Operations

                          No other schedules are required to be filed herewith
                          pursuant to Article 7 of Regulation S-X.

         (a)(3)  Listing of Exhibits

                 See exhibit index contained herein at pages 37 through 40.
                 Management contracts and compensatory plans and arrangements
                 are identified in the Exhibit Index as Exhibit Nos. (10)(B)
                 through (10)(K).

         (b)     Reports on Form 8-K

                 On November 12, 1993, the Company filed a Form 8-K to report
                 the call for redemption on December 17, 1993, of the entire
                 $70 million aggregate principal amount of its outstanding 8
                 3/4% Debentures due 2017.  The redemption was made at 105.425%
                 of the principal amount, plus accrued interest to the date
                 fixed for redemption.  These debentures were issued pursuant
                 to an Indenture dated October 15, 1986 between the Company and
                 Morgan Guaranty Trust Company of New York, as trustee.

         (c)     Exhibits

                 The exhibits in response to this portion of Item 14 are
                 submitted concurrently with this report.

         (d)     Financial Statement Schedules

                 The response to this portion of Item 14 is located at pages 23
                 through 36.





                                       20

<PAGE>   22

                                   SIGNATURES

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


<TABLE>              
<S>                                      <C>
                                         THE PROGRESSIVE CORPORATION
                   
March 29, 1994                           BY: /s/ Peter B. Lewis       

                                             -------------------------
                                               Peter B. Lewis
                                               Chairman, President and Chief
                                               Executive Officer of the
                                               Registrant
</TABLE>
           
                   

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.



<TABLE>
<S>                                     <C>                                              <C>
/s/ Peter B. Lewis                      Chairman, President and Chief Executive          March 29, 1994
- - - ---------------------------------       Officer of the Registrant and a Director
Peter B. Lewis 


/s/ Charles B. Chokel                   Chief Financial Officer                          March 29, 1994
- - - ---------------------------------       of the Registrant
Charles B. Chokel


/s/ Jeffrey W. Basch                    Chief Accounting Officer                         March 29, 1994
- - - ---------------------------------       of the Registrant
Jeffrey W. Basch


Milton N. Allen*                        Director                                         March 29, 1994
- - - ---------------------------                                                                            
Milton N. Allen


B. Charles Ames*                        Director                                         March 29, 1994
- - - --------------------------                                                                             
B. Charles Ames


Stephen R. Hardis*                      Director                                         March 29, 1994
- - - ---------------------------                                                                            
Stephen R. Hardis


Norman S. Matthews*                     Director                                         March 29, 1994
- - - ------------------------                                                                               
Norman S. Matthews


Donald B. Shackelford*                  Director                                         March 29, 1994
- - - -------------------------                                                                              
Donald B. Shackelford
</TABLE>






                                       21

<PAGE>   23

<TABLE>
<S>                                     <C>                                              <C>
Paul B. Sigler*                         Director                                         March 29, 1994
- - - -----------------------------                                                                          
Paul B. Sigler




*   DAVID M. SCHNEIDER, by signing his name hereto, does sign this document on
    behalf of the persons indicated above pursuant to a power of attorney duly
    executed by such persons.





By /s/ David M. Schneider                                                                March 29, 1994
   ------------------------                                                                            
    David M. Schneider
    Attorney-in-fact
</TABLE>






                                       22

<PAGE>   24





                           ANNUAL REPORT ON FORM 10-K


                                   ITEM 14(D)

                         FINANCIAL STATEMENT SCHEDULES

                          YEAR ENDED DECEMBER 31, 1993

                          THE PROGRESSIVE CORPORATION

                             MAYFIELD VILLAGE, OHIO





                                       23

<PAGE>   25






                       REPORT OF INDEPENDENT ACCOUNTANTS





To the Board of Directors and Shareholders,
The Progressive Corporation:





    Our report on the consolidated financial statements of The Progressive
Corporation and subsidiaries has been incorporated by reference in this Form
10-K from page 33 of the 1993 Annual Report to Shareholders of The Progressive
Corporation.  In connection with our audits of such financial statements, we
have also audited the related financial statement schedules listed in the index
on page 20 of this Form 10-K.

    In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.





                                                       COOPERS & LYBRAND




Cleveland, Ohio
January 26, 1994






                                       24

<PAGE>   26





                       CONSENT OF INDEPENDENT ACCOUNTANTS



To the Board of Directors and Shareholders,
The Progressive Corporation:


We consent to the incorporation by reference in the Registration Statement of
The Progressive Corporation on Form S-8 (File No. 33-64210) filed June 10,
1993, the Registration Statement of The Progressive Corporation on Form S-8
(File No. 33-51034) filed August 20, 1992, the Registration Statement on Form
S-8 (File No. 33-46944) filed April 3, 1992, the Registration Statement on Form
S-8 (File No. 33-38793) filed February 4, 1991, the Registration Statement on
Form S-8 (File No. 33-38464) filed December 28, 1990, the Registration
Statement on Form S-8 (File No. 33-38107) filed December 6, 1990, the
Registration Statement on Form S-8 (File No. 33-37707) filed November 9, 1990,
the Registration Statement on Form S-8 (File No. 33-33240) filed January 31,
1990, the Registration Statement on Form S-8 (File No. 33-23203) filed August
3, 1988 and the Registration Statement on Form S-8 (File No. 33-16509) filed
August 14, 1987 of our report dated January 26, 1994, on our audits of the
consolidated financial statements and financial statement schedules of The
Progressive Corporation and subsidiaries as of December 31, 1993 and 1992, and
for each of the three years in the period ended December 31, 1993, which report
is included in this Annual Report on Form 10-K.





                                 COOPERS & LYBRAND




Cleveland, Ohio
March 29, 1994





                                       25

<PAGE>   27

<TABLE>
SCHEDULE I -- SUMMARY OF INVESTMENTS -- OTHER
THAN INVESTMENTS IN RELATED PARTIES
 


THE PROGRESSIVE CORPORATION AND SUBSIDIARIES                                 
(millions)

<CAPTION>
                                                                       December 31, 1993
                                                     -----------------------------------------------------------
                                                                                               Amount At Which
                                                                                                  Shown In The 
               Type of Investment                              Cost       Market Value           Balance Sheet
                                                     -----------------------------------------------------------

<S>                                                        <C>                <C>                     <C>
Fixed Maturities:
Held-to-maturity:
   State, municipalities and political
    subdivisions                                           $  309.1           $  327.4                $  309.1
                                                     -----------------------------------------------------------
Available-for-sale:
 United States Government and
 government agencies and 
 authorities                                                   20.5               20.8                    20.8
 States, municipalities and political
 subdivisions                                                 819.8              835.7                   835.7
 Asset-backed securities                                      732.8              736.2                   736.2
 Foreign government obligations                                31.8               33.8                    33.8
 Corporate and other debt securities                          109.9              118.3                   118.3
 Redeemable preferred stock                                    47.1               47.8                    47.8
                                                     -----------------------------------------------------------
                                                            1,761.9            1,792.6                 1,792.6
                                                     -----------------------------------------------------------
    Total fixed maturities                                  2,071.0            2,120.0                 2,101.7
                                                     -----------------------------------------------------------

 Equity securities:
   Common Stocks                                               83.0               97.5                    97.5
   Preferred Stocks                                           350.2              356.4                   356.4
                                                     -----------------------------------------------------------
    Total equity securities                                   433.2              453.9                   453.9
                                                     -----------------------------------------------------------


Short-term investments                                        230.8              231.3                   230.8
                                                     -----------------------------------------------------------
    Total investments                                      $2,735.0           $2,805.2                $2,786.4
                                                     ===========================================================
- - - ----------------
<FN>


The Company did not have any securities of one issuer with an aggregate cost or
market value exceeding 10% of total shareholders' equity at December 31, 1993.

</TABLE>




                                       26

<PAGE>   28

<TABLE>
SCHEDULE II -- AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS,
PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES



<CAPTION>
                                     Balance at                                                  Balance
                                      Beginning                                Amounts            at End
                                      of Period         Additions1           Collected         of Period
                                 -------------------------------------------------------------------------
<S>                                  <C>                <C>                 <C>                 <C>
Year ended December 31, 1991:

William Cadden                         $      0         $  188,452          $  188,276         $     176
Charles Chokel                                0            245,327             245,327                 0
Thomas Corlett                          105,000                  0             105,000                 0
Allan Ditchfield                              0            261,008                   0           261,008
James Gordon                                  0            231,619                   0           231,619
Geoffrey Halverson                            0            133,951             131,026             2,925
Keith Phillips                                0            158,098             158,098                 0
Glenn Renwick                                 0            122,720             122,720                 0
David Ryczko                                  0            112,559                   0           112,559
                                 -------------------------------------------------------------------------
                                       $105,000         $1,453,734          $  950,447         $ 608,287
                                 =========================================================================

Year ended December 31, 1992:

David Adams                            $      0         $  114,982          $        0         $ 114,982
Alan Bauer                                    0            218,668             218,668                 0
William Cadden                              176                  0                 176                 0
Allan Ditchfield                        261,008                  0             261,008                 0
John Gibson                                   0            137,443                   0           137,443
James Gordon                            231,619                  0             231,619                 0
Geoffrey Halverson                        2,925                  0               2,925                 0
Evan Kiesz                                    0            124,574                   0           124,574
Chris Newman(2)                          10,224            161,732             135,695            36,261
Glenn Renwick                                 0            312,989             312,989                 0
David Ryczko                            112,559                  0             112,559                 0
Tom Seedle(2)                            55,995             96,610             152,605                 0
                                 -------------------------------------------------------------------------
                                       $674,506         $1,166,998          $1,428,244         $ 413,260
                                 =========================================================================

Year ended December 31, 1993:
David Adams                            $114,982         $        0          $  114,982         $       0
Travis Black (2)                         12,351             96,451             108,802                 0
John Gibson                             137,443                  0             137,443                 0
Evan Kiesz                              124,574                  0             124,574                 0
Chris Newman                             36,261                  0              36,261                 0
                                 -------------------------------------------------------------------------
                                       $425,611         $   96,451          $  522,062         $       0
                                 =========================================================================
- - - --------------------
<FN>                                             

(1)  Non-interest bearing; amounts represent an advance for relocation payable
     upon the earlier of termination of employment or sale of prior residence.

(2)  Balance at beginning of period was less than $100,000 and, therefore, not
     disclosed previously.

</TABLE>




                                       27

<PAGE>   29

<TABLE>
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT

CONDENSED STATEMENTS OF INCOME


THE PROGRESSIVE CORPORATION (PARENT COMPANY)                                 
(millions)


<CAPTION>
                                                                             Years Ended December 31,
                                                                        1993               1992          1991
                                                              -------------------------------------------------
<S>                                                                   <C>               <C>             <C>
Revenues
 Dividends from subsidiaries*                                         $131.3            $ 158.5         $129.2
 Intercompany investment income*                                         6.8                3.7           17.7
                                                              -------------------------------------------------
                                                                       138.1              162.2          146.9
                                                              -------------------------------------------------

Expenses
 Interest expense                                                       42.3               44.8           47.7
 Other operating costs and expenses                                      3.2                2.4            2.2
 Non-recurring items (1)                                                 4.0               10.0             --
                                                              -------------------------------------------------
                                                                        49.5               57.2           49.9
                                                              -------------------------------------------------

Operating income and income before Federal income
 taxes and other items below                                            88.6              105.0           97.0
Federal income tax provision (benefit)                                 (20.9)             (18.2)           2.4
                                                              -------------------------------------------------
Income before equity in undistributed earnings of
 subsidiaries and cumulative effect of accounting
 change                                                                109.5              123.2           94.6
Equity in undistributed net income of consolidated
 subsidiaries*                                                         157.8               16.4          (61.7)
                                                              -------------------------------------------------
Income before cumulative effect of accounting change                   267.3              139.6           32.9
Cumulative effect of adopting SFAS 109                                    --               14.2             --
                                                              -------------------------------------------------
Net income                                                            $267.3            $ 153.8         $ 32.9
                                                              =================================================
<FN>

*Eliminated in consolidation.

(1)  For 1993, represents a $4.0 million charge on extinguishment of the 8 3/4%
     Debentures due 2017.  For 1992, represents a $10.0 million payment to Mr.
     Alfred Lerner, then Chairman of the Company, and Mr. Lerner agreed to
     convert his $75.0 million Floating Rate Convertible Subordinated Debenture
     due 2008 into shares and to end his employment agreement with the Company.
     See "Financial Condition" section of MANAGEMENTS'S DISCUSSION AND ANALYSIS
     OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS on page 13 for further
     discussion.


See notes to condensed financial statements.

</TABLE>




                                       28

<PAGE>   30

<TABLE>
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)

CONDENSED BALANCE SHEETS

THE PROGRESSIVE CORPORATION (PARENT COMPANY)
(millions)
<CAPTION>
                                                                                              December 31,
                                                                                        1993              1992
                                                                         ----------------------------------------
<S>                                                                              <C>              <C>
ASSETS

 Investment in non-consolidated affiliates                                         $     .4         $      .4
 Investment in subsidiaries*                                                          972.0             887.7
 Intercompany receivable*                                                             484.6             301.0
 Federal income taxes                                                                  54.8              57.7
 Other assets                                                                           2.1               2.0
                                                                         ----------------------------------------
     TOTAL ASSETS                                                                  $1,513.9         $ 1,248.8
                                                                         ========================================


LIABILITIES AND SHAREHOLDERS' EQUITY

 Accounts payable and accrued expenses                                             $    6.1         $    11.5
 Payable to subsidiaries*                                                              34.4              41.6
 Funded debt                                                                          475.5             566.7
                                                                         ----------------------------------------
   Total liabilities                                                                  516.0             619.8
                                                                         ----------------------------------------
 Shareholders' equity:
   Preferred Shares, no par value (authorized 20.0
    serial Preferred Shares and 5.0 Voting
    Preference Shares)
    9 3/8% Serial Preferred Shares, Series A
     (cumulative, liquidation preference of $25
     per share, issued and outstanding 3.6 and 4.0
     shares)                                                                           87.9              96.4
   Common Shares, $1.00 par value, authorized 200.0
    shares, issued 82.2 and 77.1, including treasury
    shares of 10.1 and 10.0                                                            72.1              67.1
   Paid-in capital                                                                    357.6             180.7
   Net unrealized appreciation of investment in equity
    securities of consolidated subsidiaries                                            33.5              77.5
   Retained earnings                                                                  446.8             207.3
                                                                         ----------------------------------------
    Total shareholders' equity                                                        997.9             629.0
                                                                         ----------------------------------------
     TOTAL LIABILITIES AND
     SHAREHOLDERS' EQUITY                                                          $1,513.9         $ 1,248.8
                                                                         ========================================
<FN>

*Eliminated in consolidation.



See notes to condensed financial statements.

</TABLE>




                                       29

<PAGE>   31

<TABLE>
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)

CONDENSED STATEMENTS OF CASH FLOWS

THE PROGRESSIVE CORPORATION (PARENT COMPANY)
(millions)

<CAPTION>
                                                                                      Years Ended December 31,
                                                                                 1993            1992          1991
                                                                           -------------------------------------------
<S>                                                                            <C>              <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:

Income before cumulative effect of accounting change                           $267.3           $139.6         $  32.9
Adjustments to reconcile income to net cash
 provided by (used in) operating activities:
   Equity in income of consolidated subsidiaries                               (289.1)          (174.9)          (67.5)
   Amortization                                                                    .1               .1              .1
   Changes in:
    Intercompany receivable or payable                                           (7.2)            21.9             2.2
    Accounts payable and accrued expenses                                        (5.3)           (12.3)            4.4
    Federal income taxes                                                          2.8             22.4           (17.5)
    Other, net                                                                    3.8              1.3             3.6
                                                                           -------------------------------------------
     Net cash used in operating activities                                      (27.6)            (1.9)          (41.8)

CASH FLOWS FROM INVESTING ACTIVITIES:

Additional investments in equity securities of
 consolidated subsidiaries                                                       (4.7)           (34.2)          (19.6)
Return of capital from consolidated subsidiary                                   32.9               --              --
Dividends received from consolidated subsidiaries                               131.3            158.5           129.2
                                                                           -------------------------------------------
     Net cash provided by investing activities                                  159.5            124.3           109.6

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from exercise of stock options                                           1.8              4.2              --
Proceeds from issuance of stock                                                 177.0               --            96.4
Proceeds from funded debt                                                       148.2            170.0           170.0
Payments on funded debt                                                        (240.0)          (170.0)         (170.0)
Paid to subsidiaries                                                           (183.6)              --           (40.0)
Dividends paid to shareholders                                                  (23.1)           (20.8)          (17.0)
Acquisition of treasury shares                                                  (12.2)          (105.9)         (107.3)
                                                                           -------------------------------------------
     Net cash used in financing activities                                     (131.9)          (122.5)          (67.9)
                                                                           -------------------------------------------
Decrease in cash                                                                   --              (.1)            (.1)
Cash, beginning of year                                                            --               .1              .2
                                                                           -------------------------------------------
Cash, end of year                                                              $   --           $   --         $    .1
                                                                           ===========================================
<FN>


See notes to condensed financial statements.

</TABLE>




                                       30

<PAGE>   32
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)


NOTES TO CONDENSED FINANCIAL STATEMENTS                                      

The accompanying condensed financial statements of The Progressive Corporation
(the "Registrant") should be read in conjunction with the consolidated
financial statements and notes thereto of The Progressive Corporation and
subsidiaries included in the Registrant's 1993 Annual Report.

STATEMENTS OF CASH FLOWS -- For the purpose of the Statements of Cash Flows,
cash includes only bank demand deposits.  The Registrant paid Federal income
taxes of $91.0 million, $4.0 million and $30.4 million in 1993, 1992 and 1991,
respectively.  Total interest paid was $40.9 million for 1993, $44.3 million
for 1992 and $47.0 million for 1991.  During 1992, the $75.0 million Floating
Rate Convertible Subordinated Debenture due 2008 was converted into 9.0 million
Common Shares.

The Registrant effected a 3-for-1 stock split in the form of a dividend to
shareholders on December 8, 1992.  The Registrant issued its Common Shares by
transferring $38.5 million from retained earnings to the common stock account.
All per share and share amounts and stock prices were adjusted to give effect
to the split.  Treasury shares were not split.

DEBT -- Funded debt at December 31 consisted of:


<TABLE>                                                  
<CAPTION>                                                
(millions)                                    1993              1992
                                          ----------------------------
<S>                                        <C>                 <C>
Revolving bank credit                                    
 agreements                                 $   --              $ 50.0
Credit facilities                               --               120.0
7% Notes                                     148.2                  --
8 3/4% Debentures                               --                69.7
8 3/4% Notes                                  28.8                28.6
10% Notes                                    149.3               149.3
10 1/8% Subordinated Notes                   149.2               149.1
                                          ----------------------------
                                            $475.5              $566.7
                                          ============================
</TABLE>
                                                 
                                                         

Funded debt is the amount the Registrant has borrowed and contributed to the
capital of its insurance subsidiaries or borrowed for other long- term
purposes.

In May 1990, the Registrant entered into a revolving credit arrangement with
National City Bank, which is reviewed by the bank annually.  Under this
agreement, the Registrant had the right to borrow up to $50.0 million.  In
February 1994, the Registrant reduced this revolving credit arrangement to
$20.0 million.  See Note 12, SUBSEQUENT EVENTS, on page 46 of the Registrant's
1993 Annual Report.  By selecting from available credit options, the Registrant
may elect to pay interest at rates related to the London interbank offered
rate, the bank's base rate or at a money market rate.  A commitment fee is
payable on any unused portion of the committed amount at the rate of .125% per
annum.  At December 31, 1993, the Registrant had no borrowings under this
arrangement; at December 31, 1992, $50.0 million was outstanding.

In May 1990, the Registrant also entered into a four-year credit facility with
Morgan Guaranty Trust Company of New York under which the Registrant had the
right to borrow up to $75.0 million.  By selecting from available credit
options, the Registrant could have elected to pay interest at rates related to
the London interbank offered rate, the bank's CD rate, a base lending rate or a
quoted rate.  A commitment fee was payable on any unused portion of the
committed facility at the rate of .15% per annum.  At December 31, 1993 and
1992, the Registrant had no borrowings under this agreement.  In February 1994,
the Registrant terminated this credit facility.  See Note 12, SUBSEQUENT
EVENTS, on page 46 of the Registrant's 1993 Annual Report.





                                       31

<PAGE>   33
S
CHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)



NOTES TO CONDENSED FINANCIAL STATEMENTS                                      

In October 1989, the Registrant entered into a five-year credit facility
agreement with a group of banks under which the Registrant secured the right to
borrow up to $235.0 million and request an additional $235.0 million.  By
selecting from available credit options, the Registrant could have elected to
pay interest at rates related to the London interbank offered rate or the
greater of the agent bank's base lending rate or a rate based on the Federal
funds' rate.  A commitment fee was payable on any unused portion of the
committed facility at the rate of .125% per annum.  The agreement provides for
a utilization fee not to exceed .10% on the average amount of outstanding
borrowings.  At December 31, 1993, no borrowings were outstanding under this
arrangement; at December 31, 1992, $120.0 million was outstanding.  In February
1994, the Registrant terminated this agreement.  See Note 12, SUBSEQUENT
EVENTS, on page 46 of the Registrant's 1993 Annual Report.

In October 1993, the Registrant sold $150.0 million of noncallable 7% Notes due
2013 with interest payable semiannually.  The fair value of these Notes was
$145.3 million at December 31, 1993.

In February 1987, the Registrant sold $100.0 million, ($70.0 million after a
May 1989 debt exchange), of 8 3/4% Debentures due 2017 with interest payable
semiannually.  In December 1993, the Registrant redeemed the entire $70.0
million principal amount of these Debentures.  The Registrant redeemed the
Debentures at 105.425% of the principal amount, plus accrued interest, with the
proceeds of the sale of certain securities in its investment portfolio.  A $4.0
million charge on debt extinguishment was recorded as a "non-recurring item."
The fair value of this debt was $69.2 million at December 31, 1992.

In May 1989, the Registrant issued $30.0 million of 8 3/4% Notes due 1999 in
exchange for $30.0 million of the 8 3/4% Debentures due 2017.  These Notes are
noncallable, and interest is payable semiannually.  The fair value of these
Notes was $33.7 million and $31.8 million at December 31, 1993 and 1992,
respectively.

In December 1988, the Registrant sold $150.0 million of 10% Notes due 2000, and
$150.0 million of 10 1/8% Subordinated Notes due 2000.  All the Notes are
noncallable.  Interest is payable semiannually on both issues.  The fair value
of the 10% Notes and 10 1/8% Subordinated Notes were $180.6 million and $181.2
million, respectively, at December 31, 1993, and $170.4 million and $169.1
million, respectively, at December 31, 1992.

As of December 31, 1993, the Registrant is in compliance with its financial
debt covenants.  The most restrictive covenant, which appeared under the
recently terminated credit facilities, provided that senior indebtedness could
not exceed 200% of long-term capital.

In January 1994, the Registrant sold $200.0 million of its 6.60% Notes due
2004.  See Note 12, SUBSEQUENT EVENTS, on page 46 of this Registrant's 1993
Annual Report.

Aggregate principal payments on funded debt outstanding at December 31, 1993
are $0 for 1994 through 1998 and $480.0 million thereafter.

FEDERAL INCOME TAXES -- The Registrant files a consolidated Federal income tax
return with all subsidiaries.  The Federal income taxes in the accompanying
Condensed Balance Sheets represent amounts recoverable from the Internal
Revenue Service by the Registrant as agent for the consolidated tax group.  The
Registrant and its subsidiaries have adopted, pursuant to a written agreement,
a method of allocating consolidated Federal income taxes.  Amounts allocated to
the subsidiaries under the written agreement are included in Payable to
Subsidiaries in the accompanying Condensed Balance Sheets.





                                       32

<PAGE>   34
S
CHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)



NOTES TO CONDENSED FINANCIAL STATEMENTS                                      

Effective January 1, 1992, the Registrant adopted Statement of Financial
Accounting Standards (SFAS 109) "Accounting for Income Taxes", which changes
the method of accounting for income taxes.  Under SFAS 109, the Registrant was
able to demonstrate that the benefit of deferred tax assets were fully
realizable.  The cumulative effect of adopting SFAS 109 was to restore the
deferred tax assets and increase net income $14.2 million, or $.20 per share,
in 1992.

INVESTMENTS IN CONSOLIDATED SUBSIDIARIES -- The Registrant, through its
investment in consolidated subsidiaries, recognizes the changes in unrealized
gains (losses) on equity securities of the subsidiaries.  These amounts were:


<TABLE>
<CAPTION>
(millions)                                                      1993                 1992              1991
                                                            -------------------------------------------------
<S>                                                           <C>                 <C>                  <C>
Unrealized gains (losses):
 Available-for-sale: fixed maturities                         $  1.6               $29.1                $  --
                     equity securities                         (67.6)               56.9                 74.2
 Deferred income taxes                                          22.0               (29.2)               (25.2)
                                                            -------------------------------------------------
                                                              $(44.0)              $56.8                $49.0
                                                            =================================================


</TABLE>



OTHER MATTERS -- The information relating to incentive compensation plans and
related party transactions is incorporated by reference from Note 9, Employee
Benefit Plans, "Incentive Compensation Plans" and Note 10, RELATED PARTIES, on
pages 44 and 45 of the Registrant's 1993 Annual Report.





                                       33

<PAGE>   35

<TABLE>
               SCHEDULE V -- SUPPLEMENTARY INSURANCE INFORMATION

THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
(millions)
                                                                                                                 
<CAPTION>                                                                                                        
                                                           Future                                                   
                                                           policy                          Other                            
                                                           benefits,                       policy                           
                                            Deferred       losses,                         claims                           
                                            policy         claims and                      and                              
                                            acquisition    loss            Unearned        benefits     Premium         Investment  
Segment                                     costs          expenses(1)     premiums(1)     payable      revenue         Income(2)   
                                            ---------------------------------------------------------------------------------------
<S>                                         <C>            <C>             <C>             <C>          <C>             <C>         
Year ended December 31, 1993:                                                                                    
                                                                                                                 
   Insurance Lines                         $124.6          $1,348.6        $772.0          $   --       $1,668.7        $242.4      
                                            =======================================================================================
Year ended December 31, 1992:                                                                                    
                                                                                                                 
                                                                                                                 
   Insurance Lines                         $101.3          $1,274.2        $614.8          $   --       $1,426.1        $153.5    
                                            =======================================================================================
Year ended December 31, 1991:                                                                                    
                                                                                                                 
   Insurance Lines                         $110.2          $1,077.1        $595.0          $   --       $1,286.9        $152.2
                                            =======================================================================================
                                      

                                            Benefits,         Amortization
                                            claims,           of deferred
                                            losses and        policy             Other               Net
                                            settlement        acquisition        operating           premiums
Segment                                     expenses          costs              expenses            written
                                            ---------------------------------------------------------------------------------------
<S>                                         <C>               <C>                <C>                 <C>   
Year ended December 31, 1993:

   Insurance Lines                          $1,028.0          $311.6             $151.3              $1,819.2
                                            =======================================================================================
Year ended December 31, 1992:


   Insurance Lines                            $930.9          $304.1             $141.5              $1,451.2
                                            =======================================================================================
Year ended December 31, 1991:

   Insurance Lines                            $858.0          $313.7             $162.1              $1,324.6
                                            =======================================================================================
<FN>


(1) Pursuant to SFAS 113, amounts for 1992 and 1991 were restated.
(2) Excluding investment expenses of $10.2 million in 1993, $17.0 million in 1992, and $22.5 million in 1991.
</TABLE>





                                       34

<PAGE>   36

<TABLE>
SCHEDULE VI -- REINSURANCE


THE PROGRESSIVE CORPORATION AND SUBSIDIARIES                                  
(millions)



<CAPTION>
                                                                   Assumed                          Percentage
YEAR ENDED                                       Ceded to             From                           of Amount
                                    Gross           Other            Other                             Assumed
December 31, 1993                  Amount       Companies        Companies       Net Amount             to Net
- - - -----------------         -------------------------------------------------------------------------------------   
<S>                          <C>                 <C>              <C>            <C>                   <C>
Life Insurance in force        $    1.4          $   .3           $   --         $    1.1               --
                          =====================================================================================
Premiums earned:
 Accident and health           $     --          $   --           $   --         $     --               -- %
 Property and liability         1,808.8           149.8              9.7          1,668.7               .6
 Life                                --              --               --               --               --
                          -----------------------------------------------------------------
Total premiums earned          $1,808.8          $149.8           $  9.7         $1,668.7
                          =================================================================
December 31, 1992
- - - -----------------
Life Insurance in force        $    3.3          $  1.3           $   --         $    2.0               --
                          =====================================================================================
Premiums earned:
 Accident and health           $     .1          $   .1           $   --         $     --               -- %
 Property and liability         1,619.2           195.1              2.0          1,426.1               .1
 Life                                --              --               --               --               --       
                          -----------------------------------------------------------------

Total premiums earned          $1,619.3          $195.2           $  2.0         $1,426.1
                          =================================================================
December 31, 1991
- - - -----------------
Life Insurance in force        $    9.0          $  4.5           $   --         $    4.5               --
                          =====================================================================================
Premiums earned:
 Accident and health           $     .3          $   .2           $   .1         $     .2             50.0 %
 Property and liability         1,485.5           199.1               .2          1,286.6               --
 Life                                .2              .1               --               .1               --
                          -----------------------------------------------------------------
Total premiums earned          $1,486.0          $199.4           $   .3         $1,286.9
                          =================================================================
</TABLE>






                                       35

<PAGE>   37

<TABLE>
SCHEDULE X -   SUPPLEMENTAL INFORMATION CONCERNING PROPERTY - CASUALTY
INSURANCE OPERATIONS


THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
(millions)


<CAPTION>
                                                                                              Paid Losses and
                                            Losses and Loss Adjustment Expenses               Loss Adjustment
                                                  Incurred Related to                            Expenses
                                         ----------------------------------------          --------------------
                                            Current                     Prior
Year Ended                                   Year                      Years
- - - ----------                               ---------------         ----------------          
<S>                                         <C>                       <C>                         <C>
December 31, 1993                           $1,126.7                  $(98.5)                     $972.2
                                         ===============         ================            ================
December 31, 1992                             $981.7                  $(51.5)                     $835.3
                                         ===============         ================            ================
December 31, 1991                             $903.2                  $(42.8)                     $790.5
                                         ===============         ================            ================
<FN>


Pursuant to Rule 12-18 of Regulation S-X.  See Schedule V, page 34, for the
additional information required in Schedule X.
</TABLE>





                                       36

<PAGE>   38

<TABLE>

 
                                EXHIBIT INDEX

                               
<CAPTION>                                                                                        
Exhibit No.                                                                                       If Incorporated by Reference,
Under Reg.       Form 10-K                                                                        Documents with Which Exhibit
S-K, Item 601    Exhibit No.     Description of Exhibit                                           was Previously Filed with SEC
- - - ---------------------------------------------------------------------------------------------------------------------------------
 <S>             <C>             <C>                                                              <C>
 (3)             3(A)            Amended Articles of Incorporation of The Progressive             Quarterly Report on Form 10-Q
                                 Corporation ("Progressive"), as amended                          (Filed with SEC on April 23,  
                                                                                                  1993; see Exhibit 3 therein)
                               
 (3)             3(B)            Code of Regulations of Progressive                               Quarterly Report on Form 10-Q 
                                                                                                  (Filed with SEC on May 6, 1991;
                                                                                                  see Exhibit 3(B) therein)
                               
 (4)             4(A)            $4,000,000 Hillsborough County Industrial Development            Annual Report on Form 10-K
                                 Authority Industrial Development Revenue Bonds, Series           (filed with SEC on March 30, 1989;
                                 1982 (dated December 16, 1982); Loan and Debt Obligation         see Exhibit 4(B) therein)
                                 Agreement; Indenture of Trust; Mortgage and Security 
                                 Agreement; Unconditional Guaranty
                               
 (4)             4(B)            Indenture dated as of November 15, 1988 between                  Contained in Exhibit Binder
                                 Progressive and Rhode Island Hospital Trust National Bank, 
                                 as Trustee ("Subordinated Indenture") (including Table of 
                                 Contents and cross-reference sheet)
                               
                               
 (4)             4(C)            Form of 10 1/8% Subordinated Notes due 2000 issued in the        Contained in Exhibit Binder
                                 aggregate principal amount of $150,000,000 under the 
                                 Subordinated Indenture
                               
 (4)             4(D)            Indenture dated as of November 15, 1988 between Progressive      Contained in Exhibit Binder 
                                 and The First National Bank of Boston, as Trustee ("1988 Senior
                                 Indenture") (including  Table of Contents and cross-
                                 reference sheet)
</TABLE>
                       





                                       37

<PAGE>   39

<TABLE>
                                 EXHIBIT INDEX

                               
<CAPTION>                                                                                        
Exhibit No.                                                                                       If Incorporated by Reference,
Under Reg.       Form 10-K                                                                        Documents with Which Exhibit
S-K, Item 601    Exhibit No.     Description of Exhibit                                           was Previously Filed with SEC
- - - ---------------------------------------------------------------------------------------------------------------------------------
 <S>             <C>             <C>                                                              <C>
(4)             4(E)             Form of 10% Notes due 2000 issued in the aggregate principal      Contained in Exhibit Binder
                                 amount of $150,000,000 under the 1988 Senior Indenture
                                 
(4)             4(F)             Form of 8 3/4% Notes due 1999 issued in the aggregate principal   Annual Report on Form 10-K
                                 amount of $30,000,000 under the 1988 Senior Indenture             (Filed with SEC on March 30,
                                                                                                   1990; see Exhibit 4(K) therein)
                                 
(4)             4(G)             $235,000,000 Facility Agreement dated October 6, 1989             Quarterly Report on Form 10-Q
                                 with Credit Suisse, et al; Credit Suisse as agent; terminated     (Filed with SEC on November 13,
                                 February 10, 1994                                                 1989; see Exhibit 4 therein)
                                 
(4)             4(H)             $75,000,000 Facility Agreement dated May 4, 1990 with Morgan      Quarterly Report on Form 10-Q
                                 Guaranty Trust Company of New York; terminated February 1, 1994   (Filed with SEC on August 13,
                                                                                                   1990; see Exhibit 4(A) therein)
                                 
(4)             4(I)             $20,000,000 Unsecured Line of Credit with National City Bank      Contained in Exhibit Binder
                                 (dated May 23, 1990; renewed May 20, 1992, and amended February
                                 1, 1994)
                                 
(4)             4(J)             Indenture dated as of September 15, 1993 between Progressive      Quarterly Report on Form 10-Q 
                                 and The First National Bank of Boston, as trustee ("1993 Senior   (Filed with SEC on November 5,
                                 Indenture") (including Table of Contents and cross-reference      1993; see Exhibit 4(A) therein)
                                 sheet)
                                 
(4)             4(K)             Form of 7% Notes due 2013 issued in the aggregate principal       Quarterly Report on Form 10-Q
                                 amount of $150,000,000 under the 1993 Senior Indenture            (Filed with SEC on November 5,
                                                                                                   1993; see Exhibit 4(B) therein)
                                 
(4)             4(L)             Form of 6.60% Notes due 2004 issued in the aggregate principal    Contained in Exhibit Binder
                                 amount of $200,000,000 under the 1993 Senior Indenture.
</TABLE>
                         





                                       38

<PAGE>   40

<TABLE>
                                 EXHIBIT INDEX

                               
<CAPTION>                                                                                        
Exhibit No.                                                                                       If Incorporated by Reference,
Under Reg.       Form 10-K                                                                        Documents with Which Exhibit
S-K, Item 601    Exhibit No.     Description of Exhibit                                           was Previously Filed with SEC
- - - ---------------------------------------------------------------------------------------------------------------------------------
<S>             <C>             <C>                                                              <C>
(10)(ii)         10(A)          Construction Contract dated March 2, 1993 between                Annual Report on Form 10-K
                                Progressive Casualty Insurance Company and The                   (Filed with SEC on March 30,
                                Whiting-Turner Contracting Company                               1993; see Exhibit 10(A) therein)

(10)(iii)        10(B)          The Progressive Corporation 1994 Gainsharing Plan                 Contained in Exhibit Binder

(10)(iii)        10(C)          The Progressive Corporation 1994 Executive Bonus Plan             Contained in Exhibit Binder

(10)(iii)        10(D)          The Progressive Corporation Management Bonus Plan                 Quarterly Report on Form 10-Q 
                                (terminated December 31, 1993)                                    (filed with SEC on November 12,  
                                                                                                  1992; see Exhibit 10(B) therein)
                                                                                                                           
(10)(iii)        10(E)          The Progressive Corporation 1985 Restricted Stock Plan            Quarterly Report on Form 10-Q
                                (amended and restated on April 24, 1992); expired                 (Filed with SEC on August 14,
                                December 31, 1993                                                 1992; see Exhibit 10(C) therein)
                                                                                                                              
(10)(iii)        10(F)          The Progressive Corporation Directors Deferral                    Quarterly Report on Form 10-Q
                                Plan (Amendment and Restatement)                                  (Filed with SEC on November 13,
                                                                                                  1991; see Exhibit 10(B) therein)
                                                                                                                           
(10)(iii)        10(G)          The Progressive Corporation 1989 Incentive Plan (amended          Annual Report on Form 10-K
                                and restated as of April 24, 1992, as further amended             (Filed with SEC on March 30,
                                on July 1, 1992 and February 5, 1993)                             1993; see Exhibit 10(G) therein)

(10)(iii)        10(H)          Share Option Agreement dated March 17, 1989, between              Annual Report on Form 10-K
                                Progressive and David M. Schneider                                (Filed with SEC on March 30, 
                                                                                                  1990; see Exhibit 10(I) therein)
                                                                                                                             
(10)(iii)        10(I)          The Progressive Corporation 1990 Directors'                       Quarterly Report on Form 10-Q
                                Stock Option Plan (Amended and Restated                           (Filed with SEC on November 12,
                                as of April 24, 1992 as further amended on                        1992; see Exhibit 10(A) therein)
                                July 1, 1992)

(10)(iii)        10(J)          Share Option Agreements dated August 3, 1988, January 1,          Annual Report on Form 10-K
                                1989, May 22, 1989, and May 22, 1990 between Progressive          (Filed with SEC on March 30,
                                and Michael C. Murr                                               1993; see Exhibit 10(J) therein)
</TABLE>
                        





                                       39

<PAGE>   41

<TABLE>
                                 EXHIBIT INDEX

                               
<CAPTION>                                                                                        
Exhibit No.                                                                                       If Incorporated by Reference,
Under Reg.       Form 10-K                                                                        Documents with Which Exhibit
S-K, Item 601    Exhibit No.     Description of Exhibit                                           was Previously Filed with SEC
- - - ---------------------------------------------------------------------------------------------------------------------------------
 <S>             <C>             <C>                                                              <C>
(10)(iii)       10(K)            Agreement dated February 21, 1991 with Allan W. Ditchfield        Annual Report on Form 10-K
                                                                                                   (Filed with SEC on March 30,
                                                                                                   1992; see Exhibit 10(L) therein)
                                                                                                                            
                                 
(11)            11               Computation of Earnings Per Share                                 Contained in Exhibit Binder
                                 
                                 
(13)            13               The Progressive Corporation 1993 Annual Report                    Contained in Exhibit Binder
                                 
(21)            21               Subsidiaries of The Progressive Corporation                       Contained in Exhibit Binder
                                 
                                 
(23)            23               Consent of Independent Accountants                               Incorporated herein by
                                                                                                  reference to page 25 of this
                                                                                                  Annual Report on form 10-K

(24)            24               Powers of Attorney                                                Contained in Exhibit Binder
                                 
(28)            28               Schedule P as Filed with State Regulatory                         Contained in Exhibit Binder
                                 Authorities
<FN>                         

No other exhibits are required to be filed herewith pursuant to Item 601 of
Regulation S-K.

</TABLE>




                                       40





<PAGE>   1





   ==========================================================================




                          THE PROGRESSIVE CORPORATION


                                      AND


                          RHODE ISLAND HOSPITAL TRUST
                                 NATIONAL BANK,
                                              Trustee





                                 ______________

                                   INDENTURE

                                 ______________

                         Dated as of November 15, 1988




   ==========================================================================

<PAGE>   2
                             CROSS REFERENCE SHEET*

                                    -------
                                    Between

         Provisions of Trust Indenture Act of 1939 and Indenture to be dated as
of November 15, 1988 between THE PROGRESSIVE CORPORATION and RHODE ISLAND
HOSPITAL TRUST NATIONAL BANK, Trustee:


<TABLE>
<S>                                                                        <C>
Section of the Act                                                         Section of Indenture
- - - -------------------                                                        --------------------
310(a)(1) and (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . .  6.9
310(a)(3) and (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . .  Inapplicable
310(b)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  6.8 and 6.10(a), (b)
                                                                           and (d)
310(c)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  Inapplicable
311(a)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  6.13(a) and (c)(1)
                                                                           and (2)
311(b)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  6.13(b)
311(c)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  Inapplicable
312(a)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  4.1 and 4.2(a)
312(b)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  4.2(a) and (b)(i)
                                                                           and (ii)
312(c)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  4.2(c)
313(a)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  4.4(a)(i), (ii), (iii),
                                                                           (iv), (v) and (vi)
313(b)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  Inapplicable
313(b)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  4.4
313(c)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  4.4
313(d)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  4.4
314(a)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  4.3
314(b)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  Inapplicable
314(c)(1) and (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . .  11.5
314(c)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  Inapplicable
314(d)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  Inapplicable
314(e)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  11.5
314(f)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  Inapplicable
315(a), (c) and (d) . . . . . . . . . . . . . . . . . . . . . . . . . . .  6.1
315(b)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  5.11
315(e)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  5.12
316(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  5.9
316(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  Not required
316(a) (last sentence)  . . . . . . . . . . . . . . . . . . . . . . . . .  7.4
316(b)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  5.7
317(a)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  5.2
317(b)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  3.4(a) and (b)
318(a)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  11.7

<FN>
*   This Cross Reference Sheet is not part of the Indenture.
</TABLE>


<PAGE>   3
                                        TABLE OF CONTENTS
                                        -----------------


<TABLE>
<CAPTION>
                                                                                              PAGE
                                                                                              ----
<S>                                                                                             <C>
PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
RECITALS:

     Authorization of Indenture   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
     Compliance with Legal Requirements                                                         1
     Purpose of and Consideration for Indenture   . . . . . . . . . . . . . . . . . . . . . . . 1


                                            ARTICLE ONE

                                            DEFINITIONS

SECTION  1.1.           Certain Terms Defined . . . . . . . . . . . . . . . . . . . . . . . .   1
                        Authorized Newspaper  . . . . . . . . . . . . . . . . . . . . . . . .   2
                        Board of Directors
  . . . . . . . . . . . . . . . . . . . . . . . . .   2
                        Business Day  . . . . . . . . . . . . . . . . . . . . . . . . . . . .   2
                        Commission  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   2
                        Corporate Trust Office  . . . . . . . . . . . . . . . . . . . . . . .   2
                        Coupon  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   2
                        ECU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   3
                        European Communities  . . . . . . . . . . . . . . . . . . . . . . . .   3
                        Event of Default  . . . . . . . . . . . . . . . . . . . . . . . . . .   3
                        Foreign Currency  . . . . . . . . . . . . . . . . . . . . . . . . . .   3
                        Holder, holder of Securities, Securityholder  . . . . . . . . . . . .   3
                        Indebtedness  . . . . . . . . . . . . . . . . . . . . . . . . . . . .   3
                        Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   4
                        Interest  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   4
                        Issuer  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   4
                        Officers' Certificate . . . . . . . . . . . . . . . . . . . . . . . .   4
                        Opinion of Counsel  . . . . . . . . . . . . . . . . . . . . . . . . .   4
                        Original issue date . . . . . . . . . . . . . . . . . . . . . . . . .   4
                        Original Issue Discount Security  . . . . . . . . . . . . . . . . . .   4
                        Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   4
                        Person  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   5
                        principal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   5
                        Registered Security . . . . . . . . . . . . . . . . . . . . . . . . .   5
                        Responsible Officer . . . . . . . . . . . . . . . . . . . . . . . . .   5
                        Security or Securities  . . . . . . . . . . . . . . . . . . . . . . .   6
                        Senior Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . .   6
                        Subordinated Indebtedness . . . . . . . . . . . . . . . . . . . . . .   6
                        Subsidiary  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   6
                        Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   6
                        Trust Indenture Act of 1939 . . . . . . . . . . . . . . . . . . . . .   6
                        Unregistered Security . . . . . . . . . . . . . . . . . . . . . . . .   6
</TABLE>


<PAGE>   4
                                                ii


<TABLE>
<CAPTION>
                                                                                              PAGE
                                                                                              ----
<S>      <C>           <C>                                                                     <C>
                       U.S. Government Obligations  . . . . . . . . . . . . . . . . . . . . .   6
                       vice president   . . . . . . . . . . . . . . . . . . . . . . . . . . .   6
                       Yield to Maturity  . . . . . . . . . . . . . . . . . . . . . . . . . .   7


                                            ARTICLE TWO

                                            SECURITIES

SECTION  2.1.          Forms Generally  . . . . . . . . . . . . . . . . . . . . . . . . . . .   7
SECTION  2.2.          Form of Trustee's Certificate of Authentication  . . . . . . . . . . .   7
SECTION  2.3.          Amount Unlimited; Issuable in Series   . . . . . . . . . . . . . . . .   8
SECTION  2.4.          Authentication and Delivery of Securities  . . . . . . . . . . . . . .  10
SECTION  2.5.          Execution of Securities  . . . . . . . . . . . . . . . . . . . . . . .  11
SECTION  2.6.          Certificate of Authentication  . . . . . . . . . . . . . . . . . . . .  12
SECTION  2.7.          Denomination and Date of Securities; Payments of
                         Interest   . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  12
SECTION  2.8.          Registration, Transfer and Exchange  . . . . . . . . . . . . . . . . .  14
SECTION  2.9.          Mutilated, Defaced, Destroyed Lost and Stolen
                         Securities   . . . . . . . . . . . . . . . . . . . . . . . . . . . .  17
SECTION  2.10.         Cancellation of Securities; Destruction Thereof  . . . . . . . . . . .  18
SECTION  2.11.         Temporary Securities   . . . . . . . . . . . . . . . . . . . . . . . .  18


                                            ARTICLE THREE

                                        COVENANTS OF THE ISSUER

SECTION  3.1.          Payment of Principal and Interest  . . . . . . . . . . . . . . . . . .  19
SECTION  3.2.          Offices for Payments, etc  . . . . . . . . . . . . . . . . . . . . . .  20
SECTION  3.3.          Appointment to Fill a vacancy in Office of Trustee   . . . . . . . . .  21
SECTION  3.4.          Paying Agents  . . . . . . . . . . . . . . . . . . . . . . . . . . . .  21
SECTION  3.5.          Written Statement to Trustee   . . . . . . . . . . . . . . . . . . . .  22
SECTION  3.6.          Luxembourg Publications  . . . . . . . . . . . . . . . . . . . . . . .  22


                                            ARTICLE FOUR

                                SECURITYHOLDERS' LISTS AND REPORTS BY THE
                                        ISSUER AND THE TRUSTEE

SECTION  4.1.          Issuer to Furnish Trustee Information as to Names and
                         Addresses of Securityholders   . . . . . . . . . . . . . . . . . . .  23
SECTION  4.2.          Preservation and Disclosure of Securityholders'
                         Lists  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  23
SECTION  4.3.          Reports by the Issuer  . . . . . . . . . . . . . . . . . . . . . . . .  25
SECTION  4.4.          Reports by the Trustee   . . . . . . . . . . . . . . . . . . . . . . .  26
</TABLE>


<PAGE>   5
                                               iii


<TABLE>
<CAPTION>
                                                                                               PAGE
                                                                                               ----
<S>      <C>            <C>                                                                    <C>
                                            ARTICLE FIVE

                               REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS
                                          ON EVENT OF DEFAULT

SECTION  5.1.           Event of Default Defined; Acceleration of Maturity;
                          Waiver of Default . . . . . . . . . . . . . . . . . . . . . . . . .  28
SECTION  5.2.           Collection of Indebtedness by Trustee; Trustee May
                          Prove Debt  . . . . . . . . . . . . . . . . . . . . . . . . . . . .  31
SECTION  5.3.           Application of Proceeds . . . . . . . . . . . . . . . . . . . . . . .  34
SECTION  5.4.           Suits for Enforcement . . . . . . . . . . . . . . . . . . . . . . . .  35
SECTION  5.5.           Restoration of Rights on Abandonment of
                          Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . .  35
SECTION  5.6.           Limitations on Suits by Securityholders . . . . . . . . . . . . . . .  36
SECTION  5.7.           Unconditional Right of Securityholders to Institute
                          Certain Suits . . . . . . . . . . . . . . . . . . . . . . . . . . .  37
SECTION  5.8.           Powers and Remedies Cumulative; Delay or Omission
                          Not Waiver of Default . . . . . . . . . . . . . . . . . . . . . . .  37
SECTION  5.9.           Control by Securityholders  . . . . . . . . . . . . . . . . . . . . .  37
SECTION  5.10.          Waiver of Past Defaults . . . . . . . . . . . . . . . . . . . . . . .  38
SECTION  5.11.          Trustee to Give Notice of Default, But May Withhold
                          in Certain Circumstances  . . . . . . . . . . . . . . . . . . . . .  39
SECTION  5.12.          Right of Court to Require Filing of Undertaking to Pay
                          Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  39


                                            ARTICLE SIX

                                       CONCERNING THE TRUSTEE

SECTION  6.1.           Duties and Responsibilities of the Trustee; During
                          Default; Prior to Default . . . . . . . . . . . . . . . . . . . . .  40
SECTION  6.2.           Certain Rights of the Trustee . . . . . . . . . . . . . . . . . . . .  41
SECTION  6.3.           Trustee Not Responsible for Recitals, Disposition of
                          Securities or Application of Proceeds Thereof . . . . . . . . . . .  43
SECTION  6.4.           Trustee and Agents May Hold Securities or Coupons;
                          Collections, etc  . . . . . . . . . . . . . . . . . . . . . . . . .  43
SECTION  6.5.           Moneys Held by Trustee  . . . . . . . . . . . . . . . . . . . . . . .  43
SECTION  6.6.           Compensation and Indemnification of Trustee and Its
                          Prior Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . .  44
SECTION  6.7.           Right of Trustee to Rely on Officers' Certificate, etc. . . . . . . .  44
SECTION  6.8.           Qualification of Trustee; Conflicting Interests . . . . . . . . . . .  45
SECTION  6.9.           Persons Eligible for Appointment as Trustee . . . . . . . . . . . . .  51
</TABLE>


<PAGE>   6
                                                iv

<TABLE>
<CAPTION>
                                                                                               PAGE
                                                                                               ----
<S>      <C>            <C>                                                                    <C>
SECTION  6.10.          Resignation and Removal; Appointment of Successor
                         Trustee  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  52
SECTION  6.11.          Acceptance of Appointment by Successor Trustee  . . . . . . . . . . .  53
SECTION  6.12.          Merger, Conversion, Consolidation or Succession to
                          Business of Trustee . . . . . . . . . . . . . . . . . . . . . . . .  55
SECTION  6.13.          Preferential Collection of Claims Against the
                          Issuer  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  55


                                           ARTICLE SEVEN

                                    CONCERNING THE SECURITYHOLDERS

SECTION  7.1.           Evidence of Action Taken by Securityholders . . . . . . . . . . . . .  60
SECTION  7.2.           Proof of Execution of Instruments and of Holding of
                          Securities  . . . . . . . . . . . . . . . . . . . . . . . . . . . .  60
SECTION  7.3.           Holders to be Treated as Owners . . . . . . . . . . . . . . . . . . .  61
SECTION  7.4.           Securities Owned by Issuer Deemed Not Outstanding . . . . . . . . . .  62
SECTION  7.5.           Right of Revocation of Action Taken . . . . . . . . . . . . . . . . .  63


                                           ARTICLE EIGHT

                                       SUPPLEMENTAL INDENTURES

SECTION  8.1.           Supplemental Indentures Without Consent of Security-
                          holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  63
SECTION  8.2.           Supplemental Indentures With Consent of
                          Securityholders . . . . . . . . . . . . . . . . . . . . . . . . . .  65
SECTION  8.3.           Effect of Supplemental Indenture  . . . . . . . . . . . . . . . . . .  66
SECTION  8.4.           Documents to Be Given to Trustee  . . . . . . . . . . . . . . . . . .  67
SECTION  8.5.           Notation on Securities in Respect of Supplemental
                          Indentures  . . . . . . . . . . . . . . . . . . . . . . . . . . . .  67


                                            ARTICLE NINE

                               CONSOLIDATION, MERGER, SALE OR CONVEYANCE

SECTION  9.1.           Issuer May Consolidate, etc., on Certain Terms  . . . . . . . . . . .  67
SECTION  9.2.           Successor Corporation Substituted . . . . . . . . . . . . . . . . . .  68
SECTION  9.3.           Opinion of Counsel to Trustee . . . . . . . . . . . . . . . . . . . .  69
</TABLE>


<PAGE>   7
                                                 v


<TABLE>
<CAPTION>
                                                                                               PAGE
                                                                                               ----
<S>     <C>             <C>                                                                    <C>
                                             ARTICLE TEN

                          SATISFACTION AND DISCHARGE OF INDENTURE; UNCLAIMED MONEYS

SECTION 10.1.           Satisfaction and Discharge of Indenture . . . . . . . . . . . . . . .  69
SECTION 10.2.           Application by Trustee of Funds Deposited for Payment of Securities .  72
SECTION 10.3.           Repayment of Moneys Held by Paying Agent  . . . . . . . . . . . . . .  72
SECTION 10.4.           Return of Moneys Held by Trustee and Paying Agent Unclaimed
                          for Two Years . . . . . . . . . . . . . . . . . . . . . . . . . . .  72
SECTION 10.5.           Indemnity for U.S. Government Obligations . . . . . . . . . . . . . .  73


                                             ARTICLE ELEVEN

                                         MISCELLANEOUS PROVISIONS

SECTION 11.1.           Incorporators, Shareholders, Officers and Directors of
                          Issuer Exempt from Individual Liability . . . . . . . . . . . . . .  73
SECTION 11.2.           Provisions of Indenture for the Sole Benefit of Parties
                          and Securityholders . . . . . . . . . . . . . . . . . . . . . . . .  74
SECTION 11.3.           Successors and Assigns of Issuer Bound by Indenture . . . . . . . . .  74
SECTION 11.4.           Notices and Demands on Issuer, Trustee and Securityholders  . . . . .  74
SECTION 11.5.           Officers' Certificates and Opinions of Counsel; Statements to Be
                          Contained Therein . . . . . . . . . . . . . . . . . . . . . . . . .  75
SECTION 11.6.           Payments Due on Saturdays, Sundays and Holidays   . . . . . . . . . .  76
SECTION 11.7.           Conflict of Any Provision of Indenture with Trust
                          Indenture Act of 1939 . . . . . . . . . . . . . . . . . . . . . . .  76
SECTION 11.8.           New York Law to Govern  . . . . . . . . . . . . . . . . . . . . . . .  77
SECTION 11.9.           Counterparts  . . . . . . . . . . . . . . . . . . . . . . . . . . . .  77
SECTION 11.10.          Effect of Headings  . . . . . . . . . . . . . . . . . . . . . . . . .  77
SECTION 11.11.          Securities in Foreign Currencies or in ECU  . . . . . . . . . . . . .  77


                                           ARTICLE TWELVE

                              REDEMPTION OF SECURITIES AND SINKING FUNDS

SECTION 12.1.           Applicability of Article  . . . . . . . . . . . . . . . . . . . . . .  77
SECTION 12.2.           Notice of Redemption; Partial Redemptions . . . . . . . . . . . . . .  78
SECTION 12.3.           Payment of Securities Called for Redemption . . . . . . . . . . . . .  79
SECTION 12.4.           Exclusion of Certain Securities from Eligibility for
                          Selection for Redemption  . . . . . . . . . . . . . . . . . . . . .  80
SECTION 12.5.           Mandatory and Optional Sinking Funds  . . . . . . . . . . . . . . . .  81
</TABLE>


<PAGE>   8
                                                 vi


<TABLE>
<CAPTION>
                                                                                               PAGE
                                                                                               ----
<S>     <C>             <C>                                                                    <C>
                                            ARTICLE THIRTEEN

                                         SUBORDINATION; SENIORITY

SECTION 13.1.           Securities Subordinated to Senior Indebtedness  . . . . . . . . . . .  84
SECTION 13.2.           Issuer Not to Make Payments with Respect to Securities
                          in Certain Circumstances  . . . . . . . . . . . . . . . . . . . . .  84
SECTION 13.3.           Subrogation of Securities . . . . . . . . . . . . . . . . . . . . . .  87
SECTION 13.4.           Authorization by Holders of Securities  . . . . . . . . . . . . . . .  88
SECTION 13.5.           Notices to Trustee  . . . . . . . . . . . . . . . . . . . . . . . . .  88
SECTION 13.6.           Trustee's Relation to Senior Indebtedness . . . . . . . . . . . . . .  89
SECTION 13.7.           No Impairment of Subordination  . . . . . . . . . . . . . . . . . . .  89
SECTION 13.8.           Article 13 Not to Prevent Events of Default . . . . . . . . . . . . .  90
SECTION 13.9.           Paying Agents other than the Trustee  . . . . . . . . . . . . . . . .  90
SECTION 13.10.          Securities Senior to Subordinated Indebtedness  . . . . . . . . . . .  90

TESTIMONIUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  91

SIGNATURES  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  91

ACKNOWLEDGMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  92
</TABLE>


<PAGE>   9
         THIS INDENTURE, dated as of November 15, 1988, between THE PROGRESSIVE
CORPORATION, an Ohio corporation (the "Issuer"), and RHODE ISLAND HOSPITAL
TRUST NATIONAL BANK, a national banking association (the "Trustee"),

                                  WITNESSETH:

         WHEREAS, the Issuer has duly authorized the issue from time to time of
its unsecured debentures, notes or other evidences of indebtedness to be issued
in one or more series (the "Securities") up to such principal amount or amounts
as may from time to time be authorized in accordance with the terms of this
Indenture and to provide, among other things, for the authentication, delivery
and administration thereof, the Issuer has duly authorized the execution and
delivery of this Indenture; and

         WHEREAS, all things necessary to make this Indenture a valid indenture
and agreement according to its terms have been done;

         Now, THEREFORE:

         In consideration of the premises and the purchases of the Securities
by the holders thereof, the Issuer and the Trustee mutually covenant and agree
for the equal and proportionate benefit of the respective holders from time to
time of the Securities and of the Coupons, if any, appertaining thereto as
follows:

                                  ARTICLE ONE

                                  DEFINITIONS

         SECTION 1.1  Certain Terms Defined.  The following terms (except as
otherwise expressly provided or unless the context otherwise clearly requires)
for all purposes of this Indenture and of any indenture supplemental hereto
shall have the respective meanings specified in this Section.  All other terms
used in this Indenture that are defined in the Trust Indenture Act of 1939 or
the definitions of which in the Securities Act of 1933 are referred to in the
Trust Indenture Act of 1939, including terms defined therein by reference to
the Securities Act of 1933 (except as herein otherwise expressly provided or
unless the context otherwise clearly requires), shall have the meanings
assigned to such terms in said Trust Indenture Act and in said Securities Act
as in force at the date of this Indenture.  All accounting terms used herein
and not expressly defined shall have the meanings assigned to such terms in
accordance with generally accepted accounting principles, and the term
"generally accepted accounting principles" means such accounting principles as

<PAGE>   10
                                       2

are generally accepted at the time of any computation.  The words "herein",
"hereto" and "hereunder" and other words of similar import refer to this
Indenture as a whole and not to any particular Article, Section or other
subdivision.  The terms defined in this Article have the meanings assigned to
them in this Article and include the plural as well as the singular.

         "Authorized Newspaper" means a newspaper (which, in the case of the
United Kingdom, will, if practicable, be the Financial Times (London Edition)
and, in the case of Luxembourg, will, if practicable, be the Luxemburger Wort)
published in English or an official language of the country of publication
customarily published at least once a day for at least five days in each
calendar week and of general circulation in the United Kingdom or in
Luxembourg, as applicable.  If it shall be impractical in the opinion of the
Trustee to make any publication of any notice required hereby in an Authorized
Newspaper, any publication or other notice in lieu thereof which is made or
given with the approval of the Trustee shall constitute a sufficient
publication of such notice.

         "Board of Directors" means either the Board of Directors of the Issuer
or any committee of such Board duly authorized to act hereunder.

         "Business Day" means, with respect to any Security, a day that in the
city (or in any of the cities, if more than one) in which amounts are payable,
as specified in the form of such Security, is not a day on which banking
institutions are authorized by law or regulation to close or a day on which
transactions in the currency in which the Securities are payable are not
conducted.

         "Commission" means the Securities and Exchange Commission, as from
time to time constituted, created under the Securities Exchange Act of 1934, or
if at any time after the execution and delivery of this Indenture such
Commission is not existing and performing the duties now assigned to it under
the Trust Indenture Act, then the body performing such duties on such date.

         Corporate Trust Office" means the office of the Trustee at which the
corporate trust business of the Trustee shall, at any particular time, be
principally administered, which office is, at the date as of which this
Indenture is dated, located at 15 Westminster Street, Room 737W, Providence,
Rhode Island  02903, Attn: Corporate Trust Administration.

         "Coupon" means any interest coupon appertaining to a Security.

<PAGE>   11
                                       3

         "ECU" means the European Currency Unit as defined and revised from
time to time by the council of European Communities.

         "European Communities" means the European Economic Community (the
"EEC"), the European Coal and Steel Community and Euratom.

         "Event of Default" means any event or condition specified as such in
Section 5.1.

         "Foreign Currency" means a currency issued by the government of a
country other than the United States.

         "Holder," "Holder of Securities," "Securityholder" or other similar
terms mean (a) in the case of any Registered Security, the Person in whose name
such Security is registered in the security register kept by the Issuer for
that purpose in accordance with the terms hereof, and (b) in the case of any
Unregistered Security, the bearer of such Security, or any Coupon appertaining
thereto, as the case may be.

         "Indebtedness" with respect to any Person means:

                 (1) any debt (i) for borrowed money, or (ii) evidenced by a
         bond, note, debenture, or similar instrument (including purchase money
         obligations) given in connection with the acquisition of any business,
         property or assets, whether by purchase, merger, consolidation or
         otherwise, but shall not include any account payable or other
         obligation created or assumed by a Person in the ordinary course of
         business in connection with the obtaining of materials or services, or
         (iii) which is a direct or indirect obligation which arises as a
         result of banker's acceptances or drawings under bank letters of
         credit issued to secure obligations of such person, whether contingent
         or otherwise;

                 (2) any debt of others described in the preceding clause (1)
         which such Person has guaranteed or for which it is otherwise liable;

                 (3) the obligation of such Person as lessee under any lease of
         property which is reflected on such Person's balance sheet as a
         capitalized lease; and

                 (4) any deferral, amendment, renewal, extension, supplement or
         refunding of any liability of the kind described in any of the
         preceding clauses (1), (2) and (3) provided, however, that, in
         computing the "Indebtedness" of any Person, there shall be excluded
         any particular

<PAGE>   12
                                       4

         indebtedness if, upon or prior to the maturity thereof, there shall
         have been deposited with the depository in trust money (or evidences
         of indebtedness if permitted by the instrument creating such
         indebtedness) in the necessary amount to pay, redeem or satisfy such
         indebtedness as it becomes due, and the amount so deposited shall not
         be included in any computation of the assets of such Person.

         "Indenture" means this instrument as originally executed and delivered
or, if amended or supplemented as herein provided, as so amended or
supplemented or both, and shall include the forms and terms of particular
series of Securities established as contemplated hereunder.

         "Interest" means, when used with respect to non-interest bearing
Securities, interest payable after maturity.

         "lssuer" means (except as otherwise provided in Article Six) THE
PROGRESSIVE CORPORATION, an Ohio corporation, and, subject to Article Nine, its
successors and assigns.

         "Officers' Certificate" means a certificate signed by the chairman of
the Board of Directors or the president or any vice president or by the
treasurer and by the secretary or any assistant secretary of the Issuer and
delivered to the Trustee.  Each such certificate shall include the statements
provided for in Section 11.5.

         "Opinion of Counsel" means an opinion in writing signed by legal
counsel who may be an employee of or counsel to the Issuer or other counsel who
shall be satisfactory to the Trustee.  Each such opinion shall include the
statements provided for in Section 11.5, if and to the extent required hereby.

         "Original Issue Date" of any Security (or portion thereof) means the
earlier of (a) the date of such Security or (b) the date of any Security (or
portion thereof) for which such Security was issued (directly or indirectly) on
registration of transfer, exchange or substitution.

         "Original Issue Discount Security" means any Security that provides
for an amount less than the principal amount thereof to be due and payable upon
a declaration of acceleration of the maturity thereof pursuant to Section 5.1.

         "Outstanding" (except as otherwise provided in Section 6.8), when used
with reference to Securities, shall, subject to the provisions of Section 7.4,
means, as of any particular time, all Securities authenticated and delivered by
the Trustee under this Indenture, except

<PAGE>   13
                                       5

                 (a) Securities theretofore cancelled by the Trustee or
         delivered to the Trustee for cancellation;

                 (b) Securities, or portions thereof, for the payment or
         redemption of which moneys in the necessary amount shall have been
         deposited in trust with the Trustee or with any paying agent (other
         than the Issuer) or shall have been set aside, segregated and held in
         trust by the Issuer for the holders of such Securities (if the Issuer
         shall act as its own paying agent), provided that if such Securities,
         or portions thereof, are to be redeemed prior to the maturity thereof,
         notice of such redemption shall have been given as herein provided, or
         provision satisfactory to the Trustee shall have been made for giving
         such notice; and

                 (c) Securities in substitution for which other Securities
         shall have been authenticated and delivered, or which shall have been
         paid, pursuant to the terms of Section 2.9 (except with respect to any
         such Security as to which proof satisfactory to the Trustee is
         presented that such Security is held by a person in whose hands such
         Security is a legal, valid and binding obligation of the Issuer).

         In determining whether the holders of the requisite principal amount
of Outstanding Securities of any or all series have given any request, demand,
authorization, direction, notice, consent or waiver hereunder, the principal
amount of all Original Issue Discount Security that shall be deemed to be
Outstanding for such purposes shall be the amount of the principal thereof that
would be due and payable as of the date of such determination upon a
declaration of acceleration of the maturity thereof pursuant to Section 5.1.

         "Person" means any individual, corporation, partnership, joint
venture, association, joint stock company, trust, unincorporated organization
or government or any agency or political subdivision thereof.

         "principal" whenever used with reference to the Securities or any
Security or any portion thereof, shall be deemed to include "and premium, if
any."

         "Registered Security" means any Security registered on the Security
Register of the Issuer.

         "Responsible Officer" when used with respect to the Trustee means any
officer or assistant officer assigned by the Trustee to administer its
corporate trust matters.

<PAGE>   14
                                       6

         "Security" or "Securities" (except as otherwise provided in Section
6.8) has the meaning stated in the first recital of this Indenture, or, as the
case may be, Securities that have been authenticated and delivered under this
Indenture.

         "Senior Indebtedness" means the principal and unpaid interest on
Indebtedness of the Company outstanding at any time, other than (1) the
Securities, (2) Indebtedness of the Issuer to a Subsidiary for money borrowed
or advanced from any Subsidiary, except for such Indebtedness which the
Subsidiary has borrowed from a third party other than a Subsidiary and advanced
to the Company, (3) the Company's Floating Rate Convertible Subordinated
Debentures due 2008 issued in the aggregate principal amount of $75,000,000
("Floating Rate Convertible Subordinated Debentures"), and (4) any other
Indebtedness which by its terms expressly provides that it is not superior in
right of payment to the Securities.

         "Subordinated Indebtedness" means the principal and interest on any
Indebtedness of the Company which by its terms is expressly subordinated in
right of payment to the Securities (including without limitation the Floating
Rate Convertible Subordinated Debentures).

         "Subsidiary" means a corporation the majority of whose voting stock is
owned by the Company or a Subsidiary.  Voting stock is capital stock having
voting power under the ordinary circumstances to elect directors.

         "Trustee" means the Person identified as "Trustee" in the first
paragraph hereof and, subject to the provisions of Article Six, shall also
include any successor trustee.

         "Trust Indenture Act of 1939" (except as otherwise provided in
Sections 8.1 and 8.2) means the Trust Indenture Act of 1939 as in force at the
date as of which this Indenture was originally executed.

         "Unregistered Security" means any Security other than a Registered
Security.

         "U.S. Government Obligations" means direct obligations of the United
States of America, backed by its full faith and credit.

         "vice president" when used with respect to the Issuer, means any vice
president, whether or not designated by a number or a word or words added
before or after the title of "vice president".

<PAGE>   15
                                       7

         "Yield to Maturity" means the yield to maturity on a series of
securities, calculated at the time of issuance of such series, or, if
applicable, at the most recent redetermination of interest on such series, and
calculated in accordance with accepted financial practice.


                                  ARTICLE TWO

                                   SECURITIES

         SECTION 2.1  Forms Generally.  The Securities of each series and the
Coupons, if any, to be attached thereto shall be substantially in such form
(not inconsistent with this Indenture) as shall be established by or pursuant
to a resolution of the Board of Directors or in one or more indentures
supplemental hereto, in each case with such appropriate insertions, omissions,
substitutions and other variations as are required or permitted by this
Indenture and may have imprinted or otherwise reproduced thereon such legend or
legends, not inconsistent with the provisions of this Indenture, as may be
required to comply with any law or with any rules or regulations pursuant
thereto, or with any rules of any securities exchange or to conform to general
usage, all as may be determined by the officers executing such Securities and
Coupons, as evidenced by their execution of the Securities and Coupons.

         The definitive Securities and Coupons shall be printed, lithographed
or engraved on steel engraved borders or may be produced in any other manner,
all as determined by the officers executing such Securities and Coupons, as
evidenced by their execution of such Securities and Coupons.

         SECTION 2.2  Form of Trustees Certificate of Authentication.  The
Trustee's certificate of authentication on all Securities shall be in
substantially the following form:

         This is one of the Securities, of the series designated herein,
referred to in the within-mentioned Indenture.


                          TRUSTEE,
                                  as Trustee




                         By ____________________________________________________
                                                    Authorized Signatory

<PAGE>   16
                                       8

         SECTION 2.3  Amount Unlimited; Issuable in Series.  The aggregate
principal amount of Securities which may be authenticated and delivered under
this Indenture is unlimited.

         The Securities may be issued in one or more series. There shall be
established in or pursuant to a resolution of the Board of Directors and set
forth in an Officers' Certificate, or established in one or more indentures
supplemental hereto, prior to the issuance of Securities of any series,

                 (1) the title of the Securities of the series (which shall
         distinguish the Securities of the series from all other Securities);

                 (2) any limit upon the aggregate principal amount of the
         Securities of the series that may be authenticated and delivered under
         this Indenture (except for Securities authenticated and delivered upon
         registration of transfer of, or in exchange for, or in lieu of, other
         Securities of the series pursuant to Section 2.8, 2.9, 2.11 or 12.3);

                 (3) the date or dates on which the principal of the Securities
         of the series is payable or the method by which such date or dates
         shall be determined;

                 (4) the rate or rates at which the Securities of the series
         shall bear interest, if any, or the method by which such rate shall be
         determined, the date or dates from which such interest shall accrue,
         the interest payment dates on which such interest shall be payable and
         the record dates for the determination of Holders to whom interest is
         payable;

                 (5) the place or places where the principal and any interest
         on Securities of the series shall be payable;

                 (6) the price or prices at which, the period or periods within
         which and the terms and conditions upon which Securities of the series
         may be redeemed, in whole or in part, at the option of the Issuer,
         pursuant to any sinking fund or otherwise;

                 (7) the obligation, if any, of the Issuer to redeem, purchase
         or repay Securities of the series pursuant to any sinking fund or
         analogous provisions or at the option of a Holder thereof and the
         price or prices at which and the period or periods within which and
         the terms and conditions upon which Securities of the series shall be
         redeemed, purchased or repaid, in whole or in part, pursuant to such
         obligation;

<PAGE>   17
                                       9

                 (8) if other than denominations of U.S. $1,000 and any
         integral multiple thereof, in the case of Registered Securities, or
         U.S. $1,000 in the case of Unregistered Securities, the denominations
         in which Securities of the series shall be issuable;

                 (9) if other than the principal amount thereof, the portion of
         the principal amount of Securities of the series which shall be
         payable upon declaration of acceleration of the maturity thereof
         pursuant to Section 5.1 or provable in bankruptcy pursuant to Section
         5.2;

                 (10) any authenticating or paying agents, transfer agents or
         registrars or any other agents with respect to the Securities of such
         series;

                 (11) if other than such coin or currency of the United States
         of America as at the time of payment is legal tender for payment of
         public or private debts, the coin or currency or units based on or
         relating to currencies (including ECU) in which payment of the
         principal of and interest, if any, on the Securities of that series
         shall be payable;

                 (12) if the principal of or interest, if any, on the
         Securities of that series are to be payable, at the election of the
         Issuer or a holder thereof, in a coin or currency or units based on or
         relating to currencies (including ECU) other than that in which the
         Securities are stated to be payable, the period or periods within
         which, and the terms and conditions upon which, such election may be
         made;

                 (13) if the amount of payments of principal of or interest, if
         any, on the Securities of the series may be determined with reference
         to an index, formula or other method based on a coin or currency or
         units based on or relating to currencies (including ECU) other than
         that in which the Securities are stated to be payable, the manner in
         which such amounts shall be determined;

                 (14) whether the Securities of the series will be issuable as
         Registered Securities or Unregistered Securities (with or without
         Coupons), or both, any restrictions applicable to the offer, sale or
         delivery of Unregistered Securities and, if other than as provided in
         Section 2.8, the terms upon which Unregistered Securities of any
         series may be exchanged for Registered Securities of such series and
         vice versa;

<PAGE>   18
                                       10

                 (15) whether and under what circumstances the Issuer will pay
         additional amounts on the Securities of the series held by a Person
         who is not a U.S. person in respect of any tax, assessment or
         governmental charge withheld or deducted and, if so, whether the
         Issuer will have the option to redeem such Securities rather than pay
         such additional amounts;

                 (16) if the Securities of such series are to be issuable in
         definitive form (whether upon original issue or upon exchange of a
         temporary Security of such series) only upon receipt of certain
         certificates or other documents or satisfaction of other conditions
         not otherwise set forth herein, then the form and terms of such
         certificates, documents or conditions;

                 (17) the degree to which such Securities shall be subordinated
         to any other securities of the Issuer; and

                 (18) any other terms of the series, including provisions for
         payment by wire transfers, if any, or modifications of the definition
         of Business Day (which terms shall not adversely affect the interests
         of the Holders of the Securities).

         All Securities of any one series shall be substantially identical
except as to denomination and except as may otherwise be provided in or
pursuant to such resolution of the Board of Directors or in any such indenture
supplemental hereto.

         SECTION 2.4  Authentication and Delivery of Securities.  At any time
and from time to time after the execution and delivery of this Indenture, the
Issuer may deliver Securities of any series (having attached thereto
appropriate Coupons, if any), executed by the Issuer to the Trustee for
authentication, and the Trustee shall thereupon authenticate and deliver such
Securities and Coupons, if any, to or upon the written order of the Issuer,
signed by both (a) the chairman of its Board of Directors, or any vice chairman
of its Board of Directors, or its president or any vice president or its
treasurer or any assistant treasurer and (b) by its secretary or any assistant
secretary, without any further action by the Issuer.  In authenticating such
Securities and Coupons, if any, and accepting the additional responsibilities
under this Indenture in relation to such Securities and Coupons, if any, the
Trustee shall be entitled to receive, and (subject to Section 6.1) shall be
fully protected in relying upon:

<PAGE>   19
                                       11

                 (1)  a copy of any resolution or resolutions of the Board of
         Directors by or pursuant to which the form and term of such series
         were established in each case certified by the Secretary or an
         Assistant Secretary of the Issuer;

                 (2)  an executed supplemental indenture, if any;

                 (3)  an Officers' Certificate setting forth the form and terms
         of the Securities and Coupons, if any, as required pursuant to Section
         2.3, and prepared in accordance with Section 11.5;

                 (4)  an Opinion of Counsel, prepared in accordance with
         Section 11.5, which shall state

                          (a) that the form or forms and terms of such
                 Securities and Coupons, if any, have been established by or
                 pursuant to a resolution of the Board of Directors or by a
                 supplemental indenture as permitted by Section 2.1 and 2.3 in
                 conformity with the provisions of this Indenture;

                          (b)  that such Securities and Coupons, if any, when
                 authenticated and delivered by the Trustee and issued by the
                 issuer in the manner and subject to any conditions specified
                 in such Opinion of Counsel, will constitute valid and binding
                 obligations of the Issuer;

                          (c)  that all laws and requirements in respect of the
                 execution and delivery by the Issuer of the Securities and
                 Coupons, if any, have been complied with; and

                          (d)  such other matters as the Trustee may reasonably
                 request.

         The Trustee shall have the right to decline to authenticate and
deliver any Securities and Coupons, if any, under this Section if the Trustee,
being advised by counsel, determines that such action may not lawfully be taken
by the Issuer or if the Trustee in good faith by its board of directors or
board of trustees, executive committee, or a trust committee of directors,
trustees or Responsible Officers shall determine that such action would expose
the Trustee to personal liability to existing Holders.

         SECTION 2.5  Execution of Securities.  The Securities and, if
applicable, each Coupon appertaining thereto, shall be signed on behalf of the
Issuer by both (a) the chairman of its Board of Directors or any vice chairman
of its Board of Directors or its president or any vice president or its
treasurer or any assistant treasurer and (b) by its secretary or any

<PAGE>   20
                                       12

assistant secretary, under its corporate seal which may, but need not, be
attested.  Such signatures may be the manual or facsimile signatures of the
present or any future such officers.  The seal of the Issuer may be in the form
of a facsimile thereof and may be impressed, affixed, imprinted or otherwise
reproduced on the Securities.  Typographical and other minor errors or defects
in any such reproduction of the seal or any such signature shall not affect the
validity or enforceability of any Security or Coupon that has been duly
authenticated and delivered by the Trustee.

         In case any officer of the Issuer who shall have signed any of the
Securities or Coupons shall cease to be such officer before the Security or
Coupon so signed (or the Security to which the Coupon so signed appertains)
shall be authenticated and delivered by the Trustee or disposed of by the
Issuer, such Security or Coupon nevertheless may be authenticated and delivered
or disposed of as though the person who signed such Security or Coupon had not
ceased to be such officer of the Issuer; and any Security or Coupon may be
signed on behalf of the Issuer by such persons as, at the actual date of the
execution of such Security or Coupon, shall be the proper officers of the
Issuer, although at the date of the execution and delivery of this Indenture
any such person was not such an officer.

         SECTION 2.6  Certificate of Authentication.  Only such Securities as
shall bear thereon a certificate of authentication substantially in the form
hereinbefore recited, executed by the Trustee by the manual signature of one of
its authorized signatories, shall be entitled to the benefits of this Indenture
or be valid or obligatory for any purpose.  Such certificate by the Trustee
upon any Security executed by the Issuer shall be conclusive evidence that the
Security so authenticated has been duly authenticated and delivered hereunder
and that the holder is entitled to the benefits of this Indenture.  No Coupon
shall be entitled to the benefits of this Indenture or shall be valid or
obligatory for any purpose until such certificate by the Trustee shall have
become duly executed on the Security to which such Coupon appertains.

         SECTION 2.7  Denomination and Date of Securities; Payments of
Interest.  The Securities shall be issuable as Registered Securities or
Unregistered Securities in such denominations as shall be specified as
contemplated by Section 2.3.  In the absence of any such specification with
respect to the Registered Securities of any series, the Registered Securities
of such series shall be issuable in denominations of U.S.  $1,000 and any
integral multiple thereof.  In the absence of any such specification

<PAGE>   21
                                       13

with respect to the Unregistered Securities, Unregistered Securities shall be
issued in the denomination of U.S. $1,000.  The Securities shall be numbered,
lettered, or otherwise distinguished in such manner or in accordance with such
plan as the officers of the Issuer executing the same may determine with the
approval of the Trustee as evidenced by the execution and authentication
thereof.

         Each Registered Security shall be dated the date of its
authentication.  Each Unregistered Security shall be dated as provided in the
resolution or resolutions of the Board of Directors of the Issuer or the
supplemental indenture referred to in Section 2.3.  The Securities of each
series shall bear interest, if any, from the date, and such interest shall be
payable on the dates, established as contemplated by Section 2.3.

         The person in whose name any Registered Security of any series is
registered at the close of business on any record date applicable to a
particular series with respect to any interest payment date for such series
shall be entitled to receive the interest, if any, payable on such interest
payment date notwithstanding any transfer or exchange of such Registered
Security subsequent to the record date and prior to such interest payment date,
except if and to the extent the Issuer shall default in the payment of the
interest due on such interest payment date for such series, in which case such
defaulted interest shall be paid to the persons in whose names Outstanding
Registered Securities for such series are registered at the close of business
on a subsequent record date (which shall be not less than five Business Days
prior to the date of payment of such defaulted interest) established by notice
given by mail by or on behalf of the Issuer to the holders of Registered
Securities not less than 15 days preceding such subsequent record date.  The
term "record date" as used with respect to any interest payment date (except a
date for payment of defaulted interest) shall mean the date specified as such
in the terms of the Registered Securities of any particular series, or, if no
such date is so specified, if such interest payment date is the first day of a
calendar month, the fifteenth day of the next preceding calendar month or, if
such interest payment date is the fifteenth day of a calendar month, the first
day of such calendar month, whether or not such record date is a Business Day.

         Any defaulted interest payable in respect of any Unregistered Security
shall be payable pursuant to such procedures as are satisfactory to the Trustee
and in such manner so that there is no discrimination as between the holders of
Registered Securities and Unregistered Securities

<PAGE>   22
                                       14

of the same series and notice of the payment date therefore shall be given by
the Trustee in the name and at the expense of the Company by publication at
least once in an Authorized Newspaper.  In case an Unregistered Security is
surrendered in exchange for a Registered Security after the close of business
on any record date for the payment of defaulted interest and before the opening
of business on the proposed date of payment of such defaulted interest, the
Coupon appertaining to such surrendered Unregistered Security and due for
payment on such proposed date of payment will not be surrendered with such
surrendered Unregistered Security and interest payable on such proposed date of
payment will be made only to the holder of such Coupon on such proposed date.

         SECTION 2.8.  Registration, Transfer and Exchange.  The Issuer will
keep or cause to be kept at each office or agency to be maintained for the
purpose as provided in Section 3.2 a register or registers for each series of
Registered Securities issued hereunder (collectively, the "Security Register")
in which, subject to such reasonable regulations as it may prescribe, it will
register, and will register the transfer of, or cause the registration of
transfer of, Registered Securities as in this Article provided.  Such register
shall be in written form in the English language or in any other form capable
of being converted into such form within a reasonable time.  At all reasonable
times such register or registers shall be open for inspection by the Trustee.

         Upon due presentation for registration of transfer of any Registered
Security of any series at any such office or agency to be maintained for the
purpose as provided in Section 3.2, the Issuer shall execute and the Trustee
shall authenticate and deliver in the name of the transferee or transferees a
new Registered Security or Registered Securities of the same series in
authorized denominations for a like aggregate principal amount.

         Unregistered Securities (except for any temporary Unregistered
Securities) and Coupons (except for Coupons attached to any temporary
Unregistered Securities) shall be transferable by delivery.

         Any Registered Security or Registered Securities of any series may be
exchanged for a Registered Security or Registered Securities of the same series
in other authorized denominations, in an equal aggregate principal amount.
Registered Securities of any series to be exchanged shall be surrendered at any
office or agency to be maintained by the Issuer

<PAGE>   23
                                       15

for the purpose as provided in Section 3.2, and the Issuer shall execute and
the Trustee shall authenticate and deliver in exchange therefore the Registered
Security or Registered Securities of the same series which the Securityholder
making the exchange shall be entitled to receive, bearing numbers not
contemporaneously outstanding.  If the Securities of any series are issued in
both registered and unregistered form, except as otherwise specified pursuant
to Section 2.3, at the option of the Holder thereof, Unregistered Securities of
any series may be exchanged for Registered Securities of such series, maturity
date, and interest rate of any authorized denominations and of a like aggregate
principal amount, upon surrender of such Unregistered Securities to be
exchanged at the agency of the Issuer that shall be maintained for such purpose
in accordance with Section 3.2, with, in the case of Unregistered Securities
that have Coupons attached, all unmatured Coupons and all matured Coupons in
default thereto appertaining, and upon payment, if the Issuer shall so require,
of the charges hereinafter provided.  At the option of the Holder thereof, if
Unregistered Securities of any series, maturity date, interest rate and
original issue date are issued in more than one authorized denomination, except
as otherwise specified pursuant to Section 2.3, such Unregistered Securities
may be exchanged for Unregistered Securities of such series, maturity date,
interest rate and original issue date of other authorized denominations and of
a like aggregate principal amount, upon surrender of such Unregistered
Securities to be exchanged at the agency of the Issuer that shall be maintained
for such purpose in accordance with Section 3.2 or as specified pursuant to
Section 2.3, with, in the case of Unregistered Securities that have Coupons
attached, all unmatured Coupons and all matured Coupons in default thereto
appertaining, and upon payment, if the Issuer shall so require, of the charges
hereinafter provided.  Unless otherwise specified pursuant to Section 2.3,
Registered Securities of any series may not be exchanged for Unregistered
Securities of such series.  Whenever any Securities, and the Coupons
appertaining thereto, if any, are so surrendered for exchange, the Issuer shall
execute, and the Trustee shall authenticate and deliver, the Securities, and
the Coupons appertaining thereto, if any, which the Holder making the exchange
is entitled to receive. Notwithstanding the foregoing, if an Unregistered
Security of any series is surrendered at any such office or agency in exchange
for a Registered Security of the same series after the close of business at
such office or agency on any record date and before the opening of business at
such office or agency on the applicable interest payment date, such Unregis-

<PAGE>   24
                                       16

tered Security shall be surrendered without the Coupon, if any, relating to
such interest payment date.  All Securities and Coupons surrendered upon any
exchange or transfer provided for in this Indenture shall be promptly cancelled
and disposed of by the Trustee and the Trustee will deliver a certificate of
disposition thereof to the Issuer.

         All Registered Securities presented for registration of transfer,
exchange, redemption or payment shall (if so required by the Issuer or the
Trustee) be duly endorsed by, or be accompanied by a written instrument or
instruments of transfer in form satisfactory to the Issuer and the Trustee duly
executed by, the holder or his attorney duly authorized in writing.

         The Issuer may require payment of a sum sufficient to cover any tax or
other governmental charge that may be imposed in connection with any exchange
or registration of transfer of Securities and shall not be required to exchange
or register a transfer of any Securities until such payment is made.  No
service charge shall be made for any such transaction.

         The Issuer shall not be required to exchange or register a transfer of
(a) any Securities of any series for a period of 15 days next preceding the
first mailing of notice of redemption of Securities of such series to be
redeemed, or (b) any Securities selected, called or being called for redemption
except, in the case of any Security where public notice has been given that
such Security is to be redeemed in part, the portion thereof not so to be
redeemed and except that an Unregistered Security may be exchanged for a
Registered Security of the same series being called for redemption.

         All Securities issued upon any transfer or exchange of Securities
shall be valid obligations of the Issuer, evidencing the same debt, and
entitled to the same benefits under this Indenture, as the Securities
surrendered upon such transfer or exchange.

         Notwithstanding anything herein or in the terms of any series of
Securities to the contrary, neither the Issuer nor the Trustee (which shall
rely on an Officers' Certificate and an Opinion of Counsel) shall be required
to exchange any Unregistered Security for a Registered Security if such
exchange would result in adverse Federal income tax consequences to the Issuer
(including, without limitation the inability of the Issuer to deduct from its
income, as computed for Federal income tax purposes, the interest payable on
the Unregistered Securities) under then applicable United States Federal income
tax laws.

<PAGE>   25
                                       17

         SECTION 2.9  Mutilated, Defaced, Destroyed, Lost and Stolen
Securities.  In case any temporary or definitive Security or any Coupon
appertaining to any Security shall become mutilated, defaced or be destroyed,
lost or stolen, the Issuer in its discretion may execute, and upon the written
request of any officer of the Issuer, the Trustee shall authenticate and
deliver, a new Security of the same series, bearing a number not
contemporaneously outstanding, in exchange and substitution for the mutilated
or defaced Security, or in lieu of and substitution for the Security so
destroyed, lost or stolen with Coupons corresponding to the Coupons
appertaining to the Security so mutilated, defaced, destroyed, lost or stolen,
or in exchange or substitution for the Security to which such mutilated,
defaced, destroyed, lost or stolen Coupons appertained, with Coupons
appertaining thereto corresponding to the Coupons so mutilated, defaced,
destroyed, lost or stolen.  In every case the applicant for a substitute
Security or Coupon shall furnish to the Issuer and to the Trustee and any agent
of the Issuer or the Trustee such security or indemnity as may be required by
them to indemnify and defend and to save each of them harmless and, in every
case of destruction, loss or theft, evidence to their satisfaction of the
destruction, loss or theft of such Security and of the ownership thereof.

         Upon the issuance of any substitute Security or Coupon, the Issuer may
require the payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in relation thereto and any other expenses
(including the fees and expenses of the Trustee) connected therewith.  In case
any Security or Coupon which has matured or is about to mature or has been
called for redemption in full shall become mutilated or defaced or be
destroyed, lost or stolen, the Issuer may, at its sole discretion, instead of
issuing a substitute Security or Coupon, pay or authorize the payment of the
same (without surrender thereof except in the case of a mutilated or defaced
Security or Coupon), if the applicant for such payment shall furnish to the
Issuer and to the Trustee and any agent of the issuer or the Trustee such
security or indemnity as any of them may require to save each of them harmless,
and, in every case of destruction, loss or theft, the applicant shall also
furnish to the Issuer and the Trustee and any agent of the Issuer or the
Trustee evidence to their satisfaction of the destruction, loss or theft of
such Security or Coupon and of the ownership thereof.

         Every substitute Security or Coupon of any series issued pursuant to
the provisions of this Section by virtue of the fact that any such

<PAGE>   26
                                       18

Security or Coupon is destroyed, lost or stolen shall constitute an additional
contractual obligation of the Issuer, whether or not the destroyed, lost or
stolen Security or Coupon shall be at any time enforceable by anyone and shall
be entitled to all the benefits of (but shall be subject to all the limitations
of rights set forth in) this Indenture equally and proportionately with any and
all other Securities or Coupons of such series duly authenticated and delivered
hereunder.  All Securities or Coupons shall be held and owned upon the express
condition that, to the extent permitted by law, the foregoing provisions are
exclusive with respect to the replacement or payment of mutilated, defaced or
destroyed, lost or stolen Securities or Coupons and shall preclude any and all
other rights or remedies notwithstanding any law or statute existing or
hereafter enacted to the contrary with respect to the replacement or payment of
negotiable instruments or other securities without their surrender.

         SECTION 2.10  Cancellation of Securities; Destruction Thereof.  All
Securities and Coupons surrendered for payment, redemption, registration of
transfer or exchange, or for credit against any payment in respect of a sinking
or analogous fund, if surrendered to the Issuer or any agent of the Issuer or
the Trustee, shall be delivered to the Trustee for cancellation or, if
surrendered to the Trustee, shall be cancelled by it; and no Securities or
Coupons shall be issued in lieu thereof except as expressly permitted by any of
the provisions of this Indenture.  The Trustee shall destroy cancelled
Securities and Coupons held by it and deliver a certificate of destruction to
the Issuer.  If the Issuer shall acquire any of the Securities or Coupons, such
acquisition shall not operate as a redemption or satisfaction of the
indebtedness represented by such Securities or Coupons unless and until the
same are delivered to the Trustee for cancellation.

         SECTION 2.11  Temporary Securities.  Pending the preparation of
definitive Securities for any series, the Issuer may execute and the Trustee
shall authenticate and deliver temporary Securities for such series (printed,
lithographed, typewritten or otherwise reproduced, in each case in form
satisfactory to the Trustee).  Temporary Securities of any series shall be
issuable as Registered Securities without Coupons, or as Unregistered
Securities with or without Coupons attached thereto, of any authorized
denomination, and substantially in the form of the definitive Securities of
such series but with such omissions, insertions and variations as may be
appropriate for temporary Securities, all as may be

<PAGE>   27
                                       19

determined by the Issuer with the concurrence of the Trustee.  Temporary
Securities may contain such reference to any provisions of this Indenture as
may be appropriate.  Every temporary Security shall be executed by the Issuer
and be authenticated by the Trustee upon the same conditions and in
substantially the same manner, and with like effect, as the definitive
Securities.  Without unreasonable delay the Issuer shall execute and shall
furnish definitive Securities of such series and thereupon temporary Securities
of such series may be surrendered in exchange therefore without charge at each
office or agency to be maintained by the Issuer for that purpose pursuant to
Section 3.2, and in the case of Unregistered Securities, together with any
unmatured Coupons and any matured Coupons in default appertaining thereto, at
any agency maintained by the Issuer for such purpose as specified pursuant to
Section 2.3, and the Trustee shall authenticate and deliver in exchange for
such temporary Securities of such series a like aggregate principal amount of
definitive Securities of the same series of authorized denominations.  Until so
exchanged, the temporary Securities and any unmatured Coupons appertaining
thereto of any series shall be entitled to the same benefits under this
Indenture as definitive Securities and any unmatured Coupons appertaining
thereto of such series.  The provisions of this Section are subject to any
restrictions or limitations on the issue and delivery of temporary Unregistered
Securities of any series that may be established pursuant to Section 2.3
(including any provision that Unregistered Securities of such series initially
be issued in the form of a single global Unregistered Security to be delivered
to a depositary or agency of the Issuer located outside the United States and
the procedures pursuant to which definitive Unregistered Securities of such
series would be issued in exchange for such temporary global Unregistered
Security).


                                 ARTICLE THREE

                            COVENANTS OR THE ISSUER

         SECTION 3.1  Payment of Principal and Interest.  The Issuer covenants
and agrees for the benefit of each series of Securities that it will duly and
punctually pay or cause to be paid the principal of, and interest on, each of
the Securities of such series at the place or places, at the respective times
and in the manner provided in such Securities.  Except as specified in Section
2.3, the interest on Securities with Coupons attached (together with any
additional amounts payable pursuant to the terms of such Securities) shall be
payable only upon presentation and

<PAGE>   28
                                       20

surrender of the several Coupons for such interest installments as are
evidenced thereby as they severally mature. Except as specified in Section 2.3,
the interest on any temporary Unregistered Securities (together with any
additional amounts payable pursuant to the terms of such Securities) shall be
paid, as to the installments of interest evidenced by Coupons attached thereto,
if any, only upon presentation and surrender thereof, and, as to the other
installments of interest, if any, only upon presentation of such Securities for
notation thereon of the payment of such interest.  Each installment of interest
on the Registered Securities of any series may be paid by mailing checks for
such interest payable to or upon the written order of the holders of Registered
Securities entitled thereto as they shall appear on the registry books of the
Issuer.

         SECTION 3.2  Offices for Payments, etc.  So long as any of the
Securities remain outstanding, the Issuer will maintain the following for each
series: an office or agency (a) where the Registered Securities may be
presented for payment, (b) where the Registered Securities may be presented for
registration of transfer and for exchange as in this Indenture provided and (c)
where notices and demands to or upon the Issuer in respect of the Registered
Securities or of this Indenture may be served.

         The Issuer will maintain one or more agencies in a city or cities
located outside the United States (including any city in which such an agency
is required to be maintained under the rules of any stock exchange on which the
Securities of such series are listed) where the Unregistered Securities, if
any, of each series and Coupons, if any, appertaining thereto may be presented
for payment.  No payment on any Unregistered Security or Coupon will be made
upon presentation of such Unregistered Security or Coupon at an agency of the
Issuer within the United States nor will any payment be made by transfer to an
account in, or by mail to an address in, the United States unless pursuant to
applicable United States laws and regulations then in effect such payment can
be made without adverse tax consequences to the Issuer.  Notwithstanding the
foregoing, payments in U.S. dollars on Unregistered Securities of any series
and Coupons appertaining thereto which are denominated in U.S. dollars may be
made at an agency of the Issuer maintained in the Borough of Manhattan, The
City of New York if such payment in U.S. dollars at each agency maintained by
the Issuer outside the United States for payment on such Unregistered
Securities is illegal or effectively precluded by exchange controls or other
similar restrictions.

<PAGE>   29
                                       21

         The Issuer will give to the Trustee written notice of the location of
any such office or agency and of any change of location thereof.  With respect
to each series of Securities and Coupons whose terms are established pursuant
to Section 2.3, the Issuer hereby designates the Corporate Trust Office as the
initial office to be maintained by it for each such purpose.  In case the
Issuer shall fail to so designate or maintain any such office or agency or
shall fail to give such notice of the location or of any change in the location
thereof, presentations and demands may be made and notices may be served at the
Corporate Trust Office.

         SECTION 3.3  Appointment to Fill a Vacancy in Office of Trustee.  The
Issuer, whenever necessary to avoid or fill a vacancy in the office of Trustee,
will appoint, in the manner provided in Section 6.10, a Trustee, so that there
shall at all times be a Trustee with respect to each series of Securities
hereunder.

         SECTION 3.4  Paying Agents.  Whenever the Issuer shall appoint a
paying agent other than the Trustee with respect to the Securities of any
series, it will cause such paying agent to execute and deliver to the Trustee
an instrument in which such agent shall agree with the Trustee, subject to the
provisions of this Section,

                 (a)  that it will hold all sums received by it as such agent
         for the payment of the principal of or interest on the Securities of
         such series (whether such sums have been paid to it by the Issuer or
         by any other obligor on the Securities of such series) in trust for
         the benefit of the holders of the Securities of such series or the
         Coupons appertaining thereto or of the Trustee, and

                 (b)  that it will give the Trustee notice of any failure by
         the Issuer (or by any other obligor on the Securities of such series)
         to make any payment of the principal of or interest on the Securities
         of such series when the same shall be due and payable.

         The Issuer will, on or prior to each due date of the principal of or
interest on the Securities of such series, deposit with the paying agent a sum
sufficient to pay such principal or interest so becoming due, and (unless such
paying agent is the Trustee) the Issuer will promptly notify the Trustee of any
failure to take such action.

         If the Issuer shall act as its own paying agent with respect to the
Securities or the Coupons appertaining thereto of any series, it will, on

<PAGE>   30
                                       22

or before each due date of the principal of or interest on the Securities or
the Coupons appertaining thereto of such series, set aside, segregate and hold
in trust for the benefit of the holders of the Securities or the Coupons
appertaining thereto of such series a sum sufficient to pay such principal or
interest so becoming due.  The Issuer will promptly notify the Trustee of any
failure to take such action.

         Anything in this Section to the contrary notwithstanding, the Issuer
may at any time, for the purpose of obtaining a satisfaction and discharge with
respect to one or more or all series of Securities hereunder, or for any other
reason, pay or cause to be paid to the Trustee all sums held in trust for any
such series by the Issuer or any paying agent hereunder, as required by this
Section, such sums to be held by the Trustee upon the trusts herein contained.

         Anything in this Section to the contrary notwithstanding, the
agreement to hold sums in trust as provided in this Section is subject to the
provisions of Sections 10.3 and 10.4.

         SECTION 3.5  Written Statement to Trustee.  The Issuer will deliver to
the Trustee on or before April 30 in each year (beginning with April 30, 1989)
a written statement, signed by two of its officers (which need not comply with
Section 11.5), stating that in the course of the performance of their duties as
officers of the Issuer they would normally have knowledge of any default by the
Issuer in the performance or fulfillment of any covenant, agreement or
condition contained in this Indenture, stating whether or not they have
knowledge of any such default and, if so, specifying each such default of which
the signers have knowledge and the nature thereof.

         SECTION 3.6  Luxembourg Publications.  In the event of the publication
of any notice pursuant to Section 5.11, 6.10(a), 6.11, 8.2, 10.4 or 12.2, the
party making such publication in London shall also, to the extent that notice
is required to be given to Holders of Securities of any series by applicable
Luxembourg law or stock exchange regulation, as evidenced by an Officers'
Certificate delivered to such party, make a similar publication in Luxembourg.

<PAGE>   31
                                       23

                                  ARTICLE FOUR

                   SECURITYHOLDERS' LISTS AND REPORTS BY THE
                             ISSUER AND THE TRUSTEE

         SECTION 4.1  Issuer to Furnish Trustee Information as to Names and
Addresses of Securityholders.  The Issuer covenants and agrees that it will
furnish or cause to be furnished to the Trustee a list in such form as the
Trustee may reasonably require of the names and addresses of the holders of the
Securities of each series:

                 (a)  semiannually and not more that 15 days after each record
         date for the payment of interest on such Securities, as hereinabove
         specified, as of such record date and on dates to be determined
         pursuant to Section 2.3 for not-interest bearing securities in each
         year, and

                 (b)  at such other times as the Trustee may request in
         writing, within 30 days after receipt by the Issuer of any such
         request as of a date not more than 15 days prior to the time such
         information is furnished,

provided that if and so long as the Trustee shall be the Security registrar for
such series and all of the Securities of such series are Registered Securities,
such list shall not be required to be furnished.  The Trustee shall, at the
request of the Issuer, provide such list to the Issuer for so long as the
Trustee shall be the Security registrar.

         SECTION 4.2  Preservation and Disclosure of Securityholders' Lists.
(a) The Trustee shall preserve, in as current a form as is reasonably
practicable, all information as to the names and addresses of the holders of
each series of Securities (i) contained in the most recent list furnished to it
as provided in Section 4.1, (ii) received by it in the capacity of Security
registrar for such series, if so acting and (iii) filed with it within the
preceding two years pursuant to Section 4.4(c)(ii).  The Trustee may destroy
any list furnished to it as provided in Section 4.1 upon receipt of a new list
so furnished.

                 (b) In case three or more holders of Securities (hereinafter
         referred to as "applicants") apply in writing to the Trustee and
         furnish to the Trustee reasonable proof that each such applicant has
         owned a Security for a period of at least six months preceding the
         date of such application, and such application states that the
         applicants desire to communicate with other holders of Securities of a
         particular series (in which case the applicants must all hold
         Securities of such series) or with Holders of all

<PAGE>   32
                                       24

         Securities with respect to their rights under this Indenture or under
         such Securities and such application is accompanied by a copy of the
         form of proxy or other communication which such applicants propose to
         transmit, then the Trustee shall, within five Business Days after the
         receipt of such application, at its election, either

                          (i) afford to such applicants access to the
                 information preserved at the time by the Trustee in accordance
                 with the provisions of subsection (a) of this Section, or

                          (ii) inform such applicants as to the approximate
                 number of holders of Securities of such series or all
                 Securities, as the case may be, whose names and addresses
                 appear in the information preserved at the time by the
                 Trustee, in accordance with the provisions of subsection (a)
                 of this Section, and as to the approximate cost of mailing to
                 such Securityholders the form of proxy or other communication,
                 if any, specified in such application.

         If the Trustee shall elect not to afford to such applicants access to
such information, the Trustee shall, upon the written request of such
applicants, mail to each Securityholder of such series or all Securities, as
the case may be, whose name and address appears in the information preserved at
the time by the Trustee in accordance with the provisions of subsection (a) of
this Section a copy of the form of proxy or other communication which is
specified in such request, with reasonable promptness after a tender to the
Trustee of the material to be mailed and of payment, or provision for the
payment, of the reasonable expenses of mailing, unless within five days after
such tender, the Trustee shall mail to such applicants and file with the
Commission together with a copy of the material to be mailed, a written
statement to the effect that, in the opinion of the Trustee, such mailing would
be contrary to the best interests of the holders of Securities of such series
or all Securities, as the case may be, or would be in violation of applicable
law.  Such written statement shall specify the basis of such opinion.  If the
Commission, after opportunity for a hearing upon the objections specified in
the written statement so filed, shall enter an order refusing to sustain any of
such objections or if, after the entry of an order sustaining one or more of
such objections, the Commission shall find, after notice and opportunity for
hearing, that all the objections so sustained have been met, and shall enter an
order so declaring, the Trustee shall mail copies of such material to all such
Securityholders with reasonable promptness after the entry of such order and
the renewal of such tender; otherwise the Trustee shall

<PAGE>   33
                                       25

be relieved of any obligation or duty to such applicants respecting their
application.

                 (c) Each and every holder of Securities and Coupons, by
         receiving and holding the same, agrees with the Issuer and the Trustee
         that neither the Issuer nor the Trustee nor any agent of the Issuer or
         the Trustee shall be held accountable by reason of the disclosure of
         any such information as to the names and addresses of the holders of
         Securities in accordance with the provisions of subsection (b) of this
         Section, regardless of the source from which such information was
         derived, and that the Trustee shall not be held accountable by reason
         of mailing any material pursuant to a request made under such
         subsection (b).

         SECTION 4.3  Reports by the Issuer.  The Issuer covenants:

                 (a)  to file with the Trustee, within 15 days after the Issuer
         is required to file the same with the Commission, copies of the annual
         reports and of the information, documents, any other reports (or
         copies of such portions of any of the foregoing as the Commission may
         from time to time by rules and regulations prescribe) which the Issuer
         may be required to file with the Commission pursuant to Section 13 or
         Section 15(d) of the Securities Exchange Act of 1934, if the Issuer is
         not required to file information, documents, or reports pursuant to
         either of such Sections, then to file with the Trustee and the
         Commission, in accordance with rules and regulations prescribed from
         time to time by the Commission, such of the supplementary and periodic
         information, documents, and reports which may be required pursuant to
         Section 13 of the Securities Exchange Act of 1934, or in respect of a
         security listed and registered on a national securities exchange as
         may be prescribed from time to time in such rules and regulations;

                 (b)  to file with the Trustee and the Commission, in
         accordance with rules and regulations prescribed from time to time by
         the Commission, such additional information, documents, and reports
         with respect to compliance by the Issuer with the conditions and
         covenants provided for in this Indenture as may be required from time
         to time by such rules and regulations; and

                 (c)  to transmit by mail to the holders of Securities. within
         30 days after the filing thereof with the Trustee, such summaries of
         any information, documents and reports required to be filed by the
         Issuer pursuant to subsections (a) and (b) of this Section as may be
         required

<PAGE>   34
                                       26

         to be transmitted to such Holders by rules and regulations prescribed
         from time to time by the Commission.

         SECTION 4.4  Reports by the Trustee.  (a) On or before July 15 in each
year following the date hereof, so long as any Securities are Outstanding
hereunder, the Trustee shall transmit by mail as provided below to the
Securityholders of each series, as hereinafter in this Section provided, a
brief report dated as of the preceding May 15 with respect to:

                          (i)  its eligibility under Section 6.9 and its
                 qualification under Section 6.8, or in lieu thereof, if to the
                 best of its knowledge it has continued to be eligible and
                 qualified under such Sections, a written statement to such
                 effect;

                          (ii) the character and amount of any advances (and if
                 the Trustee elects so to state, the circumstances surrounding
                 the making thereof) made by the Trustee (as such) which remain
                 unpaid on the date of such report and for the reimbursement of
                 which it claims or may claim a lien or charge, prior to that
                 of the Securities of any series, on any property or funds held
                 or collected by it as Trustee, except that the Trustee shall
                 not be required (but may elect) to report such advances if
                 such advances so remaining unpaid aggregate not more than 1/2
                 of 1% of the principal amount of the securities of any series
                 Outstanding on the date of such report;

                          (iii) the amount, interest rate, and maturity date of
                 all other indebtedness owing by the Issuer (or by any other
                 obligor on the Securities) to the Trustee in its individual
                 capacity on the date of such report, with a brief description
                 of any property held as collateral security therefore, except
                 any indebtedness based upon a creditor relationship arising in
                 any manner described in Section 6.13(b)(2), (3), (4) or (6);

                          (iv) the property and funds, if any, physically in
                 the possession of the Trustee (as such) on the date of such 
                 report;

                          (v)  any additional issue of Securities which the
                 Trustee has not previously reported; and

                          (vi) any action taken by the Trustee in the
                 performance of its duties under this Indenture which it has
                 not previously reported and which in its opinion materially
                 affects the Securities, except action in respect of a default,
                 notice of which has been or is to be withheld by it in
                 accordance with the provisions of Section 5.11.

<PAGE>   35
                                       27

                 (b) The Trustee shall transmit to the Securityholders of each
         series, as provided in subsection (c) of this Section, a brief report
         with respect to the character and amount of any advances (and if the
         Trustee elects so to state, the circumstances surrounding the making
         thereof) made by the Trustee, as such, since the date of the last
         report transmitted pursuant to the provisions of subsection (a) of
         this Section (or if no such report has yet been so transmitted, since
         the date of this Indenture) for the reimbursement of which it claims
         or may claim a lien or charge prior to that of the Securities of such
         series on property or funds held or collected by it as Trustee and
         which it has not previously reported pursuant to this subsection (b),
         except that the Trustee shall not be required (but may elect) to
         report such advances if such advances remaining unpaid at any time
         aggregate 10% or less of the principal amount of Securities of such
         series outstanding at such time, such report to be transmitted within
         90 days after such time.

                 (c) Reports pursuant to this Section shall be transmitted by
         mail:

                          (i)  to all registered Holders of Securities, as the
                 names and addresses of such Holders appear upon the registry
                 books of the Issuer;

                          (ii) to such other Holders of Securities as have,
                 within two years preceding such transmission, filed their
                 names and addresses with the Trustee for that purpose; and

                          (iii) except in the case of reports pursuant to
                 subsection (b), to each Holder of a Security whose name and
                 address are preserved at the time by the Trustee as provided
                 in Section 4.2(a).

                 (d) A copy of each such report shall, at the time of such
         transmission to Securityholders, be furnished to the Issuer and be
         filed by the Trustee with each stock exchange upon which the
         Securities of any applicable series are listed and also with the
         Commission.  The Issuer agrees to notify the Trustee with respect to
         any series when and as the Securities of such series become admitted
         to trading on any national securities exchange.

<PAGE>   36
                                       28

                                  ARTICLE FIVE

                  REMEDIES OR THE TRUSTEE AND SECURITYHOLDERS
                              ON EVENT OF DEFAULT

         SECTION 5.1  Event of Default Defined; Acceleration of Maturity;
Waiver of Default.  "Event of Default with respect to Securities of any series
wherever used herein, means each one of the following events which shall have
occurred and be continuing (whatever the reason for such Event of Default and
whether it shall be voluntary or involuntary or be effected by operation of law
or pursuant to any judgment, decree or order of any court or any order, rule or
regulation of any administrative or governmental body):

                 (a)  default in the payment of any installment of interest
         upon any of the Securities of such series as and when the same shall
         become due and payable, and continuance of such default for a period
         of 30 days; or

                 (b)  default in the payment of all or any part of the
         principal on any of the Securities of such series as and when the same
         shall become due and payable either at maturity, upon redemption, by
         declaration or otherwise; or

                 (c)  default in the payment of any sinking fund installment as
         and when the same shall become due and payable by the terms of the
         Securities of such series; or

                 (d)  default in the performance, or breach, of any covenant or
         warranty of the Issuer in respect of the Securities of such series
         (other than a covenant or warranty in respect of the Securities of
         such series a default in whose performance or whose breach is
         elsewhere in this Section specifically dealt with), and continuance of
         such default or breach for a period of 90 days after there has been
         given, by registered or certified mail, to the Issuer by the Trustee
         or to the Issuer and the Trustee by the Holders of at least 25% in
         principal amount of the Outstanding Securities of all series affected
         thereby, a written notice specifying such default or breach and
         requiring it to be remedied and stating that such notice is a "Notice
         of Default" hereunder; or

                 (e)  a court having jurisdiction in the premises shall enter a
         decree or order for relief in respect of the Issuer in all involuntary
         case under any applicable bankruptcy, insolvency or other similar law
         now or hereafter in effect, or appointing a receiver, liquidator,
         assignee, custodian, trustee or sequestrator (or similar official) of
         the

<PAGE>   37
                                       29

         Issuer or for any substantial part of its property or ordering the
         winding up or liquidation of its affairs, and such decree or order
         shall remain unstayed and in effect for a period of 90 consecutive
         days; or

                 (f)  the Issuer shall commence a voluntary case under any
         applicable bankruptcy, insolvency or other similar law now or
         hereafter in effect, or consent to the entry of an order for relief in
         an involuntary case under any such law, or consent to the appointment
         of or taking possession by a receiver, liquidator, assignee,
         custodian, trustee or sequestrator (or similar official) of the Issuer
         or for any substantial part of its property, or make any general
         assignment for the benefit of creditors; or

                 (g)  any other Event of Default provided in the supplemental
         indenture or resolution of the Board of Directors under which such
         series of Securities is issued or in the form of Security for such
         series.

If an Event of Default described in clauses (a), (b), (c) or (d) above (if the
Event of Default under clause (d) is with respect to less than all series of
Securities then Outstanding) occurs and is continuing, then, and in each and
every such case, unless the principal of all of the Securities of such series
shall have already become due and payable, either the Trustee or the holders of
not less than 25% in aggregate principal amount of the Securities of such
series then Outstanding hereunder (each such series voting as a separate class)
by notice in writing to the Issuer (and to the Trustee if given by
Securityholders), may declare the entire principal (or, if the Securities of
such series are Original Issue Discount Securities, such portion of the
principal amount as may be specified in the terms of such series) of all
Securities of such series and the interest accrued thereon, if any, to be due
and payable immediately, and upon any such declaration the same shall become
immediately due and payable.  If an Event of Default described in clause (d)
(if the Event of Default under clause (d) is with respect to all series of
Securities then Outstanding), (e) or (f) occurs and is continuing, then and in
each and every such case, unless the principal of all the Securities shall have
already become due and payable, either the Trustee or the Holders of not less
than 25% in

<PAGE>   38
                                       30

aggregate principal amount of all the Securities then Outstanding hereunder
(treated as one class), by notice in writing to the Issuer (and to the Trustee
if given by Securityholders), may declare the entire principal (or, if any
Securities are Original Issue Discount Securities, such portion of the
principal as may be specified in the terms thereof) of all the Securities then
Outstanding and interest accrued thereon, if any, to be due and payable
immediately, and upon any such declaration the same shall become immediately
due and payable.

         The foregoing provisions, however, are subject to the condition that
if, at any time after the principal (or, if the Securities are Original Issue
Discount Securities, such portion of the principal as may be specified in the
terms thereof) of the Securities of any series (or of all the Securities, as
the case may be) shall have been so declared due and payable, and before any
judgment or decree for the payment of the moneys due shall have been obtained
or entered as hereinafter provided, the Issuer shall pay or shall deposit with
the Trustee a sum sufficient to pay all matured installments of interest upon
all the Securities of such series (or of all the Securities, as the case may
be) and the principal of any and all Securities of such series (or of all the
Securities, as the case may be) which shall have become due otherwise than by
acceleration (with interest upon such principal and, to the extent that payment
of such interest is enforceable under applicable law, on overdue installments
of interest, at the same rate as the rate of interest or Yield to Maturity (in
the case of Original Issue Discount Securities) specified in the Securities of
such series (or at the respective rates of interest or Yields to Maturity of
all the Securities, as the case may be, to the date of such payment or deposit)
and such amount as shall be sufficient to cover reasonable compensation to the
Trustee, its agents, attorneys and counsel, and all other expenses and
liabilities incurred, and all advances made, by the Trustee except as a result
of negligence or bad faith, and all other amounts due to the Trustee or any
predecessor Trustee pursuant to Section 6.6, and if any and all Events of
Default under the Indenture, other than the non-payment of the principal of
Securities which shall have become due by acceleration, shall have been cured,
waived or otherwise remedied as provided herein---then and in every such case
the holders of a majority in aggregate principal amount of all the Securities
of such series, each series voting as a separate class (or of all the
Securities, as the case may be, voting as a single class) then outstanding, by
written notice to the Issuer and to the Trustee, may waive all defaults with
respect to such series (or with respect to all the

<PAGE>   39
                                       31

Securities, as the case may be) and rescind and annul such declaration and its
consequences, but no such waiver or rescission and annulment shall extend to or
shall affect any subsequent default or shall impair any right consequent
thereon.

         For all purposes under this Indenture, if a portion of the principal
of any Original Issue Discount Securities shall have been accelerated and
declared due and payable pursuant to the provisions hereof, then, from and
after such declaration, unless such declaration has been rescinded and
annulled, the principal amount of such Original Issue Discount Securities shall
be deemed, for all purposes hereunder, to be such portion of the principal
thereof as shall be due and payable as a result of such acceleration, and
payment of such portion of the principal thereof as shall be due and payable as
a result of such acceleration, together with interest, if any, thereon and all
other amounts owing thereunder, shall constitute payment in full of such
Original Issue Discount Securities.

         SECTION 5.2  Collection of Indebtedness by Trustee; Trustee May Prove
Debt.  The Issuer covenants that (a) in case default shall be made in the
payment of any installment of interest on any of the Securities of any series
when such interest shall have become due and payable, and such default shall
have continued for a period of 30 days or (b) in case default shall be made in
the payment of all or any part of the principal of any of the Securities of any
series when the same shall have become due and payable, whether upon maturity
of the Securities of such series or upon any redemption or by declaration or
otherwise--then upon demand of the Trustee, the Issuer will pay to the Trustee
for the benefit of the Holders of the Securities of such series the whole
amount that then shall have become due and payable on all Securities of such
series, and Coupons appertaining thereto, for principal or interest, as the
case may be (with interest to the date of such payment upon the overdue
principal and, to the extent that payment of such interest is enforceable under
applicable law, on overdue installments of interest at the same rate as the
rate of interest or Yield to Maturity (in the case of Original Issue Discount
Securities) specified in the Securities of such series); and in addition
thereto, such further amount as shall be sufficient to cover the costs and
expenses of collection, including reasonable compensation to the Trustee and
each predecessor Trustee, their respective agents, attorneys and counsel, and
any expenses and liabilities incurred, and all advances made, by the Trustee
and each predecessor Trustee except as a result of its negligence or bad faith,
and all other amounts due to the Trustee or any predecessor Trustee pursuant to
Section 6.6.

<PAGE>   40
                                       32

         Until such demand is made by the Trustee, the Issuer may pay the
principal of and interest on the Securities of any series to the holders,
whether or not the principal of and interest on the Securities of such series
be overdue.

         In case the Issuer shall fail forthwith to pay such amounts upon such
demand, the Trustee, in its own name and as trustee of an express trust, shall
be entitled and empowered to institute any action or proceedings at law or in
equity for the collection of the sums so due and unpaid, and may prosecute any
such action or proceedings to judgment or final decree, and may enforce any
such judgment or final decree against the Issuer or other obligor upon such
Securities and collect in the manner provided by law out of the property of the
Issuer or other obligor upon such Securities, wherever situated, the moneys
adjudged or decreed to be payable.

         In case there shall be pending proceedings relative to the Issuer or
any other obligor upon the Securities under Title 11 of the United States Code
or any other applicable Federal or state bankruptcy, insolvency or other
similar law, or in case a receiver, assignee or trustee in bankruptcy or
reorganization, liquidator, sequestrator or similar official shall have been
appointed for or taken possession of the Issuer or its property or such other
obligor, or in case of any other comparable judicial proceedings relative to
the Issuer or other obligor upon the Securities of any series, or Coupons
appertaining thereto, or to the creditors or property of the Issuer or such
other obligor, the Trustee, irrespective of whether the principal of any
Securities shall then be due and payable as therein expressed or by declaration
or otherwise and irrespective of whether the Trustee shall have made any demand
pursuant to the provisions of this Section, shall be entitled and empowered, by
intervention in such proceedings or otherwise:

                 (a) to file and prove a claim or claims for the whole amount
         of principal and interest (or, if the Securities of any series are
         Original Issue Discount Securities, such portion of the principal
         amount as may be specified in the terms of such series) owing and
         unpaid in respect of the Securities of any series, and to file such
         other papers or documents as may be necessary or advisable in order to
         have the claims of the Trustee (including any claim for reasonable
         compensation to the Trustee and each predecessor Trustee, and their
         respective agents, attorneys and counsel, and for reimbursement of all
         expenses and liabilities incurred, and all advances made, by the
         Trustee and

<PAGE>   41
                                       33

         each predecessor Trustee, except as a result of negligence or bad
         faith, and all other amounts due to the Trustee or any predecessor
         Trustee pursuant to Section 6.6) and of the Securityholders allowed in
         any judicial proceedings relative to the Issuer or other obligor upon
         the Securities of any series, or to the creditors or property of the
         Issuer or such other obligor,

                 (b) unless prohibited by applicable law and regulations, to
         vote on behalf of the holders of the Securities of any series in any
         election of a trustee or a standby trustee in arrangement,
         reorganization, liquidation or other bankruptcy or insolvency
         proceedings or person performing similar functions in comparable
         proceedings, and

                 (c) to collect and receive any moneys or other property
         payable or deliverable on any such claims, and to distribute all
         amounts received with respect to the claims of the Securityholders and
         of the Trustee on their behalf; and any trustee, receiver, or
         liquidator, custodian or other similar official is hereby authorized
         by each of the Securityholders to make payments to the Trustee, and,
         in the event that the Trustee shall consent to the making of payments
         directly to the Securityholders, to pay to the Trustee such amounts as
         shall be sufficient to cover reasonable compensation to the Trustee,
         each predecessor Trustee and their respective agents, attorneys and
         counsel, and all other expenses and liabilities incurred, and all
         advances made, by the Trustee and each predecessor Trustee except as a
         result of negligence or bad faith and all other amounts due to the
         Trustee or any predecessor Trustee pursuant to Section 6.6.

         Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or vote for or accept or adopt on behalf of any
Securityholder any plan or reorganization, arrangement, adjustment or
composition affecting the Securities or Coupons appertaining thereto of any
series or the rights of any Holder thereof, or to authorize the Trustee to vote
in respect of the claim of any Securityholder in any such proceeding except, as
aforesaid, to vote for the election of a trustee in bankruptcy or similar
person.

         All rights of action and of asserting claims under this Indenture, or
under any of the Securities, or Coupons appertaining thereto may be enforced by
the Trustee without the possession of any of the Securities, or Coupons
appertaining thereto, or the production thereof on any trial or other
proceedings relative thereto, and any such action or proceedings

<PAGE>   42
                                       34

instituted by the Trustee shall be brought in its own name as trustee of an
express trust, and any recovery of judgment, subject to the payment of the
expenses, disbursements, compensation and all other amounts due pursuant to
Section 6.6 to the Trustee, each predecessor Trustee and their respective
agents and attorneys, shall be for the ratable benefit of the holders of the
Securities, or Coupons appertaining thereto, in respect of which such action
was taken.

         In any proceedings brought by the Trustee (and also any proceedings
involving the interpretation of any provision of this Indenture to which the
Trustee shall be a party) the Trustee shall be held to represent all the
holders of the Securities in respect to which such action was taken, and it
shall not be necessary to make any holders of such Securities parties to any
such proceedings.

         SECTION 5.3  Application of Proceeds.  Any moneys collected by the
Trustee pursuant to this Article in respect of any series shall be applied in
the following order at the date or dates fixed by the Trustee and, in case of
the distribution of such moneys on account of principal or interest, upon
presentation of the several Securities, and Coupons appertaining thereto, in
respect of which monies have been collected and stamping (or otherwise noting)
thereon the payment, or issuing Securities of such series in reduced principal
amounts in exchange for the presented Securities of like series if only
partially paid, or upon surrender thereof if fully paid:

                 FIRST:  To the payment of costs and expenses applicable to
         such series in respect of which monies have been collected, including
         reasonable compensation to the Trustee and each predecessor Trustee
         and their respective agents and attorneys and of all expenses and
         liabilities incurred, and all advances made, by the Trustee and each
         predecessor Trustee except as a result of negligence or bad faith, and
         all other amounts due to the Trustee or any predecessor Trustee
         pursuant to Section 6.6;

                 SECOND:  To the Holders of Senior Indebtedness to the extent
         required by Article 13;

                 THIRD:  In case the principal of the Securities of such series
         in respect of which moneys have been collected shall not have become
         and be then due and payable, to the payment of interest on the
         Securities of such series in default in the order of the maturity of
         the installments of such interest, with interest (to the extent that
         such

<PAGE>   43
                                       35

         interest has been collected by the Trustee) upon the overdue
         installments of interest at the same rate as the rate of interest or
         Yield to Maturity (in the case of Original Issue Discount Securities)
         specified in such Securities, such payments to be made ratably to the
         persons entitled thereto, without discrimination or preference;

                 FOURTH:  In case the principal of the Securities of such
         series in respect of which moneys have been collected shall have
         become and shall be then due and payable, to the payment of the whole
         amount then owing and unpaid upon all the Securities of such series
         for principal and interest, with interest upon the overdue principal,
         and (to the extent that such interest has been collected by the
         Trustee) upon overdue installments of interest at the same rate as the
         rate of interest or Yield to Maturity (in the case of Original Issue
         Discount Securities) specified in the Securities of such series; and
         in case such moneys shall be insufficient to pay in full the whole
         amount so due and unpaid upon the Securities of such series, then to
         the payment of such principal and interest or yield to maturity,
         without preference or priority of principal over interest or yield to
         maturity, or of interest or yield to maturity over principal, or of
         any installment of interest over any other installment of interest, or
         of any Security of such series over any other Security of such series,
         ratably to the aggregate of such principal and accrued and unpaid
         interest or yield to maturity; and

                 FIFTH:  To the payment of the remainder, if any, to the Issuer
         or any other person lawfully entitled thereto.

         SECTION 5.4  Suits for Enforcement.  In case an Event of Default has
occurred, has not been waived and is continuing, the Trustee may in its
discretion proceed to protect and enforce the rights vested in it by this
Indenture by such appropriate judicial proceedings as the Trustee shall deem
most effectual to protect and enforce any of such rights, either at law or in
equity or in bankruptcy or otherwise, whether for the specific enforcement of
any covenant or agreement contained in this Indenture or in aid of the exercise
of any power granted in this Indenture or to enforce any other legal or
equitable right vested in the Trustee by this Indenture or by law.

         SECTION 5.5  Restoration of Rights on Abandonment of Proceedings.  In
case the Trustee shall have proceeded to enforce any right under this Indenture
and such proceedings shall have been discontinued

<PAGE>   44
                                       36

or abandoned for any reason, or shall have been determined adversely to the
Trustee, then and in every such case the Issuer and the Trustee shall be
restored respectively to their former positions and rights hereunder, and all
rights, remedies and powers of the Issuer, the Trustee and the Securityholders
shall continue as though no such proceedings had been taken.

         SECTION 5.6  Limitations on Suits by Securityholders.  No holder of
any Security of any series or of any Coupon appertaining thereto shall have any
right by virtue or by availing of any provision of this Indenture to institute
any action or proceeding at law or in equity or in bankruptcy or otherwise upon
or under or with respect to this Indenture, or for the appointment of a
trustee, receiver, liquidator, custodian or other similar official or for any
other remedy hereunder, unless such holder previously shall have given to the
Trustee written notice of default and of the continuance thereof, as
hereinbefore provided, and unless also the holders of not less than 25% in
aggregate principal amount of the Securities of such series then outstanding
shall have made written request upon the Trustee to institute such action or
proceedings in its own name as trustee hereunder and shall have offered to the
Trustee such reasonable indemnity as it may require against the costs, expenses
and liabilities to be incurred therein or thereby and the Trustee for 60 days
after its receipt of such notice, request and offer of indemnity shall have
failed to institute any such action or proceeding and no direction inconsistent
with such written request shall have been given to the Trustee pursuant to
Section 5.9; it being understood and intended, and being expressly covenanted
by the taker and Holder of every Security or Coupon with every other taker and
Holder and the Trustee, that no one or more Holders of Securities of any series
or of any Coupon appertaining thereto shall have any right in any manner
whatever by virtue or by availing of any provision of this Indenture to affect,
disturb or prejudice the rights of any other such Holder of Securities or
Coupons, or to obtain or seek to obtain priority over or preference to any
other such Holder or to enforce any right under this Indenture, except in the
manner herein provided and for the equal, ratable and common benefit of all
Holders of Securities of the applicable series or of any Coupon appertaining
thereto.  For the protection and enforcement of the provisions of this Section,
each and every Securityholder and the Trustee shall be entitled to such relief
as can be given either at law or in equity.

<PAGE>   45
                                       37

         SECTION 5.7  Unconditional Rights of Securityholders to Institute
Certain Suits.  Notwithstanding any other provision in this Indenture and any
provision of any Security, the right of any holder of any Security or Coupon to
receive payment of the principal of an interest on such Security or Coupon on
or after the respective due dates expressed in such Security or Coupon, or in
any Coupon appertaining thereto, or to institute suit for the enforcement of
any such payment on or after such respective dates, shall not be impaired or
affected without the consent of such Holder.

         SECTION 5.8  Powers and Remedies Cumulative; Delay or Omission Not
Waiver of Default.  Except as provided in Section 2.9, no right or remedy
herein conferred upon or reserved to the Trustee or to the Securityholders is
intended to be exclusive of any other right or remedy, and every right and
remedy shall, to the extent permitted by law, be cumulative and in addition to
every other right and remedy given hereunder or now or hereafter existing at
law or in equity or otherwise.  The assertion or employment of any right or
remedy hereunder, or otherwise, shall not prevent the concurrent assertion or
employment of any other appropriate right or remedy.

         No delay or omission of the Trustee or of any Securityholder to
exercise any right or power accruing upon any Event of Default occurring and
continuing as aforesaid shall impair any such right or power or shall be
construed to be a waiver of any such Event of Default or an acquiescence
therein; and, subject to Section 5.6, every power and remedy given by this
Indenture or by law to the Trustee or to the Securityholders may be exercised
from time to time, and as often as shall be deemed expedient, by the Trustee or
by the Securityholders.

         SECTION 5.9  Control by Securityholders.  The Holders of a majority in
aggregate principal amount of the Securities of each series affected (with each
series voting as a separate class) at the time outstanding shall have the right
to direct the time, method, and place of conducting any proceeding for any
remedy available to the Trustee, or exercising any trust or power conferred on
the Trustee with respect to the Securities of such series by this Indenture;
provided that such direction shall not be otherwise than in accordance with law
and the provisions of this Indenture and provided further that (subject to the
provisions of Section 6.1) the Trustee shall have the right to decline to
follow any such direction if the Trustee, being advised by counsel shall
determine that the action or proceeding so directed may not lawfully be

<PAGE>   46
                                       38

taken or if the Trustee in good faith by its board of directors, the executive
committee, or a trust committee of directors or Responsible Officers of the
Trustee shall determine that the action or proceedings so directed would
involve the Trustee in personal liability or if the Trustee in good faith shall
so determine that the actions or forebearances specified in or pursuant to such
direction would be unduly prejudicial to the interests of Holders of the
Securities of all series so affected not joining in the giving of said
direction, it being understood that (subject to Section 6.1) the Trustee shall
have no duty to ascertain whether or not such actions or forebearances are
unduly prejudicial to such Holders.

         Nothing in this Indenture shall impair the right of the Trustee in its
discretion to take any action deemed proper by the Trustee and which is not
inconsistent with such direction or directions by Securityholders.

         SECTION 5.10  Waiver of Past Defaults.  Prior to the declaration of
the acceleration of the maturity of the Securities of any series as provided in
Section 5.1, the Holders of a majority in aggregate principal amount of the
Securities of such series at the time Outstanding may on behalf of the Holders
of all the Securities of such series waive any past default or Event of Default
described in clause (d) of Section 5.1 (or, in the case of an event specified
in clause (d) of Section 5.1 which relates to less than all series of
Securities then Outstanding, the Holders of a majority in aggregate principal
amount of the Securities then Outstanding affected thereby (each series voting
as a separate class)) may waive any such default or Event of Default, or, in
the case of an event specified in clause (d) (if the Event of Default under
clause (d) relates to all series of Securities then Outstanding), (e) or (f) of
Section 5.1 the Holders of Securities of a majority in principal amount of all
the Securities then Outstanding (voting as one class) may waive any such
default or Event of Default), and its consequences except a default in respect
of a covenant or provision hereof which cannot be modified or amended without
the consent of the Holder of each Security affected.  In the case of any such
waiver, the Issuer, the Trustee and the Holders of the Securities of such
series shall be restored to their former positions and rights hereunder,
respectively; but no such waiver shall extend to any subsequent or other
default or impair any right consequent thereon.

         Upon any such waiver, such default shall cease to exist and be deemed
to have been cured and not to have occurred, and any Event of

<PAGE>   47
                                       39

Default arising therefrom shall be deemed to have been cured, and not to have
occurred for every purpose of this Indenture; but no such waiver shall extend
to any subsequent or other default or Event of Default or impair any right
consequent thereon.

         SECTION 5.11  Trustee to Give Notice of Default, But May Withhold in
Certain Circumstances.  The Trustee shall, within 90 days after the occurrence
of a default with respect to the Securities of any series known to a
Responsible Officer of the Trustee, provide notice to the Holders of Securities
of such series and Coupons appertaining thereto, if any, (i) if any
Unregistered Securities of that series are then Outstanding, to the Holders
thereof, by publication at least once in an Authorized Newspaper in London
(and, if required by Section 3.6, at least once in an Authorized Newspaper in
Luxembourg), (ii) if any Unregistered Securities of that series are then
Outstanding, to all Holders thereof who have filed their names and addresses
with the Trustee pursuant to Section 4.4(c)(ii), by mailing such notice to such
Holders at such addresses and (iii) to all Holders of then Outstanding
Registered Securities of that series, by mailing such notice to such Holders at
their addresses as they shall appear in the registry books, unless such
defaults shall have been cured before the giving of such notice (the term
"default" or "defaults" for the purposes of this Section being hereby defined
to mean any event or condition which is, or with notice or lapse of time or
both would become, an Event of Default); provided that, except in the case of
default in the payment of the principal of or interest on any of the Securities
of such series, the Trustee shall be protected in withholding such notice if
and so long as the board of directors, the executive committee, or a trust
committee of directors or trustees and/or Responsible Officers of the Trustee
in good faith determines that the withholding of such notice is in the
interests of the Securityholders of such series.

         SECTION 5.12  Right of Court to Require Filing of Undertaking to Pay
Costs.  All parties to this Indenture agree, and each Holder of any Security or
Coupon by his acceptance thereof shall be deemed to have agreed, that any court
may in its discretion require, in any suit for the enforcement of any right or
remedy under this Indenture or in any suit against the Trustee for any action
taken, suffered or omitted by it as Trustee, the filing by any party litigant
in such suit of an undertaking to pay the costs of such suit, and that such
court may in its discretion assess reasonable costs, including reasonable
attorneys' fees, against any

<PAGE>   48
                                       40

party litigant in such suit, having due regard to the merits and good faith of
the claims or defenses made by such party litigant; but the provisions of this
Section shall not apply to any suit instituted by the Trustee, to any suit
instituted by any Securityholder or group of Securityholders of any series
holding in the aggregate more than 10% in aggregate principal amount of the
Securities of such series, or, in the case of any suit relating to or arising
under clause (d) of Section 5.1 (if the suit relates to Securities of more than
one but less than all series), 10% in aggregate principal amount of Securities
Outstanding affected thereby, or in the case of any suit relating to or arising
under clause (d) (if the suit under clause (d) relates to all the Securities
then Outstanding), (e) or (f) of Section 5.1, 10% in aggregate principal amount
of all Securities Outstanding, or to any suit instituted by any Securityholder
for the enforcement of the payment of the principal of or interest on any
Security or Coupon on or after the due date expressed in such Security or
Coupon.


                                  ARTICLE SIX

                             CONCERNING THE TRUSTEE

         SECTION 6.1  Duties and Responsibilities of the Trustee; During
Default; Prior to Default.   With respect to the Holders of any series of
Securities issued hereunder, the Trustee, prior to the occurrence of an Event
of Default with respect to the Securities of a particular series and after the
curing or waiving of all Events of Default which may have occurred with respect
to such series, undertakes to perform such duties and only such duties as are
specifically set forth in this Indenture.  In case an Event of Default with
respect to the Securities of a series has occurred (which has not been cured or
waived) the Trustee shall exercise such of the rights and powers vested in it
by this Indenture, and use the same degree of care and skill in their exercise,
as a prudent man would exercise or use under the circumstances in the conduct
of his own affairs.

         No provision of this Indenture shall be construed to relieve the
Trustee from liability for its own negligent action, its own negligent failure
to act or its own wilful misconduct, except that

                 (a) prior to the occurrence of an Event of Default with
         respect to the Securities of any series and after the curing or
         waiving of all such Events of Default with respect to such series
         which may have occurred:

                          (i)  the duties and obligations of the Trustee with
                 respect to the Securities of any series shall be determined
                 solely by the

<PAGE>   49
                                       41

                 express provisions of this Indenture, and the Trustee shall
                 not be liable except for the performance of such duties and
                 obligations as are specifically set forth in this Indenture,
                 and no implied covenants or obligations shall be read into
                 this Indenture against the Trustee; and

                          (ii)  in the absence of bad faith on the part of the
                 Trustee, the Trustee may conclusively rely, as to the truth of
                 the statements and the correctness of the opinions expressed
                 therein, upon any statements, certificates or opinions
                 furnished to the Trustee and conforming to the requirements of
                 this Indenture; but in the case of any such statements,
                 certificates or opinions which by any provision hereof are
                 specifically required to be furnished to the Trustee, the
                 Trustee shall be under a duty to examine the same to determine
                 whether or not they conform to the requirements of this
                 Indenture;

                 (b) the Trustee shall not be liable for any error of judgment
         made in good faith by a Responsible Officer or Responsible Officers of
         the Trustee, unless it shall be proved that the Trustee was negligent
         in ascertaining the pertinent facts; and

                 (c) the Trustee shall not be liable with respect to any action
         taken or omitted to be taken by it in good faith in accordance with
         the direction of the holders pursuant to Section 5.9 relating to the
         time, method and place of conducting any proceeding for any remedy
         available to the Trustee, or exercising any trust or power conferred
         upon the Trustee, under this Indenture.

         None of the provisions contained in this Indenture shall require the
Trustee to expend or risk its own funds or otherwise incur personal financial
liability in the performance of any of its duties or in the exercise of any of
its rights or powers, if there shall be reasonable ground for believing that
the repayment of such funds or adequate indemnity against such liability is not
reasonably assured to it.

         SECTION 6.2  Certain Rights of the Trustee.  Subject to Section 6.1:

                 (a) the Trustee may rely and shall be protected in acting or
         refraining from acting upon any resolution, Officers' Certificate or
         any other certificate, statement, instrument, opinion, report, notice,
         request, consent, order, bond, debenture, note, coupon, security or

<PAGE>   50
                                       42

         other paper or document believed by it to be genuine and to have been
         signed or presented by the proper party or parties;

                 (b) any request, direction, order or demand of the Issuer
         mentioned herein shall be sufficiently evidenced by an Officers'
         Certificate or order of the Issuer (unless other evidence in respect
         thereof be herein specifically prescribed); and any resolution of the
         Board of Directors may be evidenced to the Trustee by a copy thereof
         certified by the secretary or an assistant secretary of the Issuer;

                 (c) the Trustee may consult with counsel and any advice or
         Opinion of Counsel shall be full and complete authorization and
         protection in respect of any action taken, suffered or omitted to be
         taken by it hereunder in good faith and in accordance with such advice
         or Opinion of Counsel;

                 (d) the Trustee shall be under no obligation to exercise any
         of the trusts, rights or powers vested in it by this Indenture at the
         request, order or direction of any of the Securityholders pursuant to
         the provisions of this Indenture, unless such Securityholders shall
         have offered to the Trustee reasonable security or indemnity against
         the costs, expenses and liabilities which might be incurred therein or
         thereby;

                 (e)  the Trustee shall not be liable for any action taken or
         omitted by it in good faith and believed by it to be authorized or
         within the discretion, rights or powers conferred upon it by this
         Indenture;

                 (f)  prior to the occurrence of an Event of Default hereunder
         and after the curing or waiving of all Events of Default, the Trustee
         shall not be bound to make any investigation into the facts or matters
         stated in any resolution, certificate, statement, instrument, opinion,
         report, notice, request, consent, order, approval, appraisal, bond,
         debenture, note, coupon, security, or other paper or document unless
         requested in writing so to do by the holders of not less than a
         majority in aggregate principal amount of the Securities of all series
         affected then outstanding; provided that, if the payment within a
         reasonable time to the Trustee of the costs, expenses or liabilities
         likely to be incurred by it in the making of such investigation is, in
         the opinion of the Trustee, not reasonably assured to the Trustee by
         the security afforded to it by the terms of this Indenture, the
         Trustee may require reasonable indemnity against such expenses or
         liabilities as a

<PAGE>   51
                                       43

         condition to proceeding; the reasonable expenses of every such
         investigation shall be paid by the Issuer or, if paid by the Trustee
         or any predecessor Trustee, shall be repaid by the Issuer upon demand;

                 (g) the Trustee may execute any of the trusts or powers
         hereunder or perform any duties hereunder either directly or by or
         through agents or attorneys not regularly in its employ and the
         Trustee shall not be responsible for any misconduct or negligence on
         the part of any such agent or attorney appointed with due care by it
         hereunder; and

                 (h) the Trustee shall not be deemed to have knowledge or
         notice of any default or Event of Default unless a Responsible Officer
         has actual knowledge thereof or unless the holders of not less than
         25% of the aggregate principal amount of the then outstanding
         Securities of any affected series have notified the Trustee thereof.

         SECTION 6.3  Trustee Not Responsible for Recitals, Disposition of
Securities or Application of Proceeds Thereof.  The recitals contained herein
and in the Securities, except the Trustee's certificates of authentication,
shall be taken as the statements of the Issuer, and the Trustee assumes no
responsibility for the correctness of the same. The Trustee makes no
representation as to the validity or sufficiency of this Indenture or of the
Securities or Coupons.  The Trustee shall not be accountable for the use or
application by the Issuer of any of the Securities or of the proceeds thereof.

         SECTION 6.4  Trustee and Agents May Hold Securities or Coupons;
Collections, etc.  The Trustee or any agent of the Issuer or the Trustee, in
its individual or any other capacity, may become the owner or pledgee of
Securities or Coupons with the same rights it would have if it were not the
Trustee or such agent and, subject to Sections 6.8 and 6.13, if operative, may
otherwise deal with the Issuer and receive, collect, hold and retain
collections from the Issuer with the same rights it would have if it were not
the Trustee or such agent.

         SECTION 6.5  Moneys Held by Trustee.  Subject to the provisions of
Section 10.4 hereof, all moneys received by the Trustee shall, until used or
applied as herein provided, be held in trust for the purposes for which they
were received, but need not be segregated from other funds except

<PAGE>   52
                                       44

to the extent required by mandatory provisions of law.  Neither the Trustee nor
any agent of the Issuer or the Trustee shall be under any liability for
interest on any moneys received by it hereunder.

         SECTION 6.6  Compensation and Indemnification of Trustee and Its Prior
Claim.  The Issuer covenants and agrees to pay to the Trustee from time to
time, and the Trustee shall be entitled to, reasonable compensation (which
shall not be limited by any provision of law in regard to the compensation of a
trustee of an express trust) and the Issuer covenants and agrees to pay or
reimburse the Trustee and each predecessor Trustee upon its request for all
reasonable expenses, disbursements and advances incurred or made by or on
behalf of it in accordance with any of the provisions of this Indenture
(including the reasonable compensation and the expenses and disbursements of
its counsel and of all agents and other persons not regularly in its employ)
except any such expense, disbursement or advance as may arise from its
negligence or bad faith.  The Issuer also covenants to indemnify the Trustee
and each predecessor Trustee for, and to hold it harmless against, any loss,
liability or expense incurred without negligence or bad faith on its part,
arising out of or in connection with the acceptance or administration of this
Indenture or the trusts hereunder and its duties hereunder, including the costs
and expenses of defending itself against or investigating any claim of
liability in the premises.  The obligations of the Issuer under this Section to
compensate and indemnify the Trustee and each predecessor Trustee and to pay or
reimburse the Trustee and each predecessor Trustee for expenses, disbursements
and advances shall constitute additional indebtedness hereunder and shall
survive the satisfaction and discharge of this Indenture.  Such additional
indebtedness shall be a senior claim to that of the Securities and Coupons upon
all property and funds held or collected by the Trustee as such, except funds
held in trust for the benefit of the holders of particular Securities or
Coupons, and the Securities and Coupons are hereby subordinated to such senior
claim, but such senior claim shall not be subordinate to any Senior
Indebtedness.

         SECTION 6.7  Right of Trustee to Rely on Officers' Certificate, etc.
Subject to Sections 6.1 and 6.2, whenever in the administration of the trusts
of this Indenture the Trustee shall deem it necessary or desirable that a
matter be proved or established prior to taking or suffering or omitting any
action hereunder, such matter (unless other evidence in respect thereof be
herein specifically prescribed) may in the absence of negligence or bad faith
on the part of the Trustee, be deemed

<PAGE>   53
                                       45

to be conclusively proved and established by an Officers' Certificate delivered
to the Trustee, and such certificate, in the absence of negligence or bad faith
on the part of the Trustee, shall be full warrant to the Trustee for any action
taken, suffered or omitted by it under the provisions of this Indenture upon
the faith thereof.

         SECTION 6.8  Qualification of Trustee; Conflicting Interests.  (a) If
the Trustee has or shall acquire any conflicting interest, as defined in this
Section, it shall, within 90 days after ascertaining that it has such
conflicting interest, either eliminate such conflicting interest or resign in
the manner and with the effect specified in this Indenture.

                 (b) In the event that the Trustee shall fail to comply with
         the provisions of subsection (a) of this Section, the Trustee shall,
         within 10 days after the expiration of such 90 day period, provide
         notice of such failure to the Securityholders in the manner and to the
         extent required by Section 4.4(c).

                 (c) For the purposes of this Section, the Trustee shall be
         deemed to have a conflicting interest with respect to Securities of
         any series if

                          (i) the Trustee is trustee under this Indenture with
                 respect to the Outstanding Securities of any other series or
                 is a trustee under another indenture under which any other
                 securities, or certificates of interest or participation in
                 any other securities, of the Issuer are outstanding, unless
                 such other indenture is a collateral trust indenture under
                 which the only collateral consists of Securities issued under
                 this Indenture and this Indenture with respect to the
                 Securities of any other series and there shall also be so
                 excluded any other indenture or indentures under which other
                 securities, or certificates of interest or participation in
                 other securities, of the Issuer are outstanding if (i) this
                 Indenture is and, if applicable, this Indenture and any series
                 issued pursuant to this Indenture and such other indenture or
                 indentures are wholly unsecured, and such other indenture or
                 indentures are hereafter qualified under the Trust Indenture
                 Act of 1939, unless the Commission shall have found and
                 declared by order pursuant to Section 305(b) or Section 307(c)
                 of such Trust Indenture Act of 1939 that differences exist
                 between the provisions of this Indenture with respect to
                 Securities of such series and one or more other series, or the
                 provisions of this Indenture and the provisions of such other
                 indenture or indentures which are so likely to involve a
                 material conflict of interest as to make it necessary

<PAGE>   54
                                       46

                 in the public interest or for the protection of investors to
                 disqualify the Trustee from acting as such under this
                 Indenture with respect to Securities of such series and such
                 other series, or under this Indenture or such other indenture
                 or indentures, or (ii) the Issuer shall have sustained the
                 burden of proving, on application to the Commission and after
                 opportunity for hearing thereon, that trusteeship under this
                 Indenture with respect to Securities of such series and such
                 other series, or under this Indenture and such other indenture
                 or indentures is not so likely to involve a material conflict
                 of interest as to make it necessary in the public interest or
                 for the protection of investors to disqualify the Trustee from
                 acting as such under this Indenture with respect to Securities
                 of such series and such other series, or under this Indenture
                 and such other indentures;

                          (ii) the Trustee or any of its directors or executive
                 officers is an obligor upon the Securities of any series
                 issued under this Indenture or an underwriter for the Issuer;

                          (iii) the Trustee directly or indirectly controls or
                 is directly or indirectly controlled by or is under direct or
                 indirect common control with the Issuer or an underwriter for
                 the Issuer;

                          (iv) the Trustee or any of its directors or executive
                 officers is a director, officer, partner, employee, appointee,
                 or representative of the Issuer, or of an underwriter (other
                 than the Trustee itself) for the Issuer who is currently
                 engaged in the business of underwriting, except that (x) one
                 individual may be a director or an executive officer, or both,
                 of the Trustee and a director or an executive officer, or
                 both, of the Issuer, but may not be at the same time an
                 executive officer of both the Trustee and the Issuer; (y) if
                 and so long as the number of directors of the Trustee in
                 office is more than nine, one additional individual may be a
                 director or an executive officer, or both, of the Trustee and
                 a director of the Issuer; and (z) the Trustee may be
                 designated by the Issuer or by any underwriter for the Issuer
                 to act in the capacity of transfer agent, registrar,
                 custodian, paying agent, fiscal agent, escrow agent, or
                 depositary, or in any other similar capacity, or, subject to
                 the provisions of subsection (c)(i) of this Section, to act as
                 trustee, whether under an indenture or otherwise;

                          (v) 10% or more of the voting securities of the
                 Trustee is beneficially owned either by the Issuer or by any
                 director, partner or executive officer thereof, or 20% or more
                 of such voting securities

<PAGE>   55
                                       47

                 is beneficially owned, collectively, by any two or more of
                 such persons; or 10% or more of the voting securities of the
                 Trustee is beneficially owned either by an underwriter for the
                 Issuer or by any director, partner, or executive officer
                 thereof, or is beneficially owned, collectively, by any two or
                 more such persons;

                          (vi) the Trustee is the beneficial owner of, or holds
                 as collateral security for an obligation which is in default,
                 (x) 5% or more of the voting securities or 10% or more of any
                 other class of security of the Issuer, not including the
                 Securities issued under this Indenture and securities issued
                 under any other indenture under which the Trustee is also
                 trustee, or (y) 10% or more of any class of security of an
                 underwriter for the Issuer;

                          (vii) the Trustee is the beneficial owner of, or
                 holds as collateral security for an obligation which is in
                 default, 5% or more of the voting securities of any person
                 who, to the knowledge of the Trustee, owns 10% or more of the
                 voting securities of, or controls directly or indirectly or is
                 under direct or indirect common control with, the Issuer;

                          (viii) the Trustee is the beneficial owner of, or
                 holds as collateral security for an obligation which is in
                 default, 10% or more of any class of security of any person
                 who, to the knowledge of the Trustee, owns 50% or more of the
                 voting securities of the Issuer; or

                          (ix) the Trustee owns on May 15 in any calendar year,
                 in the capacity of executor, administrator, testamentary or
                 inter vivos trustee, guardian, committee or conservator, or in
                 any other similar capacity, an aggregate of 25% or more of the
                 voting securities, or of any class of security, of any person
                 the beneficial ownership of a specified percentage of which
                 would have constituted a conflicting interest under Section
                 6.8(c)(vi), (vii) or (viii).  As to any such securities of
                 which the Trustee acquired ownership through becoming
                 executor, administrator, or testamentary trustee of an estate
                 which included them, the provisions of the preceding sentence
                 shall not apply, for a period of two years from the date of
                 such acquisition, to the extent that such securities included
                 in such estate do not exceed 25% of such voting securities or
                 25% of any such class of security.  Promptly after May 15 in
                 each calendar year the Trustee shall make a check of its
                 holdings of such securities in any of the above-mentioned
                 capacities as of such May 15.  If the Issuer

<PAGE>   56
                                       48

                 fails to make payment in full of principal of or interest on
                 any of the Securities when and as the same becomes due and
                 payable, and such failure continues for 30 days thereafter,
                 the Trustee shall make a prompt check of its holdings of such
                 securities in any of the above-mentioned capacities as of the
                 date of the expiration of such 30-day period, and after such
                 date, notwithstanding the foregoing provisions of this
                 paragraph, all such securities so held by the Trustee, with
                 sole or joint control over such securities vested in it,
                 shall, but only so long as such failure shall continue, be
                 considered as though beneficially owned by the Trustee for the
                 purposes of subsections (c)(vi), (vii) and (viii) of this
                 Section.

         The specification of percentages in subsections (c)(v) to (ix)
inclusive of this Section shall not be construed as indicating that the
ownership of such percentages of the securities of a person is or is not
necessary or sufficient to constitute direct or indirect control for the
purposes of subsections (c)(iii) or (vii) of this Section.

         For the purposes of subsections (c)(vi), (vii), (viii) and (ix), of
this Section, only,

                 (i) the terms "security" and "securities" shall include only
         such securities as are generally known as corporate securities, but
         shall not include any note or other evidence of indebtedness issued to
         evidence an obligation to repay moneys lent to a person by one or more
         banks, trust companies, or banking firms, or any certificate of
         interest or participation in any such note or evidence of
         indebtedness;

                 (ii) an obligation shall be deemed to be in default when a
         default in payment of principal shall have continued for 30 days or
         more and shall not have been cured; and

                 (iii) the Trustee shall not be deemed to be the owner or
         holder of (x) any security which it holds as collateral security, as
         trustee or otherwise, for an obligation which is not in default as
         defined in clause (ii) above, or (y) any security which it holds as
         collateral security under this Indenture, irrespective of any default
         hereunder, or (z) any security which it holds as agent for collection,
         or as custodian, escrow agent, or depositary, or in any similar
         representative capacity.

         Except as provided above, the word "security" or "securities" as used
in this Section shall mean any note, stock, treasury stock, bond,

<PAGE>   57
                                       49

debenture, evidence of indebtedness, certificate of interest or participation
in any profit-sharing agreement, collateral trust certificate, preorganization
certificate or subscription, transferable share, investment contract, voting
trust certificate, certificate of deposit for a security, fractional undivided
interest in oil, gas or other mineral rights, or, in general, any interest or
instrument commonly known as a "security", or any certificate of interest or
participation in, temporary or interim certificate for, receipt for, guarantee
of, or warrant or right to subscribe to or purchase, any of the foregoing.

         (d) For purposes of this Section:

                 (i) the term "underwriter" when used with reference to the
         issuer shall mean every person who, within three years prior to the
         time as of which the determination is made, has purchased from the
         Issuer with a view to, or has offered or sold for the Issuer in
         connection with, the distribution of any security of the Issuer
         outstanding at such time, or has participated or has had a direct or
         indirect participation in any such undertaking, or has participated or
         has had a participation in the direct or indirect underwriting of any
         such undertaking, but such term shall not include a person whose
         interest was limited to a commission from an underwriter or dealer not
         in excess of the usual and customary distributors' or sellers'
         commission;

                 (ii) the term "director" shall mean any director of a
         corporation or any individual performing similar functions with
         respect to any organization whether incorporated or unincorporated;

                 (iii) the term "person" shall mean an individual, a
         corporation, a partnership, an association, a joint-stock company, a
         trust, an unincorporated organization, or a government or political
         subdivision thereof; as used in this paragraph, the term "trust" shall
         include only a trust where the interest or interests of the
         beneficiary or beneficiaries are evidenced by a security;

                 (iv) the term "voting security" shall mean any security
         presently entitling the owner or holder thereof to vote in the
         direction or management of the affairs of a person, or any security
         issued under or pursuant to any trust, agreement or arrangement
         whereby a trustee or trustees or agent or agents for the owner or
         holder of such security are presently entitled to vote in the
         direction or management of the affairs of a person;

<PAGE>   58
                                       50

                 (v)  the term "Issuer" shall mean any obligor upon the
         Securities; and

                 (vi) the term "executive officer" shall mean the president,
         every vice president, every trust officer, the cashier, the secretary,
         and the treasurer of a corporation, and any individual customarily
         performing similar functions with respect to any organization whether
         incorporated or unincorporated, but shall not include the chairman of
         the board of directors.

         (e)  The percentages of voting securities and other securities
specified in this Section shall be calculated in accordance with the following
provisions:

                 (i)  a specified percentage of the voting securities of the
         Trustee, the Issuer or any other person referred to in this Section
         (each of whom is referred to as a "person" in this paragraph) means
         such amount of the outstanding voting securities of such person as
         entitles the holder or holders thereof to cast such specified
         percentage of the aggregate votes which the holders of all the
         outstanding voting securities of such person are entitled to cast in
         the direction or management of the affairs of such person;

                 (ii)  a specified percentage of a class of securities of a
         person means such percentage of the aggregate amount of securities of
         the class outstanding;

                 (iii)  the term "amount", when used in regard to securities,
         means the principal amount if relating to evidences of indebtedness,
         the number of shares if relating to capital shares, and the number of
         units if relating to any other kind of security;

                 (iv)  the term "outstanding" means issued and not held by or
         for the account of the issuer; the following securities shall not be
         deemed outstanding within the meaning of this definition:

                          (A)  securities of an issuer held in a sinking fund
                 relating to securities of the issuer of the same class;

                          (B)  securities of an issuer held in a sinking fund
                 relating to another class of securities of the issuer, if the
                 obligation evidenced by such other class of securities is not
                 in default as to principal or interest or otherwise;

<PAGE>   59
                                       51

                          (C)  securities pledged by the issuer thereof as
                 security for an obligation of the issuer not in default as to
                 principal or interest or otherwise; and

                          (D)  securities held in escrow if placed in escrow by
                 the issuer thereof;

provided, that any voting securities of an issuer shall be deemed outstanding
if any person other than the issuer is entitled to exercise the voting rights
thereof; and

                 (v) a security shall be deemed to be of the same class as
         another security if both securities confer upon the holder or holders
         thereof substantially the same rights and privileges; provided, that,
         in the case of secured evidences of indebtedness, all of which are
         issued under a single indenture, differences in the interest rates or
         maturity dates of various series thereof shall not be deemed
         sufficient to constitute such series different classes and provided,
         further, that, in the case of unsecured evidences of indebtedness,
         differences in the interest rates or maturity dates thereof shall not
         be deemed sufficient to constitute them securities of different
         classes, whether or not they are issued under a single indenture.

         SECTION 6.9  Persons Eligible for Appointment as Trustee.  The Trustee
for each series of Securities hereunder shall at all times be a corporation
organized and doing business under the laws of the United States of America or
of any State or the District of Columbia having a combined capital and surplus
of at least $50,000,000, and which is authorized under such laws to exercise
corporate trust powers and is subject to supervision or examination by Federal,
State or District of Columbia authority.  If such corporation publishes reports
of condition at least annually, pursuant to law or to the requirements of the
aforesaid supervising or examining authority, then for the purposes of this
Section, the combined capital and surplus of such corporation shall be deemed
to be its combined capital and surplus as set forth in its most recent report
of condition so published.  In case at any time the Trustee shall cease to be
eligible in accordance with the provisions of this Section, the Trustee shall
resign immediately in the manner and with the effect specified in Section 6.10.

<PAGE>   60
                                       52

         SECTION 6.10  Resignation and Removal; Appointment of Successor
Trustee.  (a)  The Trustee, or any trustee or trustees hereafter appointed, may
at any time resign with respect to one or more or all series of Securities by
giving written notice of resignation to the Issuer.  Upon receiving such notice
of resignation, the Issuer shall promptly appoint a successor trustee or
trustees with respect to the applicable series by written instrument in
duplicate, executed by authority of the Board of Directors, one copy of which
instrument shall be delivered to the resigning Trustee and one copy to the
successor trustee or trustees.  If no successor trustee shall have been so
appointed with respect to any series and have accepted appointment within 30
days after the mailing of such notice of resignation, the resigning trustee may
petition any court of competent jurisdiction for the appointment of a successor
trustee, or any Securityholder who has been a bona fide Holder of a Security or
Securities of the applicable series for at least six months may, subject to the
provisions of Section 5.12, on behalf of himself and all others similarly
situated, petition any such court for the appointment of a successor trustee.
Such court may thereupon, after such notice, if any as it may deem proper and
prescribe, appoint a successor trustee.

         (b) In case at any time any of the following shall occur:

                 (i) the Trustee shall fail to comply with the provisions of
         Section 6.8 with respect to any series of Securities after written
         request therefor by the Issuer or by any Securityholder who has been a
         bona fide Holder of a Security or Securities of such series for at
         least six months; or

                 (ii) the Trustee shall cease to be eligible in accordance with
         the provisions of Section 6.9 and shall fail to resign after written
         request therefor by the Issuer or by any Securityholder; or

                 (iii) the Trustee shall become incapable of acting with
         respect to any series of Securities, or shall be adjudged a bankrupt
         or insolvent, or a receiver or liquidator of the Trustee or of its
         property shall be appointed, or any public officer shall take charge
         or control of the Trustee or of its property of affairs for the
         purpose of rehabilitation, conservation or liquidation;

then, in any such case, the Issuer may remove the Trustee with respect to the
applicable series of Securities and appoint a successor trustee for such series
by written instrument, in duplicate, executed by order of the Board of
Directors of the Issuer, one copy of which instrument shall be

<PAGE>   61
                                       53

delivered to the Trustee so removed and one copy to the successor trustee, or,
subject to the provisions of Section 5.12, any Securityholder who has been a
bona fide Holder of a Security or Securities of such series for at least six
months may on behalf of himself and all others similarly situated, petition any
court of competent jurisdiction for the removal of the Trustee and the
appointment of a successor trustee with respect to such series.  Such court may
thereupon, after such notice, if any, as it may deem proper and prescribe,
remove the Trustee and appoint a successor trustee.

         (c)  The Holders of a majority in aggregate principal amount of the
Securities of each series at the time Outstanding may at any time remove the
Trustee with respect to securities of such series and appoint a successor
trustee with respect to the Securities of such series by delivering to the
Trustee so removed, to the successor trustee so appointed and to the Issuer the
evidence provided for in Section 7.1 of the action in that regard taken by the
Securityholders.

         (d) any resignation or removal of the Trustee with respect to any
series and any appointment of a successor trustee with respect to such series
pursuant to any of the provisions of this Section 6.10 shall become effective
upon acceptance of appointment by the successor trustee as provided in Section
6.11.

         SECTION 6.11  Acceptance of Appointment by Successor Trustee.  Any
successor trustee appointed as provided in Section 6.10 shall execute and
deliver to the Issuer and to its predecessor trustee an instrument accepting
such appointment hereunder, and thereupon the resignation or removal of the
predecessor trustee with respect to all or any applicable series shall become
effective and such successor trustee, without any further act, deed or
conveyance, shall become vested with all rights, powers, duties and obligations
with respect to such series of its predecessor hereunder, with like effect as
if originally named as trustee for such series hereunder; but, nevertheless, on
the written request of the Issuer or of the successor trustee, upon payment of
its charges then unpaid, the trustee ceasing to act shall, subject to Section
10.4, pay over to the successor trustee all moneys at the time held by it
hereunder and shall execute and deliver an instrument transferring to such
successor trustee all such rights, powers, duties and obligations.  Upon
request of any such successor trustee, the Issuer shall execute any and all
instruments in writing for more fully and certainly vesting in and

<PAGE>   62
                                       54

confirming to such successor trustee all such rights and powers.  Any trustee
ceasing to act shall, nevertheless, retain a prior claim upon all property or
funds held or collected by such trustee to secure any amounts then due it
pursuant to the provisions of Section 6.6.

         If a successor trustee is appointed with respect to the Securities of
one or more (but not all) series, the Issuer, the predecessor Trustee and each
successor trustee with respect to the Securities of any applicable series shall
execute and deliver an indenture supplemental hereto which shall contain such
provisions as shall be deemed necessary or desirable to confirm that all the
rights, powers, trusts and duties of the predecessor Trustee with respect to
the Securities of any series as to which the predecessor Trustee is not
retiring shall continue to be vested in the predecessor Trustee, and shall add
to or change any of the provisions of this Indenture as shall be necessary to
provide for or facilitate the administration of the trusts hereunder by more
than one trustee, it being understood that nothing herein or in such
supplemental indenture shall constitute such trustees or co-trustees of the
same trust and that each such trustee shall be trustee of a trust or trusts
under separate indentures.

         No successor trustee with respect to any series of Securities shall
accept appointment as provided in this Section 6.11 unless at the time of such
acceptance such successor trustee shall be qualified under the provisions of
Section 6.8 and eligible under the provisions of Section 6.9.

         Upon acceptance of appointment by any successor trustee as provided in
this Section 6.11, the Issuer shall mail notice thereof (a) if any Unregistered
Securities of a series affected are then Outstanding, to the Holders thereof,
by publication of such notice at least once in an Authorized Newspaper in
London (and, if required by Section 3.6. at least once in an Authorized
Newspaper in Luxembourg), (b) if any Unregistered Securities of a series
affected are then Outstanding, to the Holders thereof who have filed their
names and addresses with the Trustee pursuant to Section 4.4(c)(ii), by mailing
such notice to such holders at such addresses as were so furnished to the
Trustee (and the Trustee shall make such information available to the Issuer
for such purpose) and (c) to the Holders of Registered Securities of each
series affected, by first-class mail to such Holders of Securities of any
series for which such successor trustee is acting as trustee at their last
addresses as they shall appear in the Security register. If the Issuer fails to
mail such notice within ten days after acceptance of appointment by the
successor trustee,

<PAGE>   63
                                       55

the successor trustee shall cause such notice to be mailed at the expense of
the Issuer.

         SECTION 6.12.  Merger, Conversion, Consolidation or Succession to
Business of Trustee.  Any corporation into which the Trustee may be merged or
converted or with which it may be consolidated, or any corporation resulting
from any merger, conversion or consolidation to which the Trustee shall be a
party or any corporation succeeding to the corporate trust business of the
Trustee, shall be the successor of the Trustee hereunder, provided, that such
corporation shall be qualified under the provisions of Section 6.8 and eligible
under the provisions of Section 6.9 without the execution or filing of any
paper or any further act on the part of any of the parties hereto, anything
herein to the contrary notwithstanding.

         In case at the time such successor to the Trustee shall succeed to the
trusts created by this Indenture any of the Securities of any series shall have
been authenticated but not delivered any such successor to the Trustee may
adopt the certificate of authentication of any predecessor Trustee and deliver
such Securities so authenticated; and, in case at that time any of the
Securities of any series shall not have been authenticated, any successor to
the Trustee may authenticate such Securities either in the name of any
predecessor hereunder or in the name of the successor Trustee; and in all such
cases such certificate shall have the full force which it is anywhere in the
Securities of such series or in this Indenture provided that the certificate of
the Trustee shall have; provided, that the right to adopt the certificate of
authentication of any predecessor Trustee or to authenticate Securities of any
series in the name of any predecessor Trustee shall apply only to its successor
or successors by merger, conversion or consolidation.

         SECTION 6.13  Preferential Collection of Claims Against the Issuer.
(a) Subject to the provisions of this Section, if the Trustee shall be or shall
become a creditor, directly or indirectly, secured or unsecured, of the Issuer
within four months prior to a default, as defined in subsection (c) of this
Section, or subsequent to such a default, then, unless and until such default
shall be cured, the Trustee shall set apart and hold in a special account for
the benefit of the Trustee individually, the Holders of the Securities and the
Holders of other indenture securities (as defined in this Section):

                 (1) an amount equal to any and all reductions in the amount
         due and owing upon any claim as such creditor in respect of principal
         or

<PAGE>   64
                                       56

         interest, effected after the beginning of such four months period and
         valid as against the Issuer and its other creditors, except any such
         reduction resulting from the receipt or disposition of any property
         described in subsection (a)(2) of this Section, or from the exercise
         of any right of set-off which the Trustee could have exercised if a
         petition in bankruptcy had been filed by or against the Issuer upon
         the date of such default; and

                 (2)  all property received by the Trustee in respect of any
         claim as such creditor, either as security therefore, or in
         satisfaction or composition thereof, or otherwise, after the beginning
         of such four months' period or an amount equal to the proceeds of any
         such property, if disposed of, subject, however, to the rights, if
         any, of the Issuer and its other creditors in such property or such
         proceeds.

         Nothing herein contained, however, shall affect the right of the
Trustee:

                 (A)  to retain for its own account (i) payments made on
         account of any such claim by any person (other than the Issuer) who is
         liable thereon, (ii)  the proceeds of the bona fide sale of any such
         claim by the Trustee to a third person, and (iii) distributions made
         in cash, securities or other property in respect of claims filed
         against the Issuer in bankruptcy or receivership or in proceedings for
         reorganization pursuant to Title 11 of the United States Code or
         applicable state law;

                 (B)  to realize, for its own account, upon any property held
         by it as security for any such claim, if such property was so held
         prior to the beginning of such four months' period;

                 (C)  to realize, for its own account, but only to the extent of
         the claim hereinafter mentioned, upon any property held by it as
         security for any such claim, if such claim was created after the
         beginning of such four months' period and such property was received
         as security therefor simultaneously with the creation thereof, and if
         the Trustee shall sustain the burden of proving that at the time such
         property was so received the Trustee had no reasonable cause to
         believe that a default as defined in subsection (c) of this Section
         would occur within four months; or

                 (D) to receive payment on any claim referred to in paragraph
         (B) or (C), against the release of any property held as security for
         such claim as provided in such paragraph (B) or (C) as the case may
         be, to the extent of the fair value of such property.

<PAGE>   65
                                       57

         For the purpose of paragraphs (B), (C) and (D), property substituted
after the beginning of such four months' period for property held as security
at the time of such substitution shall, to the extent of the fair value of the
property released, have the same status as the property released and to the
extent that any claim referred to in any of such paragraphs is created in
renewal of or in substitution for or for the purpose of repaying or refunding
any pre-existing claim of Trustee as such creditor, such claim shall have the
same status as such pre- existing claim.

         If the Trustee shall be required to account, the funds and property
held in such special account and the proceeds thereof shall be apportioned
between the Trustee, the Securityholders and the holders of other indenture
securities in such manner that the Trustee, such Securityholders and the
holders of other indenture securities realize, as a result of payment from such
special account and payments of dividends on claims filed against the Issuer in
bankruptcy or receivership or in proceedings for reorganization pursuant to
Title 11 of the United States Code or applicable State law, the same percentage
of their respective claims, figured before crediting to the claim of the
Trustee anything on account of the receipt by it from the Issuer of the funds
and property in such special account and before crediting to the respective
claims of the Trustee, such Securityholders and the holders of other indenture
securities dividends on claims filed against the Issuer in bankruptcy or
receivership or in proceedings for reorganization pursuant to Title 11 of the
United States Code or applicable State law, but after crediting thereon
receipts on account of the indebtedness represented by their respective claims
from all sources other than from such dividends and from the funds and property
so held in such special account.  As used in this paragraph, with respect to
any claim, the term "dividends" shall include any distribution with respect to
such claim, in bankruptcy or receivership or in proceedings for reorganization
pursuant to Title 11 of the United States Code or applicable State law, whether
such distribution is made in cash, securities or other property, but shall not
include and such distribution with respect to the secured portion, if any, of
such claim.  The court in which such bankruptcy, receivership or proceeding for
reorganization is pending shall have jurisdiction (i) to apportion between the
Trustee, such Securityholders and the holders of other indenture securities, in
accordance with the provisions of this paragraph, the funds and property held
in such special account and the proceeds thereof, or (ii) in lieu of such
apportionment, in whole or in part, to give to the

<PAGE>   66
                                       58

provisions of this paragraph, due consideration in determining the fairness of
the distributions to be made to the Trustee, such Securityholders and the
holders of other indenture securities with respect to their respective claims,
in which event it shall not be necessary to liquidate or to appraise the value
of any securities or other property held in such special account or as security
for any such claim, or to make a specific allocation of such distributions as
between the secured and unsecured portions of such claims, or otherwise to
apply the provisions of this paragraph as a mathematical formula.

         Any Trustee who has resigned or been removed after the beginning of
such four months' period shall be subject to the provisions of this subsection
(a) as though such resignation or removal had not occurred.  If any Trustee has
resigned or been removed prior to the beginning of such four months' period, it
shall be subject to the provisions of this subsection (a) if and only if the
following conditions exist:

                 (i) the receipt of property or reduction of claim which would
         have given rise to the obligation to account, if such Trustee had
         continued as trustee, occurred after the beginning of such four
         months' period; and

                 (ii) such receipt of property or reduction of claim occurred
         within four months after such resignation or removal.

         (b) There shall be excluded from the operation of this Section a
creditor relationship arising from

                 (1) the ownership or acquisition of securities issued under
         any indenture, or any security or securities having a maturity of one
         year or more at the time of acquisition by the Trustee;

                 (2) advances authorized by a receivership or bankruptcy court
         of competent jurisdiction or by this Indenture for the purpose of
         preserving any property which shall at any time be subject to the lien
         of this Indenture or of discharging tax liens or other prior liens or
         encumbrances thereon, if notice of such advance and of the
         circumstances surrounding the making thereof is given to the
         Securityholders at the time and in the manner provided in this
         Indenture;

                 (3) disbursements made in the ordinary course of business in
         the capacity of trustee under an indenture, transfer agent, registrar,
         custodian, paying agent, fiscal agent or depositary, or other similar
         capacity;

<PAGE>   67
                                       59

                 (4) an indebtedness created as a result of services rendered
         or premises rented or an indebtedness created as a result of goods or
         securities sold in a cash transaction as defined in subsection (c)(3)
         below:

                 (5) the ownership of stock or of other securities of a
         corporation organized under the provisions of Section 25(a) of the
         Federal Reserve Act, as amended, which is directly or indirectly a
         creditor of the Issuer, or

                 (6) the acquisition, ownership, acceptance or negotiation of
         any draft, bills of exchange, acceptance or obligations which fall
         within the classification of self-liquidating paper as defined in
         subsection (c)(4) of this Section.

         (c)  As used in this Section:

                 (1) the term "default" shall mean any failure to make payment
         in full of the principal of or interest upon any of the Securities or
         upon the other indenture securities when and as such principal or
         interest becomes due and payable;

                 (2) the term "other indenture securities" shall mean
         securities upon which the Issuer is an obligor (as defined in the
         Trust Indenture Act of 1939) outstanding under any other indenture (i)
         under which the Trustee is also trustee, (ii) which contains
         provisions substantially similar to the provisions of subsection (a)
         of this Section, and (iii) under which a default exists at the time of
         the apportionment of the funds and property held in said special
         account;

                 (3) the term "cash transaction" shall mean any transaction in
         which full payment for goods or securities sold is made within seven
         days after delivery of the goods or securities in currency or in
         checks or other orders drawn upon banks or bankers and payable upon
         demand;

                 (4) the term "self-liquidating paper" shall mean any draft,
         bill of exchange, acceptance or obligation which is made, drawn,
         negotiated or incurred by the Issuer for the purpose of financing the
         purchase, processing, manufacture, shipment, storage or sale of goods,
         wares or merchandise and which is secured by documents evidencing
         title to, possession of, or a lien upon the goods, wares or
         merchandise or the receivables or proceeds arising from the sale of
         the goods, wares or merchandise previously constituting the secu-

<PAGE>   68
                                       60

         rity, provided the security is received by the Trustee simultaneously
         with the creation of the creditor relationship with the Issuer arising
         from the making, drawing, negotiating or incurring of the draft, bill
         of exchange, acceptance or obligation; and

                 (5) the term "Issuer" shall mean any obligor upon the
                     Securities.


                                 ARTICLE SEVEN

                         CONCERNING THE SECURITYHOLDERS

         SECTION 7.1  Evidence of Action Taken by Securityholders.  Any
request, demand, authorization, direction, notice, consent, waiver or other
action provided by this Indenture to be given or taken by a specified
percentage in principal amount of the Securityholders of any or all series may
be embodied in and evidenced by one or more instruments of substantially
similar tenor signed by such specified percentage of Securityholders in person
or by agent duly appointed in writing; and, except as herein otherwise
expressly provided, such action shall become effective when such instrument or
instruments are delivered to the Trustee.  Proof of execution of any instrument
or of a writing appointing any such agent shall be sufficient for any purpose
of this Indenture and (subject to Sections 6.1 and 6.2) conclusive in favor of
the Trustee and the Issuer, if made in the manner provided in this Article.

         SECTION 7.2  Proof of Execution of Instruments and of Holding of
Securities.  Subject to Sections 6.1 and 6.2, the execution of any instrument
by a Securityholder or his agent or proxy may be proved in the following
manner:

                 The fact and date of the execution by any Holder of any
         instrument may be proved by the certificate of any notary public or
         other officer of any jurisdiction authorized to take acknowledgments
         of deeds or administer oaths that the person executing such
         instruments acknowledged to him the execution thereof, or by an
         affidavit of a witness to such execution sworn to before any such
         notary or other such officer.  Where such execution is by or on behalf
         of any legal entity other than an individual, such certificate or
         affidavit shall also constitute sufficient proof of the authority of
         the person executing the same.  The fact of the holding by any Holder

<PAGE>   69
                                       61

         of an Unregistered Security of any series, and the identifying number
         of such Security and the date of his holding the same, may be proved
         by the production of such Security or by a certificate executed by any
         trust company, bank, banker or recognized securities dealer wherever
         situated satisfactory to the Trustee, if such certificate shall be
         deemed by the Trustee to be satisfactory.  Each such certificate shall
         be dated and shall state that on the date thereof a Security of such
         series bearing a specified identifying number was deposited with or
         exhibited to such trust company, bank, banker or recognized securities
         dealer by the person named in such certificate.  Any such certificate
         may be issued in respect of one or more Unregistered Securities of one
         or more series specified therein.  The holding by the person named in
         any such certificate of any Unregistered Securities of any series
         specified therein shall be presumed to continue for a period of one
         year from the date of such certificate unless at the time of any
         determination of such holding (1) another certificate bearing a later
         date issued in respect of the same Securities shall be produced, or
         (2) the Security of such series specified in such certificate shall be
         produced by some other person, or (3) the Security of such series
         specified in such certificate shall have ceased to be Outstanding.
         Subject to Sections 6.1 and 6.2, the fact and date of the execution of
         any such instrument and the amount and numbers of Securities of any
         series held by the person so executing such instrument and the amount
         and numbers of any Security or Securities for such series may also be
         proven in accordance with such reasonable rules and regulations as may
         be prescribed by the Trustee for such series or in any other manner
         which the Trustee for such series may deem sufficient.

         SECTION 7.3  Holders to be Treated as Owners.  The Issuer, the Trustee
and any agent of the Issuer or the Trustee may deem and treat the person in
whose name any Security shall be registered upon the Security register for such
series as the absolute owner of such Security (whether or not such Security
shall be overdue and not withstanding any notation of ownership or other
writing thereon) for the purpose of receiving payment of or on account of the
principal of and, subject to the provisions of this Indenture, interest on such
Security and for all other purposes; and neither the Issuer nor the Trustee nor
any agent of the Issuer or the Trustee shall be affected by any notice to the
contrary.  The

<PAGE>   70
                                       62

Issuer, the Trustee and any agent of the lssuer or the Trustee may treat the
Holder of any Unregistered Security and the Holder of any Coupon as the
absolute owner of such Unregistered Security or Coupon (whether or not such
Unregistered Security or Coupon shall be overdue) for the purpose of receiving
payment thereof or on account thereof and for all other purposes and neither
the Issuer, the Trustee, nor any agent of the Issuer or the Trustee shall be
affected by any notice to the contrary.  All such payments so made to any such
person, or upon his order, shall be valid, and, to the extent of the sum or
sums so paid, effectual to satisfy and discharge the liability for moneys
payable upon any such Security or Coupon.

          SECTION 7.4  Securities Owned by Issuer Deemed Not Outstanding.  In
determining whether the Holders of the requisite aggregate principal amount of
Outstanding Securities of any or all series have concurred in any direction,
consent or waiver under this Indenture.  Securities which are owned by the
Issuer or any other obligor on the Securities with respect to which such
determination is being made or by any person directly or indirectly controlling
or controlled by or under direct or indirect common control with the Issuer or
any other obligor on the Securities with respect to which such determination is
being made shall be disregarded and deemed not to be Outstanding for the
purpose of any such determination, except that for the purpose of determining
whether the Trustee shall be protected in relying on any such direction,
consent or waiver only Securities which the Trustee knows are so owned shall be
so disregarded.  Securities so owned which have been pledged in good faith may
be regarded as Outstanding if the pledgee establishes to the satisfaction of
the Trustee the pledgee's right so to act with respect to such Securities and
that the pledgee is not the Issuer or any other obligor upon the Securities or
any person directly or indirectly controlling or controlled by or under direct
or indirect common control with the Issuer or any other obligor on the
Securities.  In case of a dispute as to such right, the advice of counsel shall
be full protection in respect of any decision made by the Trustee in accordance
with such advice.  Upon request of the Trustee, the Issuer shall furnish to the
Trustee promptly a written statement by two of its officers (which need not
comply with Section 11.5) listing and identifying all Securities, if any, known
by the Issuer to be owned or held by or for the account of any of the
above-described persons; and, subject to Sections 6.1 and 6.2, the Trustee
shall be entitled to accept such Officers' Certificate as conclusive evidence
of the fact therein set

<PAGE>   71
                                       63

forth and of the fact that all Securities not listed therein are Outstanding
for the purpose of any such determination.

         SECTION 7.5  Right of Revocation of Action Taken.  At any time prior
to (but not after) the evidencing to the Trustee, as provided in Section 7.1,
of the taking of any action by the Holders of the percentage in aggregate
principal amount of the Securities of any or all series, as the case may be,
specified in this Indenture in connection with such action, any Holder of a
Security the serial number of which is shown by the evidence to be included
among the serial number of the Securities the Holders of which have consented
to such action may, by filing written notice at the Corporate Trust Office and
upon proof of holding as provided in this Article, revoke such action so far as
concerns such Security.  Except as aforesaid any such action taken by the
Holder of any Security shall be conclusive and binding upon such Holder and
upon all future Holders and owners of such Security and of any Securities
issued in exchange or substitution therefore, irrespective of whether or not
any notation in regard thereto is made upon any such Security.  Any action
taken by the Holders of the percentage in aggregate principal amount of the
Securities of any or all series, as the case may be, specified in this
Indenture in connection with such action shall be conclusively binding upon the
Issuer, the Trustee and the Holders of all the Securities affected by such
action.


                                 ARTICLE EIGHT

                            SUPPLEMENTAL INDENTURES

         SECTION 8.1  Supplemental Indentures Without Consent of
Securityholders.  The Issuer, when authorized by a resolution of its Board of
Directors, and the Trustee may from time to time and at any time enter into an
indenture or indentures supplemental hereto (which shall conform to the
provisions of the Trust Indenture Act of 1939 as in force at the date of the
execution thereof) for one or more of the following purposes:

                 (a) to convey, transfer, assign, mortgage or pledge to the
         Trustee as security for the Securities of one or more series any
         property or assets:

                 (b) to evidence the succession of another corporation to the
         Issuer, or successive successions, and the assumption by the successor
         corporation of the covenants, agreements and obligations of the Issuer
         pursuant to Article Nine;

<PAGE>   72
                                       64

                 (c) to add to the covenants of the Issuer such further
         covenants, restrictions, conditions or provisions as its Board of
         Directors and the Trustee shall consider to be for the protection of
         the Holders of Securities or Coupons, and to make the occurrence, or
         the occurrence and continuance, of a default in any such additional
         covenants, restrictions, conditions or provisions an Event of Default
         permitting the enforcement of all or any of the several remedies
         provided in this Indenture as herein set forth; provided, that in
         respect of any such additional covenant, restriction, condition or
         provision such supplemental indenture may provide for a particular
         period of grace after default (which period may be shorter or longer
         than that allowed in the case of other defaults) or may provide for an
         immediate enforcement upon such an Event of Default or may limit the
         remedies available to the Trustee upon such an Event of Default or may
         limit the right of the Holders of a majority in aggregate principal
         amount of the Outstanding Securities of such series to waive such an
         Event of Default;

                 (d) to cure any ambiguity or to correct or supplement any
         provision contained herein or in any supplemental indenture which may
         be defective or inconsistent with any other provision contained herein
         or in any supplemental indenture; or to make such other provisions in
         regard to matters or questions arising under this Indenture or under
         any supplemental indenture as the Board of Directors may deem
         necessary or desirable and which shall not adversely affect the
         interests of the Holders of the Securities;

                 (e) to provide for the issuance under this Indenture of
         Securities in coupon form (including Securities registrable as to
         principal only) and to provide for exchangeability of such Securities
         with Securities issued hereunder in fully registered form, and to make
         all appropriate changes for such purpose; and

                 (f) to evidence and provide for the acceptance of appointment
         hereunder by a successor trustee with respect to the Securities of one
         or more series, or of the Coupons appertaining to such Securities, and
         to add to or change any of the provisions of this Indenture as shall
         be necessary to provide for or facilitate the administration of the
         trusts hereunder by more than one trustee, pursuant to the
         requirements of Section 6.11.

         The Trustee is hereby authorized to join with the Issuer in the
execution of any such supplemental indenture, to make any further

<PAGE>   73
                                       65

appropriate agreements and stipulations which may be therein contained and to
accept the conveyance, transfer, assignment, mortgage or pledge of any property
thereunder, but the Trustee shall not be obligated to enter into any such
supplemental indenture which affects the Trustee's own rights, duties or
immunities under this Indenture or otherwise.

         Any supplemental indenture authorized by the provisions of this
Section may be executed without the consent of the Holders of any of the
Securities at the time Outstanding, notwithstanding any of the provisions of
Section 8.2.

         SECTION 8.2  Supplemental Indentures With Consent of Securityholders.
With the consent (evidenced as provided in Article Seven of the Holders not
less than 66 2/3% in aggregate principal amount of the Securities at the time
Outstanding of all series affected by such supplemental indenture (voting as
one class), the Issuer, when authorized by a resolution of its Board of
Directors, and the Trustee may, from time to time and at any time, enter into
an indenture or indentures supplemental hereto (which shall conform to the
provisions of the Trust Indenture Act of 1939 as in force at the date of
execution thereof) for the purpose of adding any provisions to or changing in
any manner or eliminating any of the provisions of this Indenture or of any
supplemental indenture or of modifying in any manner the rights of the Holders
of the Securities of each such series or the coupons appertaining to such
Securities; provided, that no such supplemental indenture shall (a) extend the
final maturity of any Security, or reduce the principal amount thereof or the
method in which amounts of payments of principal or interest thereon are
determined, or reduce the rate or extend the time of payment of interest
thereon, or change the coin or currency or units based on or related to
currencies (including ECU) of payment thereof, or reduce any amount payable on
redemption thereof or reduce the amount of the principal of an Original Issue
Discount Security that would be due and payable upon an acceleration of the
maturity thereof pursuant to Section 5.1 or the amount thereof provable in
bankruptcy pursuant to Section 5.2, or impair or affect the right of any
Securityholder to institute suit for the payment thereof or, if the Securities
provide therefore, any right of repayment at the option of the Securityholder
or make any change in Article Thirteen hereof that adversely affects the rights
of any Holder, in each case, without the consent of the Holder of each Security
so affected, or (b) reduce the aforesaid percentage of Securities of any
series, the consent of the Holders of which is required for any such
supplemental indenture, without the consent of the Holder of each Security so
affected.

<PAGE>   74
                                       66

         Upon the request of the Issuer, accompanied by a copy of a resolution
of the Board of Directors certified by the secretary or an assistant secretary
of the Issuer authorizing the execution of any such supplemental indenture, and
upon the filing with the Trustee of evidence of the consent of Securityholders
as aforesaid and other documents, if any, required by Section 7.1, the Trustee
shall join with the Issuer in the execution of such supplemental indenture
unless such supplemental indenture affects the Trustee's own rights, duties or
immunities under this Indenture or otherwise, in which case the Trustee may in
its discretion, but shall not be obligated to, enter into such supplemental
indenture.

         It shall not be necessary for the consent of the Securityholders under
this section to approve the particular form of any proposed supplemental
indenture, but it shall be sufficient if such consent shall approve the
substance thereof.

         Promptly after the execution by the Issuer and the Trustee of any
supplemental indenture pursuant to the provisions of this Section, the Issuer
shall mail a notice thereof (i) by first class mail to the Holders of then
Outstanding Registered Securities of each series affected thereby at their
addresses as they shall appear on the registry books of the Issuer, (ii) if any
Unregistered Securities of a series affected thereby are then Outstanding, to
the Holders thereof who have filed their names and addresses with the Trustee
pursuant to Section 4.4(c)(ii), by mailing a notice thereof by first class mail
to such Holders at such addresses as were so furnished to the Trustee and (iii)
if any Unregistered Securities of a series affected thereby are then
Outstanding, to all holders thereof by publication of a notice thereof at least
once in an Authorized Newspaper in London (and, if required by Section 3.6, at
least once in an authorized Newspaper in Luxembourg), and in each case such
notice shall set forth in general terms the substance of such supplemental
indenture.  Any failure of the Issuer to mail such notice, or any defect
therein, shall not however, in any way impair or affect the validity of any
such supplemental indenture.

         SECTION 8.3  Effect of Supplemental Indenture.  Upon the execution of
any supplemental indenture pursuant to the provisions hereof, this Indenture
shall be and be deemed to be modified and amended in accordance therewith and
the respective rights, limitations of rights, obligations, duties and
immunities under this Indenture of the Trustee,

<PAGE>   75
                                       67

the Issuer and the Holders of Securities of each series affected thereby shall
thereafter be determined, exercised and enforced hereunder subject in all
respects to such modifications and amendments, and all the terms and conditions
of any such supplemental indenture shall be and be deemed to be part of the
terms and conditions of this Indenture of any and all purposes.

         SECTION 8.4  Documents to Be Given to Trustee.  The Trustee, subject
to the provisions of Sections 6.1 and 6.2, may receive an Officers' Certificate
and an Opinion Of Counsel as conclusive evidence that any supplemental
indenture executed pursuant to this Article Eight complies with the applicable
provisions of this Indenture.

         SECTION 8.5  Notation on Securities in Respect of Supplemental
Indentures.  Securities of any series authenticated and delivered after the
execution of any supplemental indenture pursuant to the provisions of this
Article may bear a notation in form approved by the Trustee for such series as
to any matter provided for by such supplemental indenture or as to any action
taken at any such meeting.  If the Issuer or the Trustee shall so determine,
new Securities of any series so modified as to conform, in the opinion of the
Trustee and the Board of Directors, to any modification of this Indenture
contained in any such supplemental indenture may be prepared by the Issuer,
authenticated by the Trustee and delivered in exchange for the Securities of
such series then Outstanding.


                                  ARTICLE NINE

                   CONSOLIDATION, MERGER, SALE OR CONVEYANCE

         SECTION 9.1  Issuer May Consolidate, etc., on Certain Terms.  The
issuer covenants that it will not merge or consolidate with any other
corporation or sell or convey all or substantially all of its assets to any
Person, unless (i) either the Issuer shall be the continuing corporation, or
the successor corporation or the Person which acquires by sale or conveyance
substantially all the assets of the Issuer (if other than the Issuer) shall be
a corporation organized under the laws of the United States of America or any
State thereof and shall expressly assume the due and punctual payment of the
principal of and interest on all the Securities and Coupons, according to their
tenor, and the due and

<PAGE>   76
                                       68

punctual performance and observance of all of the covenants and conditions of
this Indenture to be performed or observed by the Issuer by supplemental
indenture satisfactory to the Trustee, executed and delivered to the Trustee by
such corporation, and (ii) the Issuer or such successor corporation, as the
case may be, shall not, immediately after such merger or consolidation, or such
sale or conveyance, be in default in the performance of any such covenant or
condition.

         SECTION 9.2  Successor Corporation Substituted.  In case of any such
consolidation, merger, sale or conveyance and following such an assumption by
the successor corporation, such successor corporation shall succeed to and be
substituted for the Issuer, with the same effect as if it had been named
herein.  Such successor corporation may cause to be signed, and may issue
either in its own name or in the name of the Issuer prior to such succession
any or all of the Securities issuable hereunder, together with any Coupons
appertaining thereto, which theretofore shall not have been signed by the
Issuer and delivered to the Trustee; and, upon the order of such successor
corporation instead of the Issuer and subject to all the terms, conditions and
limitations in this Indenture prescribed, the Trustee authenticate and shall
deliver any Securities, together with any Coupons appertaining thereto, which
previously shall have been signed and delivered by the officers of the Issuer
to the Trustee for authentication, and any Securities, together with any
Coupons appertaining thereto, which such successor corporation thereafter shall
cause to be signed and delivered to the Trustee for that purpose.  All of the
Securities, together with any Coupons appertaining thereto, so issued shall in
all respects have the same legal rank and benefit under this Indenture as the
Securities, together with any Coupons appertaining thereto, theretofore or
thereafter issued in accordance with the terms of this Indenture as though all
of such Securities and Coupons had been issued at the date of the execution
hereof.

         In case of any such consolidation, merger, sale, lease or conveyance
such changes in phraseology and form (but not in substance) may be made in the
Securities and Coupons thereafter to be issued as may be appropriate.

         In the event of any such sale or conveyance (other than a conveyance
by way of lease) the Issuer or any successor corporation which shall
theretofore have become such in the manner described in this Article shall be
discharged from all obligations and covenants under this Indenture and the
Securities and may be liquidated and dissolved.

<PAGE>   77
                                       69

         SECTION 9.3  Opinion of Counsel to Trustee.  The Trustee, subject to
the provisions of Sections 6.1 and 6.2, may receive an Opinion of Counsel,
prepared in accordance with Section 11.5, as conclusive evidence that any such
consolidation, merger, sale, lease or conveyance and any such assumption, and
any such liquidation or dissolution, complies with the applicable provisions of
this Indenture.


                                  ARTICLE TEN

                    SATISFACTION AND DISCHARGE OF INDENTURE:
                                UNCLAIMED MONEYS

         SECTION 10.1  Satisfaction and Discharge of Indenture.  (A) If at any
time (a) the Issuer shall have paid or caused to be paid the principal of and
interest on all the Securities of any series Outstanding hereunder and all
unmatured Coupons appertaining thereto (other than Securities or Coupons which
have been destroyed, lost or stolen and which have been replaced or paid as
provided in Section 2.9) as and when the same shall have become due and
payable, or (b) the Issuer shall have delivered to the Trustee for cancellation
all Securities of any series theretofore authenticated and all unmatured
Coupons appertaining thereto (other than any Securities or Coupons of such
series which shall have been destroyed, lost or stolen and which shall have
been replaced or paid as provided in Section 2.9) or (c) (i) all the Securities
of such series not theretofore delivered to the Trustee for cancellation shall
have become due and payable, or are by their terms to become due and payable
within one year or are to be called for redemption within one year under
arrangements satisfactory to the Trustee for the giving of notice of
redemption, and (ii) the Issuer shall have irrevocably deposited or caused to
be deposited with the Trustee as trust funds the entire amount in cash (other
than moneys repaid by the Trustee or any paying agent to the Issuer in
accordance with Section 10.4) or U.S. Government Obligations, maturing as to
principal and interest in such amounts and at such times as will insure the
availability of cash (without consideration of any reinvestment of such
principal or interest), or a combination of U.S. Government Obligations and
cash sufficient to pay at maturity or upon redemption all Securities of such
series and all unmatured Coupons appertaining thereto (other than any
Securities or Coupons of such series which shall have been destroyed, lost or
stolen and which shall have been

<PAGE>   78
                                       70

replaced or paid as provided in Section 2.9) not theretofore delivered to the
Trustee for cancellation, including principal and interest due or to become due
to such date of maturity as the case may be, and if, in any such case, the
Issuer shall also pay or cause to be paid all other sums payable hereunder by
the Issuer with respect to Securities of such series and Coupons appertaining
thereto, then this Indenture shall cease to be of further effect with respect
to Securities of such series and Coupons appertaining thereto (except as to (i)
rights of registration of transfer and exchange, and the Issuer's right of
optional redemption, (ii) substitution of mutilated, defaced, destroyed, lost
or stolen Securities or Coupons, (iii) rights of holders of Securities and
Coupons appertaining thereto to receive payments of principal thereof and
interest thereon upon the original stated due dates therefore (but not upon
acceleration) and remaining rights of the holders to receive mandatory sinking
fund payments, if any, (iv) the rights, obligations, duties and immunities of
the Trustee hereunder, including those under Section 6.6. (v) the rights of the
Securityholders of such series as beneficiaries hereof with respect to the
property so deposited with the Trustee payable to all or any of them, and (vi)
the obligations of the Issuer under Section 3.2) and the Trustee, on demand of
the Issuer accompanied by an Officers' Certificate and an Opinion of Counsel
and at the cost and expense of the Issuer, shall execute proper instruments
acknowledging such satisfaction of and discharging this Indenture with respect
to such series; provided, that the rights of Holders of the Securities and
Coupons to receive amounts in respect of principal of and interest on the
Securities and Coupons held by them shall not be delayed longer than required
by then-applicable mandatory rules or policies of any securities exchange upon
which the Securities are listed.  The Issuer agrees to reimburse the Trustee
for any costs or expenses thereafter reasonably and properly incurred and to
compensate the Trustee for any services thereafter reasonably and properly
rendered by the Trustee in connection with this Indenture or the Securities and
Coupons of such series.

         (B) The following provisions shall apply to the Securities of each
series unless specifically otherwise provided in a Board Resolution, Officers'
Certificate or indenture supplemental hereto provided pursuant to Section 2.3.
In addition to discharge of the Indenture pursuant to the next preceding
paragraph, the Issuer shall be deemed to have paid and discharged the entire
indebtedness on all the Securities of a series and Coupons appertaining thereto
on the 121st day after the date of the

<PAGE>   79
                                       71

deposit referred to in subparagraph (a) below, and the provisions of this
Indenture with respect to the Securities of such series and Coupons
appertaining thereto shall no longer be in effect (except as to (i) rights of
registration of transfer and exchange of Securities of such series, and of
Coupons appertaining thereto, (ii) substitution of apparently mutilated,
defaced, destroyed, lost or stolen Securities or Coupons, (iii) rights of
holders of Securities and Coupons appertaining thereto to receive, from the
trust fund described in subparagraph (a) below, payments of principal thereof
and interest thereon, upon the original stated due dates therefore (but not
upon acceleration) and remaining rights of the holders to receive sinking fund
payments if any, (iv) the rights, obligations, duties and immunities of the
Trustee hereunder, including those under section 6.6, (v) the rights of the
holders of Securities of such series and Coupons appertaining thereto as
beneficiaries hereof with respect to the property so deposited with the Trustee
payable to all or any of them and (vi) the obligations of the Issuer under
Section 3.2) and the Trustee, at the expense of the Issuer, shall at the
Issuer's request execute proper instruments acknowledging the same, if

                 (a)  with reference to this provision the Issuer has
         irrevocably deposited or caused to be irrevocably deposited with the
         Trustee as trust funds in trust, specifically pledged as security for,
         and dedicated solely to, the benefit of the holders of the Securities
         of such series and Coupons appertaining thereto (i) cash, or (ii) U.S.
         Government Obligations, maturing as to principal and interest at such
         times and in such amounts as will insure the availability of cash or
         (iii) a combination thereof, in an amount sufficient, in the opinion
         of a nationally recognized firm of independent public accountants
         expressed in a written certification thereof delivered to the Trustee,
         to pay (A) the Principal and interest on all Securities of such series
         and Coupons appertaining thereto on the date that such principal or
         interest is due and payable and (B) any mandatory sinking fund
         payments on the day on which such payments are due and payable in
         accordance with the terms of the Indenture and the Securities of such
         series;

                 (b)  such deposit will not result in a breach or violation of,
         or constitute a default under, any agreement or instrument to which
         the Issuer is a party or by which it is bound;

                 (c)  the Issuer has delivered to the Trustee an opinion of
         independent legal counsel satisfactory to the Trustee to the effect

<PAGE>   80
                                       72

         that Holders of the Securities of such series and Coupons appertaining 
         thereto will not recognize income, gain or loss for Federal income
         tax purposes as a result of such deposit, defeasance and discharge
         and will be subject to Federal income tax on the same amount and in
         the same manner and at the same times, as would have been the case if
         such deposit, defeasance and discharge had not occurred; and

                    (d) the Issuer has delivered to the Trustee an Officers'
         Certificate and an Opinion of Counsel, each stating that all
         conditions precedent provided for relating to the defeasance
         contemplated by this provision have been complied with, and the
         Opinion of Counsel shall also state that such deposit does not
         violate applicable law.

         SECTION 10.2  Application by Trustee of Funds Deposited for Payment of
Securities.  Subject to Section 10.4, all moneys deposited with the Trustee
pursuant to Section 10.1 shall be held in trust and applied by it to the
payment, either directly or through any paying agent (including the Issuer
acting as its own paying agent), to the Holders of the particular Securities of
such series and of Coupons appertaining thereto for the payment or redemption
of which such moneys have been deposited with the Trustee, of all sums due and
to become due thereon for principal and interest; but such money need not be
segregated from other funds except to the extent required by law.  Money or
U.S. Government Obligations so held in trust are not subject to the provisions
of Article 13.

         SECTION 10.3  Repayment of Moneys Held by Paying Agent.  In connection
with the satisfaction and discharge of this Indenture with respect to
Securities of any series, all moneys then held by any paying agent under the
provisions of this Indenture with respect to such series of Securities shall,
upon demand of the Issuer, be repaid to it or paid to the Trustee and thereupon
such paying agent shall be released from all further liability with respect to
such moneys.

         SECTION 10.4  Return of Moneys Held by Trustee and Paying Agent
Unclaimed for Two Years.  Any moneys deposited with or paid to the Trustee or
any paying agent for the payment of the principal of or interest on any
Security of any series and not applied but remaining unclaimed for two years
after the date upon which such principal or interest shall have become due and
payable, shall, upon the written request of the Issuer and unless otherwise
required by mandatory provisions of applicable escheat or abandoned or
unclaimed property law, be repaid to the Issuer by the Trustee for such series
or such paying agent, and the Holder of the Security of such series shall,
unless

<PAGE>   81
                                       73

otherwise required by mandatory provisions of applicable escheat or abandoned
or unclaimed property laws, thereafter look only to the Issuer for any payment
which such Holder may be entitled to collect, and all liability of the Trustee
or any paying agent with respect to such moneys shall thereupon cease; provided
the Trustee or such paying agent, before being required to make any such
repayment with respect to moneys deposited with it for any payment (a) in
respect of Registered Securities of any series, may at the expense of the
Issuer, mail by first class mail to Holders of such Securities at their
addresses as they shall appear on the Security register, and (b) in respect of
Unregistered Securities of any series, may at the expense of the Issuer cause
to be published once, in an Authorized Newspaper in London (and if required by
Section 3.8, once in an Authorized Newspaper in Luxembourg), notice, that such
moneys remain and that, after a date specified therein, which shall not be less
than thirty days from the date of such mailing or publication, any unclaimed
balance of such money then remaining will be repaid to the Issuer.

         SECTION 10.5  Indemnity for U.S. Government Obligations.  The Issuer
shall pay and  indemnify the Trustee against any tax, fee or other charge
imposed on or assessed against the U.S. Government Obligations deposited
pursuant to Section 10.1 or the principal or interest received in respect of
such obligations.


                                 ARTICLE ELEVEN

                            MISCELLANEOUS PROVISIONS

         SECTION 11.1  Incorporators, Shareholders, Officers and Directors of
Issuer Exempt from Individual Liability.  No recourse under or upon any
obligation, covenant or agreement contained in this Indenture, or in any
Security or Coupon appertaining thereto, or because of any indebtedness
evidenced thereby, shall be had against any incorporator, as such or against
any past, present or future shareholder, officer or director, as such, of the
Issuer or of any successor, either directly or through the Issuer or any
successor, under any rule of law, statute or constitutional provision or by the
enforcement of any assessment or by any legal or equitable proceeding or
otherwise, all such liability being expressly waived and released by the
acceptance of the Securities and any Coupons appertaining thereto by the
holders thereof and as part of the consideration for the issue of the
Securities and any Coupons appertaining thereto.

<PAGE>   82
                                       74

         SECTION 11.2  Provisions of Indenture for the Sole Benefit of Parties
and Securityholders.  Nothing in this Indenture or in the Securities and any
Coupons appertaining thereto, expressed or implied, shall give or be construed
to give to any person, firm or corporation, other than the parties hereto and
their successors and the Holders of the Securities or Coupons, any legal or
equitable right, remedy or claim under this Indenture or under any covenant or
provision herein contained, all such covenants and provisions being for the
sole benefit of the parties hereto and their successors and of the Holders of
the Securities.

         SECTION 11.3  Successors and Assigns of lssuer Bound by Indenture.
All the covenants, stipulations, promises and agreements in this Indenture
contained by or in behalf of the Issuer shall bind its successors and assigns,
whether so expressed or not.

         SECTION 11.4  Notices and Demands on Issuer, Trustee and
Securityholders.  Any notice or demand which by any provision of this Indenture
is required or permitted to be given or served by the Trustee or by the Holders
of Securities or Coupons to or on the Issuer may be given or served by being
deposited postage prepaid, first-class mail (except as otherwise specifically
provided herein) addressed (until another address of the Issuer is filed by the
Issuer with the Trustee) to The Progressive Corporation, 6000 Parkland
Boulevard, Mayfield Heights, Ohio 44124, Attn: Treasurer.  Any notice,
direction, request or demand by the Issuer or any Securityholder to or upon the
Trustee shall be deemed to have been sufficiently given or made, for all
purposes, if given or made at the Corporate Trust Office.

         Where this Indenture provides for notice to Holders, such notice shall
be sufficiently given (unless otherwise herein expressly provided) (i) in the
case of Holders of Registered Securities and Holders of Unregistered Securities
who have filed their names and addresses with the Trustee pursuant to Section
4.4(c)(ii), if in writing and mailed, first-class postage prepaid, to each
holder entitled thereto, at his last address as it appears in the registry
books; and (ii) in the case of holders of Unregistered Securities who have not
filed their names and addresses with the Trustee, by publication in accordance
with the requirements of the provision hereof requiring such notice.  Any
notice which is mailed in the manner herein provided shall be conclusively
presumed to have been duly given when mailed, whether or not the Holder
receives the notice.  In any case

<PAGE>   83
                                       75

where notice to Holders is given by mail, neither the failure to mail such
notice, nor any defect in any notice so mailed, to any particular holder shall
affect the sufficiency of such notice with respect to other Holders.  Where
this Indenture provides for notice in any manner, such notice may be waived in
writing by the person entitled to receive such notice, either before or after
the event, and such waiver shall be the equivalent of such notice.  Waivers of
notice by Holders shall be filed with the Trustee, but such filing shall not be
a condition precedent to the validity of any action taken in reliance upon such
waiver.

         In case, by reason of the suspension of or irregularities in regular
mail service, it shall be impracticable to mail notice to the Issuer and
Securityholders when such notice is required to be given pursuant to any
provision of this Indenture, then any manner of giving such notice as shall be
satisfactory to the Trustee shall be deemed to be a sufficient giving of such
notice.

         SECTION 11.5  Officers' Certificates and Opinions of Counsel;
Statements to Be Contained Therein.  Upon any application or demand by the
Issuer to the Trustee to take any action under any of the provisions of this
Indenture, the Issuer shall furnish to the Trustee an Officers' Certificate
stating that all conditions precedent provided for in this Indenture relating
to the proposed action have been complied with and an Opinion of Counsel
stating that in the opinion of such counsel all such conditions precedent have
been complied with, except that in the case of any such application or demand
as to which the furnishing of such documents is specifically required by any
provision of this Indenture relating to such particular application or demand,
no additional certificate or opinion need be furnished.

         Each certificate or opinion provided for in this Indenture and
delivered to the Trustee with respect to compliance with a condition or
covenant provided for in this Indenture shall include (a) a statement that the
person making such certificate or opinion has read such covenant or condition,
(b) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based, (c) a statement that, in the opinion of such
person, he has made such examination or investigation as is necessary to enable
him to express an informed opinion as to whether or not such covenant or
condition has been complied with and (d) a statement as to whether or not, in
the opinion of such person, such condition or covenant has been complied with.

<PAGE>   84
                                       76

         Any certificate, statement or opinion of an officer of the Issuer may
be based, insofar as it relates to legal matters, upon a certificate or opinion
of or representations by counsel, unless such officer knows that the
certificate or opinion or representations with respect to the matters upon
which his certificate, statement or opinion may be based as aforesaid are
erroneous, or in the exercise of reasonable care should know that the same are
erroneous. Any certificate, statement or opinion of counsel may be based,
insofar as it relates to factual matters, information with respect to which is
in the possession of the Issuer, upon the certificate, statement or opinion of
or representations by an officer or officers of the Issuer, unless such counsel
knows that the certificate, statement or opinion or representations with
respect to the matters upon which his certificate, statement or opinion may be
based as aforesaid are erroneous, or in the exercise of reasonable care should
know that the same are erroneous.

         Any certificate, statement or opinion of an officer of the Issuer or
of counsel may be based, insofar as it relates to accounting matters, upon a
certificate or opinion of or representations by an accountant or firm of
accountants in the employ of the Issuer, unless such officer or counsel, as the
case may be, knows that the certificate or opinion or representations with
respect to the accounting matters upon which his certificate, statement or
opinion may be based as aforesaid are erroneous, or in the exercise of
reasonable care should know that the same are erroneous.

         Any certificate or opinion of any independent firm of public
accountants filed with the Trustee shall contain a statement that such firm is
independent.

         SECTION 11.6  Payments Due on Saturdays, Sundays and Holidays.  If the
date of maturity of interest on or principal of the Securities of any series or
any Coupons appertaining thereto or the date fixed for redemption or repayment
of any such Security or Coupon shall not be a Business Day, then payment of
interest or principal need not be made on such date, but may be made on the
next succeeding Business Day with the same force and effect as if made on the
date of maturity or the date fixed for redemption, and no interest shall accrue
for the period after such date.

         SECTION 11.7  Conflict of Any Provision of Indenture with Trust
Indenture Act of 1939.  If and to the extent that any provision of this
Indenture limits, qualifies or conflicts with another provision included in

<PAGE>   85
                                       77

this Indenture which is required to be included herein by any of Sections 310
to 317, inclusive, of the Trust Indenture Act of 1939, such required provision
shall control.

         SECTION 11.8  New York Law to Govern.  This Indenture and each
Security and Coupon shall be deemed to be a contract under the laws of the
State of New York, and for all purposes shall be construed in accordance with
the laws of such State, except as may otherwise be required by mandatory
provisions of law.

         SECTION 11.9  Counterparts.  This Indenture may be executed in any
number of counterparts, each of which shall be an original; but such
counterparts shall together constitute but one and the same instrument.

         SECTION 11.10  Effect of Headings.  The Article and Section headings
herein and the Table of Contents are for convenience only and shall not affect
the construction hereof.

         SECTION 11.11  Securities in Foreign Currencies or in ECU.  Whenever
this Indenture provides for any action by, or the determination of any of the
rights of, or any distribution to, Holders of Securities denominated in United
States dollars and in any other currency or currency unit (including ECU), in
the absence of any provision to the contrary in the form of Security of any
particular series, any amount in respect of any Security denominated in a
currency or currency unit (including ECU) other than United States dollars
shall be treated for any such action or distribution as that amount of United
States dollars that could be obtained for such amount on such reasonable basis
of exchange and as of such date as the Issuer may specify in a written notice
to the Trustee or in the absence of such written notice, as the Trustee shall
so determine.


                                 ARTICLE TWELVE

                   REDEMPTION OF SECURITIES AND SINKING FUNDS

         SECTION 12.1  Applicability of Article.  The provisions of this
Article shall be applicable to the Securities of any series which are
redeemable before their maturity or to any sinking fund for the retirement of
Securities of a series except as otherwise specified as contemplated by Section
2.3 for Securities of such series.

<PAGE>   86
                                       78

         SECTION 12.2  Notice of Redemption; Partial Redemptions.  Notice of
redemption to the Holders of Registered Securities of any series to be redeemed
as a whole or in part at the option of the Issuer shall be given by mailing
notice of such redemption by first class mail, postage prepaid, at least 30
days and not more than 60 days prior to the date fixed for redemption to such
Holders of Securities of such series at their last addresses as they shall
appear upon the registry books.  Notice of redemption to the Holders of
Unregistered Securities to be redeemed as a whole or in part, who have filed
their names and addresses with the Trustee pursuant to Section 4.4(c)(ii),
shall be given by mailing notice of such redemption, by first class mail,
postage prepaid, at least thirty and not more than sixty days prior to the date
fixed for redemption, to such Holders at such addresses as were so furnished to
the Trustee (and in the case of any such notice given by the Issuer, the
Trustee shall make such information available to the Issuer for such purpose).
Notice of redemption to all other holders of Unregistered Securities shall be
published in an Authorized Newspaper in London (and, if required by Section
3.6, in an Authorized Newspaper in Luxembourg), in each case, once in each of
two successive calendar weeks, the first publication to be not less than thirty
nor more than sixty days prior to the date fixed for redemption.  Any notice
which is mailed in the manner herein provided shall be conclusively presumed to
have been duly given, whether or not the Holder receives the notice.  Failure
to give notice by mail, or any defect in the notice to the Holder of any
Security of a series designated for redemption as a whole or in part shall not
affect the validity of the proceedings for the redemption of any other Security
of such series.

         The notice of redemption to each such Holder shall specify the
principal amount of each Security of such series held by such Holder to be
redeemed, the date fixed for redemption, the redemption price, the place or
places of payment, that payment will be made upon presentation and surrender of
such Securities, and, in the case of Securities with Coupons attached thereto,
of all Coupons appertaining thereto maturing after the date fixed for
redemption, that such redemption is pursuant to the mandatory or optional
sinking fund, or both, if such be the case, that interest accrued to the date
fixed for redemption will be paid as specified in such notice and that on and
after said date interest thereon or on the portions thereof to be redeemed will
cease to accrue.  In case any Security of a series is to be redeemed in part
only the notice of redemption shall state the portion of the principal amount
thereof to be redeemed and shall state that on and after the date fixed for
redemption, upon surrender of

<PAGE>   87
                                       79

such Security, a new Security or Securities of such series in principal amount
equal to the unredeemed portion thereof will be issued.

         The notice of redemption of Securities of any series to be redeemed at
the option of the Issuer shall be given by the Issuer or, at the Issuer's
request, by the Trustee in the name and at the expense of the Issuer.

         On the redemption date specified in the notice of redemption given as
provided in this Section, the Issuer will deposit with the Trustee or with one
or more paying agents (or, if the Issuer is acting as its own paying agent, set
aside, segregate and hold in trust as provided in Section 3.4) an amount of
money sufficient to redeem on the redemption date all the Securities of such
series so called for redemption at the appropriate redemption price, together
with accrued interest to the date fixed for redemption.  If any or all of the
outstanding Securities of a series are to be redeemed, the Issuer will deliver
to the Trustee at least 70 days prior to the date fixed for redemption an
Officers' Certificate stating the date of redemption and the aggregate
principal amount of Securities to be redeemed.

         If less than all the Securities of a series are to be redeemed, the
Trustee shall select, in such manner as it shall deem appropriate and fair,
Securities of such series to be redeemed in whole or in part.  Securities may
be redeemed in part in multiples equal to the minimum authorized denomination
for Securities of such series or any integral multiple thereof.  The Trustee
shall promptly notify the Issuer in writing of the Securities of such series
selected for redemption and, in the case of any Securities of such series
selected for partial redemption, the principal amount thereof to be redeemed.
For all purposes of this Indenture, unless the context otherwise requires, all
provisions relating to the redemption of Securities of any series shall relate,
in the case of any Security redeemed or to be redeemed only in part, to the
portion of the principal amount of such Security which has been or is to be
redeemed.

         SECTION 12.3 Payment of Securities Called for Redemption.  If notice
of redemption has been given as above provided, the Securities or portions of
Securities specified in such notice shall become due and payable on the date
and at the place stated in such notice at the applicable redemption price,
together with interest accrued to the date fixed for redemption, and on and
after said date (unless the Issuer shall default in the payment of such
Securities at the redemption price, together with interest accrued to said
date) interest on the Securities or portions of Securities so called for
redemption shall cease to accrue and the

<PAGE>   88
                                       80

unmatured Coupons, if any, appertaining thereto shall be void and, except as
provided in Sections 6.5 and 10.4, such Securities shall cease from and after
the date fixed for redemption to be entitled to any benefit or security under
this Indenture, and the Holders thereof shall have no right in respect of such
Securities except the right to receive the redemption price thereof and unpaid
interest to the date fixed for redemption.  On presentation and surrender of
such Securities, together with all Coupons appertaining thereto maturing after
the date fixed for redemption, at a place of payment specified in said notice,
said Securities and Coupons or the specified portions thereof shall be paid and
redeemed by the Issuer at the applicable redemption price, together with
interest accrued thereon to the date fixed for redemption; provided that any
semiannual payment of interest becoming due on the date fixed for redemption
shall be payable in the case of Securities with Coupons attached thereto, to
the bearers of the Coupons for such interest upon surrender thereof, and in the
case of Registered Securities, to the Holders of such Securities registered as
such on the relevant record date subject to the terms and provisions of Section
2.4 hereof.

         If any Security called for redemption shall not be so paid upon
surrender thereof for redemption, the principal shall, until paid or duly
provided for, bear interest from the date fixed for redemption at the rate of
interest or Yield to Maturity (in the case of an Original Issue Discount
Security) borne by the Security.

         If any Security with Coupons attached thereto is surrendered for
redemption and is not accompanied by all such Coupons maturing after the date
fixed for redemption, the surrender of such missing Coupon or Coupons may be
waived by the Issuer and the Trustee, if there be furnished to each of them
such security or indemnity as they may require to save each of them harmless.

         Upon presentation of any Security redeemed in part only, the Issuer
shall execute and the Trustee shall authenticate and deliver to or on the order
of the Holder thereof, at the expense of the Issuer, a new Security or
Securities of such series, together with all Coupons, if any, appertaining
thereto, of authorized denominations, in principal amount equal to the
unredeemed portion of the Security so presented.

         SECTION 12.4  Exclusion of Certain Securities from Eligibility for
Selection for Redemption.  Securities shall be excluded from eligibility for
selection for redemption if they are identified by registra-

<PAGE>   89
                                       81

tion and certificate number in a written statement signed by an authorized
officer of the Issuer and delivered to the Trustee at least 40 days prior to
the last date on which notice of redemption may be given as being owned of
record and beneficially by, and not pledged or hypothecated by either (a) the
Issuer or (b) an entity specifically identified in such written statement
directly or indirectly controlling or controlled by or under direct or indirect
common control with the Issuer.

         SECTION 12.5  Mandatory and Optional Sinking Funds.  The minimum
amount of any sinking fund payment provided for by the terms of Securities of
any series is herein referred to as a "mandatory sinking fund payment", and any
payment in excess of such minimum amount provided for by the terms of
Securities of any series is herein referred to as an "optional sinking fund
payment".  The date on which a sinking fund payment is to be made is herein
referred to as the "sinking fund payment date".

         In lieu of making all or any part of any mandatory sinking fund
payment with respect to any series of Securities in cash, the Issuer may at its
option (a) deliver to the Trustee Securities of such series theretofore
purchased or otherwise acquired (except upon redemption pursuant to the
mandatory sinking fund) by the Issuer or receive credit for Securities of such
series (not previously so credited) theretofore purchased or otherwise acquired
(except as aforesaid) by the Issuer and delivered to the Trustee for
cancellation pursuant to Section 2.7, (b) receive credit for optional sinking
fund payments (not previously so credited) made pursuant to this Section, or
(c) receive credit for Securities of such series (not previously so credited)
redeemed by the Issuer through any optional redemption provision contained in
the terms of such series.  Securities so delivered or credited shall be
received or credited by the Trustee at the sinking fund redemption price
specified in such Securities.

         On or before the sixtieth day next preceding each sinking fund payment
date for any series, the Issuer will deliver to the Trustee a written statement
(which need not contain the statements required by Section 11.5) signed by an
authorized officer of the Issuer (a) specifying the portion of the mandatory
sinking fund payment to be satisfied by payment of cash and the portion to be
satisfied by credit of Securities of such series, (b) stating that none of the
Securities of such series has theretofore been so credited, (c) stating that no
defaults in the payment of interest or Events of Default with respect to such
series have occurred

<PAGE>   90
                                       82

(which have not been waived or cured) and are continuing and (d) stating
whether or not the Issuer intends to exercise its right to make an optional
sinking fund payment with respect to such series and, if so, specifying the
amount of such optional sinking fund payment which the Issuer intends to pay on
or before the next succeeding sinking fund payment date.  Any Securities of
such series to be credited and required to be delivered to the Trustee in order
for the Issuer to be entitled to credit therefore as aforesaid which have not
theretofore been delivered to the Trustee shall be delivered for cancellation
pursuant to Section 2.10 to the Trustee with such written statement (or
reasonably promptly thereafter if acceptable to the Trustee).  Such written
statement shall be irrevocable and upon its receipt by the Trustee the Issuer
shall become unconditionally obligated to make all the cash payments or
payments therein referred to, if any, on or before the next succeeding sinking
fund payment date.  Failure of the Issuer, on or before any such sixtieth day,
to deliver such written statement and Securities specified in this paragraph,
if any, shall not constitute a default but shall constitute, on and as of such
date, the irrevocable election of the Issuer (i) that the mandatory sinking
fund payment for such series due on the next succeeding sinking fund payment
date shall be paid entirely in cash without the option to deliver or credit
Securities of such series in respect thereof and (ii) that the Issuer will make
no optional sinking fund payment with respect to such series as provided in
this Section.

         If the sinking fund payment or payments (mandatory or optional or
both) to be made in cash on the next succeeding sinking fund payment date plus
any unused balance of any preceding sinking fund payments made in cash shall
exceed $50,000 (or a lesser sum if the Issuer shall so request) with respect to
the Securities of any particular series, such cash shall be applied on the next
succeeding sinking fund payment date to the redemption of Securities of such
series at the sinking fund redemption price together with accrued interest to
the date fixed for redemption. If such amount shall be $50,000 or less and the
Issuer makes no such request, then it shall be carried over until a sum in
excess of $50,000 is available.  The Trustee shall select, in the manner
provided in Section 12.2, for redemption on such sinking fund payment date a
sufficient principal amount of Securities of such series to absorb said cash,
as nearly as may be, and shall (if requested in writing by the Issuer) inform
the Issuer of the serial numbers of the Securities of such series (or potions
thereof) so selected.  Securities of any series which are (a) owned by the
Issuer

<PAGE>   91
                                       83

or an entity known by the Trustee to be directly or indirectly controlling or
controlled by or under direct or indirect common control with the Issuer, as
shown by the Security register, and not know to the Trustee to have been
pledged or hypothecated by the Issuer or any such entity or (b) identified in
an Officers' Certificate at least 60 days prior to the sinking fund payment
date as being beneficially owned by, and not pledged or hypothecated by, the
Issuer or an entity directly or indirectly controlling or controlled by or
under direct or indirect common control with the Issuer shall be excluded from
Securities of such series eligible for selection for redemption.  The Trustee,
in the name and at the expense of the Issuer (or the Issuer, if it shall so
request the Trustee in writing) shall cause notice of redemption of the
Securities of such series to be given in substantially the manner provided in
Section 12.2 (and with the effect provided in Section 12.3) for the redemption
of Securities of such series in part at the option of the Issuer.  The amount
of any sinking fund payments not so applied or allocated to the redemption of
Securities of such series shall be added to the next cash sinking fund payment
for such series and, together with such payment, shall be applied in accordance
with the provisions of this Section.  Any and all sinking fund moneys held on
the stated maturity date of the Securities of any particular series (or
earlier, if such maturity is accelerated), which are not held for the payment
or redemption of particular Securities of such series shall be applied,
together with other moneys, if necessary, sufficient for the purpose, to the
payment of the principal of, and interest on, the Securities of such series at
maturity.

         On each sinking fund payment date, the Issuer shall pay to the Trustee
in cash or shall otherwise provide for the payment of all interest accrued to
the date fixed for redemption on Securities to be redeemed on the next
following sinking fund payment date.

         The Trustee shall not redeem or cause to be redeemed any Securities of
a series with sinking fund moneys or provide any notice of redemption of
Securities for such series by operation of the sinking fund during the
continuance of a default in payment of interest on such Securities or of any
Event of Default except that, where the mailing or publication of notice of
redemption of any Securities shall theretofore have been made, the Trustee
shall redeem or cause to be redeemed such Securities, provided that it shall
have received from the Issuer a sum sufficient for such redemption.  Except as
aforesaid, any moneys in the sinking fund for such series at the time when any
such default or Event of Default

<PAGE>   92
                                       84

shall occur, and any moneys thereafter paid into the sinking fund, shall,
during the continuance of such default or Event of Default, be deemed to have
been collected under Article Five and held for the payment of all such
Securities.  In case such Event of Default shall have been waived as provided
in Section 5.10 or the default cured on or before the sixtieth day preceding
the sinking fund payment date in any year, such moneys shall thereafter be
applied on the next succeeding sinking fund payment date in accordance with
this Section to the redemption of such Securities.


                                ARTICLE THIRTEEN

                            SUBORDINATION; SENIORITY

         SECTION 13.1  Securities Subordinated to Senior Indebtedness.  The
Issuer agrees, and each Holder of the Securities by his acceptance thereof
likewise agrees, that the payment of the principal of and interest on
Securities of any series issued under this Indenture shall be subordinated and
junior in right of payment, to the extent and in the manner provided in this
Article 13 to the prior payment in full of all Senior Indebtedness whether
outstanding on the date hereof or hereafter created, incurred, assumed or
guaranteed.

         The Senior Indebtedness of the Issuer shall continue to be Senior
Indebtedness and entitled to the benefits of these subordination provisions
irrespective of any amendment, modification or waiver of any term of any
instrument relating to the Senior Indebtedness or the extension or renewal of
the Senior Indebtedness.

         All the provisions of this Indenture and the Securities shall be
subject to the provisions of this Article 13 so far as they may be applicable
thereto, except that nothing in this Article 13 shall apply to claims for, or
payments to, the Trustee under or pursuant to Section 6.6.

         SECTION 13.2  Issuer Not to Make Payments with Respect to Securities
in Certain Circumstances.  No payment shall be made by the Issuer on account of
principal of or interest on Securities of any series or on account of the
purchase or other acquisition of Securities of any series, if there shall have
occurred and be continuing a default with respect to any Senior Indebtedness
permitting the acceleration thereof or with respect to the payment of any
Senior Indebtedness and (a) such default is the subject of a judicial
proceeding or (b) notice of such default

<PAGE>   93
                                       85

in writing or by telegram has been given to the Issuer by any holder or holders
of any Senior Indebtedness (provided, however, that in the case of Senior
Indebtedness issued pursuant to an indenture such notice may be validly given
only by the trustee under such indenture), unless and until such default or
event of default shall have been cured or waived or shall have ceased to exist.

         Upon any acceleration of the principal of Securities of any series or
any payment by the Issuer, or distribution of assets of the Issuer of any kind
or character, whether in cash, property or securities, to creditors upon any
dissolution or winding up or liquidation or reorganization of the Issuer,
whether voluntary or involuntary, or in bankruptcy, insolvency, receivership or
other proceedings, all amounts due or to become due upon all Senior
Indebtedness shall first be paid in full in money or money's worth, or payment
thereof provided for, before any payment is made on account of the principal of
or interest on Securities of any series; and (subject to the power of a court
of competent jurisdiction to make other equitable provision, which shall have
been determined by such court to give effect to the rights conferred in this
Article upon the Senior Indebtedness and the holders thereof with respect to
Securities of any series or the Holders thereof or the Trustee, by a lawful
plan of reorganization or readjustment under applicable law) upon any such
dissolution or winding up or liquidation or reorganization, any payment by the
Issuer, or distribution of assets of the Issuer of any kind or character,
whether in cash, property or securities, to which the Holders of the Securities
of any series or the Trustee would be entitled except for the provisions of
this Article, shall be paid by the Issuer or by any receiver, trustee in
bankruptcy, liquidating trustee, agent or other Person making such payment or
distribution directly to the holders of Senior Indebtedness or their
representative or representatives, or to the trustee or trustees under any
indenture pursuant to which any instruments evidencing any Senior Indebtedness
may have been issued, as their respective interests may appear, to the extent
necessary to pay all Senior Indebtedness in full in money or money's worth,
after giving effect to any concurrent payment or distribution to or for the
holders of Senior Indebtedness, before any payment or distribution is made to
the Holders of the Securities of any series or to the Trustee.

         In the event that, notwithstanding the foregoing, any payment by or
distribution of assets of the Issuer of any kind or character, whether in cash,
property or securities, prohibited by the foregoing, shall be

<PAGE>   94
                                       86

received by the Trustee or the Holders of the Securities of any series before
all Senior Indebtedness is paid in full in money or money's worth, or provision
is made for such payment, and if such fact shall then have been or thereafter
be made known to the Trustee or, as the case may be, such Holder, then and in
such event such payment or distribution shall be paid over or delivered to the
holders of Senior Indebtedness or their representative or representatives, or
to the trustee or trustees under any indenture pursuant to which any
instruments evidencing any Senior Indebtedness may have been issued, as their
respective interests may appear, for application to the payment of all Senior
Indebtedness remaining unpaid to the extent necessary to pay all Senior
Indebtedness in full in money or money's worth, after giving effect to any
concurrent payment or distribution to or for the holders of such Senior
Indebtedness, and, until so delivered, the same shall be held in trust by any
Holder of a Security as the property of the holders of Senior Indebtedness.

         The consolidation of the Issuer with, or the merger of the Issuer
into, another corporation or the liquidation or dissolution of the Issuer
following the conveyance or transfer of its property as an entirety, or
substantially as an entirety, to another corporation upon the terms and
conditions provided in Article Nine shall not be deemed a dissolution, winding
up, liquidation or reorganization for the purposes of this Section if such
other corporation shall, as a part of such consolidation, merger, conveyance or
transfer, comply with the conditions stated in Article Nine. Nothing in this
Section shall apply to claims of, or payments to, the Trustee under or pursuant
to Section 6.6.

         The holders of Senior Indebtedness may, at any time and from time to
time, without the consent of or notice to the Holders of the Securities of any
series, without incurring responsibility to the Holders of the Securities of
any series and without impairing or releasing the obligations of the Holders of
the Securities of any series to the holders of Senior Indebtedness: (i) change
the manner, place or terms of payment or change or extend the time of payment
of, or renew or alter, Senior Indebtedness, or otherwise amend in any manner
Senior Indebtedness or any instrument evidencing the same or any agreement
under which Senior Indebtedness is outstanding; (ii) sell, exchange, release or
otherwise deal with any property pledged, mortgaged or otherwise securing
Senior Indebtedness; (iii) release any Person liable in any manner for the
collection of Senior Indebtedness; and (iv) exercise or refrain from exercising
any rights against the Issuer and any other Person.

<PAGE>   95
                                       87

         SECTION 13.3  Subrogation of Securities.  Subject to the payment in
full of all amounts then due (whether by acceleration of the maturity thereof
or otherwise) on account of the principal and interest on all Senior
Indebtedness at the time outstanding, the Holders of the Securities shall be
subrogated to the rights of the holders of Senior Indebtedness to receive
payments or distributions of cash, property or securities of the Issuer
applicable to the Senior Indebtedness until the principal and interest on the
Securities shall be paid in full; and, for the purposes of such subrogation, no
payments or distributions to the holders of Senior Indebtedness of any cash,
property or securities to which the Holders of the Securities of any series or
the Trustee would be entitled except for the provisions of this Article shall,
as between the Issuer, its creditors other than holders of Senior Indebtedness,
and the Holders of the Securities of any series, be deemed to be a payment by
the Issuer to or on account of the Senior Indebtedness.  It is understood that
the provisions of this Article are and are intended solely for the purpose of
defining the relative rights of the Holders of the Securities, on the one hand,
and the holders of Senior Indebtedness, on the other hand.

         Nothing contained in this Article or elsewhere in this Indenture or in
the Securities of any series is intended to or shall impair, as among the
Issuer, its creditors other than the holders of Senior Indebtedness, and the
Holders of the Securities, the obligation of the Issuer, which is absolute and
unconditional, to pay to the Holders of the Securities the principal of and
interest on the Securities as and when the same shall become due and payable in
accordance with their terms, or is intended to or shall affect the relative
rights of the Holders of the Securities of any series and creditors of the
Issuer other than the holders of Senior Indebtedness, nor shall anything herein
or therein prevent the Trustee or the Holder of any Security from exercising
all remedies otherwise permitted by applicable law upon default under this
Indenture, subject to the rights, if any, under this Article of the holders of
Senior Indebtedness in respect of cash, property or securities of the Issuer
received upon the exercise of any such remedy.

         Upon any payment or distribution of assets of the Issuer referred to
in this Article, the Trustee, subject to the provisions of Section 6.1, and the
Holders of the Securities shall be entitled to rely upon any order or decree
made by any court of competent jurisdiction in which such

<PAGE>   96
                                       88

dissolution, winding up, liquidation or reorganization proceedings are pending,
or certificate of the receiver, trustee in bankruptcy, liquidating trustee,
agent or other Person making such payment or distribution, delivered to the
Trustee or to the Holders of the Securities, for the purpose of ascertaining
the persons entitled to participate in such distribution, the holders of Senior
Indebtedness and other indebtedness of the Issuer, the amount thereof or
payable thereon, the amount or amounts paid or distributed thereon and all
other facts pertinent thereto or to this Article.

         SECTION 13.4  Authorization by Holders of Securities.  Each Holder of
a Security of any series by his acceptance thereof authorizes and directs the
Trustee on his behalf to take such action as may be necessary or appropriate to
effectuate, as between the Holder of the Security and the holders of Senior
Indebtedness, the subordination provided in this Article and appoints the
Trustee his attorney-in-fact for any and all such purposes.

         SECTION 13.5  Notices to Trustee.  The Issuer shall give prompt
written notice to the Trustee of any fact known to the Issuer which would
prohibit the making of any payment of moneys to or by the Trustee in respect of
the Securities of any series pursuant to the provisions of this Article.
Notwithstanding the provisions of this Article or any other provision of this
Indenture, the Trustee shall not be charged with knowledge of the existence of
any facts which would prohibit the making of any payment of moneys to or by the
Trustee in respect of the Securities of any series pursuant to the provisions
of this Article, unless and until the Trustee shall have received at its
Corporate Trust Office written notice thereof from the Issuer or a holder or
holders of Senior Indebtedness or from any trustee therefore; and, prior to the
receipt of any such written notice, the Trustee, subject to the provisions of
Section 6.1, shall be entitled in all respects to assume that no such facts
exist; provided, however, that if the Trustee shall not have received at least
three Business Days prior to the date upon which by the terms hereof any such
moneys may become payable for any purpose (including, without limitation, the
payment of the principal or interest on any Security of any series) with
respect to such moneys the notice provided for in this Section, then, anything
herein contained to the contrary notwithstanding, the Trustee shall have full
power and authority to receive such moneys and to apply the same to the purpose
for which they were received and shall

<PAGE>   97
                                       89

not be affected by any notice to the contrary which may be received by it
within three Business Days prior to such date.

         The Trustee shall be entitled to rely on the delivery to it of a
written notice by a Person representing himself to be a holder of Senior
Indebtedness (or a trustee on behalf of such holder) to establish that such
notice has been given by a holder of Senior Indebtedness or a trustee on behalf
of any such holder.  In the event that the Trustee determines in good faith
that further evidence is required with respect to the right of any Person as a
holder of Senior Indebtedness to participate in any payment or distribution
pursuant to this Article, the Trustee may request such Person to furnish
evidence to the reasonable satisfaction of the Trustee as to the amount of
Senior Indebtedness held by such Person, the extent to which such Person is
entitled to participate in such payment or distribution and any other facts
pertinent to the rights of such Person under this Article, and if such evidence
is not furnished, the Trustee may defer any payment to such Person pending
judicial determination as to the right of such Person to receive such payment.

         SECTION 13.6  Trustee's Relation to Senior Indebtedness.  The Trustee
in its individual capacity shall be entitled to all the rights set forth in
this Article in respect of any Senior Indebtedness at any time held by it, to
the same extent as any other holder of Senior Indebtedness, and nothing in
Section 6.13 or elsewhere in this Indenture shall deprive the Trustee of any of
its rights as such holder.

         With respect to the holders of Senior Indebtedness, the Trustee
undertakes to perform or to observe any such of its covenants and obligations
as are specifically set forth in this Article, and no implied covenants or
obligations with respect to the holders of Senior Indebtedness shall be read
into this Indenture against the Trustee. The Trustee shall not owe any
fiduciary duty to the holders of Senior Indebtedness but shall have only such
obligations to such holders as are expressly set forth in this Article.

         SECTION 13.7  No Impairment of Subordination.  No right of any present
or future holder of any Senior Indebtedness to enforce subordination as herein
provided shall at any time in any way be prejudiced or impaired by any act or
failure to act on the part of the Issuer or by any act or failure to act, in
good faith, by any such holder, or by any noncompliance by the Issuer with the
terms, provisions and

<PAGE>   98
                                       90

covenants of this Indenture, regardless of any knowledge thereof which any such
holder may have or otherwise be charged with.

         SECTION 13.8  Article 13 Not To Prevent Events of Default.  The
failure to make a payment on account of principal or interest on the Securities
by reason of any provision in this Article 13 shall not be construed as
preventing the occurrence of an Event of Default under Section 5.1.

         SECTION 13.9  Paying Agents other than the Trustee.  In case at any
time any Paying Agent other than the Trustee shall have been appointed by the
Issuer and be then acting hereunder, the term "Trustee" as used in this Article
13 shall in such case (unless the context shall otherwise require) be construed
as extending to and including such Paying Agent within its meaning as fully for
all intents and purposes as if such Paying Agent were named in this Article 13
in addition to or in place of the Trustee; provided, however, that Sections
13.5 and 13.6 hereof shall not apply to the Issuer or any Subsidiary if it acts
as Paying Agent.

         SECTION 13.10  Securities Senior to Subordinated Indebtedness.  The
indebtedness represented by the Securities will be senior and prior in right of
payment to the principal and interest on all Subordinated Indebtedness, to the
extent and in the manner provided in such Subordinated Indebtedness.

<PAGE>   99
                                       91

         IN WITNESS WHEREOF, the parties hereto have caused this Indenture to
be duly executed, and their respective corporate seals to be hereunto affixed
and attested, all as of November 15, 1988.


<TABLE>
<S>                                        <C>                                                            
                                           THE PROGRESSIVE CORPORATION
[CORPORATE SEAL]
                                           By                                              
                                           -----------------------------------------
                                           Treasurer

Attest:

By                                                   
   --------------------------------------




                                           RHODE ISLAND HOSPITAL TRUST
                                             NATIONAL BANK

[CORPORATE SEAL]
                                           By                                          
                                           -----------------------------------------


Attest:
By                                                   
   --------------------------------------
</TABLE>


<PAGE>   100
                                       92

STATE OF NEW YORK
COUNTY OF NEW YORK        ss.:


        On this ____ day of ______ before me personally came Howard M. Zelikow,
to me personally known, who, being by me duly sworn, did depose and say that he
resides at Cleveland, Ohio
                          ; that he is an officer of THE PROGRESSIVE
CORPORATION, one of the corporations described in and which executed the above
instrument; that he knows the corporate seal of said corporation; that the seal
affixed to said instrument is such corporate seal; that it was so affixed by
authority of the Board of Directors of said corporation, and that he signed his
name thereto by like authority.


<TABLE>
<S>                                        <C>
                                                                                                               
                                           -----------------------------------------
                                           Notary Public
[NOTARIAL SEAL]
</TABLE>






STATE OF NEW YORK
COUNTY OF NEW YORK        ss.:


        On this           day of  , before me personally came , to me personally
known, who, being by me duly sworn, did depose and say that he resides at       
New York, New York; that he is an             of RHODE ISLAND HOSPITAL TRUST
NATIONAL BANK, one of the corporations described in and which executed the above
instrument; that he knows the corporate seal of said corporation; that the seal
affixed to said instrument is such corporate seal; that it was so affixed by
authority of the Board of Directors of said corporation, and that he signed his
name thereto by like authority.


<TABLE>
<S>                                        <C>
                                           -----------------------------------------
                                           Notary Public

[NOTARIAL SEAL]
</TABLE>




<PAGE>   1





                   [FORM OF FACE OF REGISTERED DEBT SECURITY]


NO. R                                                         $____________
                                                          CUSIP 743315 AD 5
                                                    SEE REVERSE FOR CERTAIN
                                                                DEFINITIONS

                          THE PROGRESSIVE CORPORATION

                10-1/8% SUBORDINATED NOTE DUE DECEMBER 15, 2000


                 THE PROGRESSIVE CORPORATION, an Ohio corporation (the
"Issuer"), for value received, hereby promises to pay to
___________________________________ or registered assigns, at the office or
agency of the Issuer at the office of the Trustee in Providence, Rhode Island,
the principal sum of __________________ Dollars on December 15, 2000, in such
coin or currency of the United States of America as at the time of payment
shall be legal tender for the payment of public and private debts, and to pay
interest semiannually on June 15 and December 15 of each year, commencing June
15, 1989, on said principal sum at said office or agency, in like coin or
currency, at the rate per annum specified in the title of this Note, from the
June 15 or the December 15, as the case may be, next preceding the date of this
Note to which interest has been paid, unless the date hereof is a date to which
interest has been paid, in which case from the date of this Note, or unless no
interest has been paid on these Notes, in which case from December 15, 1988,
until payment of said principal sum has been made or duly provided for;
PROVIDED, that payment
 of interest may be made at the option of the Issuer by
check mailed to the address of the person entitled thereto as such address
shall appear on the Security Register. Notwithstanding the foregoing, if the
date hereof is after the first day of June or December, as the case may be, and
before the following June 15 or December 15, this Note shall bear interest from
such June 15 or December 15; PROVIDED, that if the Issuer shall default in the
payment of interest due on such June 15 or December 15, then this Note shall
bear interest from the next preceding June 15 or December 15 to which interest
has been paid or, if no interest has been paid on these Notes, from December
15, 1988.  The interest so payable on any June 15 or December 15 will, subject
to certain exceptions provided in the Indenture referred to on the reverse
hereof, be paid to the person in whose name this Note is registered at the
close of business on the June 1 or December 1, as the case may be, next
preceding such June 15 or December 15.

                 Reference is made to the further provisions of this Note set
forth on the reverse hereof.  Such further provisions shall for all purposes
have the same effect as though fully set forth at this place.

<PAGE>   2
         This Note shall not be valid or become obligatory for any purpose
until the certificate of authentication hereon shall have been signed by the
Trustee under the Indenture referred to on the reverse hereof.

         IN WITNESS WHEREOF, The Progressive Corporation has caused this
instrument to be signed by facsimile by its duly authorized officers and has
caused a facsimile of its corporate seal to be affixed hereunto or imprinted
hereon.

Dated:

                                           THE PROGRESSIVE CORPORATION


Attest:                                    By /s/ Peter B. Lewis
                                           --------------------------------
                                              President and Chief Executive
         /s/ David M. Schneider                Officer
         ----------------------
                Secretary

               [FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION]

         This is one of the Securities, of the series designated herein,
referred to in the within-mentioned Indenture.

                                                     Rhode Island Hospital Trust
                                                       National Bank, as Trustee


                                             By.................................
                                                            Authorized Signatory


                       [FORM OF REVERSE OF DEBT SECURITY]

                          THE PROGRESSIVE CORPORATION

                10-1/8% SUBORDINATED NOTE DUE DECEMBER 15, 2000

                                     -2-


<PAGE>   3
         This Note is one of a duly authorized issue of debentures, notes,
bonds or other evidences of indebtedness of the Issuer (hereinafter called the
"Securities") of the series hereinafter specified, all issued or to be issued
under and pursuant to an indenture dated as of November 15, 1988 (herein called
the "Indenture"), duly executed and delivered by the Issuer to Rhode Island
Hospital Trust National Bank, as Trustee (herein called the "Trustee"), to
which Indenture and all indentures supplemental thereto reference is hereby
made for a description of the rights, limitations of rights, obligations,
duties and immunities thereunder of the Trustee, the Issuer and the holders of
the Securities.  The Securities may be issued in one or more series, which
different series may be issued in various aggregate principal amounts, may
mature at different times, may bear interest (if any) at different rates, may
be subject to different redemption provisions (if any), may be subject to
different sinking, purchase or analogous funds (if any) and may otherwise vary
as in the Indenture provided.  This Note is one of a series designated as the
10-1/8% Subordinated Note Due December 15, 2000 of the Issuer, limited in
aggregate principal amount to $150,000,000.

         In case an Event of Default with respect to the 10-1/8% Subordinated
Notes Due December 15, 2000, as defined in the Indenture, shall have occurred
and be continuing, the principal hereof may be declared, and upon such
declaration shall become, due and payable, in the manner, with the effect and
subject to the conditions provided in the Indenture.

         This Note is subordinated to all existing and future Senior
Indebtedness (as defined in the Indenture) of the Issuer.  To the extent and in
the manner provided in the Indenture, Senior Indebtedness must be paid before
any payment may be made to any Holders of Securities of any series.  Any
Securityholder by accepting this Note agrees to the subordination and
authorizes the Trustee to give it effect.

         In addition to all other rights of Senior Indebtedness described in
the Indenture, the Senior Indebtedness shall continue to be Senior Indebtedness
and entitled to the benefits of the subordination provisions irrespective of
any amendment, modification or waiver of any term of any instrument relating to
the Senior Indebtedness or extension or renewal of the Senior Indebtedness.

         The Indenture contains provisions permitting the Issuer and the
Trustee, with the consent of the Holders of not less than 66-2/3% in aggregate
principal amount of the Securities at the time Outstanding (as defined in the
Indenture) of all series to be affected (voting as one class), evidenced as in
the Indenture provided, to execute supplemental indentures adding any
provisions to or changing in any manner or eliminating any of the provisions of
the Indenture or of any supplemental indenture or modifying in any manner the
rights of the Holders of the Securities of each such series; PROVIDED HOWEVER,
that no such supplemental indenture shall (i) extend the final maturity of any
Security, or reduce the principal amount thereof or any premium thereon, or
reduce the rate or extend the time of payment of any interest thereon, or
impair or affect the rights of any Holder to institute suit for the payment
thereof, or make any change in the subordination provisions that adversely
affects the rights of any Holder, in each case, without the consent of the
Holder of each Security so affected or (ii) reduce the aforesaid percentage of
Securities, the Holders of which are required to consent to any such
supplemental indenture, without the consent of the Holder of each Security
affected.  It is also provided in the Indenture





                                      -3-

<PAGE>   4

that, with respect to certain defaults or Events of Default regarding the
Securities of any series, prior to any declaration accelerating the maturity of
such Securities, the Holders of a majority in aggregate principal amount
Outstanding of the Securities of such series (or, in the case of certain
defaults or Events of Default, all or certain series of the Securities) may on
behalf of the Holders of all the Securities of such series (or all or certain
series of the Securities, as the case may be) waive any such past default or
Event of Default and its consequences.  The preceding sentence shall not,
however, apply to a default in the payment of the principal of or premium, if
any, or interest on any of the Securities.  Any such consent or waiver by the
Holder of this Note (unless revoked as provided in the Indenture) shall be
conclusive and binding upon such Holder and upon all future Holders and owners
of this Note and any Note which may be issued in exchange or substitution
herefor, irrespective of whether or not any notation thereof is made upon this
Note or such other Note.

         No reference herein to the Indenture and no provision of this Note or
of the Indenture shall alter or impair the obligation of the Issuer, which is
absolute and unconditional, to pay the principal of and interest on this Note
in the manner, at the respective times, at the rate and in the coin or currency
herein prescribed.

         The Notes are issuable in registered form without coupons in
denominations of $1,000 and any integral multiples of $1,000 at the office or
agency of the Issuer at the office of the Trustee in Providence, Rhode Island,
and in the manner and subject to the limitations provided in the Indenture, but
without the payment of any service charge, Notes may be exchanged for a like
aggregate principal amount of Notes of other authorized denominations.

         The Notes are not subject to redemption at the option of the Issuer or
through the operation of a sinking fund.

         Upon due presentment for registration of transfer of this Note at the
office or agency of the Issuer or at the office of the Trustee in Providence,
Rhode Island, a new Note or Notes of authorized denominations for an equal
aggregate principal amount will be issued to the transferee in exchange
therefor, subject to the limitations provided in the Indenture, without charge
except for any tax or other governmental charge imposed in connection
therewith.

         The Issuer, the Trustee and any authorized agent of the Issuer or the
Trustee may deem and treat the registered Holder hereof as the absolute owner
of this Note (whether or not this Note shall be overdue and notwithstanding any
notation of ownership or other writing hereon), for the purpose of receiving
payment of, or on account of, the principal hereof and, subject to the
provisions on the face hereof, interest hereon, and for





                                      -4-

<PAGE>   5

all other purposes, and neither the Issuer nor the Trustee nor any authorized
agent of the Issuer or the Trustee shall be affected by any notice to the
contrary.

         No recourse under or upon any obligation, covenant or agreement of the
Issuer in the Indenture or any indenture supplemental thereto or in any Note,
or because of the creation of any indebtedness represented thereby, shall be
had against any incorporator, shareholder, officer or director, as such, of the
Issuer or of any successor corporation, either directly or through the Issuer
or any successor corporation, under any rule of law, statute or constitutional
provision or by the enforcement of any assessment or by any legal or equitable
proceeding or otherwise, all such liability being expressly waived and released
by the acceptance hereof and as part of the consideration for the issue hereof.

         Terms used herein which are defined in the Indenture shall have the
respective meanings assigned thereto in the Indenture.










                                      -5-



<PAGE>   1





   ==========================================================================




                          THE PROGRESSIVE CORPORATION


                                      AND


                       THE FIRST NATIONAL BANK OF BOSTON,
                                                   Trustee





                                 ______________

                                   INDENTURE

                                 ______________

                         Dated as of November 15, 1988




   ==========================================================================

<PAGE>   2
                             CROSS REFERENCE SHEET*

                                    Between

         Provisions of Trust Indenture Act of 1939 and Indenture to be dated as
of November 15, 1988 between THE PROGRESSIVE CORPORATION and THE FIRST NATIONAL
BANK OF BOSTON, Trustee:


<TABLE>
<CAPTION>
Section of the Act                                                         Section of Indenture
- - - ------------------                                                         --------------------
<S>                                                                        <C>
310(a)(1) and (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . .  6.9
310(a)(3) and (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . .  Inapplicable
310(b)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  6.8 and 6.10(a), (b)
                                                                           and (d)
310(c)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  Inapplicable
311(a)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  6.13(a) and (c)(1)
                                                                           and (2)
311(b)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  6.13(b)
311(c)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  Inapplicable
312(a)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  4.1 and 4.2(a)
312(b)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  4.2(a) and (b)(i)
                                                                           and (ii)
312(c)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  4.2(c)
313(a)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  4.4(a)(i), (ii), (iii),
                                                                           (iv), (v) and (vi)
313(b)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  Inapplicable
313(b)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  4.4
313(c)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  4.4
313(d)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  4.4
314(a)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  4.3
314(b)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  Inapplicable
314(c)(1) and (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . .  11.5
314(c)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  Inapplicable
314(d)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  Inapplicable
314(e)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  11.5
314(f)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  Inapplicable
315(a), (c) and (d) . . . . . . . . . . . . . . . . . . . . . . . . . . .  6.1
315(b)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  5.11
315(e)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  5.12
316(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  5.9
316(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  Not Required
316(a) (last sentence)  . . . . . . . . . . . . . . . . . . . . . . . . .  7.4
316(b)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  5.7
317(a)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  5.2
317(b)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  3.4(a) and (b)
318(a)  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  11.7
</TABLE>


*  This Cross Reference Sheet is not part of the Indenture.

<PAGE>   3
                               TABLE OF CONTENTS




<TABLE>
<CAPTION>
                                                                                              PAGE
                                                                                              ----
<S>                                                                                             <C>
PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
RECITALS:

     Authorization of Indenture   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
     Compliance with Legal Requirements   . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
     Purpose of and Consideration for Indenture   . . . . . . . . . . . . . . . . . . . . . . . 1
</TABLE>



                                                    ARTICLE ONE
    
                                                    DEFINITIONS


<TABLE>
<S>      <C>           <C>                                                                      <C>
SECTION  1.1.          Certain Terms Defined  . . . . . . . . . . . . . . . . . . . . . . . . . 1
                       Authorized Newspaper   . . . . . . . . . . . . . . . . . . . . . . . . . 2
                       Board of Directors
   . . . . . . . . . . . . . . . . . . . . . . . . . . 2
                       Business Day   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
                       Commission   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
                       Corporate Trust Office   . . . . . . . . . . . . . . . . . . . . . . . . 2
                       Coupon   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
                       ECU  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
                       European Communities   . . . . . . . . . . . . . . . . . . . . . . . . . 3
                       Event of Default   . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
                       Foreign Currency   . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
                       Holder, holder of Securities, Securityholder   . . . . . . . . . . . . . 3
                       Indenture  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
                       Interest   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
                       Issuer   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
                       Officers' Certificate  . . . . . . . . . . . . . . . . . . . . . . . . . 3
                       Opinion of Counsel   . . . . . . . . . . . . . . . . . . . . . . . . . . 3
                       Original Issue date  . . . . . . . . . . . . . . . . . . . . . . . . . . 4
                       Original Issue Discount Securities   . . . . . . . . . . . . . . . . . . 4
                       Outstanding  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
                       Person   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
                       principal  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
                       Registered Security  . . . . . . . . . . . . . . . . . . . . . . . . . . 5
                       Responsible Officer  . . . . . . . . . . . . . . . . . . . . . . . . . . 5
                       Security or Securities   . . . . . . . . . . . . . . . . . . . . . . . . 5
                       Trustee  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
                       Trust Indenture Act of 1939  . . . . . . . . . . . . . . . . . . . . . . 5
                       Unregistered Security  . . . . . . . . . . . . . . . . . . . . . . . . . 5
</TABLE>


<PAGE>   4
                                       ii


<TABLE>
<CAPTION>
                                                                                              PAGE
                                                                                              ----
                       <S>                                                                      <C>
                       U.S. Government Obligations  . . . . . . . . . . . . . . . . . . . . . . 5
                       Vice President   . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
                       Yield to Maturity  . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
</TABLE>



                                  ARTICLE TWO

                                   SECURITIES


<TABLE>
<S>                    <C>                                                                     <C>
SECTION 2.1.           Forms Generally  . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
SECTION 2.2.           Form of Trustee's Certificate of Authentication  . . . . . . . . . . . . 6
SECTION 2.3.           Amount Unlimited; Issuable in Series   . . . . . . . . . . . . . . . . . 7
SECTION 2.4.           Authentication and Delivery of Securities  . . . . . . . . . . . . . . . 9
SECTION 2.5.           Execution of Securities  . . . . . . . . . . . . . . . . . . . . . . .  10
SECTION 2.6.           Certificate of Authentication  . . . . . . . . . . . . . . . . . . . .  11
SECTION 2.7.           Denomination and Date of Securities; Payments of
                         Interest   . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  11
SECTION 2.8.           Registration, Transfer and Exchange  . . . . . . . . . . . . . . . . .  13
SECTION 2.9.           Mutilated, Defaced, Destroyed, Lost and Stolen
                         Securities   . . . . . . . . . . . . . . . . . . . . . . . . . . . .  16
SECTION 2.10.          Cancellation of Securities; Destruction Thereof  . . . . . . . . . . .  17
SECTION 2.11.          Temporary Securities   . . . . . . . . . . . . . . . . . . . . . . . .  17
</TABLE>



                                 ARTICLE THREE

                            COVENANTS OF THE ISSUER


<TABLE>
<S>                    <C>                                                                     <C>
SECTION 3.1.           Payment of Principal and Interest  . . . . . . . . . . . . . . . . . .  18
SECTION 3.2.           Offices for Payments, etc.   . . . . . . . . . . . . . . . . . . . . .  19
SECTION 3.3.           Appointment to Fill a Vacancy in the Office of Trustee   . . . . . . .  20
SECTION 3.4.           Paying Agents  . . . . . . . . . . . . . . . . . . . . . . . . . . . .  20
SECTION 3.5.           Written Statement to Trustee   . . . . . . . . . . . . . . . . . . . .  21
SECTION 3.6.           Luxembourg Publications  . . . . . . . . . . . . . . . . . . . . . . .  21
</TABLE>



                                  ARTICLE FOUR

                   SECURITYHOLDERS' LISTS AND REPORTS BY THE
                             ISSUER AND THE TRUSTEE


<TABLE>
<S>                    <C>                                                                     <C>
SECTION 4.1.           Issuer to Furnish Trustee Information as to Names and
                         Addresses of Securityholders   . . . . . . . . . . . . . . . . . . .  22
SECTION 4.2.           Preservation and Disclosure of Securityholders'
                         Lists  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  22
SECTION 4.3.           Reports by the Issuer  . . . . . . . . . . . . . . . . . . . . . . . .  24
SECTION 4.4.           Reports by the Trustee   . . . . . . . . . . . . . . . . . . . . . . .  25
</TABLE>


                                      iii

<PAGE>   5
                                      iii

                                  ARTICLE FIVE

                  REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS
                              ON EVENT OF DEFAULT


<TABLE>
<CAPTION>
                                                                                              PAGE
                                                                                              ----
<S>                    <C>                                                                     <C>
SECTION 5.1.           Event of Default Defined; Acceleration of Maturity;
                         Waiver of Default  . . . . . . . . . . . . . . . . . . . . . . . . .  27
SECTION 5.2.           Collection of Indebtedness by Trustee; Trustee May
                         Prove Debt   . . . . . . . . . . . . . . . . . . . . . . . . . . . .  30
SECTION 5.3.           Application of Proceeds  . . . . . . . . . . . . . . . . . . . . . . .  33
SECTION 5.4.           Suits for Enforcement  . . . . . . . . . . . . . . . . . . . . . . . .  34
SECTION 5.5.           Restoration of Rights on Abandonment of
                         Proceedings  . . . . . . . . . . . . . . . . . . . . . . . . . . . .  34
SECTION 5.6.           Limitations on Suits by Securityholders  . . . . . . . . . . . . . . .  35
SECTION 5.7.           Unconditional Right of Securityholders to Institute
                         Certain Suits  . . . . . . . . . . . . . . . . . . . . . . . . . . .  36
SECTION 5.8.           Powers and Remedies Cumulative; Delay or Omission
                         Not Waiver of Default  . . . . . . . . . . . . . . . . . . . . . . .  36
SECTION 5.9.           Control by Securityholders   . . . . . . . . . . . . . . . . . . . . .  36
SECTION 5.10.          Waiver of Past Defaults  . . . . . . . . . . . . . . . . . . . . . . .  37
SECTION 5.11.          Trustee to Give Notice of Default, But May Withhold
                         in Certain Circumstances   . . . . . . . . . . . . . . . . . . . . .  38
SECTION 5.12.          Right of Court to Require Filing of Undertaking to Pay
                         Costs    . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  38
</TABLE>



                                  ARTICLE SIX

                             CONCERNING THE TRUSTEE


<TABLE>
<S>                    <C>                                                                     <C>
SECTION 6.1.           Duties and Responsibilities of the Trustee; During
                         Default; Prior to Default  . . . . . . . . . . . . . . . . . . . . .  39
SECTION 6.2.           Certain Rights of the Trustee  . . . . . . . . . . . . . . . . . . . .  40
SECTION 6.3.           Trustee Not Responsible for Recitals, Disposition of
                         Securities or Application of Proceeds Thereof  . . . . . . . . . . .  42
SECTION 6.4.           Trustee and Agents May Hold Securities or Coupons;
                         Collections, etc.  . . . . . . . . . . . . . . . . . . . . . . . . .  42
SECTION 6.5.           Moneys Held by Trustee   . . . . . . . . . . . . . . . . . . . . . . .  42
SECTION 6.6.           Compensation and Indemnification of Trustee and Its
                         Prior Claim  . . . . . . . . . . . . . . . . . . . . . . . . . . . .  43
SECTION 6.7.           Right of Trustee to Rely on Officers' Certificate,
                         etc.   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  43
SECTION 6.8.           Qualification of Trustee; Conflicting Interests  . . . . . . . . . . .  44
SECTION 6.9.           Persons Eligible for Appointment as Trustee  . . . . . . . . . . . . .  50
</TABLE>


<PAGE>   6
                                       iv



<TABLE>
<CAPTION>
                                                                                              PAGE
                                                                                              ----
<S>                    <C>                                                                    <C>
SECTION 6.10.          Resignation and Removal; Appointment of Successor
                         Trustee  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   51
SECTION 6.11.          Acceptance of Appointment by Successor Trustee   . . . . . . . . . .   52
SECTION 6.12.          Merger, Conversion, Consolidation or Succession to
                         Business of Trustee  . . . . . . . . . . . . . . . . . . . . . . .   54
SECTION 6.13.          Preferential Collection of Claims Against the
                         Issuer   . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   54
</TABLE>



                                 ARTICLE SEVEN

                         CONCERNING THE SECURITYHOLDERS


<TABLE>
<S>                    <C>                                                                    <C>
SECTION 7.1.           Evidence of Action Taken by Securityholders  . . . . . . . . . . . .   59
SECTION 7.2.           Proof of Execution of Instruments and of Holding of
                         Securities   . . . . . . . . . . . . . . . . . . . . . . . . . . .   59
SECTION 7.3.           Holders to be Treated as Owners  . . . . . . . . . . . . . . . . . .   60
SECTION 7.4.           Securities Owned by Issuer Deemed Not Outstanding  . . . . . . . . .   61
SECTION 7.5.           Right of Revocation of Action Taken  . . . . . . . . . . . . . . . .   62
</TABLE>



                                 ARTICLE EIGHT

                            SUPPLEMENTAL INDENTURES


<TABLE>
<S>                    <C>                                                                    <C>
SECTION 8.1.           Supplemental Indentures Without Consent of Security-
                         holders  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   62
SECTION 8.2.           Supplemental Indentures With Consent of Securityholders  . . . . . .   64
SECTION 8.3.           Effect of Supplemental Indenture   . . . . . . . . . . . . . . . . .   65
SECTION 8.4.           Documents to Be Given to Trustee   . . . . . . . . . . . . . . . . .   66
SECTION 8.5.           Notation on Securities in Respect of Supplemental Indentures   . . . . 66
                                                                                                
</TABLE>



                                  ARTICLE NINE

                   CONSOLIDATION, MERGER, SALE OR CONVEYANCE


<TABLE>
<S>                    <C>                                                                    <C>
SECTION 9.1.           Issuer May Consolidate, etc., on Certain Terms   . . . . . . . . . .   66
SECTION 9.2.           Successor Corporation Substituted  . . . . . . . . . . . . . . . . .   67
SECTION 9.3.           Opinion of Counsel to Trustee  . . . . . . . . . . . . . . . . . . .   68
</TABLE>


<PAGE>   7
                                       v


                                  ARTICLE TEN

           SATISFACTION AND DISCHARGE OF INDENTURE; UNCLAIMED MONEYS


<TABLE>
<CAPTION>
                                                                                              PAGE
                                                                                              ----
<S>                    <C>                                                                    <C>
SECTION 10.1.          Satisfaction and Discharge of Indenture  . . . . . . . . . . . . . .   68
SECTION 10.2.          Application by Trustee of Funds Deposited for Payment of Securities    71
SECTION 10.3.          Repayment of Moneys Held by Paying Agent   . . . . . . . . . . . . .   71
SECTION 10.4.          Return of Moneys Held By Trustee and Paying Agent Unclaimed for
                       Two Years  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   71
SECTION 10.5.          Indemnity for U.S. Government Obligations  . . . . . . . . . . . . .   72
</TABLE>



                                 ARTICLE ELEVEN

                            MISCELLANEOUS PROVISIONS


<TABLE>
<S>                    <C>                                                                    <C>
SECTION 11.1.          Incorporators, Shareholders, Officers and Directors of
                         Issuer Exempt from Individual Liability  . . . . . . . . . . . . .   72
SECTION 11.2.          Provisions of Indenture for the Sole Benefit of Parties
                         and Securityholders  . . . . . . . . . . . . . . . . . . . . . . .   73
SECTION 11.3.          Successors and Assigns of Issuer Bound by Indenture  . . . . . . . .   73
SECTION 11.4.          Notices and Demands on Issuer, Trustee and Securityholders   . . . .   73
SECTION 11.5.          Officers' Certificates and Opinions of Counsel; Statements
                         to Be Contained Therein  . . . . . . . . . . . . . . . . . . . . .   74
SECTION 11.6.          Payments Due on Saturdays, Sundays and Holidays .  . . . . . . . . .   75
SECTION 11.7.          Conflict of Any Provision of Indenture with Trust
                         Indenture Act of 1939  . . . . . . . . . . . . . . . . . . . . . .   75
SECTION 11.8.          New York Law to Govern   . . . . . . . . . . . . . . . . . . . . . .   76
SECTION 11.9.          Counterparts   . . . . . . . . . . . . . . . . . . . . . . . . . . .   76
SECTION 11.10.         Effect of Headings   . . . . . . . . . . . . . . . . . . . . . . . .   76
SECTION 11.11.         Securities in Foreign Currencies or in ECU   . . . . . . . . . . . .   76
</TABLE>



                                 ARTICLE TWELVE

                   REDEMPTION OF SECURITIES AND SINKING FUNDS


<TABLE>
<S>                    <C>                                                                    <C>
SECTION 12.1.          Applicability of Article   . . . . . . . . . . . . . . . . . . . . .   76
SECTION 12.2.          Notice of Redemption; Partial Redemptions  . . . . . . . . . . . . .   77
SECTION 12.3.          Payment of Securities Called for Redemption  . . . . . . . . . . . .   78
SECTION 12.4.          Exclusion of Certain Securities from Eligibility for
                         Selection for Redemption   . . . . . . . . . . . . . . . . . . . .   79
SECTION 12.5.          Mandatory and Optional Sinking Funds   . . . . . . . . . . . . . . .   80
</TABLE>


<PAGE>   8
                                       vi



<TABLE>
<S>                                                                                           <C>
TESTIMONIUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
SIGNATURES  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
ACKNOWLEDGMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
</TABLE>


<PAGE>   9
         THIS INDENTURE, dated as of November 15, 1988, between THE PROGRESSIVE
CORPORATION, an Ohio corporation (the "Issuer"), and THE FIRST NATIONAL BANK OF
BOSTON, a national banking association (the "Trustee"),

                                  WITNESSETH:

         WHEREAS, the Issuer has duly authorized the issue from time to time of
its unsecured debentures, notes or other evidences of indebtedness to be issued
in one or more series (the "Securities") up to such principal amount or amounts
as may from time to time be authorized in accordance with the terms of this
Indenture and to provide, among other things, for the authentication, delivery
and administration thereof, the Issuer has duly authorized the execution and
delivery of this Indenture; and

         WHEREAS, all things necessary to make this Indenture a valid indenture
and agreement according to its terms have been done;

         NOW, THEREFORE:

         In consideration of the premises and the purchases of the Securities
by the holders thereof, the Issuer and the Trustee mutually covenant and agree
for the equal and proportionate benefit of the respective holders from time to
time of the Securities and of the Coupons, if any, appertaining thereto as
follows:


                                  ARTICLE ONE

                                  DEFINITIONS

         SECTION 1.1  Certain Terms Defined.  The following terms (except as
otherwise expressly provided or unless the content otherwise clearly requires)
for all purposes of this Indenture and of any indenture supplemental hereto
shall have the respective meanings specified in this Section.  All other terms
used in this Indenture that are defined in the Trust Indenture Act of 1939 or
the definitions of which in the Securities Act of 1933 are referred to in the
Trust Indenture Act of 1939, including terms defined therein by reference to
the Securities Act of 1933 (except as herein otherwise expressly provided or
unless the content otherwise clearly requires), shall have the meanings
assigned to such terms in said Trust Indenture Act and in said Securities Act
as in force at the date of this Indenture.  All accounting terms used herein
and not expressly defined shall have the meanings assigned to such terms in
accordance with generally accepted accounting principles, and the term
"GENERALLY ACCEPTED ACCOUNTING PRINCIPLES" means such accounting principles as

<PAGE>   10
                                       2

are generally accepted at the time of any computation.  The words "herein",
"hereof" and "hereunder" and other words of similar import refer to this
Indenture as a whole and not to any particular Article, Section or other
subdivision.  The terms defined in this Article have the meanings assigned to
them in this Article and include the plural as well as the singular.

         "Authorized Newspaper" means a newspaper (which, in the case of the
United Kingdom, will, if practicable, be the Financial Times (London Edition)
and, in the case of Luxembourg, will, if practicable, be the Luxemburger Wort)
published in English or an official language of the country of publication
customarily published at least once a day for at least five days in each
calendar week and of general circulation in the United Kingdom or in
Luxembourg, as applicable.  If it shall be impractical in the opinion of the
Trustee to make any publication of any notice required hereby in an Authorized
Newspaper, any publication or other notice in lieu thereof which is made or
given with the approval of the Trustee shall constitute a sufficient
publication of such notice.

         "Board of Directors" means either the Board of Directors of the Issuer
or any committee of such Board duly authorized to act hereunder.

         "Business Day" means, with respect to any Security, a day that in the
city (or in any of the cities, if more than one) in which amounts are payable,
as specified in the form of such Security, is not a day on which banking
institutions are authorized by law or regulation to close or a day on which
transactions in the currency in which the Securities are payable are not
conducted.

         "Commission" means the Securities and Exchange Commission, as from
time to time constituted, created under the Securities Exchange Act of 1934, or
if at any time after the execution and delivery of this Indenture such
Commission is not existing and performing the duties now assigned to it under
the Trust Indenture Act, then the body performing such duties on such date.

         "Corporate Trust Office" means the office of the Trustee at which the
corporate trust business of the Trustee shall, at any particular time, be
principally administered, which office is, at the date as of which this
Indenture is dated, located at 100 Federal Street, Boston, Massachusetts 02110,
Attn: Corporate Trust Administration.

         "Coupon" means any interest coupon appertaining to a Security.

<PAGE>   11
                                       3

         "ECU" means the European Currency Unit as defined and revised from
time to time by the council of European Communities.

         "European Communities" means the European Economic Community (the
"EEC"), the European Coal and Steel Community and Euratom.

         "Event of Default" means any event or condition specified as such in
Section 5.1.

         "Foreign Currency" means a currency issued by the government of a
country other than the United States.

         "Holder," "holder of Securities," "Securityholder" or other similar
terms mean (a) in the case of any Registered Security, the Person in whose name
such Security is registered in the security register kept by the Issuer for
that purpose in accordance with the terms hereof, and (b) in the case of any
Unregistered Security, the bearer of such Security, or any Coupon appertaining
thereto, as the case may be.

         "Indenture" means this instrument as originally executed and delivered
or, if amended or supplemented as herein provided, as so amended or
supplemented or both, and shall include the forms and terms of particular
series of Securities established as contemplated hereunder.

         "Interest" means, when used with respect to non-interest bearing
Securities, interest payable after maturity.

         "Issuer" means (except as otherwise provided in Article Six) THE
PROGRESSIVE CORPORATION, an Ohio corporation, and, subject to Article Nine, its
successors and assigns.

         "Officers' Certificate" means a certificate signed by the chairman of
the Board of Directors or the president or any vice president or by the
treasurer and by the secretary or any assistant secretary of the Issuer and
delivered to the Trustee.  Each such certificate shall include the statements
provided for in Section 11.5.

         "Opinion of Counsel" means an opinion in writing signed by legal
counsel who may be an employee of or counsel to the Issuer or other counsel who
shall be satisfactory to the Trustee.  Each such opinion shall include the
statements provided for in Section 11.5, if and to the extent required hereby.

<PAGE>   12
                                       4

         "Original issue date" of any Security (or portion thereof) means the
earlier of (a) the date of such Security or (b) the date of any Security (or
portion thereof) for which such Security was issued (directly or indirectly) on
registration of transfer, exchange or substitution.

         "Original Issue Discount Security" means any Security that provides
for an amount less than the principal amount thereof to be due and payable upon
a declaration of acceleration of the maturity thereof pursuant to Section 5.1.

         "Outstanding" (except as otherwise provided in Section 6.8), when used
with reference to Securities, subject to the provisions of Section 7.4, means,
as of any particular time, all Securities authenticated and delivered by the
Trustee under this Indenture, except

                 (a) Securities theretofore cancelled by the Trustee or
         delivered to the Trustee for cancellation;
                 (b) Securities, or portions thereof, for the payment or
         redemption of which moneys in the necessary amount shall have been
         deposited in trust with the Trustee or with any paying agent (other
         than the Issuer) or shall have been set aside, segregated and held in
         trust by the Issuer for the holders of such Securities (if the Issuer
         shall act as its own paying agent), provided that if such Securities,
         or portions thereof, are to be redeemed prior to the maturity thereof,
         notice of such redemption shall have been given as herein provided or
         provision satisfactory to the Trustee shall have been made for giving
         such notice; and
                 (c) Securities in substitution for which other Securities
         shall have been authenticated and delivered, or which shall have been
         paid, pursuant to the terms of Section 2.9 (except with respect to any
         such Security as to which proof satisfactory to the Trustee is
         presented that such Security is held by a person in whose hands such
         Security is a legal, valid and binding obligation of the Issuer).

         In determining whether the holders of the requisite principal amount
of Outstanding Securities of any or all series have given any request, demand,
authorization, direction, notice, consent or waiver hereunder, the principal
amount of an Original Issue Discount Security that shall be deemed to be
Outstanding for such purposes shall be the amount of the principal thereof that
would be due and payable as of the date of such determination upon a
declaration of acceleration of the maturity thereof pursuant to Section 5.1.

<PAGE>   13
                                       5

         "Person" means any individual, corporation, partnership, joint
venture, association, joint stock company, trust, unincorporated organization
or government or any agency or political subdivision thereof.

         "Principal" whenever used with reference to the Securities or any
Security or any portion thereof, shall be deemed to include "and premium, if
any."

         "Registered Security" means any Security registered on the Security
Register of the Issuer.

         "Responsible Officer" when used with respect to the Trustee means any
officer or assistant officer assigned by the Trustee to administer its
corporate trust matters.

         "Security" or "Securities" (except as otherwise provided in Section
6.8) has the meaning stated in the first recital of this Indenture, or, as the
case may be, Securities that have been authenticated and delivered under this
Indenture.

         "Trustee" means the Person identified as "Trustee" in the first
paragraph hereof and, subject to the provisions of Article Six, shall also
include any successor trustee.

         "Trust Indenture Act of 1939" (except as otherwise provided in
Sections 8.1 and 8.2) means the Trust Indenture Act of 1939 as in force at the
date as of which this Indenture was originally executed.

         "Unregistered Security" means any Security other than a Registered
Security.

         "U.S. Government Obligations" means direct obligations of the United
States of America, backed by its full faith and credit.

         "Vice President," when used with respect to the Issuer, means any vice
president, whether or not designated by a number or a word or words added
before or after the title of "vice president".

         "Yield to Maturity" means the yield to maturity on a series of
securities, calculated at the time of issuance of such series, or, if
applicable, at the most recent redetermination of interest on such series, and
calculated in accordance with accepted financial practice.

<PAGE>   14
                                       6

                                  ARTICLE TWO

                                   SECURITIES

         SECTION 2.1  Forms Generally.  The Securities of each series and the
Coupons, if any, to be attached thereto shall be substantially in such form
(not inconsistent with this Indenture) as shall be established by or pursuant
to a resolution of the Board of Directors or in one or more indentures
supplemental hereto, in each case with such appropriate insertions, omissions,
substitutions and other variations as are required or permitted by this
Indenture and may have imprinted or otherwise reproduced thereon such legend or
legends, not inconsistent with the provisions of this Indenture, as may be
required to comply with any law or with any rules or regulations pursuant
thereto, or with any rules of any securities exchange or to conform to general
usage, all as may be determined by the officers executing such Securities and
Coupons, as evidenced by their execution of the Securities and Coupons.

         The definitive Securities and Coupons shall be printed, lithographed
or engraved on steel engraved borders or may be produced in any other manner,
all as determined by the officers executing such Securities and Coupons, as
evidenced by their execution of such Securities and Coupons.

         SECTION 2.2 Form of Trustee's Certificate of Authentication.  The
Trustee's certificate of authentication on all Securities shall be in
substantially the following form:

         This is one of the Securities, of the series designated herein,
referred to in the within-mentioned Indenture.



                                          TRUSTEE,

                                                 as Trustee


                                        By
                                           ____________________________________
                                               
                                                  Authorized Signatory

<PAGE>   15
                                       7

         SECTION 2.3 Amount Unlimited; Issuable in Series.  The aggregate
principal amount of Securities which may be authenticated and delivered under
this Indenture is unlimited.

         The Securities may be issued in one or more series.  There shall be
established in or pursuant to a resolution of the Board of Directors and set
forth in an Officers' Certificate, or established in one or more indentures
supplemental hereto, prior to the issuance of Securities of any series,

                 (1) the title of the Securities of the series (which shall
         distinguish the Securities of the series from all other Securities);

                 (2) any limit upon the aggregate principal amount of the
         Securities of the series that may be authenticated and delivered under
         this Indenture (except for Securities authenticated and delivered upon
         registration of transfer of, or in exchange for, or in lieu of, other
         Securities of the series pursuant to Section 2.8, 2.9, 2.11 or 12.3);

                 (3) the date or dates on which the principal of the Securities
         of the series is payable or the method by which such date or dates
         shall be determined;

                 (4) the rate or rates at which the Securities of the series
         shall bear interest, if any, or the method by which such rate shall be
         determined, the date or dates from which such interest shall accrue,
         the interest payment dates on which such interest shall be payable and
         the record dates for the determination of Holders to whom interest is
         payable;

                 (5) the place or places where the principal and any interest
         on Securities of the series shall be payable;

                 (6) the price or prices at which, the period or periods within
         which and the terms and conditions upon which Securities of the series
         may be redeemed, in whole or in part, at the option of the Issuer,
         pursuant to any sinking fund or otherwise;

                 (7) the obligation, if any, of the Issuer to redeem, purchase
         or repay Securities of the series pursuant to any sinking fund or
         analogous provisions or at the option of a Holder thereof and the
         price or prices at which and the period or periods within which and
         the terms and conditions upon which Securities of the series shall be
         redeemed, purchased or repaid, in whole or in part, pursuant to such
         obligation;

<PAGE>   16
                                       8

                 (8) if other than denominations of U.S. $1,000 and any
         integral multiple thereof, in the case of Registered Securities, or
         U.S. $1,000 in the case of Unregistered Securities, the denominations
         in which Securities of the series shall be issuable;

                 (9) if other than the principal amount thereof, the portion of
         the principal amount of Securities of the series which shall be
         payable upon declaration of acceleration of the maturity thereof
         pursuant to Section 5.1 or provable in bankruptcy pursuant to Section
         5.2;

                 (10) any authenticating or paying agents, transfer agents or
         registrars or any other agents with respect to the Securities of such
         series;

                 (11) if other than such coin or currency of the United States
         of America as at the time of payment is legal tender for payment of
         public or private debts, the coin or currency or units based on or
         relating to currencies (including ECU) in which payment of the
         principal of and interest, if any, on the Securities of that series
         shall be payable;

                 (12) if the principal of or interest, if any, on the
         Securities of that series are to be payable, at the election of the
         Issuer or a holder thereof, in a coin or currency or units based on or
         relating to currencies (including ECU) other than that in which the
         Securities are stated to be payable, the period or periods within
         which, and the terms and conditions upon which, such election may be
         made;

                 (13) if the amount of payments of principal of or interest, if
         any, on the Securities of the series may be determined with reference
         to an index, formula or other method based on a coin or currency or
         units based on or relating to currencies (including ECU) other than
         that in which the Securities are stated to be payable, the manner in
         which such amounts shall be determined;

                 (14) whether the Securities of the series will be issuable as
         Registered Securities or Unregistered Securities (with or without
         Coupons), or both, any restrictions applicable to the offer, sale or
         delivery of Unregistered Securities and, if other than as provided in
         Section 2.8, the terms upon which Unregistered Securities and, of any
         series may be exchanged for Registered Securities of such series and
         vice versa;

<PAGE>   17
                                       9

                 (15) whether and under what circumstances the Issuer will pay
         additional amounts on the Securities of the series held by a Person
         who is not a U.S. person in respect of any tax, assessment or
         governmental charge withheld or deducted and, if so, whether the
         Issuer will have the option to redeem such Securities rather than pay
         such additional amounts;

                 (16) if the Securities of such series are to be issuable in
         definitive form (whether upon original issue or upon exchange of a
         temporary Security of such series) only upon receipt of certain
         certificates or other documents or satisfaction of other conditions
         not otherwise set forth herein, then the form and terms of such
         certificates, documents or conditions; and

                 (17) any other terms of the series, including provisions for
         payment by wire transfers, if any, or modifications of the definition
         of Business Day (which terms shall not adversely affect the interests
         of the Holders of the Securities).

         All Securities of any one series shall be substantially identical
except as to denomination and except as may otherwise be provided in or
pursuant to such resolution of the Board of Directors or in any such indenture
supplemental hereto.

         SECTION 2.4 Authentication and Delivery of Securities.  At any time
and from time to time after the execution and delivery of this Indenture, the
Issuer may deliver Securities of any series (having attached thereto
appropriate Coupons, if any), executed by the Issuer to the Trustee for
authentication, and the Trustee shall thereupon authenticate and deliver such
Securities and Coupons, if any, to or upon the written order of the Issuer,
signed by both (a) the chairman of its Board of Directors, or any vice chairman
of its Board of Directors, or its president or any vice president or its
treasurer or any assistant treasurer and (b) by its secretary or any assistant
secretary, without any further action by the Issuer.  In authenticating such
Securities and Coupons, if any, and accepting the additional responsibilities
under this Indenture in relation to such Securities and Coupons, if any, the
Trustee shall be entitled to receive, and (subject to Section 6.1) shall be
fully protected in relying upon:

                 (1) a copy of any resolution or resolutions of the Board of
         Directors by or pursuant to which the form and term of such series


<PAGE>   18
                                       10

         were established in each case certified by the secretary or an
         assistant secretary of the Issuer;

                 (2) an executed supplemental indenture, if any;

                 (3) an Officers' Certificate setting forth the form and terms
         of the Securities and Coupons, if any, as required pursuant to Section
         2.3, and prepared in accordance with Section 11.5;

                 (4) an Opinion of Counsel, prepared in accordance with Section
         11.5, which shall state

                         (a) that the form or forms and terms of such
                 Securities and Coupons, if any, have been established by or
                 pursuant to a resolution of the Board of Directors or by a
                 supplemental indenture as permitted by Section 2.1 and 2.3 in
                 conformity with the provisions of this Indenture;

                         (b) that such Securities and Coupons, if any, when
                 authenticated and delivered by the Trustee and issued by the
                 issuer in the manner and subject to any conditions specified
                 in such Opinion of Counsel, will constitute valid and binding
                 obligations of the Issuer;

                         (c) that all laws and requirements in respect of the
                 execution and delivery by the Issuer of the Securities and
                 Coupons, if any, have been complied with; and

                         (d) such other matters as the Trustee may reasonably
                 request.

         The Trustee shall have the right to decline to authenticate and
deliver any Securities and Coupons, if any, under this Section if the Trustee,
being advised by counsel, determines that such action may not lawfully be taken
by the Issuer or if the Trustee in good faith by its board of directors or
board of trustees, executive committee, or a trust committee of directors,
trustees or Responsible Officers shall determine that such action would expose
the Trustee to personal liability to existing Holders.

         SECTION 2.5 Execution of Securities.  The Securities and, if
applicable, each Coupon appertaining thereto, shall be signed on behalf of the
Issuer by both (a) the chairman of its Board of Directors or any vice chairman
of its Board of Directors or its president or any vice president or its
treasurer or any assistant treasurer and (b) by its secretary or any assistant
secretary, under its corporate seal which may, but need not, be

<PAGE>   19
                                       11

attested.  Such signatures may be the manual or facsimile signatures of the
present or any future such officers.  The seal of the Issuer may be in the form
of a facsimile thereof and may be impressed, affixed, imprinted or otherwise
reproduced on the Securities.  Typographical and other minor errors or defects
in any such reproduction of the seal or any such signature shall not affect the
validity or enforceability of any Security or Coupon that has been duly
authenticated and delivered by the Trustee.

         In case any officer of the Issuer who shall have signed any of the
Securities or Coupons shall cease to be such officer before the Security or
Coupon so signed (or the Security to which the Coupon so signed appertains)
shall be authenticated and delivered by the Trustee or disposed of by the
Issuer, such Security or Coupon nevertheless may be authenticated and delivered
or disposed of as though the person who signed such Security or Coupon had not
ceased to be such officer of the Issuer; and any Security or Coupon may be
signed on behalf of the Issuer by such persons as, at the actual date of the
execution of such Security or Coupon, shall be the proper officers of the
Issuer, although at the date of the execution and delivery of this Indenture
any such person was not such an officer.

         SECTION 2.6 Certificate of Authentication.  Only such Securities as
shall bear thereon a certificate of authentication substantially in the form
hereinbefore recited, executed by the Trustee by the manual signature of one of
its authorized signatories, shall be entitled to the benefits of this Indenture
or be valid or obligatory for any purpose.  Such certificate by the Trustee
upon any Security executed by the Issuer shall be conclusive evidence that the
Security so authenticated has been duly authenticated and delivered hereunder
and that the holder is entitled to the benefits of this Indenture.  No Coupon
shall be entitled to the benefits of this Indenture or shall be valid or
obligatory for any purpose until such certificate by the Trustee shall have
become duly executed on the Security to which such Coupon appertains.

         SECTION 2.7 Denomination and Date of Securities; Payments of Interest.
The Securities shall be issuable as Registered Securities or Unregistered
Securities in such denominations as shall be specified as contemplated by
Section 2.3.  In the absence of any such specification with respect to the
Registered Securities of any series, the Registered Securities of such series
shall be issuable in denominations of U.S.  $1,000 and any integral multiple
thereof.  In the absence of any such specification

<PAGE>   20
                                       12

with respect to the Unregistered Securities, Unregistered Securities shall be
issued in the denomination of U.S. $1,000.  The Securities shall be numbered,
lettered, or otherwise distinguished in such manner or in accordance with such
plan as the officers of the Issuer executing the same may determine with the
approval of the Trustee as evidenced by the execution and authentication
thereof.

         Each Registered Security shall be dated the date of its
authentication.  Each Unregistered Security shall be dated as provided in the
resolution or resolutions of the Board of Directors of the Issuer or the
supplemental indenture referred to in Section 2.3.  The Securities of each
series shall bear interest, if any, from the date, and such interest shall be
payable on the dates, established as contemplated by Section 2.3.

         The person in whose name any Registered Security of any series is
registered at the close of business on any record date applicable to a
particular series with respect to any interest payment date for such series
shall be entitled to receive the interest, if any, payable on such interest
payment date notwithstanding any transfer or exchange of such Registered
Security subsequent to the record date and prior to such interest payment date,
except if and to the extent the Issuer shall default in the payment of the
interest due on such interest payment date for such series, in which case such
defaulted interest shall be paid to the persons in whose names Outstanding
Registered Securities for such series are registered at the close of business
on a subsequent record date (which shall be not less than five Business Days
prior to the date of payment of such defaulted interest) established by notice
given by mail by or on behalf of the Issuer to the holders of Registered
Securities not less than 15 days preceding such subsequent record date.  The
term "record date" as used with respect to any interest payment date (except a
date for payment of defaulted interest) shall mean the date specified as such
in the terms of the Registered Securities of any particular series, or, if no
such date is so specified, if such interest payment date is the first day of a
calendar month, the fifteenth day of the next preceding calendar month or, if
such interest payment date is the fifteenth day of a calendar month, the first
day of such calendar month, whether or not such record date is a Business Day.

         Any defaulted interest payable in respect of any Unregistered Security
shall be payable pursuant to such procedures as are satisfactory to the Trustee
and in such manner so that there is no discrimination as between the holders of
Registered Securities and Unregistered Securities

<PAGE>   21
                                       13

of the same series and notice of the payment date therefor shall be given by
the Trustee in the name and at the expense of the Company by publication at
least once in an Authorized Newspaper.  In case an Unregistered Security is
surrendered in exchange for a Registered Security after the close of business
on any record date for the payment of defaulted interest and before the opening
of business on the proposed date of payment of such defaulted interest, the
Coupon appertaining to such surrendered Unregistered Security and due for
payment on such proposed date of payment will not be surrendered with such
surrendered Unregistered Security and interest payable on such proposed date of
payment will be made only to the holder of such Coupon on such proposed date.

         SECTION 2.8.  Registration, Transfer and Exchange.  The Issuer will
keep or cause to be kept at each office or agency to be maintained for the
purpose as provided in Section 3.2 a register or registers for each series of
Registered Securities issued hereunder (collectively, the "Security Register")
in which, subject to such reasonable regulations as it may prescribe, it will
register, and will register the transfer of, or cause the registration of
transfer of, Registered Securities as in this Article provided.  Such register
shall be in written form in the English language or in any other form capable
of being converted into such form within a reasonable time.  At all reasonable
times such register or registers shall be open for inspection by the Trustee.

         Upon due presentation for registration of transfer of any Registered
Security of any series at any such office or agency to be maintained for the
purpose as provided in Section 3.2, the Issuer shall execute and the Trustee
shall authenticate and deliver in the name of the transferee or transferees a
new Registered Security or Registered Securities of the same series in
authorized denominations for a like aggregate principal amount.

         Unregistered Securities (except for any temporary Unregistered
Securities) and Coupons (except for Coupons attached to any temporary
Unregistered Securities) shall be transferable by delivery.

         Any Registered Security or Registered Securities of any series may be
exchanged for a Registered Security or Registered Securities of the same series
in other authorized denominations, in all equal aggregate principal amount.
Registered Securities of any series to be exchanged shall be surrendered at any
office or agency to be maintained by the Issuer

<PAGE>   22
                                       14

for the purpose as provided in Section 3.2, and the Issuer shall execute and
the Trustee shall authenticate and deliver in exchange therefor the Registered
Security or Registered Securities of the same series which the Securityholder
making the exchange shall be entitled to receive, bearing numbers not
contemporaneously outstanding.  If the Securities of any series are issued in
both registered and unregistered form, except as otherwise specified pursuant
to Section 2.3, at the option of the Holder thereof, Unregistered Securities of
any series may be exchanged for Registered Securities of such series, maturity
date, and interest rate of any authorized denominations and of a like aggregate
principal amount, upon surrender of such Unregistered Securities to be
exchanged at the agency of the Issuer that shall be maintained for such purpose
in accordance with Section 3.2, with, in the case of Unregistered Securities
that have Coupons attached, all unmatured Coupons and all matured Coupons in
default thereto appertaining, and upon payment, if the Issuer shall so require,
of the charges hereinafter provided.  At the Option of the Holder thereof, if
Unregistered Securities of any series, maturity date, interest rate and
original issue date are issued in more than one authorized denomination, except
as otherwise specified pursuant to Section 2.3, such Unregistered Securities
may be exchanged for Unregistered Securities of such series, maturity date,
interest rate and original issue date of other authorized denominations and of
a like aggregate principal amount, upon surrender of such Unregistered
Securities to be exchanged at the agency of the Issuer that shall be maintained
for such purpose in accordance with Section 3.2 or as specified pursuant to
Section 2.3, with, in the case of Unregistered Securities that have Coupons
attached, all unmatured Coupons and all matured Coupons in default thereto
appertaining, and upon payment, if the Issuer shall so require, of the charges
hereinafter provided.  Unless otherwise specified pursuant to Section 2.3,
Registered Securities of any series may not be exchanged for Unregistered
Securities of such series.  Whenever any Securities, and the Coupons
appertaining thereto, if any, are so surrendered for exchange, the Issuer shall
execute, and the Trustee shall authenticate and deliver, the Securities, and
the Coupons appertaining thereto, if any, which the Holder making the exchange
is entitled to receive. Notwithstanding the foregoing, if an Unregistered
Security of any series is surrendered at any such office or agency in exchange
for a Registered Security of the same series after the close of business at
such office or agency on any record date and before the opening of business at
such office or agency on the applicable interest payment date, such Unregis-

<PAGE>   23
                                       15

tered Security shall be surrendered without the Coupon, if any, relating to
such interest payment date.  All Securities and Coupons surrendered upon any
exchange or transfer provided for in this Indenture shall be promptly cancelled
and disposed of by the Trustee and the Trustee will deliver a certificate of
disposition thereof to the Issuer.

         All Registered Securities presented for registration of transfer,
exchange, redemption or payment shall (if so required by the Issuer or the
Trustee) be duly endorsed by, or be accompanied by a written instrument or
instruments of transfer in form satisfactory to the Issuer and the Trustee duly
executed by, the holder or his attorney duly authorized in writing.

         The Issuer may require payment of a sum sufficient to cover any tax or
other governmental charge that may be imposed in connection with any exchange
or registration of transfer of Securities and shall not be required to exchange
or register a transfer of any Securities until such payment is made.  No
service charge shall be made for any such transaction.

         The Issuer shall not be required to exchange or register a transfer of
(a) any Securities of any series for a period of 15 days next preceding the
first mailing of notice of redemption of Securities of such series to be
redeemed, or (b) any Securities selected, called or being called for redemption
except, in the case of any Security where public notice has been given that
such Security is to be redeemed in part, the portion thereof not so to be
redeemed and except that all Unregistered Security may be exchanged for a
Registered Security of the same series being called for redemption.

         All Securities issued upon any transfer or exchange of Securities
shall be valid obligations of the Issuer, evidencing the same debt, and
entitled to the same benefits under this Indenture, as the Securities
surrendered upon such transfer or exchange.

         Notwithstanding anything herein or in the terms of any series of
Securities to the contrary, neither the Issuer nor the Trustee (which shall
rely on an Officers' Certificate and an Opinion of Counsel) shall be required
to exchange any Unregistered Security for a Registered Security if such
exchange would result in adverse Federal income tax consequences to the Issuer
(including, without limitation the inability of the Issuer to deduct from its
income, as computed for Federal income tax purposes, the interest payable on
the Unregistered Securities) under then applicable United States Federal income
tax laws.

<PAGE>   24
                                       16

         SECTION 2.9  Mutilated, Defaced, Destroyed, Lost and Stolen
Securities.  In case any temporary or definitive Security or any Coupon
appertaining to any Security shall become mutilated, defaced or be destroyed,
lost or stolen, the Issuer in its discretion may execute, and upon the written
request of any officer of the Issuer, the Trustee shall authenticate and
deliver, a new Security of the same series, bearing a number not
contemporaneously outstanding, in exchange and substitution for the mutilated
or defaced Security, or in lieu of and substitution for the Security so
destroyed, lost or stolen with Coupons corresponding to the Coupons
appertaining to the Security so mutilated, defaced, destroyed, lost or stolen,
or in exchange or substitution for the Security to which such mutilated,
defaced, destroyed, lost or stolen Coupons appertained, with Coupons
appertaining thereto corresponding to the Coupons so mutilated, defaced,
destroyed, lost or stolen.  In every case the applicant for a substitute
Security or Coupon shall furnish to the Issuer and to the Trustee and any agent
of the Issuer or the Trustee such security or indemnity as may be required by
them to indemnify and defend and to save each of them harmless and, in every
case of destruction, loss or theft, evidence to their satisfaction of the
destruction, loss or theft of such Security and of the ownership thereof.

         Upon the issuance of any substitute Security or Coupon, the Issuer may
require the payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in relation thereto and any other expenses
(including the fees and expenses of the Trustee) connected therewith.  In case
any Security or Coupon which has matured or is about to mature or has been
called for redemption in full shall become mutilated or defaced or be
destroyed, lost or stolen, the Issuer may, at its sole discretion, instead of
issuing a substitute Security or Coupon, pay or authorize the payment of the
same (without surrender thereof except in the case of a mutilated or defaced
Security or Coupon), if the applicant for such payment shall furnish to the
Issuer and to the Trustee and any agent of the issuer or the Trustee such
security or indemnity as any of them may require to save each of them harmless,
and, in every case of destruction, loss or theft, the applicant shall also
furnish to the Issuer and the Trustee and any agent of the Issuer or the
Trustee evidence to their satisfaction of the destruction, loss or theft of
such Security or Coupon and of the ownership thereof.

         Every substitute Security or Coupon of any series issued pursuant to
the provisions of this Section by virtue of the fact that any such

<PAGE>   25
                                       17

Security or Coupon is destroyed, lost or stolen shall constitute an additional
contractual obligation of the Issuer, whether or not the destroyed, lost or
stolen Security or Coupon shall be at any time enforceable by anyone and shall
be entitled to all the benefits of (but shall be subject to all the limitations
of rights set forth in) this Indenture equally and proportionately with any and
all other Securities or Coupons of such series duly authenticated and delivered
hereunder.  All Securities or Coupons shall be held and owned upon the express
condition that, to the extent permitted by law, the foregoing provisions are
exclusive with respect to the replacement or payment of mutilated, defaced or
destroyed, lost or stolen Securities or Coupons and shall preclude any and all
other rights or remedies notwithstanding any law or statute existing or
hereafter enacted to the contrary with respect to the replacement or payment of
negotiable instruments or other securities without their surrender.

         SECTION 2.10  Cancellation of Securities; Destruction Thereof.  All
Securities and Coupons surrendered for payment, redemption, registration of
transfer or exchange, or for credit against any payment in respect of a sinking
or analogous fund, if surrendered to the Issuer or any agent of the Issuer or
the Trustee, shall be delivered to the Trustee for cancellation or, if
surrendered to the Trustee, shall be cancelled by it; and no Securities or
Coupons shall be issued in lieu thereof except as expressly permitted by any of
the provisions of this Indenture.  The Trustee shall destroy cancelled
Securities and Coupons held by it and deliver a certificate of destruction to
the Issuer.  If the Issuer shall acquire any of the Securities or Coupons, such
acquisition shall not operate as a redemption or satisfaction of the
indebtedness represented by such Securities or Coupons unless and until the
same are delivered to the Trustee for cancellation.

         SECTION 2.11 Temporary Securities.  Pending the preparation of
definitive Securities for any series, the Issuer may execute and the Trustee
shall authenticate and deliver temporary Securities for such series (printed,
lithographed, typewritten or otherwise reproduced, in each case in form
satisfactory to the Trustee).  Temporary Securities of any series shall be
issuable as Registered Securities without Coupons, or as Unregistered
Securities with or without Coupons attached thereto, of any authorized
denomination, and substantially in the form of the definitive Securities of
such series but with such omissions, insertions and variations as may be
appropriate for temporary Securities, all as may be

<PAGE>   26
                                       18

determined by the Issuer with the concurrence of the Trustee.  Temporary
Securities may contain such reference to any provisions of this Indenture as
may be appropriate.  Every temporary Security shall be executed by the Issuer
and be authenticated by the Trustee upon the same conditions and in
substantially the same manner, and with like effect, as the definitive
Securities.  Without unreasonable delay the Issuer shall execute and shall
furnish definitive Securities of such series and thereupon temporary Securities
of such series may be surrendered in exchange therefor without charge at each
office or agency to be maintained by the Issuer for that purpose pursuant to
Section 3.2, and in the case of Unregistered Securities, together with any
unmatured Coupons and any matured Coupons in default appertaining thereto, at
any agency maintained by the Issuer for such purpose as specified pursuant to
Section 2.3, and the Trustee shall authenticate and deliver in exchange for
such temporary Securities of such series a like aggregate principal amount of
definitive Securities of the same series of authorized denominations.  Until so
exchanged, the temporary Securities and any unmatured Coupons appertaining
thereto of any series shall be entitled to the same benefits under this
Indenture as definitive Securities and any unmatured Coupons appertaining
thereto of such series.  The provisions of this Section are subject to any
restrictions or limitations on the issue and delivery of temporary Unregistered
Securities of any series that may be established pursuant to Section 2.3
(including any provision that Unregistered Securities of such series initially
be issued in the form of a single global Unregistered Security to be delivered
to a depositary or agency of the Issuer located outside the United States and
the procedures pursuant to which definitive Unregistered Securities of such
series would be issued in exchange for such temporary global Unregistered
Security).


                                 ARTICLE THREE

                            COVENANTS OF THE ISSUER

         SECTION 3.1  Payment of Principal and Interest.  The Issuer covenants
and agrees for the benefit of each series of Securities that it will duly and
punctually pay or cause to be paid the principal of, and interest on, each of
the Securities of such series at the place or places, at the respective times
and in the manner provided in such Securities.  Except as specified in Section
2.3, the interest on Securities with Coupons attached (together with any
additional amounts payable pursuant to the terms of such Securities) shall be
payable only upon presentation and

<PAGE>   27
                                       19

surrender of the several Coupons for such interest installments as are
evidenced thereby as they severally mature. Except as specified in Section 2.3,
the interest on any temporary Unregistered Securities (together with any
additional amounts payable pursuant to the terms of such Securities) shall be
paid, as to the installments of interest evidenced by Coupons attached thereto,
if any, only upon presentation and surrender thereof and, as to the other
installments of interest, if any, only upon presentation of such Securities for
notation thereon of the payment of such interest.  Each installment of interest
on the Registered Securities of any series may be paid by mailing checks for
such interest payable to or upon the written order of the holders of Registered
Securities entitled thereto as they shall appear on the registry books of the
Issuer.

         SECTION 3.2  Offices for Payments, etc.  So long as any of the
Securities remain outstanding, the Issuer will maintain the following for each
series: an office or agency (a) where the Registered Securities may be
presented for payment, (b) where the Registered Securities may be presented for
registration of transfer and for exchange as in this Indenture provided and (c)
where notices and demands to or upon the Issuer in respect of the Registered
Securities or of this Indenture may be served.

         The Issuer will maintain one or more agencies in a city or cities
located outside the United States (including any city in which such an agency
is required to be maintained under the rules of any stock exchange on which the
Securities of such series are listed) where the Unregistered Securities, if
any, of each series and Coupons, if any, appertaining thereto may be presented
for payment.  No payment on any Unregistered Security or Coupon will be made
upon presentation of such Unregistered Security or Coupon at an agency of the
Issuer within the United States nor will any payment be made by transfer to an
account in, or by mail to an address in, the United States unless pursuant to
applicable United States laws and regulations then in effect such payment can
be made without adverse tax consequences to the Issuer.  Notwithstanding the
foregoing, payments in U.S. dollars on Unregistered Securities of any series
and Coupons appertaining thereto which are denominated in U.S. dollars may be
made at an agency of the Issuer maintained in the Borough of Manhattan, The
City of New York if such payment in U.S. dollars at each agency maintained by
the Issuer outside the United States for payment on such Unregistered
Securities is illegal or effectively precluded by exchange controls or other
similar restrictions.

<PAGE>   28
                                       20

         The Issuer will give to the Trustee written notice of the location of
any such office or agency and of any change of location thereof.  With respect
to each series of Securities and Coupons whose terms are established pursuant
to Section 2.3, the Issuer hereby designates the Corporate Trust Office as the
initial office to be maintained by it for each such purpose.  In case the
Issuer shall fail to so designate or maintain any such office or agency or
shall fail to give such notice of the location or of any change in the location
thereof, presentations and demands may be made and notices may be served at the
Corporate Trust Office.

         SECTION 3.3  Appointment to Fill a Vacancy in Office of Trustee.  The
Issuer, whenever necessary to avoid or fill a vacancy in the office of Trustee,
will appoint, in the manner provided in Section 6.10, a Trustee, so that there
shall at all times be a Trustee with respect to each series of Securities
hereunder.

         SECTION 3.4  Paying Agents.  Whenever the Issuer shall appoint a
paying agent other than the Trustee with respect to the Securities of any
series, it will cause such paying agent to execute and deliver to the Trustee
an instrument in which such agent shall agree with the Trustee, subject to the
provisions of this Section,

                 (a) that it will hold all sums received by it as such agent
         for the payment of the principal of or interest on the Securities of
         such series (whether such sums have been paid to it by the Issuer or
         by any other obligor on the Securities of such series) in trust for
         the benefit of the holders of the Securities of such series or the
         Coupons appertaining thereto or of the Trustee, and
                 (b) that it will give the Trustee notice of any failure by the
         Issuer (or by any other obligor on the Securities of such series) to
         make any payment of the principal of or interest on the Securities of
         such series when the same shall be due and payable.

         The Issuer will, on or prior to each due date of the principal of or
interest on the Securities of such series, deposit with the paying agent a sum
sufficient to pay such principal or interest so becoming due, and (unless such
paying agent is the Trustee) the Issuer will promptly notify the Trustee of any
failure to take such action.

         If the Issuer shall act as its own paying agent with respect to the
Securities or the Coupons appertaining thereto of any series, it will, on

<PAGE>   29
                                       21

or before each due date of the principal of or interest on the Securities or
the Coupons appertaining thereto of such series, set aside, segregate and hold
in trust for the benefit of the holders of the Securities or the Coupons
appertaining thereto of such series a sum sufficient to pay such principal or
interest so becoming due.  The Issuer will promptly notify the Trustee of any
failure to take such action.

         Anything in this Section to the contrary notwithstanding, the Issuer
may at any time, for the purpose of obtaining a satisfaction and discharge with
respect to one or more or all series of Securities hereunder, or for any other
reason, pay or cause to be paid to the Trustee all sums held in trust for any
such series by the Issuer or any paying agent hereunder, as required by this
Section, such sums to be held by the Trustee upon the trusts herein contained.

         Anything in this Section to the contrary notwithstanding, the
agreement to hold sums in trust as provided in this Section is subject to the
provisions of Sections 10.3 and 10.4.

         SECTION 3.5  Written Statement to Trustee.  The Issuer will deliver to
the Trustee on or before April 30 in each year (beginning with April 30, 1989)
a written statement, signed by two of its officers (which need not comply with
Section 11.5), stating that in the course of the performance of their duties as
officers of the Issuer they would normally have knowledge of any default by the
Issuer in the performance or fulfillment of any covenant, agreement or
condition contained in this Indenture, stating whether or not they have
knowledge of any such default and, if so, specifying each such default of which
the signers have knowledge and the nature thereof.

         SECTION 3.6  Luxembourg Publications.  In the event of the publication
of any notice pursuant to Section 5.11, 6.10(a), 6.11, 8.2, 10.4 or 12.2, the
party making such publication in London shall also, to the extent that notice
is required to be given to Holders of Securities of any series by applicable
Luxembourg law or stock exchange regulation, as evidenced by an Officers'
Certificate delivered to such party, make a similar publication in Luxembourg.

<PAGE>   30
                                       22

                                  ARTICLE FOUR

                   SECURITYHOLDERS' LISTS AND REPORTS BY THE
                             ISSUER AND THE TRUSTEE

         SECTION 4.1  Issuer to Furnish Trustee Information as to Names and
Addresses of Securityholders.  The Issuer covenants and agrees that it will
furnish or cause to be furnished to the Trustee a list in such form as the
Trustee may reasonably require of the names and addresses of the holders of the
Securities of each series:

                 (a) semiannually and not more that 15 days after each record
         date for the payment of interest on such Securities, as hereinabove
         specified, as of such record date and on dates to be determined
         pursuant to Section 2.3 for not-interest bearing securities in each
         year, and

                 (b) at such other times as the Trustee may request in writing,
         within 30 days after receipt by the Issuer of any such request as of a
         date not more than 15 days prior to the time such information is
         furnished,

PROVIDED that if and so long as the Trustee shall be the Security registrar for
such series and all of the Securities of such series are Registered Securities,
such list shall not be required to be furnished.  The Trustee shall, at the
request of the Issuer, provide such list to the Issuer for so long as the
Trustee shall be the Security registrar.

         SECTION 4.2  Preservation and Disclosure of Securityholders' Lists.
(a) The Trustee shall preserve, in as current a form as is reasonably
practicable, all information as to the names and addresses of the holders of
each series of Securities (i) contained in the most recent list furnished to it
as provided in Section 4.1, (ii) received by it in the capacity of Security
registrar for such series, if so acting and (iii) filed with it within the
preceding two years pursuant to Section 4.4(c)(ii).  The Trustee may destroy
any list furnished to it as provided in Section 4.1 upon receipt of a new list
so furnished.

         (b) In case three or more holders of Securities (hereinafter referred
to as "applicants") apply in writing to the Trustee and furnish to the Trustee
reasonable proof that each such applicant has owned a Security for a period of
at least six months preceding the date of such application, and such
application states that the applicants desire to communicate with other holders
of Securities of a particular series (in which case the applicants must all
hold Securities of such series) or with Holders of all

<PAGE>   31
                                       23

Securities with respect to their rights under this Indenture or under such
Securities and such application is accompanied by a copy of the form of proxy
or other communication which such applicants propose to transmit, then the
Trustee shall, within five Business Days after the receipt of such application,
at its election, either

                 (i) afford to such applicants access to the information
         preserved at the time by the Trustee in accordance with the provisions
         of subsection (a) of this Section, or

                 (ii) inform such applicants as to the approximate number of
         holders of Securities of such series or all Securities, as the case
         may be, whose names and addresses appear in the information preserved
         at the time by the Trustee, in accordance with the provisions of
         subsection (a) of this Section, and as to the approximate cost of
         mailing to such Securityholders the form of proxy or other
         communication, if any, specified in such application.

         If the Trustee shall elect not to afford to such applicants access to
such information, the Trustee shall, upon the written request of such
applicants, mail to each Securityholder of such series or all Securities, as
the case may be, whose name and address appears in the information preserved at
the time by the Trustee in accordance with the provisions of subsection (a) of
this Section a copy of the form of proxy or other communication which is
specified in such request, with reasonable promptness after a tender to the
Trustee of the material to be mailed and of payment, or provision for the
payment, of the reasonable expenses of mailing, unless within five days after
such tender, the Trustee shall mail to such applicants and file with the
Commission together with a copy of the material to be mailed, a written
statement to the effect that, in the opinion of the Trustee, such mailing would
be contrary to the best interests of the holders of Securities of such series
or all Securities, as the case may be, or would be in violation of applicable
law.  Such written statement shall specify the basis of such opinion.  If the
Commission, after opportunity for a hearing upon the objections specified in
the written statement so filed, shall enter an order refusing to sustain any of
such objections or if, after the entry of an order sustaining one or more of
such objections, the Commission shall find, after notice and opportunity for
hearing, that all the objections so sustained have been met, and shall enter an
order so declaring, the Trustee shall mail copies of such material to all such
Securityholders with reasonable promptness after the entry of such order and
the renewal of such tender; otherwise the Trustee shall

<PAGE>   32
                                       24

be relieved of any obligation or duty to such applicants respecting their
application.

         (c) Each and every holder of Securities and Coupons, by receiving and
holding the same, agrees with the Issuer and the Trustee that neither the
Issuer nor the Trustee nor any agent of the Issuer or the Trustee shall be held
accountable by reason of the disclosure of any such information as to the names
and addresses of the holders of Securities in accordance with the provisions of
subsection (b) of this Section, regardless of the source from which such
information was derived, and that the Trustee shall not be held accountable by
reason of mailing any material pursuant to a request made under such subsection
(b).

         SECTION 4.3  Reports by the Issuer.  The Issuer covenants:

                 (a) to file with the Trustee, within 15 days after the Issuer
         is required to file the same with the Commission, copies of the annual
         reports and of the information, documents, any other reports (or
         copies of such portions of any of the foregoing as the Commission may
         from time to time by rules and regulations prescribe) which the Issuer
         may be required to file with the Commission pursuant to Section 13 or
         Section 15(d) of the Securities Exchange Act of 1934, of if the Issuer
         is not required to file information, documents, or reports pursuant to
         either of such Sections, then to file with the Trustee and the
         Commission, in accordance with rules and regulations prescribed from
         time to time by the Commission, such of the supplementary and periodic
         information, documents, and reports which may be required pursuant to
         Section 13 of the Securities Exchange Act of 1934, or in respect of a
         security listed and registered on a national securities exchange as
         may be prescribed from time to time in such rules and regulations;

                 (b) to file with the Trustee and the Commission, in accordance
         with rules and regulations prescribed from time to time by the
         Commission, such additional information, documents, and reports with
         respect to compliance by the Issuer with the conditions and covenants
         provided for in this Indenture as may be required from time to time by
         such rules and regulations; and

                 (c) to transmit by mail to the holders of Securities, within
         30 days after the filing thereof with the Trustee, such summaries of
         any information, documents and reports required to be filed by the
         Issuer pursuant to subsections (a) and (b) of this Section as may be
         required

<PAGE>   33
                                       25

         to be transmitted to such Holders by rules and regulations prescribed
from time to time by the Commission.

         SECTION 4.4  Reports by the Trustee.  (a) On or before July 15 in each
year following the date hereof, so long as any Securities are Outstanding
hereunder, the Trustee shall transmit by mail as provided below to the
Securityholders of each series, as hereinafter in this Section provided, a
brief report dated as of the preceding May 15 with respect to:

                 (i) its eligibility under Section 6.9 and its qualification
         under Section 6.8, or in lieu thereof, if to the best of its knowledge
         it has continued to be eligible and qualified under such Sections, a
         written statement to such effect;

                 (ii) the character and amount of any advances (and if the
         Trustee elects so to state, the circumstances surrounding the making
         thereof) made by the Trustee (as such) which remain unpaid on the date
         of such report and for the reimbursement of which it claims or may
         claim a lien or charge, prior to that of the Securities of any series,
         on any property or funds held or collected by it as Trustee, except
         that the Trustee shall not be required (but may elect) to report such
         advances if such advances so remaining unpaid aggregate not more than
         1/2 of 1% of the principal amount of the securities of any series
         Outstanding on the date of such report;

                 (iii) the amount, interest rate, and maturity date of all
         other indebtedness owing by the Issuer (or by any other obligor on the
         Securities) to the Trustee in its individual capacity on the date of
         such report, with a brief description of any property held as
         collateral security therefor, except any indebtedness based upon a
         creditor relationship arising in any manner described in Section
         6.13(b)(2), (3), (4) or (6);

                 (iv) the property and funds, if any, physically in the
         possession of the Trustee (as such) on the date of such report;

                 (v) any additional issue of Securities which the Trustee has
         not previously reported; and

                 (vi) any action taken by the Trustee in the performance of its
         duties under this Indenture which it has not previously reported and
         which in its opinion materially affects the Securities, except action
         in respect of a default, notice of which has been or is to be withheld
         by it in accordance with the provisions of Section 5.11.

<PAGE>   34
                                       26

         (b) The Trustee shall transmit to the Securityholders of each series,
as provided in subsection (c) of this Section, a brief report with respect to
the character and amount of any advances (and if the Trustee elects so to
state, the circumstances surrounding the making thereof) made by the Trustee,
as such, since the date of the last report transmitted pursuant to the
provisions of subsection (a) of this Section (or if no such report has yet been
so transmitted, since the date of this Indenture) for the reimbursement of
which it claims or may claim a lien or charge prior to that of the Securities
of such series on property or funds held or collected by it as Trustee and
which it has not previously reported pursuant to this subsection (b), except
that the Trustee shall not be required (but may elect) to report such advances
if such advances remaining unpaid at any time aggregate 10% or less of the
principal amount of Securities of such series outstanding at such time, such
report to be transmitted within 90 days after such time.

         (c) Reports pursuant to this Section shall be transmitted by mail:

                 (i) to all registered Holders of Securities, as the names and
         addresses of such Holders appear upon the registry books of the
         Issuer;

                 (ii) to such other Holders of Securities as have, within two
         years preceding such transmission, filed their names and addresses
         with the Trustee for that purpose; and

                 (iii) except in the case of reports pursuant to subsection
         (b), to each Holder of a Security whose name and address are preserved
         at the time by the Trustee as provided in Section 4.2(a).

         (d) A copy of each such report shall, at the time of such transmission
to Securityholders, be furnished to the Issuer and be filed by the Trustee with
each stock exchange upon which the Securities of any applicable series are
listed and also with the Commission.  The Issuer agrees to notify the Trustee
with respect to any series when and as the Securities of such series become
admitted to trading on any national securities exchange.

<PAGE>   35
                                       27

                                  ARTICLE FIVE

                  REMEDIES OF THE TRUSTEE AND SECURITYHOLDERS
                              ON EVENT OF DEFAULT

         SECTION 5.1  Event of Default Defined; Acceleration of Maturity;
Waiver of Default.  "Event of Default" with respect to Securities of any series
wherever used herein, means each one of the following events which shall have
occurred and be continuing (whatever the reason for such Event of Default and
whether it shall be voluntary or involuntary or be effected by operation of law
or pursuant to any judgment, decree or order of any court or any order, rule or
regulation of any administrative or governmental body):

                 (a) default in the payment of any installment of interest upon
         any of the Securities of such series as and when the same shall become
         due and payable, and continuance of such default for a period of 30
         days; or

                 (b) default in the payment of all or any part of the principal
         on any of the Securities of such series as and when the same shall
         become due and payable either at maturity, upon redemption, by
         declaration or otherwise; or

                 (c) default in the payment of any sinking fund installment as
         and when the same shall become due and payable by the terms of the
         Securities of such series; or

                 (d) default in the performance, or breach, of any covenant or
         warranty of the Issuer in respect of the Securities of such series
         (other than a covenant or warranty in respect of the Securities of
         such series a default in whose performance or whose breach is
         elsewhere in this Section specifically dealt with), and continuance of
         such default or breach for a period of 90 days after there has been
         given, by registered or certified mail, to the Issuer by the Trustee
         or to the Issuer and the Trustee by the Holders of at least 25% in
         principal amount of the Outstanding Securities of all series affected
         thereby, a written notice specifying such default or breach and
         requiring it to be remedied and stating that such notice is a "Notice
         of Default" hereunder; or

                 (e) a court having jurisdiction in the premises shall enter a
         decree or order for relief in respect of the Issuer in an involuntary
         case under any applicable bankruptcy, insolvency or other similar law
         now or hereafter in effect, or appointing a receiver, liquidator,
         assignee, custodian, trustee or sequestrator (or similar official) of
         the

<PAGE>   36
                                       28

         Issuer or for any substantial part of its property or ordering the
         winding up or liquidation of its affairs, and such decree or order
         shall remain unstayed and in effect for a period of 90 consecutive
         days; or

                 (f) the Issuer shall commence a voluntary case under any
         applicable bankruptcy, insolvency or other similar law now or
         hereafter in effect, or consent to the entry of an order for relief in
         an involuntary case under any such law, or consent to the appointment
         of or taking possession by a receiver, liquidator, assignee,
         custodian, trustee or sequestrator (or similar official) of the Issuer
         or for any substantial part of its property, or make any general
         assignment for the benefit of creditors; or

                 (g) any other Event of Default provided in the supplemental
         indenture or resolution of the Board of Directors under which such
         series of Securities is issued or in the form of Security for such
         series.

If an Event of Default described in clauses (a), (b), (c) or (d) above (if the
Event of Default under clause (d) is with respect to less than all series of
Securities then Outstanding) occurs and is continuing, then, and in each and
every such case, unless the principal of all of the Securities of such series
shall have already become due and payable, either the Trustee or the holders of
not less than 25% in aggregate principal amount of the Securities of such
series then Outstanding hereunder (each such series voting as a separate class)
by notice in writing to the Issuer (and to the Trustee if given by
Securityholders), may declare the entire principal (or, if the Securities of
such series are Original Issue Discount Securities, such portion of the
principal amount as may be specified in the terms of such series) of all
Securities of such series and the interest accrued thereon, if any, to be due
and payable immediately, and upon any such declaration the same shall become
immediately due and payable.  If an Event of Default described in clause (d)
(if the Event of Default under clause (d) is with respect to all series of
Securities then Outstanding), (e) or (f) occurs and is continuing, then and in
each and every such case, unless the principal of all the Securities shall have
already become due and payable, either the Trustee or the Holders of not less
than 25% in

<PAGE>   37
                                       29

aggregate principal amount of all the Securities then Outstanding hereunder
(treated as one class), by notice in writing to the Issuer (and to the Trustee
if given by Securityholders), may declare the entire principal (or, if any
Securities are Original Issue Discount Securities, such portion of the
principal as may be specified in the terms thereof) of all the Securities then
Outstanding and interest accrued thereon, if any, to be due and payable
immediately, and upon any such declaration the same shall become immediately
due and payable.

         The foregoing provisions, however, are subject to the condition that
if, at any time after the principal (or, if the Securities are Original Issue
Discount Securities, such portion of the principal as may be specified in the
terms thereof) of the Securities of any series (or of all the Securities, as
the case may be) shall have been so declared due and payable, and before any
judgment or decree for the payment of the moneys due shall have been obtained
or entered as hereinafter provided, the Issuer shall pay or shall deposit with
the Trustee a sum sufficient to pay all matured installments of interest upon
all the Securities of such series (or of all the Securities, as the case may
be) and the principal of any and all Securities of such series (or of all the
Securities, as the case may be) which shall have become due otherwise than by
acceleration (with interest upon such principal and, to the extent that payment
of such interest is enforceable under applicable law, on overdue installments
of interest, at the same rate as the rate of interest or Yield to Maturity (in
the case of Original Issue Discount Securities) specified in the Securities of
such series (or at the respective rates of interest or Yields to Maturity of
all the Securities, as the case may be, to the date of such payment or deposit)
and such amount as shall be sufficient to cover reasonable compensation to the
Trustee, its agents, attorneys and counsel, and all other expenses and
liabilities incurred, and all advances made, by the Trustee except as a result
of negligence or bad faith, and all other amounts due to the Trustee or any
predecessor Trustee pursuant to Section 6.6, and if any and all Events of
Default under the Indenture, other than the non-payment of the principal of
Securities which shall have become due by acceleration, shall have been cured,
waived or otherwise remedied as provided herein -- then and in every such case
the holders of a majority in aggregate principal amount of all the Securities
of such series, each series voting as a separate class (or of all the
Securities, as the case may be, voting as a single class) then outstanding, by
written notice to the Issuer and to the Trustee, may waive all defaults with
respect to such series (or with respect to all the

<PAGE>   38
                                       30

Securities, as the case may be) and rescind and annul such declaration and its
consequences, but no such waiver or rescission and annulment shall extend to or
shall affect any subsequent default or shall impair any right consequent
thereon.

         For all purposes under this Indenture, if a portion of the principal
of any Original Issue Discount Securities shall have been accelerated and
declared due and payable pursuant to the provisions hereof, then, from and
after such declaration, unless such declaration has been rescinded and
annulled, the principal amount of such Original Issue Discount Securities shall
be deemed, for all purposes hereunder, to be such portion of the principal
thereof as shall be due and payable as a result of such acceleration, and
payment of such portion of the principal thereof as shall be due and payable as
a result of such acceleration, together with interest, if any, thereon and all
other amounts owing thereunder, shall constitute payment in full of such
Original Issue Discount Securities.

         SECTION 5.2  Collection of Indebtedness by Trustee, Trustee May Prove
Debt.  The Issuer covenants that (a) in case default shall be made in the
payment of any installment of interest on any of the Securities of any series
when such interest shall have become due and payable, and such default shall
have continued for a period of 30 days or (b) in case default shall be made in
the payment of all or any part of the principal of any of the Securities of any
series when the same shall have become due and payable, whether upon maturity
of the Securities of such series or upon any redemption or by declaration or
otherwise -- then upon demand of the Trustee, the Issuer will pay to the
Trustee for the benefit of the Holders of the Securities of such series the
whole amount that then shall have become due and payable on all Securities of
such series, and Coupons appertaining thereto, for principal or interest, as
the case may be (with interest to the date of such payment upon the overdue
principal and, to the extent that payment of such interest is enforceable under
applicable law, on overdue installments of interest at the same rate as the
rate of interest or Yield to Maturity (in the case of Original Issue Discount
Securities) specified in the Securities of such series); and in addition
thereto, such further amount as shall be sufficient to cover the costs and
expenses of collection, including reasonable compensation to the Trustee and
each predecessor Trustee, their respective agents, attorneys and counsel, and
any expenses and liabilities incurred, and all advances made, by the Trustee
and each predecessor Trustee except as a result of its negligence or bad faith,
and all other amounts due to the Trustee or any predecessor Trustee pursuant to
Section 6.6.

<PAGE>   39
                                       31

         Until such demand is made by the Trustee, the Issuer may pay the
principal of and interest on the Securities of any series to the holders,
whether or not the principal of and interest on the Securities of such series
be overdue.

         In case the Issuer shall fail forthwith to pay such amounts upon such
demand, the Trustee, in its own name and as trustee of an express trust, shall
be entitled and empowered to institute any action or proceedings at law or in
equity for the collection of the sums so due and unpaid, and may prosecute any
such action or proceedings to judgment or final decree, and may enforce any
such judgment or final decree against the Issuer or other obligor upon such
Securities and collect in the manner provided by law out of the property of the
Issuer or other obligor upon such Securities, wherever situated, the moneys
adjudged or decreed to be payable.

         In case there shall be pending proceedings relative to the Issuer or
any other obligor upon the Securities under Title 11 of the United States Code
or any other applicable Federal or state bankruptcy, insolvency or other
similar law, or in case a receiver, assignee or trustee in bankruptcy or
reorganization, liquidator, sequestrator or similar official shall have been
appointed for or taken possession of the Issuer or its property or such other
obligor, or in case of any other comparable judicial proceedings relative to
the Issuer or other obligor upon the Securities of any series, or Coupons
appertaining thereto, or to the creditors or property of the Issuer or such
other obligor, the Trustee, irrespective of whether the principal of any
Securities shall then be due and payable as therein expressed or by declaration
or otherwise and irrespective of whether the Trustee shall have made any demand
pursuant to the provisions of this Section, shall be entitled and empowered, by
intervention in such proceedings or otherwise:

                 (a) to file and prove a claim or claims for the whole amount
         of principal and interest (or, if the Securities of any series are
         Original Issue Discount Securities, such portion of the principal
         amount as may be specified in the terms of such series) owing and
         unpaid in respect of the Securities of any series, and to file such
         other papers or documents as may be necessary or advisable in order to
         have the claims of the Trustee (including any claim for reasonable
         compensation to the Trustee and each predecessor Trustee, and their
         respective agents, attorneys and counsel, and for reimbursement of all
         expenses and liabilities incurred, and all advances made, by the
         Trustee and

<PAGE>   40
                                       32

         each predecessor Trustee, except as a result of negligence or bad
         faith, and all other amounts due to the Trustee or any predecessor
         Trustee pursuant to Section 6.6) and of the Securityholders allowed in
         any judicial proceedings relative to the Issuer or other obligor upon
         the Securities of any series, or to the creditors or property of the
         Issuer or such other obligor,

                 (b) unless prohibited by applicable law and regulations, to
         vote on behalf of the holders of the Securities of any series in any
         election of a trustee or a standby trustee in arrangement,
         reorganization, liquidation or other bankruptcy or insolvency
         proceedings or person performing similar functions in comparable
         proceedings, and

                 (c) to collect and receive any moneys or other property
         payable or deliverable on any such claims, and to distribute all
         amounts received with respect to the claims of the Securityholders and
         of the Trustee on their behalf; and any trustee, receiver, or
         liquidator, custodian or other similar official is hereby authorized
         by each of the Securityholders to make payments to the Trustee, and,
         in the event that the Trustee shall consent to the making of payments
         directly to the Securityholders, to pay to the Trustee such amounts as
         shall be sufficient to cover reasonable compensation to the Trustee,
         each predecessor Trustee and their respective agents, attorneys and
         counsel, and all other expenses and liabilities incurred, and all
         advances made, by the Trustee and each predecessor Trustee except as a
         result of negligence or bad faith and all other amounts due to the
         Trustee or any predecessor Trustee pursuant to Section 6.6.

         Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or vote for or accept or adopt on behalf of any
Securityholder any plan or reorganization, arrangement, adjustment or
composition affecting the Securities or Coupons appertaining thereto of any
series or the rights of any Holder thereof, or to authorize the Trustee to vote
in respect of the claim of any Securityholder in any such proceeding except, as
aforesaid, to vote for the election of a trustee in bankruptcy or similar
person.

         All rights of action and of asserting claims under this Indenture, or
under any of the Securities, or Coupons appertaining thereto, may be enforced
by the Trustee without the possession of any of the Securities, or Coupons
appertaining thereto, or the production thereof on any trial or other
proceedings relative thereto, and any such action or proceedings

<PAGE>   41
                                       33

instituted by the Trustee shall be brought in its own name as trustee of an
express trust, and any recovery of judgment, subject to the payment of the
expenses, disbursements, compensation and all other amounts due pursuant to
Section 6.6 to the Trustee, each predecessor Trustee and their respective
agents and attorneys, shall be for the ratable benefit of the holders of the
Securities, or Coupons appertaining thereto, in respect of which such action
was taken.

         In any proceedings brought by the Trustee (and also any proceedings
involving the interpretation of any provision of this Indenture to which the
Trustee shall be a party) the Trustee shall be held to represent all the
holders of the Securities in respect to which such action was taken, and it
shall not be necessary to make any holders of such Securities parties to any
such proceedings.

         SECTION 5.3  Application of Proceeds.  Any moneys collected by the
Trustee pursuant to this Article in respect of any series shall be applied in
the following order at the date or dates fixed by the Trustee and, in case of
the distribution of such moneys on account of principal or interest, upon
presentation of the several Securities, and Coupons appertaining thereto, in
respect of which monies have been collected and stamping (or otherwise noting)
thereon the payment, or issuing Securities of such series in reduced principal
amounts in exchange for the presented Securities of like series if only
partially paid, or upon surrender thereof if fully paid:

                 FIRST: To the payment of costs and expenses applicable to such
         series in respect of which monies have been collected, including
         reasonable compensation to the Trustee and each predecessor Trustee
         and their respective agents and attorneys and of all expenses and
         liabilities incurred, and all advances made, by the Trustee and each
         predecessor Trustee except as a result of negligence or bad faith, and
         all other amounts due to the Trustee or any predecessor Trustee
         pursuant to Section 6.6;

                 SECOND: In case the principal of the Securities of such series
         in respect of which moneys have been collected shall not have become
         and be then due and payable, to the payment of interest on the
         Securities of such series in default in the order of the maturity of
         the installments of such interest, with interest (to the extent that
         such interest has been collected by the Trustee) upon the overdue
         installments of interest at the same rate as the rate of interest or
         Yield

<PAGE>   42
                                       34

         to Maturity (in the case of Original Issue Discount Securities)
         specified in such Securities, such payments to be made ratably to the
         persons entitled thereto, without discrimination or preference;

                 THIRD: In case the principal of the Securities of such series
         in respect of which moneys have been collected shall have become and
         shall be then due and payable, to the payment of the whole amount then
         owing and unpaid upon all the Securities of such series for principal
         and interest, with interest upon the overdue principal, and (to the
         extent that such interest has been collected by the Trustee) upon
         overdue installments of interest at the same rate as the rate of
         interest or Yield to Maturity (in the case of Original Issue Discount
         Securities) specified in the Securities of such series; and in case
         such moneys shall be insufficient to pay in full the whole amount so
         due and unpaid upon the Securities of such series, then to the payment
         of such principal and interest or yield to maturity, without
         preference or priority of principal over interest or yield to
         maturity, or of interest or yield to maturity over principal, or of
         any installment of interest over any other installment of interest, or
         of any Security of such series over any other Security of such series,
         ratably to the aggregate of such principal and accrued and unpaid
         interest or yield to maturity; and

                 FOURTH: To the payment of the remainder, if any, to the Issuer
         or any other person lawfully entitled thereto.

         SECTION 5.4  Suits for Enforcement.  In case an Event of Default has
occurred, has not been waived and is continuing, the Trustee may in its
discretion proceed to protect and enforce the rights vested in it by this
Indenture by such appropriate judicial proceedings as the Trustee shall deem
most effectual to protect and enforce any of such rights, either at law or in
equity or in bankruptcy or otherwise, whether for the specific enforcement of
any covenant or agreement contained in this Indenture or in aid of the exercise
of any power granted in this Indenture or to enforce any other legal or
equitable right vested in the Trustee by this Indenture or by law.

         SECTION 5.5  Restoration of Rights on Abandonment of Proceedings.  In
case the Trustee shall have proceeded to enforce any right under this Indenture
and such proceedings shall have been discontinued

<PAGE>   43
                                       35

or abandoned for any reason, or shall have been determined adversely to the
Trustee, then and in every such case the Issuer and the Trustee shall be
restored respectively to their former positions and rights hereunder, and all
rights, remedies and powers of the Issuer, the Trustee and the Securityholders
shall continue as though no such proceedings had been taken.

         SECTION 5.6  Limitations on Suits by Securityholders.  No holder of
any Security of any series or of any Coupon appertaining thereto shall have any
right by virtue or by availing of any provision of this Indenture to institute
any action or proceeding at law or in equity or in bankruptcy or otherwise upon
or under or with respect to this Indenture, or for the appointment of a
trustee, receiver, liquidator, custodian or other similar official or for any
other remedy hereunder, unless such holder previously shall have given to the
Trustee written notice of default and in of the continuance thereof, as
hereinbefore provided, and unless also the holders of not less than 25% in
aggregate principal amount of the Securities of such series then Outstanding
shall have made written request upon the Trustee to institute such action or
proceedings in its own name as trustee hereunder and shall have offered to the
Trustee such reasonable indemnity as it may require against the costs, expenses
and liabilities to be incurred therein or thereby and the Trustee for 60 days
after its receipt of such notice, request and offer of indemnity shall have
failed to institute any such action or proceeding and no direction inconsistent
with such written request shall have been given to the Trustee pursuant to
Section 5.9; it being understood and intended, and being expressly covenanted
by the taker and Holder of every Security or Coupon with every other taker and
Holder and the Trustee, that no one or more Holders of Securities of any series
or of any Coupon appertaining thereto shall have any right in any manner
whatever by virtue or by availing of any provision of this Indenture to affect,
disturb or prejudice the rights of any other such Holder of Securities or
Coupons, or to obtain or seek to obtain priority over or preference to any
other such Holder or to enforce any right under this Indenture, except in the
manner herein provided and for the equal, ratable and common benefit of all
Holders of Securities of the applicable series or of any Coupon appertaining
thereto.  For the protection and enforcement of the provisions of this Section,
each and every Securityholder and the Trustee shall be entitled to such relief
as can be given either at law or in equity.

<PAGE>   44
                                       36

         SECTION 5.7  Unconditional Right of Securityholders to Institute
Certain Suits.  Notwithstanding any other provision in this Indenture and any
provision of any Security, the right of any holder of any Security or Coupon to
receive payment of the principal of an interest on such Security or Coupon on
or after the respective due dates expressed in such Security or Coupon, or in
any Coupon appertaining thereto, or to institute suit for the enforcement of
any such payment on or after such respective dates, shall not be impaired or
affected without the consent of such Holder.

         SECTION 5.8  Powers and Remedies Cumulative; Delay or Omission Not
Waiver of Default.  Except as provided in Section 2.9, no right or remedy
herein conferred upon or reserved to the Trustee or to the Securityholders is
intended to be exclusive of any other right or remedy, and every right and
remedy shall, to the extent permitted by law, be cumulative and in addition to
every other right and remedy given hereunder or now or hereafter existing at
law or in equity or otherwise.  The assertion or employment of any right or
remedy hereunder, or otherwise, shall not prevent the concurrent assertion or
employment of any other appropriate right or remedy.

         No delay or omission of the Trustee or of any Securityholder to
exercise any right or power accruing upon any Event of Default occurring and
continuing as aforesaid shall impair any such right or power or shall be
construed to be a waiver of any such Event of Default or an acquiescence
therein; and, subject to Section 5.6, every power and remedy given by this
Indenture or by law to the Trustee or to the Securityholders may be exercised
from time to time, and as often as shall be deemed expedient, by the Trustee or
by the Securityholders.

         SECTION 5.9  Control by Securityholders.  The Holders of a majority in
aggregate principal amount of the Securities of each series affected (with each
series voting as a separate class) at the time Outstanding shall have the right
to direct the time, method, and place of conducting any proceeding for any
remedy available to the Trustee, or exercising any trust or power conferred on
the Trustee with respect to the Securities of such series by this Indenture;
PROVIDED that such direction shall not be otherwise than in accordance with law
and the provisions of this Indenture and PROVIDED FURTHER that (subject to the
provisions of Section 6.1) the Trustee shall have the right to decline to
follow any such direction if the Trustee, being advised by counsel, shall
determine that the action or proceeding so directed may not lawfully be

<PAGE>   45
                                       37

taken or if the Trustee in good faith by its board of directors, the executive
committee, or a trust committee of directors or Responsible Officers of the
Trustee shall determine that the action or proceedings so directed would
involve the Trustee in personal liability or if the Trustee in good faith shall
so determine that the actions or forebearances specified in or pursuant to such
direction would be unduly prejudicial to the interests of Holders of the
Securities of all series so affected not joining in the giving of said
direction, it being understood that (subject to Section 6.1) the Trustee shall
have no duty to ascertain whether or not such actions or forebearances are
unduly prejudicial to such Holders.

         Nothing in this Indenture shall impair the right of the Trustee in its
discretion to take any action deemed proper by the Trustee and which is not
inconsistent with such direction or directions by Securityholders.

         SECTION 5.10  Waiver of Past Defaults.  Prior to the declaration of
the acceleration of the maturity of the Securities of any series as provided in
Section 5.1, the Holders of a majority in aggregate principal amount of the
Securities of such series at the time Outstanding may on behalf of the Holders
of all the Securities of such series waive any past default or Event of Default
described in clause (d) of Section 5.1 (or, in the case of an event specified
in clause (d) of Section 5.1 which relates to less than all series of
Securities then Outstanding, the Holders of a majority in aggregate principal
amount of the Securities then Outstanding affected thereby (each series voting
as a separate class) may waive any such default or Event of Default, or, in the
case of all event specified in clause (d) (if the Event of Default under clause
(d) relates to all series of Securities then Outstanding), (e) or (f) of
Section 5.1 the Holders of Securities of a majority in principal amount of all
the Securities then Outstanding (voting as one class) may waive any such
default or Event of Default), and its consequences except a default in respect
of a covenant or provision hereof which cannot be modified or amended without
the consent of the Holder of each Security affected.  In the case of any such
waiver, the Issuer, the Trustee and the Holders of the Securities of such
series shall be restored to their former positions and rights hereunder,
respectively; but no such waiver shall extend to any subsequent or other
default or impair any right consequent thereon.

         Upon any such waiver, such default shall cease to exist and be deemed
to have been cured and not to have occurred, and any Event of

<PAGE>   46
                                       38

Default arising therefrom shall be deemed to have been cured, and not to have
occurred for every purpose of this Indenture; but no such waiver shall extend
to any subsequent or other default or Event of Default or impair any right
consequent thereon.

         SECTION 5.11  Trustee to Give Notice of Default, But May Withhold in
Certain Circumstances.  The Trustee shall, within 90 days after the occurrence
of a default known to the Trustee with respect to the Securities of any series,
provide notice to the Holders of Securities of such series and Coupons
appertaining thereto, if any, (i) if any Unregistered Securities of that series
are then Outstanding, to the Holders thereof, by publication at least once in
an Authorized Newspaper in London (and, if required by Section 3.6, at least
once in an Authorized Newspaper in Luxembourg), (ii) if any Unregistered
Securities of that series are then Outstanding, to all Holders thereof who have
filed their names and addresses with the Trustee pursuant to Section
4.4(c)(ii), by mailing such notice to such Holders at such addresses and (iii)
to all Holders of then Outstanding Registered Securities of that series, by
mailing such notice to such Holders at their addresses as they shall appear in
the registry books, unless such defaults shall have been cured before the
giving of such notice (the term "default" or "defaults" for the purposes of
this Section being hereby defined to mean any event or condition which is, or
with notice or lapse of time or both would become, an Event of Default);
PROVIDED that, except in the case of default in the payment of the principal of
or interest on any of the Securities of such series, the Trustee shall be
protected in withholding such notice if and so long as the board of directors,
the executive committee, or a trust committee of directors or trustees and/or
Responsible Officers of the Trustee in good faith determines that the
withholding of such notice is in the interests of the Securityholders of such
series.

         SECTION 5.12  Right of Court to Require Filing of Undertaking to Pay
Costs.  All parties to this Indenture agree, and each Holder of any Security or
Coupon by his acceptance thereof shall be deemed to have agreed, that any court
may in its discretion require, in any suit for the enforcement of any right or
remedy under this Indenture or in any suit against the Trustee for any action
taken, suffered or omitted by it as Trustee, the filing by any party litigant
in such suit of an undertaking to pay the costs of such suit, and that such
court may in its discretion assess reasonable costs, including reasonable
attorneys' fees, against any

<PAGE>   47
                                       39

party litigant in such suit, having due regard to the merits and good faith of
the claims or defenses made by such party litigant; but the provisions of this
Section shall not apply to any suit instituted by the Trustee, to any suit
instituted by any Securityholder or group of Securityholders of any series
holding in the aggregate more than 10% in aggregate principal amount of the
Securities of such series, or, in the case of any suit relating to or arising
under clause (d) of Section 5.1 (if the suit relates to Securities of more than
one but less than all series), 10% in aggregate principal amount of Securities
Outstanding affected thereby, or in the case of any suit relating to or arising
under clause (d) (if the suit under clause (d) relates to all the Securities
then Outstanding), (e) or (f) of Section 5.1, 10% in aggregate principal amount
of all Securities Outstanding, or to any suit instituted by any Securityholder
for the enforcement of the payment of the principal of or interest on any
Security or Coupon on or after the due date expressed in such Security or
Coupon.


                                  ARTICLE SIX

                             CONCERNING THE TRUSTEE

         SECTION 6.1  Duties and Responsibilities of the Trustee; During
Default; Prior to Default.  With respect to the Holders of any series of
Securities issued hereunder, the Trustee, prior to the occurrence of an Event
of Default with respect to the Securities of a particular series and after the
curing or waiving of all Events of Default which may have occurred with respect
to such series, undertakes to perform such duties and only such duties as are
specifically set forth in this Indenture.  In case an Event of Default with
respect to the Securities of a series has occurred (which has not been cured or
waived) the Trustee shall exercise such of the rights and powers vested in it
by this Indenture, and use the same degree of care and skill in their exercise,
as a prudent man would exercise or use under the circumstances in the conduct
of his own affairs.

         No provision of this Indenture shall be construed to relieve the
Trustee from liability for its own negligent action, its own negligent failure
to act or its own wilful misconduct, except that

                 (a) prior to the occurrence of an Event of Default with
         respect to the Securities of any series and after the curing or
         waiving of all such Events of Default with respect to such series
         which may have occurred:

                         (i) the duties and obligations of the Trustee with
                 respect to the Securities of any series shall be determined
                 solely by the

<PAGE>   48
                                       40

                 express provisions of this Indenture, and the Trustee shall
                 not be liable except for the performance of such duties and
                 obligations as are specifically set forth in this Indenture,
                 and no implied covenants or obligations shall be read into
                 this Indenture against the Trustee; and

                         (ii) in the absence of bad faith on the part of the
                 Trustee, the Trustee may conclusively rely, as to the truth of
                 the statements and the correctness of the opinions expressed
                 therein, upon any statements, certificates or opinions
                 furnished to the Trustee and conforming to the requirements of
                 this Indenture; but in the case of any such statements,
                 certificates or opinions which by any provision hereof are
                 specifically required to be furnished to the Trustee, the
                 Trustee shall be under a duty to examine the same to determine
                 whether or not they conform to the requirements of this
                 Indenture;

                 (b) the Trustee shall not be liable for any error of judgment
         made in good faith by a Responsible Officer or Responsible Officers of
         the Trustee, unless it shall be proved that the Trustee was negligent
         in ascertaining the pertinent facts; and

                 (c) the Trustee shall not be liable with respect to any action
         taken or omitted to be taken by it in good faith in accordance with
         the direction of the holders pursuant to Section 5.9 relating to the
         time, method and place of conducting any proceeding for any remedy
         available to the Trustee, or exercising any trust or power conferred
         upon the Trustee, under this Indenture.

         None of the provisions contained in this Indenture shall require the
Trustee to expend or risk its own funds or otherwise incur personal financial
liability in the performance of any of its duties or in the exercise of any of
its rights or powers, if there shall be reasonable ground for believing that
the repayment of such funds or adequate indemnity against such liability is not
reasonably assured to it.

         SECTION 6.2  Certain Rights of the Trustee.  Subject to Section 6.1:

                 (a) the Trustee may rely and shall be protected in acting or
         refraining from acting upon any resolution, Officers' Certificate or
         any other certificate, statement, instrument, opinion, report, notice,
         request, consent, order, bond, debenture, note, coupon, security or

<PAGE>   49
                                       41

         other paper or document believed by it to be genuine and to have been
         signed or presented by the proper party or parties;

                 (b) any request, direction, order or demand of the Issuer
         mentioned herein shall be sufficiently evidenced by an Officers'
         Certificate or order of the Issuer (unless other evidence in respect
         thereof be herein specifically prescribed); and any resolution of the
         Board of Directors may be evidenced to the Trustee by a copy thereof
         certified by the secretary or an assistant secretary of the Issuer;

                 (c) the Trustee may consult with counsel and any advice or
         Opinion of Counsel shall be full and complete authorization and
         protection in respect of any action taken, suffered or omitted to be
         taken by it hereunder in good faith and in accordance with such advice
         or Opinion of Counsel;

                 (d) the Trustee shall be under no obligation to exercise any
         of the trusts, rights or powers vested in it by this Indenture at the
         request, order or direction of any of the Securityholders pursuant to
         the provisions of this Indenture, unless such Securityholders shall
         have offered to the Trustee reasonable security or indemnity against
         the costs, expenses and liabilities which might be incurred therein or
         thereby;

                 (e) the Trustee shall not be liable for any action taken or
         omitted by it in good faith and believed by it to be authorized or
         within the discretion, rights or powers conferred upon it by this
         Indenture;

                 (f) prior to the occurrence of an Event of Default hereunder
         and after the curing or waiving of all Events of Default, the Trustee
         shall not be bound to make any investigation into the facts or matters
         stated in any resolution, certificate, statement, instrument, opinion,
         report, notice, request, consent, order, approval, appraisal, bond,
         debenture, note, coupon, security, or other paper or document unless
         requested in writing so to do by the holders of not less than a
         majority in aggregate principal amount of the Securities of all series
         affected then Outstanding; provided that, if the payment within a
         reasonable time to the Trustee of the costs, expenses or liabilities
         likely to be incurred by it in the making of such investigation is, in
         the opinion of the Trustee, not reasonably assured to the Trustee by
         the security afforded to it by the terms of this Indenture, the
         Trustee may require reasonable indemnity against such expenses or
         liabilities as a

<PAGE>   50
                                       42

         condition to proceeding; the reasonable expenses of every such
         investigation shall be paid by the Issuer or, if paid by the Trustee
         or any predecessor Trustee, shall be repaid by the Issuer upon demand;

                 (g) the Trustee may execute any of the trusts or powers
         hereunder or perform any duties hereunder either directly or by or
         through agents or attorneys not regularly in its employ and the
         Trustee shall not be responsible for any misconduct or negligence on
         the part of any such agent or attorney appointed with due care by it
         hereunder; and

                 (h) the Trustee shall not be deemed to have knowledge or
         notice of any default or Event of Default unless a Responsible Officer
         has actual knowledge thereof or unless the holders of not less than
         25% of the aggregate principal amount of the then Outstanding
         Securities of any affected series have notified the Trustee thereof.

         SECTION 6.3  Trustee Not Responsible for Recitals, Disposition of
Securities or Application of Proceeds Thereof.  The recitals contained herein
and in the Securities, except the Trustee's certificates of authentication,
shall be taken as the statements of the Issuer, and the Trustee assumes no
responsibility for the correctness of the same. The Trustee makes no
representation as to the validity or sufficiency of this Indenture or of the
Securities or Coupons.  The Trustee shall not be accountable for the use or
application by the Issuer of any of the Securities or of the proceeds thereof.

         SECTION 6.4  Trustee and Agents May Hold Securities or Coupons;
Collections, etc.  The Trustee or any agent of the Issuer or the Trustee, in
its individual or any other capacity, may become the owner or pledgee of
Securities or Coupons with the same rights it would have if it were not the
Trustee or such agent and, subject to Sections 6.8 and 6.13, if operative, may
otherwise deal with the Issuer and receive, collect, hold and retain
collections from the Issuer with the same rights it would have if it were not
the Trustee or such agent.

         SECTION 6.5  Moneys Held by Trustee.  Subject to the provisions of
Section 10.4 hereof, all moneys received by the Trustee shall until used or
applied as herein provided, be held in trust for the purposes for which they
were received, but need not be segregated from other funds except

<PAGE>   51
                                       43

to the extent required by mandatory provisions of law.  Neither the Trustee nor
any agent of the Issuer or the Trustee shall be under any liability for
interest on any moneys received by it hereunder.

         SECTION 6.6  Compensation and Indemnification of Trustee and Its Prior
Claim.  The Issuer covenants and agrees to pay to the Trustee from time to
time, and the Trustee shall be entitled to, reasonable compensation (which
shall not be limited by any provision of law in regard to the compensation of a
trustee of an express trust) and the Issuer covenants and agrees to pay or
reimburse the Trustee and each predecessor Trustee upon its request for all
reasonable expenses, disbursements and advances incurred or made by or on
behalf of it in accordance with any of the provisions of this Indenture
(including the reasonable compensation and the expenses and disbursements of
its counsel and of all agents and other persons not regularly in its employ)
except any such expense, disbursement or advance as may arise from its
negligence or bad faith.  The Issuer also covenants to indemnify the Trustee
and each predecessor Trustee for, and to hold it harmless against, any loss,
liability or expense incurred without negligence or bad faith on its part,
arising out of or in connection with the acceptance or administration of this
Indenture or the trusts hereunder and its duties hereunder, including the costs
and expenses of defending itself against or investigating any claim of
liability in the premises.  The obligations of the Issuer under this Section to
compensate and indemnify the Trustee and each predecessor Trustee and to pay or
reimburse the Trustee and each predecessor Trustee for expenses, disbursements
and advances shall constitute additional indebtedness hereunder and shall
survive the satisfaction and discharge of this Indenture.  Such additional
indebtedness shall be a senior claim to that of the Securities and Coupons upon
all property and funds held or collected by the Trustee as such, except funds
held in trust for the benefit of the holders of particular Securities or
Coupons, and the Securities and Coupons are hereby subordinated to such senior
claim.

         SECTION 6.7  Right of Trustee to Rely on Officers' Certificate, etc.
Subject to Sections 6.1 and 6.2, whenever in the administration of the trusts
of this Indenture the Trustee shall deem it necessary or desirable that a
matter be proved or established prior to taking or suffering or omitting any
action hereunder, such matter (unless other evidence in respect thereof be
herein specifically prescribed) may, in the absence of negligence or bad faith
on the part of the Trustee, be deemed

<PAGE>   52
                                       44

to be conclusively proved and established by an Officers' Certificate delivered
to the Trustee, and such certificate, in the absence of negligence or bad faith
on the part of the Trustee, shall be full warrant to the Trustee for any action
taken, suffered or omitted by it under the provisions of this Indenture upon
the faith thereof.

         SECTION 6.8  Qualification of Trustee; Conflicting Interests.  (a) If
the Trustee has or shall acquire any conflicting interest, as defined in this
Section, it shall, within 90 days after ascertaining that it has such
conflicting interest, either eliminate such conflicting interest or resign in
the manner and with the effect specified in this Indenture.

         (b) In the event that the Trustee shall fail to comply with the
provisions of subsection (a) of this Section, the Trustee shall, within 10 days
after the expiration of such 90 day period, provide notice of such failure to
the Securityholders in the manner and to the extent required by Section 4.4(c).

         (c) For the purposes of this Section, the Trustee shall be deemed to
have a conflicting interest with respect to Securities of any series if

                 (i) the Trustee is trustee under this Indenture with respect
         to the Outstanding Securities of any other series or is a trustee
         under another indenture under which any other securities, or
         certificates of interest or participation in any other securities, of
         the Issuer are outstanding, unless such other indenture is a
         collateral trust indenture under which the only collateral consists of
         Securities issued under this Indenture and this Indenture with respect
         to the Securities of any other series and there shall also be so
         excluded any other indenture or indentures under which other
         securities, or certificates of interest or participation in other
         securities, of the Issuer are outstanding and this Indenture with
         respect to the Securities of any other series (i) this Indenture is
         and, if applicable, this Indenture and any series issued pursuant to
         this Indenture and such other indenture or indentures are wholly
         unsecured, and such other indenture or indentures are hereafter
         qualified under the Trust Indenture Act of 1939, unless the Commission
         shall have found and declared by order pursuant to Section 305(b) or
         Section, 307(c) of such Trust Indenture Act of 1939 that differences
         exist between the provisions of this Indenture with respect to
         Securities of such series and one or more other series, or the
         provisions of this Indenture and the provisions of such other
         indenture or indentures which are so likely to involve a material
         conflict of interest as to make it necessary

<PAGE>   53
                                       45

         in the public interest or for the protection of investors to
         disqualify the Trustee from acting as such under this Indenture with
         respect to Securities of such series and such other series, or under
         this Indenture or such other indenture or indentures, or (ii) the
         Issuer shall have sustained the burden of proving, on application to
         the Commission and after opportunity for hearing thereon, that
         trusteeship under this Indenture with respect to Securities of such
         series and such other series, or under this Indenture and such other
         indenture or indentures is not so likely to involve a material
         conflict of interest as to make it necessary in the public interest or
         for the protection of investors to disqualify the Trustee from acting
         as such under this Indenture with respect to Securities of such series
         and such other series, or under this Indenture and such other
         indentures;

                 (ii) the Trustee or any of its directors or executive officers
         is an obligor upon the Securities of any series issued under this
         Indenture or an underwriter for the Issuer;

                 (iii) the Trustee directly or indirectly controls or is
         directly or indirectly controlled by or is under direct or indirect
         common control with the Issuer or an underwriter for the Issuer;

                 (iv) the Trustee or any of its directors or executive officers
         is a director, officer, partner, employee, appointee, or
         representative of the Issuer, or of an underwriter (other than the
         Trustee itself) for the Issuer who is currently engaged in the
         business of underwriting, except that (x) one individual may be a
         director or an executive officer, or both, of the Trustee and a
         director or an executive officer, or both, of the Issuer, but may not
         be at the same time an executive officer of both the Trustee and the
         Issuer; (y) if and so long as the number of directors of the Trustee
         in office is more than nine, one additional individual may be a
         director or an executive officer, or both, of the Trustee and a
         director of the Issuer; and (z) the Trustee may be designated by the
         Issuer or by any underwriter for the Issuer to act in the capacity of
         transfer agent, registrar, custodian, paying agent, fiscal agent,
         escrow agent, or depositary, or in any other similar capacity, or,
         subject to the provisions of subsection (c)(i) of this Section, to act
         as trustee, whether under all indenture or otherwise;

                 (v) 10% or more of the voting securities of the Trustee is
         beneficially owned either by the Issuer or by any director, partner or
         executive officer thereof, or 20% or more of such voting securities

<PAGE>   54
                                       46

         is beneficially owned, collectively, by any two or more of such
         persons; or 10% or more of the voting securities of the Trustee is
         beneficially owned either by an underwriter for the Issuer or by any
         director, partner, or executive officer thereof, or is beneficially
         owned, collectively, by any two or more such persons;

                 (vi) the Trustee is the beneficial owner of, or holds as
         collateral security for an obligation which is in default, (x) 5% or
         more of the voting securities or 10% or more of any other class of
         security of the Issuer, not including the Securities issued under this
         Indenture and securities issued under any other indenture under which
         the Trustee is also trustee, or (y) 10% or more of any class of
         security of an underwriter for the Issuer;

                 (vii) the Trustee is the beneficial owner of, or holds as
         collateral security for an obligation which is in default, 5%. or more
         of the voting securities of any person who, to the knowledge of the
         Trustee, owns 10% or more of the voting securities of, or controls
         directly or indirectly or is under direct or indirect common control
         with, the Issuer;

                 (viii) the Trustee is the beneficial owner of, or holds as
         collateral security for an obligation which is in default, 10% or more
         of any class of security of any person who, to the knowledge of the
         Trustee, owns 50% or more of the voting securities of the Issuer; or

                 (ix) the Trustee owns on May 15 in any calendar year, in the
         capacity of executor, administrator, testamentary or INTER VIVOS
         trustee, guardian, committee or conservator, or in any other similar
         capacity, an aggregate of 25% or more of the voting securities, or of
         any class of security, of any person, the beneficial ownership of a
         specified percentage of which would have constituted a conflicting
         interest under Section 6.8(c)(vi), (vii) or (viii).  As to any such
         securities of which the Trustee acquired ownership through becoming
         executor, administrator, or testamentary trustee of an estate which
         included them, the provisions of the preceding sentence shall not
         apply, for a period of two years from the date of such acquisition, to
         the extent that such securities included in such estate do not exceed
         25% of such voting securities or 25% of any such class of security.
         Promptly after May 15 in each calendar year, the Trustee shall make a
         check of its holdings of such securities in any of the above-mentioned
         capacities as of such May 15. If the Issuer

<PAGE>   55
                                       47

         fails to make payment in full of principal of or interest on any of
         the Securities when and as the same becomes due and payable, and such
         failure continues for 30 days thereafter, the Trustee shall make a
         prompt check of its holdings of such securities in any of the
         above-mentioned capacities as of the date of the expiration of such
         30-day period, and after such date, notwithstanding the foregoing
         provisions of this paragraph, all such securities so held by the
         Trustee, with sole or joint control over such securities vested in it,
         shall, but only so long as such failure shall continue, be considered
         as though beneficially owned by the Trustee for the purposes of
         subsections (c)(vi), (vii) and (viii) of this Section.

         The specification of percentages in subsections (c)(v) to (ix)
inclusive of this Section shall not be construed as indicating that the
ownership of such percentages of the securities of a person is or is not
necessary or sufficient to constitute direct or indirect control for the
purposes of subsections (c)(iii) or (vii) of this Section.

         For the purposes of subsections (c)(vi), (vii), (viii) and (ix), of
         this Section, only,

                 (i) the terms "security" and "securities" shall include only
         such securities as are generally known as corporate securities, but
         shall not include any note or other evidence of indebtedness issued to
         evidence an obligation to repay moneys lent to a person by one or more
         banks, trust companies, or banking firms, or any certificate of
         interest or participation in any such note or evidence of
         indebtedness;

                 (ii) an obligation shall be deemed to be in default when a
         default in payment of principal shall have continued for 30 days or
         more and shall not have been cured; and

                 (iii) the Trustee shall not be deemed to be the owner or
         holder of (x) any security which it holds as collateral security, as
         trustee or otherwise, for an obligation which is not in default as
         defined in clause (ii) above, or (y) any security which it holds as
         collateral security under this Indenture, irrespective of any default
         hereunder, or (z) any security which it holds as agent for collection,
         or as custodian, escrow agent, or depositary, or in any similar
         representative capacity.

         Except as provided above, the word "security" or 'securities' as used
in this Section shall mean any note, stock, treasury stock, bond,

<PAGE>   56
                                       48

debenture, evidence of indebtedness, certificate of interest or participation
in any profit-sharing agreement, collateral trust certificate, preorganization
certificate or subscription, transferable share, investment contract, voting
trust certificate, certificate of deposit for a security, fractional undivided
interest in oil, gas or other mineral rights, or, in general, any interest or
instrument commonly known as a "security", or any certificate of interest or
participation in, temporary or interim certificate for, receipt for, guarantee
of, or warrant or right to subscribe to or purchase, any of the foregoing.

         (d) For purposes of this Section:

                 (i) the term "underwriter" when used with reference to the
         issuer shall mean every person who, within three years prior to the
         time as of which the determination is made, has purchased from the
         Issuer with a view to, or has offered or sold for the Issuer in
         connection with, the distribution of any security of the Issuer
         outstanding at such time, or has participated or has had a direct or
         indirect participation in any such undertaking, or has participated or
         has had a participation in the direct or indirect underwriting of any
         such undertaking, but such term shall not include a person whose
         interest was limited to a commission from an underwriter or dealer not
         in excess of the usual and customary distributors' or sellers'
         commission;

                 (ii) the term "director" shall mean any director of a
         corporation or any individual performing similar functions with
         respect to any organization whether incorporated or unincorporated;

                 (iii) the term "person" shall mean an individual, a
         corporation, a partnership, an association, a joint-stock company, a
         trust, an unincorporated organization, or a government or political
         subdivision thereof; as used in this paragraph, the term "trust" shall
         include only a trust where the interest or interests of the
         beneficiary or beneficiaries are evidenced by a security;

                 (iv) the term "voting security" shall mean any security
         presently entitling the owner or holder thereof to vote in the
         direction or management of the affairs of a person, or any security
         issued under or pursuant to any trust, agreement or arrangement
         whereby a trustee or trustees or agent or agents for the owner or
         holder of such security are presently entitled to vote in the
         direction or management of the affairs of a person;

<PAGE>   57
                                       49

                 (v) the term "Issuer" shall mean any obligor upon the
         Securities; and

                 (vi) the term "executive officer" shall mean the president,
         every vice president, every trust officer, the cashier, the secretary,
         and the treasurer of a corporation, and any individual customarily
         performing similar functions with respect to any organization whether
         incorporated or unincorporated, but shall not include the chairman of
         the board of directors.

         (e) The percentages of voting securities and other securities
specified in this Section shall be calculated in accordance with the following
provisions:

                 (i) a specified percentage of the voting securities of the
         Trustee, the Issuer or any other person referred to in this Section
         (each of whom is referred to as a "person" in this paragraph) means
         such amount of the outstanding voting securities of such person as
         entitles the holder or holders thereof to cast such specified
         percentage of the aggregate votes which the holders of all the
         outstanding voting securities of such person are entitled to cast in
         the direction or management of the affairs of such person;

                 (ii) a specified percentage of a class of securities of a
         person means such percentage of the aggregate amount of securities of
         the class outstanding;

                 (iii) the term "amount", when used in regard to securities,
         means the principal amount if relating to evidences of indebtedness,
         the number of shares if relating to capital shares, and the number of
         units if relating to any other kind of security;

                 (iv) the term "outstanding" means issued and not held by or
         for the account of the issuer; the following securities shall not be
         deemed outstanding within the meaning of this definition:

                         (A) securities of an issuer held in a sinking fund
                 relating to securities of the issuer of the same class;

                         (B) securities of an issuer held in a sinking fund
                 relating to another class of securities of the issuer, if the
                 obligation evidenced by such other class of securities is not
                 in default as to principal or interest or otherwise;

<PAGE>   58
                                       50

                         (C) securities pledged by the issuer thereof as
                 security for an obligation of the issuer not in default as to
                 principal or interest or otherwise; and

                         (D) securities held in escrow if placed in escrow by
                 the issuer thereof;

PROVIDED, that any voting securities of an issuer shall be deemed outstanding
if any person other than the issuer is entitled to exercise the voting rights
thereof; and

                 (v) a security shall be deemed to be of the same class as
         another security if both securities confer upon the holder or holders
         thereof substantially the same rights and privileges; PROVIDED, that,
         in the case of secured evidences of indebtedness, all of which are
         issued under a single indenture, differences in the interest rates or
         maturity dates of various series thereof shall not be deemed
         sufficient to constitute such series different classes and PROVIDED,
         FURTHER, that, in the case of unsecured evidences of indebtedness,
         differences in the interest rates or maturity dates thereof shall not
         be deemed sufficient to constitute them securities of different
         classes, whether or not they are issued under a single indenture.

         SECTION 6.9  Persons Eligible for Appointment as Trustee.  The Trustee
for each series of Securities hereunder shall at all times be a corporation
organized and doing business under the laws of the United States of America or
of any State or the District of Columbia having a combined capital and surplus
of at least $50,000,000, and which is authorized under such laws to exercise
corporate trust powers and is subject to supervision or examination by Federal,
State or District of Columbia authority.  If such corporation publishes reports
of condition at least annually, pursuant to law or to the requirements of the
aforesaid supervising or examining authority, then for the purposes of this
Section, the combined capital and surplus of such corporation shall be deemed
to be its combined capital and surplus as set forth in its most recent report
of condition, so published.  In case at any time the Trustee shall cease to be
eligible in accordance with the provisions of this Section, the Trustee shall
resign immediately in the manner and with the effect specified in Section 6.10.

<PAGE>   59
                                       51

         SECTION 6.10  Resignation and Removal; Appointment of Successor
Trustee.  (a) The Trustee, or any trustee or trustees hereafter appointed, may
at any time resign with respect to one or more or all series of Securities
bygiving written notice of resignation to the Issuer.  Upon receiving such
notice of resignation, the Issuershall promptly appoint a successor trustee or
trustees with respect to the applicable series by written instrument in
duplicate, executed by authority of the Board of Directors, one copy of which
instrument shall be delivered to the resigning Trustee and one copy to the
successor trustee or trustees.  If no successor trustee shall have been so
appointed with respect to any series and have accepted appointment within 30
days after the mailing of such notice of resignation, the resigning trustee may
petition any court of competent jurisdiction for the appointment of a successor
trustee, or any Securityholder who has been a bona fide Holder of a Security or
Securities of the applicable series for at least six months may, subject to the
provisions of Section 5.12, on behalf of himself and all others similarly
situated, petition any such court for the appointment of a successor trustee.
Such court may thereupon, after such notice, if any, as it may deem proper and
prescribe, appoint a successor trustee.

         (b) In case at any time any of the following shall occur:

                 (i) the Trustee shall fail to comply with the provisions of
         Section 6.8 with respect to any series of Securities after written
         request therefor by the Issuer or by any Securityholder who has been a
         bona fide Holder of a Security or Securities of such series for at
         least six months; or

                 (ii) the Trustee shall cease to be eligible in accordance with
         the provisions of Section 6.9 and shall fail to resign after written
         request therefor by the Issuer or by any Securityholder; or

                 (iii) the Trustee shall become incapable of acting with
         respect to any series of Securities, or shall be adjudged a bankrupt
         or insolvent, or a receiver or liquidator of the Trustee or of its
         property shall be appointed, or any public officer shall take charge
         or control of the Trustee or of its property of affairs for the
         purpose of rehabilitation, conservation or liquidation;

then, in any such case, the Issuer may remove the Trustee with respect to the
applicable series of Securities and appoint a successor trustee for such series
by written instrument, in duplicate, executed by order of the Board of
Directors of the Issuer, one copy of which instrument shall be

<PAGE>   60
                                       52

delivered to the Trustee so removed and one copy to the successor trustee, or,
subject to the provisions of Section 5.12, any Securityholder who has been a
bona fide Holder of a Security or Securities of such series for at least six
months may on behalf of himself and all others similarly situated, petition any
court of competent jurisdiction for the removal of the Trustee and the
appointment of a successor trustee with respect to such series.  Such court may
thereupon, after such notice, if any, as it may deem proper and prescribe,
remove the Trustee and appoint a successor trustee.

         (c) The Holders of a majority in aggregate principal amount of the
Securities of each series at the time Outstanding may at any time remove the
Trustee with respect to securities of such series and appoint a successor
trustee with respect to the Securities of such series by delivering to the
Trustee so removed, to the successor trustee so appointed and to the Issuer the
evidence provided for in Section 7.1 of the action in that regard taken by the
Securityholders.

         (d) Any resignation or removal of the Trustee with respect to any
series and any appointment of a successor trustee with respect to such series
pursuant to any of the provisions of this Section 6.10 shall become effective
upon acceptance of appointment by the successor trustee as provided in Section
6.11.

         SECTION 6.11  Acceptance of Appointment by Successor Trustee.  Any
successor trustee appointed as provided in Section 6.10 shall execute and
deliver to the Issuer and to its predecessor trustee an instrument accepting
such appointment hereunder, and thereupon the resignation or removal of the
predecessor trustee with respect to all or any applicable series shall become
effective and such successor trustee, without any further act, deed or
conveyance, shall become vested with all rights, powers, duties and obligations
with respect to such series of its predecessor hereunder, with like effect as
if originally named as trustee for such series hereunder; but, nevertheless, on
the written request of the Issuer or of the successor trustee, upon payment of
its charges then unpaid, the trustee ceasing to act shall, subject to Section
10.4, pay over to the successor trustee all moneys at the time held by it
hereunder and shall execute and deliver all instrument transferring to such
successor trustee all such rights, powers, duties and obligations.  Upon
request of any such successor trustee, the Issuer shall execute any and all
instruments in writing for more fully and certainly vesting in and

<PAGE>   61
                                       53

confirming to such successor trustee all such rights and powers.  Any trustee
ceasing to act shall, nevertheless, retain a prior claim upon all property or
funds held or collected by such trustee to secure any amounts then due it
pursuant to the provisions of Section 6.6.

         If a successor trustee is appointed with respect to the Securities of
one or more (but not all) series, the Issuer, the predecessor Trustee and each
successor trustee with respect to the Securities of any applicable series shall
execute and deliver an indenture supplemental hereto which shall contain such
provisions as shall be deemed necessary or desirable to confirm that all the
rights, powers, trusts and duties of the predecessor Trustee with respect to
the Securities of any series as to which the predecessor Trustee is not
retiring shall continue to be vested in the predecessor Trustee, and shall add
to or change any of the provisions of this Indenture as shall be necessary to
provide for or facilitate the administration of the trusts hereunder by more
than one trustee, it being understood that nothing herein or in such
supplemental indenture shall constitute such trustees or co-trustees of the
same trust and that each such trustee shall be trustee of a trust or trusts
under separate indentures.

         No successor trustee with respect to any series of Securities shall
accept appointment as provided in this Section 6.11 unless at the time of such
acceptance such successor trustee shall be qualified under the provisions of
Section 6.8 and eligible under the provisions of Section 6.9.

         Upon acceptance of appointment by any successor trustee as provided in
this Section 6.11, the Issuer shall mail notice thereof (a) if any Unregistered
Securities of a series affected are then Outstanding, to the Holders thereof,
by publication of such notice at least once in an Authorized Newspaper in
London (and, if required by Section 3.8, at least once in an Authorized
Newspaper in Luxembourg), (b) if any Unregistered Securities of a series
affected are then Outstanding, to the Holders thereof who have filed their
names and addresses with the Trustee pursuant to Section 4.4(c)(ii), by mailing
such notice to such holders at such addresses as were so furnished to the
Trustee (and the Trustee shall make such information available to the Issuer
for such purpose) and (c) to the Holders of Registered Securities of each
series affected, by first-class mail to such Holders of Securities of any
series for which such successor trustee is acting as trustee at their last
addresses as they shall appear in the Security register. If the Issuer fails to
mail such notice within ten days after acceptance of appointment by the
successor trustee,

<PAGE>   62
                                       54

the successor trustee shall cause such notice to be mailed at the expense of
the Issuer.

         SECTION 6.12.  Merger, Conversion, Consolidation or Succession to
Business of Trustee.  Any corporation into which the Trustee may be merged or
converted or with which it may be consolidated, or any corporation resulting
from any merger, conversion or consolidation to which the Trustee shall be a
party, or any corporation succeeding to the corporate trust business of the
Trustee, shall be the successor of the Trustee hereunder, provided that such
corporation shall be qualified under the provisions of Section 6.8 and eligible
under the provisions of Section 6.9, without the execution or filing of any
paper or any further act on the part of any of the parties hereto, anything
herein to the contrary notwithstanding.

         In case at the time such successor to the Trustee shall succeed to the
trusts created by this Indenture any of the Securities of any series shall have
been authenticated but not delivered, any such successor to the Trustee may
adopt the certificate of authentication of any predecessor Trustee and deliver
such Securities so authenticated; and, in case at that time any of the
Securities of any series shall not have been authenticated, any successor to
the Trustee may authenticate such Securities either in the name of any
predecessor hereunder or in the name of the successor Trustee; and in all such
cases such certificate shall have the full force which it is anywhere in the
Securities of such series or in this Indenture provided that the certificate of
the Trustee shall have; PROVIDED, that the right to adopt the certificate of
authentication of any predecessor Trustee or to authenticate Securities of any
series in the name of any predecessor Trustee shall apply only to its successor
or successors by merger, conversion or consolidation.

         SECTION 6.13  Preferential Collection of Claims Against the Issuer.
(a) Subject to the provisions of this Section, if the Trustee shall be or shall
become a creditor, directly or indirectly, secured or unsecured, of the Issuer
within four months prior to a default, as defined in subsection (c) of this
Section, or subsequent to such a default, then, unless and until such default
shall be cured, the Trustee shall set apart and hold in a special account for
the benefit of the Trustee individually, the Holders of the Securities and the
Holders of other indenture securities (as defined in this Section):

                 (1) an amount equal to any and all reductions in the amount
         due and owing upon any claim as such creditor in respect of principal
         or

<PAGE>   63
                                       55

         interest, effected after the beginning of such four months' period and
         valid as against the Issuer and its other creditors, except any such
         reduction resulting from the receipt or disposition of any property
         described in subsection (a)(2) of this Section, or from the exercise
         of any right of set-off which the Trustee could have exercised if a
         petition in bankruptcy had been filed by or against the Issuer upon
         the date of such default; and

                 (2) all property received by the Trustee in respect of any
         claim as such creditor, either as security therefor, or in
         satisfaction or composition thereof, or otherwise, after the beginning
         of such four months' period, or an amount equal to the proceeds of any
         such property, if disposed of, subject, however, to the rights, if
         any, of the Issuer and its other creditors in such property or such
         proceeds.

         Nothing herein contained, however, shall affect the right of the
         Trustee:

                 (A) to retain for its own account (i) payments made on account
         of any such claim by any person (other than the Issuer) who is liable
         thereon, (ii) the proceeds of the bona fide sale of any such claim by
         the Trustee to a third person, and (iii) distributions made in cash,
         securities or other property in respect of claims filed against the
         Issuer in bankruptcy or receivership or in proceedings for
         reorganization pursuant to Title 11 of the United States Code or
         applicable state law;

                 (B) to realize, for its own account, upon any property held by
         it as security for any such claim, if such property was so held prior
         to the beginning of such four months' period;

                 (C) to realize, for its own account, but only to the extent of
         the claim hereinafter mentioned, upon any property held by it as
         security for any such claim, if such claim was created after the
         beginning of such four months' period and such property was received
         as security therefor simultaneously with the creation thereof, and if
         the Trustee shall sustain the burden of proving that at the time such
         property was so received the Trustee had no reasonable cause to
         believe that a default as defined in subsection (c) of this Section
         would occur within four months; or

                 (D) to receive payment on any claim referred to in paragraph
         (B) or (C), against the release of any property held as security for
         such claim as provided in such paragraph (B) or (C), as the case may
         be, to the extent of the fair value of such property.

<PAGE>   64
                                       56

         For the purposes of paragraphs (B), (C) and (D), property substituted
after the beginning of such four months' period for property held as security
at the time of such substitution shall, to the extent of the fair value of the
property released, have the same status as the property released, and, to the
extent that any claim referred to in any of such paragraphs is created in
renewal of or in substitution for or for the purpose of repaying or refunding
any pre-existing claim of the Trustee as such creditor, such claim shall have
the same status as such pre-existing claim.

         If the Trustee shall be required to account, the funds and property
held in such special account and the proceeds thereof shall be apportioned
between the Trustee, the Securityholders and the Holders of other indenture
securities in such manner that the Trustee, such Securityholders and the
holders of other indenture securities realize, as a result of payments from
such special account and payments of dividends on claims filed against the
Issuer in bankruptcy or receivership or in proceedings for reorganization
pursuant to Title 11 of the United States Code or applicable State law, the
same percentage of their respective claims, figured before crediting to the
claim of the Trustee anything on account of the receipt by it from the Issuer
of the funds and property in such special account and before crediting to the
respective claims of the Trustee, such Securityholders and the holders of other
indenture securities dividends on claims filed against the Issuer in bankruptcy
or receivership or in proceedings for reorganization pursuant to Title 11 of
the United States Code or applicable State law, but after crediting thereon
receipts on account of the indebtedness represented by their respective claims
from all sources other than from such dividends and from the funds and property
so held in such special account.  As used in this paragraph, with respect to
any claim, the term "dividends" shall include any distribution with respect to
such claim, in bankruptcy or receivership or in proceedings for reorganization
pursuant to Title 11 of the United States Code or applicable State law, whether
such distribution is made in cash, securities or other property, but shall not
include any such distribution with respect to the secured portion, if any, of
such claim.  The court in which such bankruptcy, receivership or proceeding for
reorganization is pending shall have jurisdiction (i) to apportion between the
Trustee, such Securityholders and the holders of other indenture securities, in
accordance with the provisions of this paragraph, the funds and property held
in such special account and the proceeds thereof, or (ii) in lieu of such
apportionment, in whole or in part, to give to the

<PAGE>   65
                                       57

provisions of this paragraph due consideration in determining the fairness of
the distributions to be made to the Trustee, such Securityholders and the
holders of other indenture securities with respect to their respective claims,
in which event it shall not be necessary to liquidate or to appraise the value
of any securities or other property held in such special account or as security
for any such claim, or to make a specific allocation of such distributions as
between the secured and unsecured portions of such claims, or otherwise to
apply the provisions of this paragraph as a mathematical formula.

         Any Trustee who has resigned or been removed after the beginning of
such four months' period shall be subject to the provisions of this subsection
(a) as though such resignation or removal had not occurred.  If any Trustee has
resigned or been removed prior to the beginning of such four months' period, it
shall be subject to the provisions of this subsection (a) if and only if the
following conditions exist:

                 (i) the receipt of property or reduction of claim which would
         have given rise to the obligation to account, if such Trustee had
         continued as trustee, occurred after the beginning of such four
         months' period; and

                 (ii) such receipt of property or reduction of claim occurred
         within four months after such resignation or removal.

         (b) There shall be excluded from the operation of this Section a
         creditor relationship arising from

                 (1) the ownership or acquisition of securities issued under
         any indenture, or any security or securities having a maturity of one
         year or more at the time of acquisition by the Trustee;

                 (2) advances authorized by a receivership or bankruptcy court
         of competent jurisdiction or by this Indenture for the purpose of
         preserving any property which shall at any time be subject to the lien
         of this Indenture or of discharging tax liens or other prior liens or
         encumbrances thereon, if notice of such advance and of the
         circumstances surrounding the making thereof is given to the
         Securityholders at the time and in the manner provided in this
         Indenture;

                 (3) disbursements made in the ordinary course of business in
         the capacity of trustee under an indenture, transfer agent, registrar,
         custodian, paying agent, fiscal agent or depositary, or other similar
         capacity;

<PAGE>   66
                                       58

                 (4) an indebtedness created as a result of services rendered
         or premises rented or an indebtedness created as a result of goods or
         securities sold in a cash transaction as defined in subsection (c)(3)
         below;

                 (5) the ownership of stock or of other securities of a
         corporation organized under the provisions of Section 25(a) of the
         Federal Reserve Act, as amended, which is directly or indirectly a
         creditor of the Issuer; or

                 (6) the acquisition, ownership, acceptance or negotiation of
         any drafts, bills of exchange, acceptances or obligations which fall
         within the classification of self-liquidating paper as defined in
         subsection (c)(4) of this Section.

         (c) As used in this Section:

                 (1) the term "default" shall mean any failure to make payment
         in full of the principal of or interest upon any of the Securities or
         upon the other indenture securities when and as such principal or
         interest becomes due and payable;

                 (2) the term "other indenture securities" shall mean
         securities upon which the Issuer is an obligor (as defined in the
         Trust Indenture Act of 1939) outstanding under any other indenture (i)
         under which the Trustee is also trustee, (ii) which contains
         provisions substantially similar to the provisions of subsection (a)
         of this Section, and (iii) under which a default exists at the time of
         the apportionment of the funds and property held in said special
         account;

                 (3) the term "cash transaction" shall mean any transaction in
         which full payment for goods or securities sold is made within seven
         days after delivery of the goods or securities in currency or in
         checks or other orders drawn upon banks or bankers and payable upon
         demand

                 (4) the term "self-liquidating paper" shall mean any draft,
         bill of exchange, acceptance or obligation which is made, drawn,
         negotiated or incurred by the Issuer for the purpose of financing the
         purchase, processing, manufacture, shipment, storage or sale of goods,
         wares or merchandise and which is secured by documents evidencing
         title to, possession of, or a lien upon the goods, wares or
         merchandise or the receivables or proceeds arising from the sale of
         the goods, wares or merchandise previously constituting the secu-

<PAGE>   67
                                       59

         rity, provided the security is received by the Trustee simultaneously
         with the creation of the creditor relationship with the Issuer arising
         from the making, drawing, negotiating or incurring of the draft, bill
         of exchange, acceptance or obligation; and

                 (5) the term "Issuer" shall mean any obligor upon the
                     Securities.


                                 ARTICLE SEVEN

                         CONCERNING THE SECURITYHOLDERS

         SECTION 7.1  Evidence of Action Taken by Securityholders.  Any
request, demand, authorization, direction, notice, consent, waiver or other
action provided by this Indenture to be given or taken by a specified
percentage in principal amount of the Securityholders of any or all series may
be embodied in and evidenced by one or more instruments of substantially
similar tenor signed by such specified percentage of Securityholders in person
or by agent duly appointed in writing; and, except as herein otherwise
expressly provided, such action shall become effective when such instrument or
instruments are delivered to the Trustee.  Proof of execution of any instrument
or of a writing appointing any such agent shall be sufficient for any purpose
of this Indenture and (subject to Sections 6.1 and 6.2) conclusive in favor of
the Trustee and the Issuer, if made in the manner provided in this Article.

         SECTION 7.2  Proof of Execution of lnstruments and of Holding of
Securities.  Subject to Sections 6.1 and 6.2, the execution of any instrument
by a Securityholder or his agent or proxy may be proved in the following
manner:

                 The fact and date of the execution by any Holder of any
         instrument may be proved by the certificate of any notary public or
         other officer of any jurisdiction authorized to take acknowledgments
         of deeds or administer oaths that the person executing such
         instruments acknowledged to him the execution thereof, or by an
         affidavit of a witness to such execution sworn to before any such
         notary or other such officer.  Where such execution is by or on behalf
         of any legal entity other than an individual, such certificate or
         affidavit shall also constitute sufficient proof of the authority of
         the person executing the same.  The fact of the holding by any Holder

<PAGE>   68
                                       60

         of an Unregistered Security of any series, and the identifying number
         of such Security and the date of his holding the same, may be proved
         by the production of such Security or by a certificate executed by any
         trust company, bank, banker or recognized securities dealer wherever
         situated satisfactory to the Trustee, if such certificate shall be
         deemed by the Trustee to be satisfactory.  Each such certificate shall
         be dated and shall state that on the date thereof a Security of such
         series bearing a specified identifying number was deposited with or
         exhibited to such trust company, bank, banker or recognized securities
         dealer by the person named in such certificate. Any such certificate
         may be issued in respect of one or more Unregistered Securities of one
         or more series specified therein.  The holding by the person named in
         any such certificate of any Unregistered Securities of any series
         specified therein shall be presumed to continue for a period of one
         year from the date of such certificate unless at the time of any
         determination of such holding (1) another certificate bearing a later
         date issued in respect of the same Securities shall be produced, or
         (2) the Security of such series specified in such certificate shall be
         produced by some other person, or (3) the Security of such series
         specified in such certificate shall have ceased to be Outstanding.
         Subject to Sections 6.1 and 6.2, the fact and date of the execution of
         any such instrument and the amount and numbers of Securities of any
         series held by the person so executing such instrument and the amount
         and numbers of any Security or Securities for such series may also be
         proven in accordance with such reasonable rules and regulations as may
         be prescribed by the Trustee for such series or in any other manner
         which the Trustee for such series may deem sufficient.


         SECTION 7.3  Holders to be Treated as Owners.  The Issuer, the Trustee
and any agent of the Issuer or the Trustee may deem and treat the person in
whose name any Security shall be registered upon the Security register for such
series as the absolute owner of such Security (whether or not such Security
shall be overdue and not withstanding any notation of ownership or other
writing thereon) for the purpose of receiving payment of or on account of the
principal of and, subject to the provisions of this Indenture, interest on such
Security and for all other purposes; and neither the Issuer nor the Trustee nor
any agent of the Issuer or the Trustee shall be affected by any notice to the
contrary.  The

<PAGE>   69
                                       61

Issuer, the Trustee and any agent of the Issuer or the Trustee may treat the
Holder of any Unregistered Security and the Holder of any Coupon as the
absolute owner of such Unregistered Security or Coupon (whether or not such
Unregistered Security or Coupon shall be overdue) for the purpose of receiving
payment thereof or on account thereof and for all other purposes and neither
the Issuer, the Trustee, nor any agent of the Issuer or the Trustee shall be
affected by any notice to the contrary.  All such payments so made to any such
person, or upon his order, shall be valid, and, to the extent of the sum or
sums so paid, effectual to satisfy and discharge the liability for moneys
payable upon any such Security or Coupon.

         SECTION 7.4  Securities Owned by Issuer Deemed Not Outstanding.  In
determining whether the Holders of the requisite aggregate principal amount of
Outstanding Securities of any or all series have concurred in any direction,
consent or waiver under this Indenture, Securities which are owned by the
Issuer or any other obligor on the Securities with respect to which such
determination is being made or by any person directly or indirectly controlling
or controlled by or under direct or indirect common control with the Issuer or
any other obligor on the Securities with respect to which such determination is
being made shall be disregarded and deemed not to be Outstanding for the
purpose of any such determination, except that for the purpose of determining
whether the Trustee shall be protected in relying on any such direction,
consent or waiver only Securities which the Trustee knows are so owned shall be
so disregarded.  Securities so owned which have been pledged in good faith may
be regarded as Outstanding if the pledgee establishes to the satisfaction of
the Trustee the pledgee's right so to act with respect to such Securities and
that the pledgee is not the Issuer or any other obligor upon the Securities or
any person directly or indirectly controlling or controlled by or under direct
or indirect common control with the Issuer or any other obligor on the
Securities.  In case of a dispute as to such right, the advice of counsel shall
be full protection in respect of any decision made by the Trustee in accordance
with such advice.  Upon request of the Trustee, the Issuer shall furnish to the
Trustee promptly a written statement by two of its officers (which need not
comply with Section 11.5) listing and identifying all Securities, if any, known
by the Issuer to be owned or held by or for the account of any of the
above-described persons; and, subject to Sections 6.1 and 6.2, the Trustee
shall be entitled to accept such Officers' Certificate as conclusive evidence
of the facts therein set

<PAGE>   70
                                       62

forth and of the fact that all Securities not listed therein are Outstanding
for the purpose of any such determination.

         SECTION 7.5  Right of Revocation of Action Taken.  At any time prior
to (but not after) the evidencing to the Trustee, as provided in Section 7.1,
of the taking of any action by the Holders of the percentage in aggregate
principal amount of the Securities of any or all series, as the case may be,
specified in this Indenture in connection with such action, any Holder of a
Security the serial number of which is shown by the evidence to be included
among the serial numbers of the Securities the Holders of which have consented
to such action may, by filing written notice at the Corporate Trust Office and
upon proof of holding as provided in this Article, revoke such action so far as
concerns such Security.  Except as aforesaid any such action taken by the
Holder of any Security shall be conclusive and binding upon such Holder and
upon all future Holders and owners of such Security and of any Securities
issued in exchange or substitution therefor, irrespective of whether or not any
notation in regard thereto is made upon any such Security.  Any action taken by
the Holders of the percentage in aggregate principal amount of the Securities
of any or all series, as the case may be, specified in this Indenture in
connection with such action shall be conclusively binding upon the Issuer, the
Trustee and the Holders of all the Securities affected by such action.


                                 ARTICLE EIGHT

                            SUPPLEMENTAL INDENTURES

         SECTION 8.1  Supplemental Indentures Without Consent of
Securityholders.  The Issuer, when authorized by a resolution of its Board of
Directors, and the Trustee may from time to time and at any time enter into an
indenture or indentures supplemental hereto (which shall conform to the
provisions of the Trust Indenture Act of 1939 as in force at the date of the
execution thereof) for one or more of the following purposes:

                 (a) to convey, transfer, assign, mortgage or pledge to the
         Trustee as security for the Securities of one or more series any
         property or assets;

                 (b) to evidence the succession of another corporation to the
         Issuer, or successive successions, and the assumption by the successor
         corporation of the covenants, agreements and obligations of the Issuer
         pursuant to Article Nine;

<PAGE>   71
                                       63

                 (c) to add to the covenants of the Issuer such further
         covenants, restrictions, conditions or provisions as its Board of
         Directors and the Trustee shall consider to be for the protection of
         the Holders of Securities or Coupons, and to make the occurrence, or
         the occurrence and continuance, of a default in any such additional
         covenants, restrictions, conditions or provisions an Event of Default
         permitting the enforcement of all or any of the several remedies
         provided in this Indenture as herein set forth; PROVIDED, that in
         respect of any such additional covenant, restriction, condition or
         provision such supplemental indenture may provide for a particular
         period of grace after default (which period may be shorter or longer
         than that allowed in the case of other defaults) or may provide for an
         immediate enforcement upon such an Event of Default or may limit the
         remedies available to the Trustee upon such an Event of Default or may
         limit the right of the Holders of a majority in aggregate principal
         amount of the Outstanding Securities of such series to waive such an
         Event of Default;

                 (d) to cure any ambiguity or to correct or supplement any
         provision contained herein or in any supplemental indenture which may
         be defective or inconsistent with any other provision contained herein
         or in any supplemental indenture; or to make such other provisions in
         regard to matters or questions arising under this Indenture or under
         any supplemental indenture as the Board of Directors may deem
         necessary or desirable and which shall not adversely affect the
         interests of the Holders of the Securities;

                 (e) to provide for the issuance under this Indenture of
         Securities in coupon form (including Securities registrable as to
         principal only) and to provide for exchangeability of such Securities
         with Securities issued hereunder in fully registered form, and to make
         all appropriate changes for such purpose; and

                 (f) to evidence and provide for the acceptance of appointment
         hereunder by a successor trustee with respect to the Securities of one
         or more series, or of the Coupons appertaining to such Securities, and
         to add to or change any of the provisions of this Indenture as shall
         be necessary to provide for or facilitate the administration of the
         trusts hereunder by more than one trustee, pursuant to the
         requirements of Section 6.11.

         The Trustee is hereby authorized to join with the Issuer in the
execution of any such supplemental indenture, to make any further

<PAGE>   72
                                       64

appropriate agreements and stipulations which may be therein contained and to
accept the conveyance, transfer, assignment, mortgage or pledge of any property
thereunder, but the Trustee shall not be obligated to enter into any such
supplemental indenture which affects the Trustee's own rights, duties or
immunities under this Indenture or otherwise.

         Any supplemental indenture authorized by the provisions of this
Section may be executed without the consent of the Holders of any of the
Securities at the time Outstanding, notwithstanding any of the provisions of
Section 8.2.

         SECTION 8.2  Supplemental Indentures With Consent of Securityholders.
With the consent (evidenced as provided in Article Seven) of the Holders of not
less than 66 2/3% in aggregate principal amount of the Securities at the time
Outstanding of all series affected by such supplemental indenture (voting as
one class), the Issuer, when authorized by a resolution of its Board of
Directors, and the Trustee may, from time to time and at any time, enter into
an indenture or indentures supplemental hereto (which shall conform to the
provisions of the Trust Indenture Act of 1939 as in force at the date of
execution thereof) for the purpose of adding any provisions to or changing in
any manner or eliminating any of the provisions of this Indenture or of any
supplemental indenture or of modifying in any manner the rights of the Holders
of the Securities of each such series or the coupons appertaining to such
Securities; provided, that no such supplemental indenture shall (a) extend the
final maturity of any Security, or reduce the principal amount thereof or the
method in which amounts of payments of principal or interest thereon are
determined, or reduce the rate or extend the time of payment of interest
thereon, or change the coin, or currency or units based on or related to
currencies (including ECU) of payment thereof, or reduce any amount payable on
redemption thereof or reduce the amount of the principal of an Original Issue
Discount Security that would be due and payable upon an acceleration of the
maturity thereof pursuant to Section 5.1 or the amount thereof provable in
bankruptcy pursuant to Section 5.2, or impair or affect the right of any
Securityholder to institute suit for the payment thereof or, if the Securities
provide therefor, any right of repayment at the option of the Securityholder
without the consent of the Holder of each Security so affected, or (b) reduce
the aforesaid percentage of Securities of any series, the consent of the
Holders of which is required for any such supplemental indenture, without the
consent of the Holders of each Security so affected.

<PAGE>   73
                                       65

         Upon the request of the Issuer, accompanied by a copy of a resolution
of the Board of Directors certified by the secretary or an assistant secretary
of the Issuer authorizing the execution of any such supplemental indenture, and
upon the filing with the Trustee of evidence of the consent of Securityholders
as aforesaid and other documents, if any, required by Section 7.1, the Trustee
shall join with the Issuer in the execution of such supplemental indenture
unless such supplemental indenture affects the Trustee's own rights, duties or
immunities under this Indenture or otherwise, in which case the Trustee may in
its discretion, but shall not be obligated to, enter into such supplemental
indenture.

         It shall not be necessary for the consent of the Securityholders under
this section to approve the particular form of any proposed supplemental
indenture, but it shall be sufficient if such consent shall approve the
substance thereof.

         Promptly after the execution by the Issuer and the Trustee of any
supplemental indenture pursuant to the provisions of this Section, the Issuer
shall mail a notice thereof (i) by first class mail to the Holders of then
Outstanding Registered Securities of each series affected thereby at their
addresses as they shall appear on the registry books of the Issuer, (ii) if any
Unregistered Securities of a series affected thereby are then Outstanding, to
the Holders thereof who have filed their names and addresses with the Trustee
pursuant to section 4.4(c)(ii), by mailing a notice thereof by first class mail
to such Holders at such addresses as were so furnished to the Trustee and (iii)
if any Unregistered Securities of a series affected thereby are then
Outstanding, to all holders thereof, by publication of a notice thereof at
least once in an Authorized ~newspaper in London (and, if required by Section
3.6, at least once in an Authorized Newspaper in Luxembourg), and in each case
such notice shall set forth in general terms the substance of such supplemental
indenture.  Any failure of the Issuer to mail such notice, or any defect
therein, shall not, however, in any way impair or affect the validity of any
such supplemental indenture.

         SECTION 8.3  Effect of Supplemental Indenture.  Upon the execution of
any supplemental indenture pursuant to the provisions hereof, this Indenture
shall be and be deemed to be modified and amended in accordance therewith and
the respective rights, limitations of rights, obligations, duties and
immunities under this Indenture of the Trustee,

<PAGE>   74
                                       66

the Issuer and the Holders of Securities of each series affected thereby shall
thereafter be determined, exercised and enforced hereunder subject in all
respects to such modifications and amendments, and all the terms and conditions
of any such supplemental indenture shall be and be deemed to be part of the
terms and conditions of this Indenture for any and all purposes.

         SECTION 8.4  Documents to Be Given to Trustee.  The Trustee, subject
to the provisions of Sections 6.1 and 6.2, may receive an Officers' Certificate
and an Opinion of Counsel as conclusive evidence that any supplemental
indenture executed pursuant to this Article 8 complies with the applicable
provisions of this Indenture.

         SECTION 8.5  Notation on Securities in Respect of Supplemental
Indentures.  Securities of any series authenticated and delivered after the
execution of any supplemental indenture pursuant to the provisions of this
Article may bear a notation in form approved by the Trustee for such series as
to any matter provided for by such supplemental indenture or as to any action
taken at any such meeting.  If the Issuer or the Trustee shall so determine,
new Securities of any series so modified as to conform, in the opinion of the
Trustee and the Board of Directors, to any modification of this Indenture
contained in any such supplemental indenture may be prepared by the Issuer,
authenticated by the Trustee and delivered in exchange for the Securities of
such series then Outstanding.


                                  ARTICLE NINE

                   CONSOLIDATION, MERGER, SALE OR CONVEYANCE

         SECTION 9.1  Issuer May Consolidate, etc., on Certain Terms.  The
Issuer covenants that it will not merge or consolidate with any other
corporation or sell or convey all or substantially all of its assets to any
Person, unless (i) either the Issuer shall be the continuing corporation, or
the successor corporation or the Person which acquires by sale or conveyance
substantially all the assets of the Issuer (if other than the Issuer) shall be
a corporation organized under the laws of the United States of America or any
State thereof and shall expressly assume the due and punctual payment of the
principal of and interest on all the Securities and Coupons, according to their
tenor, and the due and

<PAGE>   75
                                       67

punctual performance and observance of all of the covenants and conditions of
this Indenture to be performed or observed by the Issuer, by supplemental
indenture satisfactory to the Trustee, executed and delivered to the Trustee by
such corporation, and (ii) the Issuer or such successor corporation, as the
case may be, shall not, immediately after such merger or consolidation, or such
sale or conveyance, be in default in the performance of any such covenant or
condition.

         SECTION 9.2  Successor Corporation Substituted.  In case of any such
consolidation, merger, sale or conveyance, and following such an assumption by
the successor corporation, such successor corporation shall succeed to and be
substituted for the Issuer, with the same effect as if it had been named
herein.  Such successor corporation may cause to be signed, and may issue
either in its own name or in the name of the Issuer prior to such succession
any or all of the Securities issuable hereunder, together with any Coupons
appertaining thereto, which theretofore shall not have been signed by the
Issuer and delivered to the Trustee; and, upon the order of such successor
corporation instead of the Issuer and subject to all the terms, conditions and
limitations in this Indenture prescribed, the Trustee shall authenticate and
shall deliver any Securities, together with any Coupons appertaining thereto,
which previously shall have been signed and delivered by the officers of the
Issuer to the Trustee for authentication, and any Securities, together with any
Coupons appertaining thereto, which such successor corporation thereafter shall
cause to be signed and delivered to the Trustee for that purpose.  All of the
Securities, together with any Coupons appertaining thereto, so issued shall in
all respects have the same legal rank and benefit under this Indenture as the
Securities, together with any Coupons appertaining thereto, theretofore or
thereafter issued in accordance with the terms of this Indenture as though all
of such Securities and Coupons had been issued at the date of the execution
hereof.

         In case of any such consolidation, merger, sale, lease or conveyance
such changes in phraseology and form (but not in substance) may be made in the
Securities and Coupons thereafter to be issued as may be appropriate.

         In the event of any such sale or conveyance (other than a conveyance
by way of lease) the Issuer or any successor corporation which shall
theretofore have become such in the manner described in this Article shall be
discharged from all obligations and covenants under this Indenture and the
Securities and may be liquidated and dissolved.

<PAGE>   76
                                       68

         SECTION 9.3  Opinion of Counsel to Trustee.  The Trustee, subject to
the provisions of Sections 6.1 and 6.2, may receive an Opinion of Counsel,
prepared in accordance with Section 11.5, as conclusive evidence that any such
consolidation, merger, sale, lease or conveyance, and any such assumption, and
any such liquidation or dissolution, complies with the applicable provisions of
this Indenture.


                                  ARTICLE TEN

                    SATISFACTION AND DISCHARGE OR INDENTURE;
                               UNCLAIMED MONEYS.

         SECTION 10.1  Satisfaction and Discharge of Indenture.  (A) If at any
time (a) the Issuer shall have paid or caused to be paid the principal of and
interest on all the Securities of any series Outstanding hereunder and all
unmatured Coupons appertaining thereto (other than Securities or Coupons which
have been destroyed, lost or stolen and which have been replaced or paid as
provided in Section 2.9) as and when the same shall have become due and
payable, or (b) the Issuer shall have delivered to the Trustee for cancellation
all Securities of any series theretofore authenticated and all unmatured
Coupons appertaining thereto (other than any Securities or Coupons of such
series which shall have been destroyed, lost or stolen and which shall have
been replaced or paid as provided in Section 2.9) or (c) (i) all the Securities
of such series not theretofore delivered to the Trustee for cancellation shall
have become due and payable, or are by their terms to become due and payable
within one year or are to be called for redemption within one year under
arrangements satisfactory to the Trustee for the giving of notice of
redemption, and (ii) the Issuer shall have irrevocably deposited or caused to
be deposited with the Trustee as trust funds the entire amount in cash (other
than moneys repaid by the Trustee or any paying agent to the Issuer in
accordance with Section 10.4) or U.S. Government Obligations, maturing as to
principal and interest in such amounts and at such times as will insure the
availability of cash (without consideration of any reinvestment of such
principal or interest), or a combination of U.S. Government Obligations and
cash sufficient to pay at maturity or upon redemption all Securities of such
series and all unmatured Coupons appertaining thereto (other than any
Securities or Coupons of such series which shall have been destroyed, lost or
stolen and which shall have been

<PAGE>   77
                                       69

replaced or paid as provided in Section 2.9) not theretofore delivered to the
Trustee for cancellation, including principal and interest due or to become due
to such date of maturity as the case may be, and if, in any such case, the
Issuer shall also pay or cause to be paid all other sums payable hereunder by
the Issuer with respect to Securities of such series and Coupons appertaining
thereto, then this Indenture shall cease to be of further effect with respect
to Securities of such series and Coupons appertaining thereto (except as to (i)
rights of registration of transfer and exchange, and the Issuer's right of
optional redemption, (ii) substitution of mutilated, defaced, destroyed, lost
or stolen Securities or Coupons, (iii) rights of holders of Securities and
Coupons appertaining thereto to receive payments of principal thereof and
interest thereon, upon the original stated due dates therefor (but not upon
acceleration) and remaining rights of the holders to receive mandatory sinking
fund payments, if any, (iv) the rights, obligations, duties and immunities of
the Trustee hereunder, including those under Section 6.6, (v) the rights of the
Securityholders of such series as beneficiaries hereof with respect to the
property so deposited with the Trustee payable to all or any of them, and (vi)
the obligations of the Issuer under Section 3.2) and the Trustee, on demand of
the Issuer accompanied by an Officers' Certificate and an Opinion of Counsel
and at the cost and expense of the Issuer, shall execute proper instruments
acknowledging such satisfaction of and discharging this Indenture with respect
to such series; PROVIDED, that the rights of Holders of the Securities and
Coupons to receive amounts in respect of principal of and interest on the
Securities and Coupons held by them shall not be delayed longer than required
by then-applicable mandatory rules or policies of any securities exchange upon
which the Securities are listed.  The Issuer agrees to reimburse the Trustee
for any costs or expenses thereafter reasonably and properly incurred and to
compensate the Trustee for any services thereafter reasonably and properly
rendered by the Trustee in connection with this Indenture or the Securities and
Coupons of such series.

         (B) The following provisions shall apply to the Securities of each
series unless specifically otherwise provided in a Board Resolution, Officers'
Certificate or indenture supplemental hereto provided pursuant to Section 2.3.
In addition to discharge of the Indenture pursuant to the next preceding
paragraph, the Issuer shall be deemed to have paid and discharged the entire
indebtedness on all the Securities of a series and Coupons appertaining thereto
on the 121st day after the date of the

<PAGE>   78
                                       70

deposit referred to in subparagraph (a) below, and the provisions of this
Indenture with respect to the Securities of such series and Coupons
appertaining thereto shall no longer be in effect (except as to (i) rights of
registration of transfer and exchange of Securities of such series, and of
Coupons appertaining thereto, (ii) substitution of apparently mutilated,
defaced, destroyed, lost or stolen Securities or Coupons, (iii) rights of
holders of Securities and Coupons appertaining thereto to receive, from the
trust fund described in subparagraph (a) below, payments of principal thereof
and interest thereon, upon the original stated due dates therefor (but not upon
acceleration) and remaining rights of the holders to receive sinking fund
payments, if any, (iv) the rights, obligation, duties and immunities of the
Trustee hereunder, including those under Section 6.6, (v) the rights of the
holders of Securities of such series and Coupons appertaining thereto as
beneficiaries hereof with respect to the property so deposited with the Trustee
payable to all or any of them and (vi) the obligations of the Issuer under
Section 3.2) and the Trustee, at the expense of the Issuer, shall at the
Issuer's request, execute proper instruments acknowledging the same, if

                 (a) with reference to this provision the Issuer has
         irrevocably deposited or caused to be irrevocably deposited with the
         Trustee as trust funds in trust, specifically pledged as security for,
         and dedicated solely to, the benefit of the holders of the Securities
         of such series and Coupons appertaining thereto (i) cash, or (ii) U.S.
         Government Obligations, maturing as to principal and interest at such
         times and in such amounts as will insure the availability of cash or
         (iii) a combination thereof, in an amount sufficient, in the opinion
         of a nationally recognized firm of independent public accountants
         expressed in a written certification thereof delivered to the Trustee,
         to pay (A) the principal and interest on all Securities of such series
         and Coupons appertaining thereto on the date that such principal or
         interest is due and payable and (B) any mandatory sinking fund
         payments on the day on which such payments are due and payable in
         accordance with the terms of the Indenture and the Securities of such
         series;

                 (b) such deposit will not result in a breach or violation of,
         or constitute a default under, any agreement or instrument to which
         the Issuer is a party or by which it is bound;

                 (c) the Issuer has delivered to the Trustee an opinion of
         independent legal counsel satisfactory to the Trustee to the effect

<PAGE>   79
                                       71

         that Holders of the Securities of such series and Coupons appertaining
         thereto will not recognize income, gain or loss for Federal income tax
         purposes as a result of such deposit, defeasance and discharge and
         will be subject to Federal income tax on the same amount and in the
         same manner and at the same times, as would have been the case if such
         deposit, defeasance and discharge had not occurred; and

                 (d) the Issuer has delivered to the Trustee an Officers'
         Certificate and an Opinion of Counsel, each stating that all
         conditions precedent provided for relating to the defeasance
         contemplated by this provision have been complied with, and the
         Opinion of Counsel shall also state that such deposit does not violate
         applicable law.

         SECTION 10.2  Application by Trustee of Funds Deposited for Payment of
Securities.  Subject to Section 10.4, all moneys deposited with the Trustee
pursuant to Section 10.1 shall be held in trust and applied by it to the
payment, either directly or through any paying agent (including the Issuer
acting as its own paying agent), to the Holders of the particular Securities of
such series and of Coupons appertaining thereto for the payment or redemption
of which such moneys have been deposited with the Trustee, of all sums due and
to become due thereon for principal and interest; but such money need not be
segregated from other funds except to the extend required by law.

         SECTION 10.3  Repayment of Moneys Held by Paying Agent.  In connection
with the satisfaction, and discharge of this Indenture with respect to
Securities of any series, all moneys then held by any paying agent under the
provisions of this Indenture with respect to such series of Securities shall,
upon demand of the Issuer, be repaid to it or paid to the Trustee and thereupon
such paying agent shall be released from all further liability with respect to
such moneys.

         SECTION 10.4  Return of Moneys Held by Trustee and Paying Agent
Unclaimed for Two Years.  Any moneys deposited with or paid to the Trustee or
any paying agent for the payment of the principal of or interest on any
Security of any series and not applied but remaining unclaimed for two years
after the date upon which such principal or interest shall have become due and
payable, shall, upon the written request of the Issuer and unless otherwise
required by mandatory provisions of applicable escheat or abandoned or
unclaimed property law, be repaid to the Issuer by the Trustee for such series
or such paying agent, and the Holder of the Security of such series shall,
unless

<PAGE>   80
                                       72

otherwise required by mandatory provisions of applicable escheat or abandoned
or unclaimed property laws, thereafter look only to the Issuer for any payment
which such Holder may be entitled to collect, and all liability of the Trustee
or any paying agent with respect to such moneys shall thereupon cease;
provided, the Trustee or such paying agent, before being required to make any
such repayment with respect to moneys deposited with it for any payment (a) in
respect of Registered Securities of any series, may at the expense of the
Issuer, mail by first class mail to Holders of such Securities at their
addresses as they shall appear on the Security register, and (b) in respect of
Unregistered Securities of any series, may at the expense of the Issuer cause
to be published once, in an Authorized Newspaper in London (and if required by
Section 3.6, once in an Authorized Newspaper in Luxembourg), notice, that such
moneys remain and that, after a date specified therein, which shall not be less
than thirty days from the date of such mailing or publication, any unclaimed
balance of such money then remaining will be repaid to the Issuer.

         SECTION 10.5  Indemnity for U.S. Government Obligations.  The Issuer
shall pay and indemnify the Trustee against any tax, fee or other charge
imposed on or assessed against the U.S. Government Obligations deposited
pursuant to Section 10.1 or the principal or interest received in respect of
such obligations.


                                 ARTICLE ELEVEN

                            MISCELLANEOUS PROVISIONS

         SECTION 11.1  Incorporators, Shareholders, Officers and Directors of
Issuer Exempt from Individual Liability.  No recourse under or upon any
obligation, covenant or agreement contained in this Indenture, or in any
Security or Coupon appertaining thereto, or because of any indebtedness
evidenced thereby, shall be had against any incorporator, as such or against
any past, present or future shareholder, officer or director, as such, of the
Issuer or of any successor, either directly or through the Issuer or any
successor, under any rule of law, statute or constitutional provision or by the
enforcement of any assessment or by any legal or equitable proceeding or
otherwise, all such liability being expressly waived and released by the
acceptance of the Securities and any Coupons appertaining thereto by the
holders thereof and as part of the consideration for the issue of the
Securities and any Coupons appertaining thereto.

<PAGE>   81
                                       73

         SECTION 11.2  Provisions of Indenture for the Sole Benefit of Parties
and Securityholders.  Nothing in this Indenture or in the Securities and any
Coupons appertaining thereto, expressed or implied, shall give or be construed
to give to any person, firm or corporation, other than the parties hereto and
their successors and the Holders of the Securities or Coupons, any legal or
equitable right, remedy or claim under this Indenture or under any covenant or
provision herein contained, all such covenants and provisions being for the
sole benefit of the parties hereto and their successors and of the Holders of
the Securities.

         SECTION 11.3  Successors and Assigns of Issuer Bound by Indenture.
All the covenants, stipulations, promises and agreements in this Indenture
contained by or in behalf of the Issuer shall bind its successors and assigns,
whether so expressed or not.

         SECTION 11.4  Notices and Demands on Issuer, Trustee and
Securityholders.  Any notice or demand which by any provision of this Indenture
is required or permitted to be given or served by the Trustee or by the Holders
of Securities or Coupons to or on the Issuer may be given or served by being
deposited postage prepaid, first-class mail (except as otherwise specifically
provided herein) addressed (until another address of the Issuer is filed by the
Issuer with the Trustee) to The Progressive Corporation, 6000 Parkland
Boulevard, Mayfield Heights, Ohio 44124, Attn: Treasurer.  Any notice,
direction, request or demand by the Issuer or any Securityholder to or upon the
Trustee shall be deemed to have been sufficiently given or made, for all
purposes, if given or made at the Corporate Trust Office.

         Where this Indenture provides for notice to Holders. such notice shall
be sufficiently given (unless otherwise herein expressly provided) (i) in the
case of Holders of Registered Securities and Holders of Unregistered Securities
who have filed their names and addresses with the Trustee pursuant to Section
4.4(c)(ii), if in writing and mailed, first-class postage prepaid, to each
holder entitled thereto, at his last address as it appears in the registry
books or as so filed; and (ii) in the case of holders of Unregistered
Securities who have not filed their names and addresses with the Trustee, by
publication in accordance with the requirements of the provision hereof
requiring such notice.  Any notice which is mailed in the manner herein
provided shall be conclusively presumed to have been duly given when mailed,
whether or not the Holder receives the notice.  In any case

<PAGE>   82
                                       74

where notice to Holders is given by mail, neither the failure to mail such
notice, nor any defect in any notice so mailed, to any particular holder shall
affect the sufficiency of such notice with respect to other Holders. Where this
Indenture provides for notice in any manner, such notice may be waived in
writing by the person entitled to receive such notice, either before or after
the event, and such waiver shall be the equivalent of such notice. Waivers of
notice by Holders shall be filed with the Trustee, but such filing shall not be
a condition precedent to the validity of any action taken in reliance upon such
waiver.

         In case, by reason of the suspension of or irregularities in regular
mail service, it shall be impracticable to mail notice to the Issuer and
Securityholders when such notice is required to be given pursuant to any
provision of this Indenture, then any manner of giving such notice as shall be
satisfactory to the Trustee shall be deemed to be a sufficient giving of such
notice.

         SECTION 11.5  Officers' Certificates and Opinions of Counsel;
Statements to Be Contained Therein.  Upon any application or demand by the
Issuer to the Trustee to take any action under any of the provisions of this
Indenture, the Issuer shall furnish to the Trustee an Officers' Certificate
stating that all conditions precedent provided for in this Indenture relating
to the proposed action have been complied with and an Opinion of Counsel
stating that in the opinion of such counsel all such conditions precedent have
been complied with, except that in the case of any such application or demand
as to which the furnishing of such documents is specifically required by any
provision of this Indenture relating to such particular application or demand,
no additional certificate or opinion need be furnished.

         Each certificate or opinion provided for in this Indenture and
delivered to the Trustee with respect to compliance with a condition or
covenant provided for in this Indenture shall include (a) a statement that the
person making such certificate or opinion has read such covenant or condition,
(b) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based, (c) a statement that, in the opinion of such
person, he has made such examination or investigation as is necessary to enable
him to express an informed opinion as to whether or not such covenant or
condition has been complied with and (d) a statement as to whether or not, in
the opinion of such person, such condition or covenant has been complied with.

<PAGE>   83
                                       75

         Any certificate, statement or opinion of an officer of the Issuer may
be based, insofar as it relates to legal matters, upon a certificate or opinion
of or representations by counsel, unless such officer knows that the
certificate or opinion or representations with respect to the matters upon
which his certificate, statement or opinion may be based as aforesaid are
erroneous, or in the exercise of reasonable care should know that the same are
erroneous. Any certificate, statement or opinion of counsel may be based,
insofar as it relates to factual matters, information with respect to which is
in the possession of the Issuer, upon the certificate, statement or opinion of
or representations by an officer or officers of the Issuer, unless such counsel
knows that the certificate, statement or opinion or representations with
respect to the matters upon which his certificate, statement or opinion may be
based as aforesaid are erroneous, or in the exercise of reasonable care should
know that the same are erroneous.

         Any certificate, statement or opinion of an officer of the Issuer or
of counsel may be based, insofar as it relates to accounting matters, upon a
certificate or opinion of or representations by an accountant or firm of
accountants in the employ of the Issuer, unless such officer or counsel, as the
case may be, knows that the certificate or opinion or representations with
respect to the accounting matters upon which his certificate, statement or
opinion may be based as aforesaid are erroneous, or in the exercise of
reasonable care should know that the same are erroneous.

         Any certificate or opinion of any independent firm of public
accountants filed with the Trustee shall contain a statement that such firm is
independent.

         SECTION 11.6  Payments Due on Saturdays, Sundays and Holidays.  If the
date of maturity of interest on or principal of the Securities of any series or
any Coupons appertaining thereto or the date fixed for redemption or repayment
of any such Security or Coupon shall not be a Business Day, then payment of
interest or principal need not be made on such date, but may be made on the
next succeeding Business Day with the same force and effect as if made on the
date of maturity or the date fixed for redemption, and no interest shall accrue
for the period after such date.

         SECTION 11.7  Conflict of Any Provision of Indenture with Trust
Indenture Act of 1939.  If and to the extent that any provision of this
Indenture limits, qualifies or conflicts with another provision included in

<PAGE>   84
                                       76

this Indenture which is required to be included herein by any of Sections 310
to 317, inclusive, of the Trust Indenture Act of 1939, such required provision
shall control.

         SECTION 11.8  New York Law to Govern.  This Indenture and each
Security and Coupon shall be deemed to be a contract under the laws of the
State of New York, and for all purposes shall be construed in accordance with
the laws of such State, except as may otherwise be required by mandatory
provisions of law.

         SECTION 11.9  Counterparts.  This Indenture may be executed in any
number of counterparts, each of which shall be an original; but such
counterparts shall together constitute but one and the same instrument.

         SECTION 11.10  Effect of Headings.  The Article and Section headings
herein and the Table of Contents are for convenience only and shall not affect
the construction hereof.

         SECTION 11.11  Securities in Foreign Currencies or in ECU.  Whenever
this Indenture provides for any action by, or the determination of any of the
rights of, or any distribution to, Holders of Securities denominated in United
States dollars and in any other currency or currency unit (including ECU), in
the absence of any provision to the contrary in the form of Security of any
particular series, any amount in respect of any Security denominated in a
currency or currency unit (including ECU) other than United States dollars
shall be treated for any such action or distribution as that amount of United
States dollars that could be obtained for such amount on such reasonable basis
of exchange and as of such date as the Issuer may specify in a written notice
to the Trustee or in the absence of such written notice, as the Trustee shall
so determine.


                                 ARTICLE TWELVE

                   REDEMPTION or SECURITIES AND SINKING FUNDS

         SECTION 12.1  Applicability of Article.  The provisions of this
Article shall be applicable to the Securities of any series which are
redeemable before their maturity or to any sinking fund for the retirement of
Securities of a series except as otherwise specified as contemplated by Section
2.3 for Securities of such series.

<PAGE>   85
                                       77

         SECTION 12.2  Notice of Redemption; Partial Redemptions.  Notice of
redemption to the Holders of Registered Securities of any series to be redeemed
as a whole or in part at the option of the Issuer shall be given by mailing
notice of such redemption by first class mail, postage prepaid, at least 30
days and not more than 60 days prior to the date fixed for redemption to such
Holders of Securities of such series at their last addresses as they shall
appear upon the registry books.  Notice of redemption to the Holders of
Unregistered Securities to be redeemed as a whole or in part, who have filed
their names and addresses with the Trustee pursuant to Section 4.4(c)(ii),
shall be given by mailing notice of such redemption, by first class mail,
postage prepaid, at least thirty and not more than sixty days prior to the date
fixed for redemption, to such Holders at such addresses as were so furnished to
the Trustee (and, in the case of any such notice given by the Issuer, the
Trustee shall make such information available to the Issuer for such purpose).
Notice of redemption to all other holders of Unregistered Securities shall be
published in an Authorized Newspaper in London (and, if required by Section
3.6, in an Authorized Newspaper in Luxembourg), in each case, once in each of
two successive calendar weeks, the first publication to be not less than thirty
nor more than sixty days prior to the date fixed for redemption.  Any notice
which is mailed in the manner herein provided shall be conclusively presumed to
have been duly given, whether or not the Holder receives the notice.  Failure
to give notice by mail, or any defect in the notice to the Holder of any
Security of a series designated for redemption as a whole or in part shall not
affect the validity of the proceedings for the redemption of any other Security
of such series.

         The notice of redemption to each such Holder shall specify the
principal amount of each Security of such series held by such Holder to be
redeemed, the date fixed for redemption, the redemption price, the place or
places of payment, that payment will be made upon presentation and surrender of
such Securities, and, in the case of Securities with Coupons attached thereto,
of all Coupons appertaining thereto maturing after the date fixed for
redemption, that such redemption is pursuant to the mandatory or optional
sinking fund, or both, if such be the case, that interest accrued to the date
fixed for redemption will be paid as specified in such notice and that on and
after said date interest thereon or on the portions thereof to be redeemed will
cease to accrue.  In case any Security of a series is to be redeemed in part
only the notice of redemption shall state the portion of the principal amount
thereof to be redeemed and shall state that on and after the date fixed for
redemption, upon surrender of

<PAGE>   86
                                       78

such Security, a new Security or Securities of such series in principal amount
equal to the unredeemed portion thereof will be issued.

         The notice of redemption of Securities of any series to be redeemed at
the option of the Issuer shall be given by the Issuer or, at the Issuer's
request, by the Trustee in the name and at the expense of the Issuer.

         On the redemption date specified in the notice of redemption given as
provided in this Section, the Issuer will deposit with the Trustee or with one
or more paying agents (or, if the Issuer is acting as its own paying agent, set
aside, segregate and hold in trust as provided in Section 3.4) an amount of
money sufficient to redeem on the redemption date all the Securities of such
series so called for redemption at the appropriate redemption price, together
with accrued interest to the date fixed for redemption.  If any or all of the
outstanding Securities of a series are to be redeemed, the Issuer will deliver
to the Trustee at least 70 days prior to the date fixed for redemption an
Officers' Certificate stating the date of redemption and the aggregate
principal amount of Securities to be redeemed.

         If less than all the Securities of a series are to be redeemed, the
Trustee shall select, in such manner as it shall deem appropriate and fair,
Securities of such series to be redeemed in whole or in part.  Securities may
be redeemed in part in multiples equal to the minimum authorized denomination
for Securities of such series or any integral multiple thereof.  The Trustee
shall promptly notify the Issuer in writing of the Securities of such series
selected for redemption and, in the case of any Securities of such series
selected for partial redemption, the principal amount thereof to be redeemed.
For all purposes of this Indenture, unless the context otherwise requires, all
provisions relating to the redemption of Securities of any series shall relate,
in the case of any Security redeemed or to be redeemed only in part, to the
portion of the principal amount of such Security which has been or is to be
redeemed.

         SECTION 12.3  Payment of Securities Called for Redemption.  If notice
of redemption has been given as above provided, the Securities or portions of
Securities specified in such notice shall become due and payable on the date
and at the place stated in such notice at the applicable redemption price,
together with interest accrued to the date fixed for redemption, and on and
after said date (unless the Issuer shall default in the payment of such
Securities at the redemption price, together with interest accrued to said
date) interest on the Securities or portions of Securities so called for
redemption shall cease to accrue and the

<PAGE>   87
                                       79

unmatured Coupons, if any, appertaining thereto shall be void and, except as
provided in Sections 6.5 and 10.4, such Securities shall cease from and after
the date fixed for redemption to be entitled to any benefit or security under
this Indenture, and the Holders thereof shall have no right in respect of such
Securities except the right to receive the redemption price thereof and unpaid
interest to the date fixed for redemption.  On presentation and surrender of
such Securities, together with all Coupons appertaining thereto maturing after
the date fixed for redemption, at a place of payment specified in said notice,
said Securities and Coupons or the specified portions thereof shall be paid and
redeemed by the Issuer at the applicable redemption price, together with
interest accrued thereon to the date fixed for redemption; provided that any
semiannual payment of interest becoming due on the date fixed for redemption
shall be payable in the case of Securities with Coupons attached thereto, to
the bearers of the Coupons for such interest upon surrender thereof, and in the
case of Registered Securities, to the Holders of such Securities registered as
such on the relevant record date subject to the terms and provisions of Section
2.4 hereof.

         If any Security called for redemption shall not be so paid upon
surrender thereof for redemption, the principal shall, until paid or duly
provided for, bear interest from the date fixed for redemption at the rate of
interest or Yield to Maturity (in the case of an Original Issue Discount
Security) borne by the Security.

         If any Security with Coupons attached thereto is surrendered for
redemption and is not accompanied by all such Coupons maturing after the date
fixed for redemption, the surrender of such missing Coupon or Coupons may be
waived by the Issuer and the Trustee, if there be furnished to each of them
such security or indemnity as they may require to save each of them harmless.

         Upon presentation of any Security redeemed in part only, the Issuer
shall execute and the Trustee shall authenticate and deliver to or on the order
of the Holder thereof, at the expense of the Issuer, a new Security or
Securities of such series, together with all Coupons, if any, appertaining
thereto, of authorized denominations, in principal amount equal to the
unredeemed portion of the Security so presented.

         SECTION 12.4  Exclusion of Certain Securities from Eligibility for
Selection for Redemption.  Securities shall be excluded from eligibility for
selection for redemption if they are identified by registra-

<PAGE>   88
                                       80

tion and certificate number in a written statement signed by an authorized
officer of the Issuer and delivered to the Trustee at least 40 days prior to
the last date on which notice of redemption may be given as being owned of
record and beneficially by, and not pledged or hypothecated by either (a) the
Issuer or (b) an entity specifically identified in such written statement
directly or indirectly controlling or controlled by or under direct or indirect
common control with the Issuer.

         SECTION 12.5  Mandatory and Optional Sinking Funds.  The minimum
amount of any sinking fund payment provided for by the terms of Securities of
any series is herein referred to as a "mandatory sinking fund payment", and any
payment in excess of such minimum amount provided for by the terms of
Securities of any series is herein referred to as an "optional sinking fund
payment".  The date on which a sinking fund payment is to be made is herein
referred to as the "sinking fund payment date".

         In lieu of making all or any part of any mandatory sinking fund
payment with respect to any series of Securities in cash, the Issuer may at its
option (a) deliver to the Trustee Securities of such series theretofore
purchased or otherwise acquired (except upon redemption pursuant to the
mandatory sinking fund) by the Issuer or receive credit for Securities of such
series (not previously so credited) theretofore purchased or otherwise acquired
(except as aforesaid) by the Issuer and delivered to the Trustee for
cancellation pursuant to Section 2.7, (b) receive credit for optional sinking
fund payments (not previously so credited) made pursuant to this Section, or
(c) receive credit for Securities of such series (not previously so credited)
redeemed by the Issuer through any optional redemption provision contained in
the terms of such series.  Securities so delivered or credited shall be
received or credited by the Trustee at the sinking fund redemption price
specified in such, Securities.

         On or before the sixtieth day next preceding each sinking fund payment
date for any series, the Issuer will deliver to the Trustee a written statement
(which need not contain the statements required by Section 11.5) signed by an
authorized officer of the Issuer (a) specifying the portion of the mandatory
sinking fund payment to be satisfied by payment of cash and the portion to be
satisfied by credit of Securities of such series, (b) stating that none of the
Securities of such series has theretofore been so credited, (c) stating that no
defaults in the payment of interest or Events of Default with respect to such
series have occurred

<PAGE>   89
                                       81

(which have not been waived or cured) and are continuing and (d) stating
whether or not the Issuer intends to exercise its right to make an optional
sinking fund payment with respect to such series and, if so, specifying the
amount of such optional sinking fund payment which the Issuer intends to pay on
or before the next succeeding sinking fund payment date.  Any Securities of
such series to be credited and required to be delivered to the Trustee in order
for the Issuer to be entitled to credit therefore as aforesaid which have not
theretofore been delivered to the Trustee shall be delivered for cancellation
pursuant to Section 2.10 to the Trustee with such written statement (or
reasonably promptly thereafter if acceptable to the Trustee).  Such written
statement shall be irrevocable and upon its receipt by the Trustee the Issuer
shall become unconditionally obligated to make all the cash payments or
payments therein referred to, if any, on or before the next succeeding sinking
fund payment date.  Failure of the Issuer, on or before any such sixtieth day,
to deliver such written statement and Securities specified in this paragraph,
if any, shall not constitute a default but shall constitute, on and as of such
date, the irrevocable election of the Issuer (i) that the mandatory sinking
fund payment for such series due on the next succeeding sinking fund payment
date shall be paid entirely in cash without the option to deliver or credit
Securities of such series in respect thereof and (ii) that the Issuer will make
no optional sinking fund payment with respect to such series as provided in
this Section.

         If the sinking fund payment or payments (mandatory or optional or
both) to be made in cash on the next succeeding sinking fund payment date plus
any unused balance of any preceding sinking fund payments made in cash shall
exceed $50,000 (or a lesser sum if the Issuer shall so request) with respect to
the Securities of any particular series, such cash shall be applied on the next
succeeding sinking fund payment date to the redemption of Securities of such
series at the sinking fund redemption price together with accrued interest to
the date fixed for redemption. If such amount shall be $50,000 or less and the
Issuer makes no such request then it shall be carried over until a sum in
excess of $50,000 is available.  The Trustee shall select, in the manner
provided in Section 12.2, for redemption on such sinking fund payment date a
sufficient principal amount of Securities of such series to absorb said cash,
as nearly as may be, and shall (if requested in writing by the Issuer) inform
the Issuer of the serial numbers of the Securities of such series (or portions
thereof) so selected.  Securities of any series which are (a) owned by the
Issuer

<PAGE>   90
                                       82

or an entity known by the Trustee to be directly or indirectly controlling or
controlled by or under direct or indirect common control with the Issuer, as
shown by the Security register, and not know to the Trustee to have been
pledged or hypothecated by the Issuer or any such entity or (b) identified in
an Officers' Certificate at least 60 days prior to the sinking fund payment
date as being beneficially owned by, and not pledged or hypothecated by, the
Issuer or an entity directly or indirectly controlling or controlled by or
under direct or indirect common control with the Issuer shall be excluded from
Securities of such series eligible for selection for redemption. The Trustee,
in the name and at the expense of the Issuer (or the Issuer, if it shall so
request the Trustee in writing) shall cause notice of redemption of the
Securities of such series to be given in substantially the manner provided in
Section 12.2 (and with the effect provided in Section 12.3) for the redemption
of Securities of such series in part at the option of the issuer.  The amount
of any sinking fund payments not so applied or allocated to the redemption of
Securities of such series shall be added to the next cash sinking fund payment
for such series and, together with such payment, shall be applied in accordance
with the provisions of this Section.  Any and all sinking fund moneys held on
the stated maturity date of the Securities of any particular series (or
earlier, if such maturity is accelerated), which are not held for the payment
or redemption of particular Securities of such series shall be applied,
together with other moneys, if necessary, sufficient for the purpose, to the
payment of the principal of, and interest on, the Securities of such series at
maturity.

         On each sinking fund payment date, the Issuer shall pay to the Trustee
in cash or shall otherwise provide for the payment of all interest accrued to
the date fixed for redemption on Securities to be redeemed on such sinking fund
payment date.

         The Trustee shall not redeem or cause to be redeemed any Securities of
a series with sinking fund moneys or provide any notice of redemption of
Securities for such series by operation of the sinking fund during the
continuance of a default in payment of interest on such Securities or of any
Event of Default except that, where the mailing or publication of notice of
redemption of any Securities shall theretofore have been made, the Trustee
shall redeem or cause to be redeemed such Securities, provided that it shall
have received from the Issuer a sum sufficient for such redemption.  Except as
aforesaid, any moneys in the sinking fund for such series at the time when any
such default or Event of Default

<PAGE>   91
                                       83

shall occur, and any moneys thereafter paid into the sinking fund, shall,
during the continuance of such default or Event of Default, be deemed to have
been collected under Article Five and held for the payment of all such
Securities.  In case such Event of Default shall have been waived as provided
in Section 5.10 or the default cured on or before the sixtieth day preceding
the sinking fund payment date in any year, such moneys shall thereafter be
applied on the next succeeding sinking fund payment date in accordance with
this Section to the redemption of such Securities.

<PAGE>   92
                                       84



         IN WITNESS WHEREOF, the parties hereto have caused this Indenture to
be duly executed, and their respective corporate seals to be hereunto affixed
and attested, all as of November 15, 1988.


<TABLE>
<S>                                                  <C>
                                                     THE PROGRESSIVE CORPORATION
[CORPORATE SEAL]
                                                     By                                                            
                                                        -----------------------------------------------------------


Attest:

By                                                         
   --------------------------------------------------------




                                                     THE FIRST NATIONAL BANK
                                                        OF BOSTON

[CORPORATE SEAL]
                                                        By                                                            
                                                           -----------------------------------------------------------


Attest:

By                                                         
   --------------------------------------------------------
</TABLE>


<PAGE>   93
                                       85


<TABLE>
<S>                                                  <C>
STATE OF NEW YORK
COUNTY OF NEW YORK                                   SS.:
</TABLE>



         On this _______ day of_______________, before me personally came
HOWARD M. ZELIKOW, to me personally known, who, being by me duly sworn, did
depose and say that he resides at Cleveland, Ohio
                        that he is an officer of THE PROGRESSIVE CORPORATION,
one of the corporations described in and which executed the above instrument;
that he knows the corporate seal of said corporation; that the seal affixed to
said instrument is such corporate seal; that it was so affixed by authority of
the Board of Directors of said corporation, and that he signed his name thereto
by like authority.




<TABLE>
<S>                                                  <C>
                                                                                                                      
                                                        --------------------------------------------------------------
                                                        Notary Public
[NOTARIAL SEAL]





STATE OF NEW YORK
COUNTY OF NEW YORK                                   SS.:

</TABLE>


       On this _____ day of_______________, before me personally came
                                        to me personally known, who, being by
me duly sworn,, did depose and say that he resides at New York, New York; that
he is an of THE FIRST NATIONAL BANK OF BOSTON, one of the corporations
described in and which executed the above instrument; that he knows the
corporate seal of said corporation; that the seal affixed to said instrument is
such corporate seal; that it was so affixed by authority of the Board of
Directors of said corporation, and that he signed his name thereto by like
authority.




<TABLE>
<S>                                                     <C>
                                                                                                                      
                                                        --------------------------------------------------------------
                                                        Notary Public

[NOTARIAL SEAL]
</TABLE>




<PAGE>   1





                   [FORM OF FACE OF REGISTERED DEBT SECURITY]

NO. R                                                       $__________
                                                      CUSIP 743315 AC 7
                                                SEE REVERSE FOR CERTAIN
                                                            DEFINITIONS

                          THE PROGRESSIVE CORPORATION

                          10% NOTE DUE DECEMBER 15, 2000




                 THE PROGRESSIVE CORPORATION, an Ohio corporation (the
"Issuer"), for value received, hereby promises to pay to
___________________________________ or registered assigns, at the office or
agency of the Issuer at the office of the Trustee in Boston, Massachusetts, the
principal sum of __________________ Dollars on December 15, 2000, in such coin
or currency of the United States of America as at the time of payment shall be
legal tender for the payment of public and private debts, and to pay interest
semiannually on June 15 and December 15 of each year, commencing June 15, 1989,
on said principal sum at said office or agency, in like coin or currency at the
rate per annum specified in the title of this Note, from the June 15 or the
December 15, as the case may be, next preceding the date of this Note to which
interest has been paid, unless the date hereof is a date to which interest has
been paid, in which case from the date of this Note, or unless no interest has
been paid on these Notes, in which case from December 15, 1988, until payment
of said principal sum has been made or duly provided for; PROVIDED that payment
of interest may
 be made at the option of the Issuer by check mailed to the
address of the person entitled thereto as such address shall appear on the
Security Register.  Notwithstanding the foregoing, if the date hereof is after
the first day of June or December, as the case may be, and before the following
June 15 or December 15, this Note shall bear interest from such June 15 or
December 15; PROVIDED, that if the Issuer shall default in the payment of
interest due on such June 15 or December 15, then this Note shall bear interest
from the next preceding June 15 or December 15 to which interest has been paid
or, if no interest has been paid on these Notes, from December 15, 1988.  The
interest so payable on any June 15 or December 15 will, subject to certain
exceptions provided in the Indenture referred to on the reverse hereof, be paid
to the person in whose name this Note is registered at the close of business on
the June 1 or December 1, as the case may be, next preceding such June 15 or
December 15.

                 Reference is made to the further provisions of this Note set
forth on the reverse hereof.  Such further provisions


<PAGE>   2

shall for all purposes have the same effect as though fully set forth at this
place.

                 This Note shall not be valid or become obligatory for any
purpose until the certificate of authentication hereon shall have been signed
by the Trustee under the Indenture referred to on the reverse hereof.

                 IN WITNESS WHEREOF, The Progressive Corporation has caused
this instrument to be signed by facsimile by its duly authorized officers, and
has caused a facsimile of its corporate seal to be affixed hereunto or
imprinted hereon.

Dated:

Attest:                               THE PROGRESSIVE CORPORATION


/s/ David M. Schneider               By /s/ Peter B. Lewis
- - - ----------------------               --------------------------------
       Secretary                       President and Chief Executive
                                       Officer






<PAGE>   3

                    TRUSTEE'S CERTIFICATE OF AUTHENTICATION


                 This is one of the Securities, of the series designated
herein, referred to in the within-mentioned Indenture.

                                   The First National Bank of Boston, as Trustee



                                             By_________________________________
                                                            Authorized Signatory



                       [FORM OF REVERSE OF DEBT SECURITY]


                          THE PROGRESSIVE CORPORATION

                         10% NOTE DUE DECEMBER 15, 2000


                 This Note is one of a duly authorized issue of debentures,
notes, bonds or other evidences of indebtedness of the Issuer (hereinafter
called the "Securities") of the series hereinafter specified, all issued or to
be issued under and pursuant to an indenture dated as of November 15, 1988
(herein called the "Indenture"), duly executed and delivered by the Issuer to
The First National Bank of Boston, as Trustee (herein called the "Trustee"), to
which Indenture and all indentures supplemental thereto reference is hereby
made for a description of the rights, limitations of rights, obligations,
duties and immunities thereunder of the Trustee, the Issuer and the holders of
the Securities.  The Securities may be issued in one or more series, which
different series may be issued in various aggregate principal amounts, may
mature at different times, may bear interest (if any) at different rates, may
be subject to different redemption provisions (if any), may be subject to
different sinking, purchase or analogous funds (if any) and may otherwise vary
as in the Indenture provided.  This Note is one of a series designated as the
10% Notes Due December 15, 2000 of the Issuer, limited in aggregate principal
amount to $150,000,000.

                 In case an Event of Default with respect to the 10% Notes Due
December 15, 2000, as defined in the Indenture, shall have occurred and be
continuing, the principal hereof may be declared, and upon such declaration
shall become, due and payable, in the manner, with the effect and subject to
the conditions provided in the Indenture.

                 The Indenture contains provisions permitting the Issuer and
the Trustee, with the consent of the Holders of not less than 66-2/3% in
aggregate principal amount of the Securities at the


<PAGE>   4

time Outstanding (as defined in the Indenture) of all series to be affected
(voting as one class), evidenced as in the Indenture provided, to execute
supplemental indentures adding any provisions to or changing in any manner or
eliminating any of the provisions of the Indenture or of any supplemental
indenture or modifying in any manner the rights of the Holders of the
Securities of each such series; PROVIDED, HOWEVER, that no such supplemental
indenture shall (i) extend the final maturity of any Security, or reduce the
principal amount thereof or any premium thereon, or reduce the rate or extend
the time of payment of any interest thereon, or impair or affect the rights of
any Holder to institute suit for the payment thereof, without the consent of
the Holder of each Security so affected or (ii) reduce the aforesaid percentage
of Securities, the Holders of which are required to consent to any such
supplemental indenture, without the consent of the Holder of each Security
affected.  It is also provided in the Indenture that, with respect to certain
defaults or Events of Default regarding the Securities of any series, prior to
any declaration accelerating the maturity of such Securities, the Holders of a
majority in aggregate principal amount Outstanding of the Securities of such
series (or, in the case of certain defaults or Events of Default, all or
certain series of the Securities) may on behalf of the Holders of all the
Securities of such series (or all or certain series of the Securities, as the
case may be) waive any such past default or Event of Default and its
consequences.  The preceding sentence shall not, however, apply to a default in
the payment of the principal of or premium, if any, or interest on any of the
Securities.  Any such consent or waiver by the Holder of this Note (unless
revoked as provided in the Indenture) shall be conclusive and binding upon such
Holder and upon all future Holders and owners of this Note and any Note which
may be issued in exchange or substitution herefor, irrespective of whether or
not any notation thereof is made upon this Note or such other Note.

                 No reference herein to the Indenture and no provision of this
Note or of the Indenture shall alter or impair the obligation of the Issuer,
which is absolute and unconditional, to pay the principal of and interest on
this Note in the manner, at the respective times, at the rate and in the coin
or currency herein prescribed.

                 The Notes are issuable in registered form without coupons in
denominations of $1,000 and any integral multiples of $1,000 at the office or
agency of the Issuer at the office of the Trustee in Boston, Massachusetts, and
in the manner and subject to the limitations provided in the Indenture, but
without the payment of any service charge, Notes may be exchanged for a like
aggregate principal amount of Notes of other authorized denominations.

                 The Notes are not subject to redemption at the option of the
Issuer or through the operation of a sinking fund.



<PAGE>   5

                 Upon due presentment for registration of transfer of this Note
at the office or agency of the Issuer at the office of the Trustee in Boston,
Massachusetts, a new Note or Notes of authorized denominations for an equal
aggregate principal amount will be issued to the transferee in exchange
therefor, subject to the limitations provided in the Indenture, without charge
except for any tax or other governmental charge imposed in connection
therewith.

                 The Issuer, the Trustee and any authorized agent of the Issuer
or the Trustee may deem and treat the registered Holder hereof as the absolute
owner of this Note (whether or not this Note shall be overdue and
notwithstanding any notation of ownership or other writing hereon), for the
purpose of receiving payment of, or on account of, the principal hereof and,
subject to the provisions on the face hereof, interest hereon, and for all
other purposes, and neither the Issuer nor the Trustee nor any authorized agent
of the Issuer or the Trustee shall be affected by notice to the contrary.

                 No recourse under or upon any obligation, covenant or
agreement of the Issuer in the Indenture or any indenture supplemental thereto
or in any Note, or because of the creation of any indebtedness represented
thereby, shall be had against any incorporator, shareholder, officer or
director, as such, of the Issuer or of any successor corporation, either
directly or through the Issuer or any successor corporation, under any rule of
law, statute or constitutional provision or by the enforcement of any
assessment or by any legal or equitable proceeding or otherwise, all such
liability being expressly waived and released by the acceptance hereof and as
part of the consideration for the issue hereof.

                 Terms used herein which are defined in the Indenture shall
have the respective meanings assigned thereto in the Indenture.









<PAGE>   1





January 19, 1994


National City Bank
1900 East Ninth Street
Cleveland, OH  44114

Attention: Robert E. Little
           Vice President

Re: The Progressive Corporation; $50 Million Unsecured Credit Line from
    National City Bank

Gentlemen:

Reference is hereby made to the $50 million unsecured line of credit provided
to The  Progressive Corporation ("Progressive") by National City Bank (the
"Bank"), as described in the letters dated May 23, 1990 and July 24, 1991 from
Robert E. Little, Vice President of the Bank to Progressive, and related or
subsequent correspondence.  Since the first half of 1993, Progressive has
raised over $500 million in capital through the sale of its debt and equity
securities in the public market and is, therefore, not currently in need of
such a substantial credit line.  Accordingly, this letter will evidence our
mutual agreement to reduce the above-referenced line of credit from $50 million
to $20 million, effective as of February 1, 1994.  Commitment fees will be
computed on the basis of the reduced credit line.

If the foregoing correctly sets forth our mutual agreement with respect to the
subject matter hereof, please confirm by signing and dating a copy of this
letter and thereafter return a fully executed
 copy hereof to the undersigned.

                                 Sincerely,

                                 THE PROGRESSIVE CORPORATION


                                 /s/ David M. Schneider

                                 David M. Schneider
                                 Secretary


Agreed as of this 24th day of January, 1994

NATIONAL CITY BANK

By:      /s/ Robert E. Little    
   ----------------------------------------------
Title:    Vice President, Senior Lending Officer  
      -------------------------------------------



<PAGE>   1





                               (Face of Security)


REGISTERED                                                           REGISTERED

No. ________                                                        $___________


                               CUSIP 743315 AG 8


                          THE PROGRESSIVE CORPORATION

                              6.60% NOTE DUE 2004

  THE PROGRESSIVE CORPORATION, an Ohio corporation (the "Issuer"), for value
received, hereby promises to pay to



or registered assigns, at the office or agency of the Issuer at the office of
the Trustee in Canton, Massachusetts, the principal sum of

dollars on January 15, 2004, in such coin or currency of the United States of
America as at the time of payment shall be legal tender for the payment of
public and private debts, and to pay interest semiannually on January 15 and
July 15 of each year, commencing on July 15, 1994, on said principal sum at
said office or agency, in like coin or currency, at the rate per annum
specified in the title of this Note, from the January 15 or the July 15, as the
case may be, next preceding the date of this Note to which interest has been
paid, unless the date hereof is a date to which interest has been paid, in
which case from the date of this Note, or unless no interest has been paid on
the Notes, in which case from January 12, 1994, until payment of said principal
sum has been made or duly provided for; PROVIDED, that payment of interest may
be made at the option of the Issuer by check mailed to the
 address of the
person entitled thereto as such address shall appear on the Security Register.
Notwithstanding the foregoing, if the date hereof is after the first day of
January or July, as the case may be, and before the following January 15 or
July 15, this Note shall bear interest from such January 15 or July 15;
PROVIDED, that if the Issuer shall default in the payment of interest due on
such January 15 or July 15, then this Note shall bear interest from the next
preceding January 15 or July 15 to which interest has been paid or, if no
interest has been paid on this Note, from January 12, 1994.  The interest so
payable on any January 15 or July 15 will, subject to certain exceptions
provided in the Indenture referred to on the reverse hereof, be paid to the
person in whose name this Note is registered at the close of business on the
January 1 or July 1, as the case may be, next preceding such January 15 or July
15.

<PAGE>   2
  Reference is made to the further provisions of this Note set forth on the
reverse hereof.  Such further provisions shall for all purposes have the same
effect as though fully set forth at this place.

  This Note shall not be valid or become obligatory for any purpose until the
certificate of authentication hereon shall have been signed by the Trustee
under the Indenture referred to on the reverse hereof.

  IN WITNESS WHEREOF, The Progressive Corporation has caused this instrument to
be signed by facsimile by its duly authorized officers and has caused a
facsimile of its corporate seal to be affixed hereto or imprinted hereon.

                          THE PROGRESSIVE CORPORATION


<TABLE>
<S>                                          <C>
[CORPORATE SEAL]                             By:_______________________________
                                                President and Chief Executive
                                                  Officer

Attest:


   _______________________________
   Secretary


Dated: ____________
</TABLE>


                      TRUSTEE'S CERTIFICATE OF AUTHENTICATION

  This is one of the Securities, of the series designated herein, referred to 
in the within-mentioned Indenture.

                                             THE FIRST NATIONAL BANK OF BOSTON,
                                               as Trustee


                                             By:_______________________________
                                                Authorized Signatory

<PAGE>   3
                               (Back of Security)

                          THE PROGRESSIVE CORPORATION

                              6.60% NOTE DUE 2004

  This Note is one of a duly authorized issue of debentures, notes, bonds or
other evidences of indebtedness of the Issuer (hereinafter called the
"Securities") of the series hereinafter specified, all issued or to be issued
under and pursuant to an indenture dated as of September 15, 1993 (herein
called the "Indenture"), duly executed and delivered by the Issuer to The First
National Bank of Boston, as Trustee (herein called the "Trustee"), to which
Indenture and all indentures supplemental thereto reference is hereby made for
a description of the rights, limitations of rights, obligations, duties and
immunities thereunder of the Trustee, the Issuer and the holders of the
Securities.  The Securities may be issued in one or more series, which
different series may be issued in various aggregate principal amounts, may
mature at different times, may bear interest (if any) at different rates, may
be subject to different redemption provisions (if any), may be subject to
different sinking, purchase or analogous funds (if any) and may otherwise vary
as in the Indenture provided.  This Note is one of a series designated as the
6.60% Notes Due 2004 of the Issuer, limited in aggregate principal amount to
$200,000,000.

  In case an Event of Default, as defined in the Indenture, with respect to the
6.60% Notes Due 2004 shall have occurred and be continuing, the principal
hereof may be declared, and upon such declaration shall become, due and
payable, in the manner, with the effect and subject to the conditions provided
in the Indenture.

  The Indenture contains provisions permitting the Issuer and the Trustee, with
the consent of the Holders of not less than 66-2/3% in aggregate principal
amount of the Securities at the time Outstanding (as defined in the Indenture)
of all series to be affected (voting as one class), evidenced as in the
Indenture provided, to execute supplemental indentures adding any provisions to
or changing in any manner or eliminating any of the provisions of the Indenture
or of any supplemental indenture or modifying in any manner the rights of the
Holders of the Securities of each such series; PROVIDED, HOWEVER, that no such
supplemental indenture shall (i) extend the final maturity of any Security, or
reduce the principal amount thereof, or reduce the rate or extend the time of
payment of any interest thereon, or impair or affect the rights of any Holder
to institute suit for the payment thereof, without the consent of the Holder of
each Security so affected or (ii) reduce the aforesaid percentage of
Securities, the Holders of which are required to consent to any such
supplemental indenture, without the consent of the Holder of each Security so
affected.  It is also provided in the Indenture





                                      -3-

<PAGE>   4
that, with respect to certain defaults or Events of Default regarding the
Securities of any series, prior to any declaration accelerating the maturity of
such Securities, the Holders of a majority in aggregate principal amount
Outstanding of the Securities of such series may on behalf of the Holders of
all the Securities of such series waive any such past default or Event of
Default and its consequences.  The preceding sentence shall not, however, apply
to a default in the payment of the principal of or premium, if any, or interest
on any of the Securities.  Any such consent or waiver by the Holder of this
Note (unless revoked as provided in the Indenture) shall be conclusive and
binding upon such Holder and upon all future Holders and owners of this Note
and any Note which may be issued in exchange or substitution herefor,
irrespective of whether or not any notation thereof is made upon this Note or
such other Note.

  No reference herein to the Indenture and no provision of this Note or of the
Indenture shall alter or impair the obligation of the Issuer, which is absolute
and unconditional, to pay the principal of and interest on this Note in the
manner, at the respective times, at the rate and in the coin or currency herein
prescribed.

  The Notes are issuable in registered form without coupons in denominations of
$1,000 and any integral multiple of $1,000 at the office or agency of the
Issuer at the office of the Trustee in Canton, Massachusetts, and in the manner
and subject to the limitations provided in the Indenture, but without the
payment of any service charge.  Notes may be exchanged for a like aggregate
principal amount of Notes of other authorized denominations.

  The Notes are not subject to redemption at the option of the Issuer or
through the operation of a sinking fund.

  Upon due presentment for registration of transfer of this Note at the office
or agency of the Issuer at the office of the Trustee in Canton, Massachusetts,
a new Note or Notes of authorized denominations for an equal aggregate
principal amount will be issued to the transferee in exchange therefor, subject
to the limitations provided in the Indenture, without charge except for any tax
or other governmental charge imposed in connection therewith.

  The Issuer, the Trustee and any authorized agent of the Issuer or the Trustee
may deem and treat the registered Holder hereof as the absolute owner of this
Note (whether or not this Note shall be overdue and notwithstanding any
notation of ownership or other writing hereon), for the purpose of receiving
payment of, or on account of, the principal hereof and, subject to the
provisions on the face hereof, interest hereon, and for all other purposes, and
neither the Issuer nor the Trustee nor any authorized agent of the Issuer or
the Trustee shall be affected by notice to the contrary.





                                      -4-

<PAGE>   5
  No recourse under or upon any obligation, covenant or agreement of the Issuer
in the Indenture or any indenture supplemental thereto or in any Note, or
because of the creation of any indebtedness represented thereby, shall be had
against any incorporator, shareholder, officer or director, as such, of the
Issuer or of any successor corporation, either directly or through the Issuer
or any successor corporation, under any rule of law, statute or constitutional
provision or by the enforcement of any assessment or by any legal or equitable
proceeding or otherwise, all such liability being expressly waived and released
by the acceptance hereof and as part of the consideration for the issue hereof.

  Terms used herein which are defined in the Indenture shall have the
respective meanings assigned thereto in the Indenture.





                                      -5-

<PAGE>   6


<TABLE>
<S>                                                        <C>
                          ____________________________
                                 ABBREVIATIONS

  The following abbreviations, when used in the inscription on the face of this instrument, shall be construed as though they were 
written out in full according to applicable laws or regulations:

 TEN COM - as tenants in common
 TEN ENT - as tenants by the entireties                    CUST -__________________-Custodian
 JT TEN  - as joint tenants with right of
           survivorship and not as tenants                 UNIF GIFT MIN ACT - Uniform Gifts to Minors Act
           in common                                                           ______________________________________
                                                                                              (State)


                       Additional abbreviations may also be used though not in the above list.
                                      _____________________________________

                 FOR VALUE RECEIVED the undersigned hereby sell(s), assign(s) and transfer(s) unto


PLEASE INSERT SOCIAL SECURITY OR OTHER
   IDENTIFYING NUMBER OF ASSIGNEE                                          

 __________________________________________
|                                          |
|__________________________________________|_______________________________________________________________________________________


___________________________________________________________________________________________________________________________________
                          Please print or typewrite name and address including postal zip code of assignee

___________________________________________________________________________________________________________________________________
the within Note and all rights thereunder, hereby irrevocably constituting and appointing


___________________________________________________________________________________________________________________________________
attorney to transfer said Note on the books of the Issuer, with full power of substitution in the premises.


Dated: __________________________                          _____________________________________________
                                                           NOTICE:  The signature to this assignment must correspond
                                                           with the name as written upon the face of the within
                                                           instrument in every particular, without alteration or
                                                           enlargement or any change whatever.


</TABLE>








                                      -6-



<PAGE>   1





                          THE PROGRESSIVE CORPORATION
                             1994 GAINSHARING PLAN
                             ---------------------

1.  The Progressive Corporation and its subsidiaries ("Progressive" or the
    "Company") have adopted the 1994 Gainsharing Plan (the "Plan") as part of
    their overall compensation program.  The objective of the compensation
    program is to pay competitive base salaries and for gainsharing to bring
    total cash compensation to the top of the market when Core Business and
    Division performance meets expectations.  Participants will have the
    opportunity to earn cash compensation in excess of the top of the market
    when Core Business and Division performance exceeds expectations.

2.  Plan participants for each Plan year shall be selected by the Executive
    Compensation Committee (the "Committee") of the Board of Directors of The
    Progressive Corporation from those officers and regular employees of
    Progressive who are assigned primarily to the Core Business or a corporate
    support function as of December 1 of that Plan year.  For those executive
    officers who participate in the 1994 Executive Bonus Plan, their
    gainsharing opportunity, if any, will be provided by and be a component of
    that plan.  The Plan shall be administered by or under the direction of the
    Committee.


3.  Annual Gainsharing Payments under the Plan will be determined by
    application of the following formula:

    Annual Gainsharing Payment = Paid Earnings x Target Percentage 
    x Performance Factor

4.  Paid Earnings for any Plan year means the sum of (a) the following items
    actually paid during the Plan year to a participant through the pay period
    ending immediately prior to the December payment date referred to in
    Section 7 below:  (i) regular, vacation, sick, holiday, funeral and
    overtime pay, (ii) lump sum merit adjustments based on performance, (iii)
    retroactive payments of any of the foregoing items relating to the same
    Plan year and (iv) the earnings replacement component of any worker's
    compensation award, plus (b) an additional amount equal to what the
    participant would have earned from the end of such pay period through the
    end of the Plan year had he continued to receive compensation at the same
    rate during such period, regardless of his actual compensation during such
    period.

5.  Target Percentages vary by position.  Target Percentages for Plan
    participants typically are as follows:


<TABLE>
<CAPTION>
                          POSITION                               TARGET %
                          --------                               --------
     <S>                                                           <C>
     Division Presidents, Product Leaders and Corporate     
     Support Team Members                                          50%
                                                            
     Senior Product Managers (PM's) and Senior Division     
     Claims Managers                                               30%
</TABLE>
                                                    


                                                            

<PAGE>   2

<TABLE>                                                     
<CAPTION>                                                   
                          POSITION                                TARGET %
                          --------                                --------
     <S>                                                            <C>
                                                            
                                                            
     Division DRG's, Function Heads and PM's                        20%
                                                            
     Regional Claims Managers, Finance Managers, new        
     PM's, new Division DRG's and PM's with small markets           10%
                                                            
     Senior Professionals and Managers                               7%
                                                            
     Professionals and Supervisors                                   5%
</TABLE>
                                                    

 Target Percentages may be changed with the approval of the Chief Operating
 Officer, Chief Human Resources Officer and the relevant process leader or
 product leader.  Target Percentages also may be changed from year to year.

6.  THE PERFORMANCE FACTOR

 A.   GENERAL

      The Performance Factor shall consist of a Profitability and Growth
      Component and a Cost Structure Improvement Component, as described below
      (the "Performance Components").  The Performance Components will be
      weighted to reflect the nature of the individual participant's assigned
      responsibilities. The weighting factors may differ among participants
      and may be changed from year to year by or under the direction of
      the Committee.

 B.   PROFITABILITY AND GROWTH COMPONENT

      The Profitability and Growth Component measures overall operating
      performance of Progressive's core personal and commercial automobile
      insurance business ("Core Business"), as a whole, and the assigned
      Division or Product (if applicable), for the Plan year in respect of
      which an annual Gainsharing Payment is to be made.  For purposes of
      computing a score for this Component, operating performance results are
      measured by the Gainsharing Matrix, as established by or under the
      direction of the Committee for the Plan year, which assigns a
      Profitability and Growth Score to various combinations of profitability
      (as measured by the GAAP combined ratio) and growth (based on year-
      to-year change in market share) outcomes. Market share is determined in
      terms of direct written premium.  For the Core Business as a whole, the
      market means all personal auto premium and all commercial auto premium in
      the United States, plus personal auto premium in Ontario, Canada.  For
      Personal Lines Divisions, the market means personal auto premium in
      active states. All market information shall be as published by A.M.
      Best Company, Inc., or other sources selected by the Committee.





                                     2

<PAGE>   3
 C.   COST STRUCTURE IMPROVEMENT COMPONENT

      The Cost Structure Improvement Component measures success in achieving
      cost structure improvement for the Core Business, as a whole, and for the
      assigned Division, if any.  Results are reflected in a Cost Structure
      Improvement Score.  For purposes of computing the Cost Structure
      Improvement Score, cost structure improvement is measured by comparing
      the sum of the GAAP Underwriting Expense Ratio ("Underwriting Expense
      Ratio") and Loss Adjustment Expense Ratio ("LAE Ratio") achieved for the
      Plan year (collectively, "Actual Expense Ratio") against defined expense
      objectives for that year, as established by or under the direction of the
      Committee ("Target Expense Ratio").  The Target Expense Ratio, including
      its individual components, may vary by Division and/or for the Company as
      a whole, and may be changed from year to year.

      The Cost Structure Improvement Score will be computed in accordance with 
      the following formula:

      Cost Structure
      Improvement = 1+ [Target Expense Ratio-Actual Expense Ratio]
      Score            -------------------------------------------
                                          4

 D.   COMPONENT WEIGHTING

      Performance Components are weighted by Core Business and Division or
      Product, as applicable.  The weighting factors may differ among
      participants and may be changed from year to year.  For participants in
      the Core  Business, the typical weighting shall be as follows:



<TABLE>
<CAPTION>
                                               Weighting
                             -------------------------------------------
      Performance            Profitability       Cost
      Factor                 and Growth          Structure         Total
      -------------------------------------------------------------------
      <S>                    <C>                 <C>               <C>
      Core Business           35%                 15%               50%
      Results
      -------------------------------------------------------------------
      Division Results        35%                 15%               50%
      -------------------------------------------------------------------
      Total                   70%                 30%               100%
</TABLE>



      There will typically be no Division Component for participants assigned
      to a corporate support function (such as Finance, Human Resources, Law
      and Information Services) and others who are not assigned primarily to a
      Division.  Individualized programs may be developed if and to the extent
      deemed appropriate by the Company's Chief Executive Officer ("CEO") and   
      Chief Operating Officer ("COO").





                                                                   3

<PAGE>   4
      The Performance Score for each Performance Component is multiplied by the
      assigned weighting factor to produce a Weighted Performance Score.  The
      sum of the Weighted Performance Scores equals the Performance Factor. 
      The final Performance Factor can vary from 0 to 2.0, based on actual
      performance versus pre-established objectives.  In some cases, the
      performance score for a Performance Component may be above 2.0 or below
      0. The individual scores (positive and negative, above 2.0 and below 0)
      are not adjusted, but go directly into the calculation of the Performance
      Factor, which is capped at 0 and 2.0.

7.  In December of each Plan year, results will be estimated for the full Plan
    year, based on year-to-date performance and other factors.  Subject to
    Section 8 below, full payments for participants with Target Percentages of
    5% and 7% will be made in December of each Plan year, based on such
    estimated results, with upward only adjustments, if any, made no later than
    (i) the following September 30, or, (ii) if later, within thirty (30) days
    following the Company's receipt of all market share information necessary
    to compute final Gainsharing Payment amounts.  Subject to Section 8 below,
    for participants with target percentages of 10% or greater, 90% of the
    estimated payment will be paid in December and a final payment, if any,
    made no later than the following September 30, or, if later, within thirty
    (30) days following the Company's receipt of all market share information
    necessary to compute final Gainsharing Payment amounts.  Participants who
    are employed as of the date of the final Gainsharing Payment determination
    and who have Target Percentages of 10% or greater are required to return to
    the Company no later than thirty (30) days following receipt of written
    notice from the Company the amount, if any, by which the estimated payment
    made to such participant the previous December exceeds the actual annual
    Gainsharing Payment to which such participant is entitled.  If any such
    participant fails to return such excess payment when and as required, the
    Company shall have the right to setoff such obligation against any other
    sums then or thereafter owed by the Company to such participant, whether
    under this Plan or otherwise.

8.  Unless otherwise determined by the Committee, in order to be entitled to
    receive any portion of an annual Gainsharing Payment for any Plan year, the
    participant must be employed by Progressive on the payment date for such
    portion of the annual Gainsharing Payment.

9.  The right to any annual Gainsharing Payment hereunder shall not be
    transferred, assigned or encumbered by any participant.  Nothing herein
    shall prevent any participant's interest hereunder from being subject to
    involuntary attachment, levy or other legal process.

10. The Plan shall be administered by or under the direction of the Committee.
    The Committee shall have the authority to adopt, alter and repeal such
    rules, guidelines, procedures and practices governing the Plan as it shall,
    from time to time, in its sole discretion, deem advisable.





                                                                    4

<PAGE>   5
    The Committee shall have full authority to determine the manner in which
    the Plan will operate, to interpret the provisions of the Plan and to make
    all determinations hereunder.  All such interpretations and determinations
    shall be final and binding on Progressive, all Plan participants and all
    other parties.  No such interpretation or determination shall be relied on
    as a precedent for any similar action or decision.

    All of the authority of the Committee hereunder (including, without
    limitation, the authority to administer the Plan, select the persons to
    participate herein, interpret the provisions thereof and make
    determinations hereunder and to establish, change or modify Performance
    Components and their respective weighting factors, performance targets and
    Target Percentages) may be exercised by the CEO or the COO with respect to
    all employees other than executive officers of the Company.

11. The Plan may be terminated, amended or revised, in whole or in part, at any
    time and from time to time by the Committee, in its sole discretion.

12. The Plan will be unfunded and all payments due under the Plan shall be made
    from Progressive's general assets.

13. Nothing in the Plan shall be construed as conferring upon any person the
    right to remain a participant in the Plan or to remain employed by
    Progressive, nor shall the Plan limit Progressive's right to discipline or
    discharge any of its officers or employees or change their job duties or
    compensation.

14. Progressive shall have the unrestricted right to set off against or recover
    out of any annual Gainsharing Payment or other sums owed to any participant
    under the Plan any amounts owed by such participant to Progressive.

15. This Plan supersedes all prior plans, agreements, understandings and
    arrangements regarding bonuses or other cash incentive compensation payable
    by or due from Progressive.  Without limiting the generality of the
    foregoing, this Plan supersedes and replaces The Progressive Corporation
    Management Bonus Plan, as heretofore in effect (the "Prior Plan"), which is
    and shall be deemed to be terminated as of December 31, 1993 (the
    "Termination Date"); provided, that any bonuses or other sums earned under
    the Prior Plan prior to the Termination Date shall be unaffected by such
    termination and shall be paid to the appropriate participants when and as
    provided thereunder.

16. This Plan is adopted, and is to be effective, as of January 1, 1994.  This
    Plan shall be effective for 1994 and for each calendar year thereafter
    unless and until terminated by the Committee.

17. This Plan shall be interpreted and construed in accordance with the laws of
    the State of Ohio.





                                                                        5



<PAGE>   1





                          THE PROGRESSIVE CORPORATION
                           1994 EXECUTIVE BONUS PLAN
                           --------------------------

1.  The Progressive Corporation and its subsidiaries ("Progressive") have
    designed an executive compensation program consisting of three components:
    salary, annual bonus and equity-based incentives in the form of
    non-qualified stock options.  These components have been structured to
    reflect the market for executive compensation and to promote both the
    achievement of corporate goals and performance that is in the long-term
    interests of shareholders.  The annual bonus component is performance-based
    and focuses on current results.

2.  The 1994 Executive Bonus Plan (the "Plan") shall be administered by or
    under the direction of the Executive Compensation Committee (the
    "Committee") of the Board of Directors.  Executive officers of Progressive
    may be selected by the Committee to participate in the Plan for one or more
    Plan years.  Plan years shall coincide with Progressive's fiscal years.

3.  The following executive officers have initially been selected for
    participation in the Plan: Charles B. Chokel, Peter B. Lewis, Bruce W. 
    Marlow,  Michael C. Murr, David M. Schneider and Tiona M. Thompson (the
    "participants"); provided that the participation of Messrs. Chokel,
 Lewis,
    Marlow and Murr (the "senior participants") in the Plan shall be subject 
    to shareholder approval in accordance with the requirements of Section 
    162(m) of the Internal Revenue Code, as amended (the "Code"), and the
    rules and regulations promulgated thereunder.

4.  Subject to the following sentence, the amount of the annual bonus earned by
    any participant under the Plan ("Annual Bonus") will be determined by
    application of the following formula:

           Annual Bonus = Paid Salary x Target Percentage x Performance Factor

    The Annual Bonus payable to any participant with respect to any Plan year
    may not exceed $2,000,000.00.

5.  The salary of each Plan participant shall be as established by the
    Committee prior to commencement of the Plan year (or prior to April 1, 1994
    with respect to the

<PAGE>   2
    1994 Plan year), and will be determined through market analysis based on 
    data reported in published national compensation surveys.


<TABLE>
<CAPTION>
6.  The Target Percentages for the participants in the Plan are as follows:

    
    Participant                   Position                 Target Percentage
    -----------                   --------                 -----------------
    <S>                      <C>                                   <C>
    Charles B. Chokel        Chief Financial Officer                80%
    Peter B. Lewis           Chief Executive Officer               100%
    Bruce W. Marlow          Chief Operating Officer                80%
    Michael C. Murr          Chief Investment Officer              167%
    David M. Schneider       Chief Legal Officer                    50%
    Tiona M. Thompson        Chief Human Resources Officer          50%
<FN>
    Target Percentages may be changed from year to year by the Committee.
</TABLE>


7.  The Performance Factor
    ----------------------
    A.    General
          -------
          The Performance Factor shall be determined by the performance
          results achieved with respect to one or more of the following
          components:  Core Business Gainsharing, Return on Average
          Equity ("ROE") and Investment Performance, as described below
          (the "Bonus Components").  An appropriate combination of Bonus
          Components will be designated for each participant, and the
          designated Bonus Components will be weighted, based on such
          participant's assigned responsibilities.


<TABLE>
<CAPTION>
          The combination of Bonus Components designated for each of the 
          participants, and the relative weighting of those Components, are as 
          follows:

          <S>                  <C>                   <C>              <C>         
        +---------------+---------------------+-----------------+-----------------+
        |               |      Core Business  |     ROE         |     Investment  |
        | Participant   |      Gainsharing    |     Component   |     Performance |
        |               |      Component      |                 |     Component   |
        +---------------+---------------------+-----------------+-----------------+
        | Chokel        |      60%            |      30%        |     10%         |
        +---------------+---------------------+-----------------+-----------------+
        | Lewis         |      50%            |      30%        |     20%         |
        +---------------+---------------------+-----------------+-----------------+
        | Marlow        |      80%            |      20%        |     0%          |
        +---------------+---------------------+-----------------+-----------------+
        | Murr          |      0%             |      50%        |     50%         |
        +---------------+---------------------+-----------------+-----------------+
        | Schneider     |      70%            |      30%        |     0%          |
        +---------------+---------------------+-----------------+-----------------+
        | Thompson      |      80%            |      20%        |     0%          |
        +---------------+---------------------+-----------------+-----------------+

</TABLE>



                                             2   



<PAGE>   3
                 The relative weighting of the Bonus Components may vary among
                 Plan participants and may be changed from year to year by the
                 Committee.

                 Actual performance results achieved for any Plan year, as used
                 to calculate the performance score achieved for each of the
                 applicable Bonus Components, shall be as certified by the
                 Committee prior to payment of the Annual Bonus.

                 For purposes of computing the amount of the Annual Bonus, the
                 performance score achieved for each of the designated Bonus
                 Components will be multiplied by the applicable weighting
                 factor to produce a Weighted Component Score.  The sum of the
                 Weighted Component Scores equals the Performance Factor.  The
                 Performance Factor can vary from 0 to 2.0, based on actual
                 performance versus the pre-established objectives.

         B.      Core Business Gainsharing Component
                 -----------------------------------
                 The Core Business Gainsharing Component consists of the
                 following factors:

                 (i)      Profitability and Growth Factor
                          -------------------------------
                          The Profitability and Growth Factor measures overall
                          operating performance of Progressive's core personal
                          and commercial automobile insurance business ("Core
                          Business") for the Plan year in respect of which an
                          Annual Bonus is to be paid.  For purposes of
                          computing a score for this Factor, results will be
                          measured by the Gainsharing Matrix, as established by
                          the Committee for the Plan year, which assigns a
                          performance score to various combinations of
                          profitability and growth outcomes.  For this Factor,
                          profitability is measured by the GAAP combined ratio
                          and growth is measured by the year-to-year change in
                          market share.  Change in market share is measured in
                          terms of net written premium, based on industry data
                          (which may be estimated), as reported by A.M. Best
                          Company, Inc. in BEST WEEK, or any successor
                          publication, upon conclusion of the Plan year for
                          which the Annual Bonus is to be paid.  The
                          Profitability and Growth Factor is weighted 70% in
                          computing the Core Business Gainsharing Score.





                                                           3


<PAGE>   4
                 (ii)     Cost Structure Improvement Factor
                          ---------------------------------
                          The Cost Structure Improvement Factor measures
                          success in achieving cost structure improvement for
                          the Core Business.  Results are reflected in a Cost
                          Structure Improvement Score.  For purposes of
                          computing the Cost Structure Improvement Score, cost
                          structure improvement is measured by comparing the
                          sum of the GAAP Underwriting Expense Ratio
                          ("Underwriting Expense Ratio") and Loss Adjustment
                          Expense Ratio ("LAE Ratio") achieved in the Core
                          Business for the Plan year (collectively, "Actual
                          Expense Ratio") against the defined expense
                          objectives for that year, as established by the
                          Committee ("Target Expense Ratio").  For 1994 and
                          thereafter until otherwise directed by the Committee,
                          the Target Expense Ratio shall be 34, based on a
                          target LAE Ratio of 10 and a target Underwriting
                          Expense Ratio of 24.  The Cost Structure Improvement
                          Factor is weighted 30% in computing the Core Business
                          Gainsharing Score.

                          The Cost Structure Improvement Score will be computed
                          in accordance with the following formula:

             Cost Structure        [Target Expense Ratio-Actual Expense Ratio]
             Improvement     =  1+ -------------------------------------------
             Score                                    4
                                         

                 Expense targets and the relative weighting of the above
                 Factors may be changed from year to year by the Committee.

         C.      Return on Average Equity Component
                 ----------------------------------
                 This Component is based on Progressive's Return on Average
                 Equity ("ROE") for the Plan year.  The ROE will be calculated
                 for each month of the Plan year and such monthly results will
                 be averaged to determine the ROE for the Plan year.  For
                 purposes of this Plan, ROE shall be calculated as follows:

                 ROE =     net income - Preferred Share dividends      
                        -------------------------------------------
                            average common shareholders' equity





                                                                  4


<PAGE>   5

<TABLE>
<CAPTION>
                 In determining the ROE Performance Score, actual performance will be compared to a scale which excludes the 
                 effect of inflation, in accordance with the following scoring table:

                                             <S>                           <C>             
                                           +----------------------------+------------------+
                                           | ROE (excluding effect of   |  ROE Performance |
                                           | inflation, as reflected in |  Score           |
                                           | the CPI)                   |                  |
                                           +----------------------------+------------------+
                                           | 11% or lower               |  0.0             |
                                           +----------------------------+------------------+
                                           | 12%                        |  0.3             |
                                           +----------------------------+------------------+
                                           | 13%                        |  0.5             |
                                           +----------------------------+------------------+
                                           | 14%                        |  0.7             |
                                           +----------------------------+------------------+
                                           | 15%                        |  1.0             |
                                           +----------------------------+------------------+
                                           | 16%                        |  1.1             |
                                           +----------------------------+------------------+
                                           | 17%                        |  1.2             |
                                           +----------------------------+------------------+
                                           | 18%                        |  1.3             |
                                           +----------------------------+------------------+
                                           | 19%                        |  1.4             |
                                           +----------------------------+------------------+
                                           | 20%                        |  1.5             |
                                           +----------------------------+------------------+
                                           | 21%                        |  1.6             |
                                           +----------------------------+------------------+
                                           | 22%                        |  1.7             |
                                           +----------------------------+------------------+
                                           | 23%                        |  1.8             |
                                           +----------------------------+------------------+
                                           | 24%                        |  1.9             |
                                           +----------------------------+------------------+
                                           | 25% or higher              |  2.0             |
                                           +----------------------------+------------------+

</TABLE>


                 To achieve a given ROE Performance Score for any Plan year,
                 Progressive's ROE for that year must equal or exceed the
                 required ROE level set forth in the above scoring table,
                 without rounding, and ROE Performance Scores will not be
                 derived from or subject to an interpolative or similar
                 process.

                 For purposes of this Plan, CPI shall mean the Consumer Price
                 Index for All Urban Consumers (CPI-U) for the U.S. City
                 Average for All Items (1982-1984 equals 100) or such other
                 index as the Committee may designate prior to the applicable
                 Plan year.





                                                                    5


<PAGE>   6
         D.      Investment Performance Component
                 --------------------------------
                 The Investment Performance Component compares investment
                 performance against targets ("Benchmarks") established for the
                 individual segments of Progressive's investment portfolio.
                 Investments are marked to market in order to calculate total
                 return, which is then compared against the designated
                 Benchmarks to produce a Performance Score for each segment of
                 the portfolio.  The Performance Scores for the several
                 segments are weighted, based on the actual amounts invested in
                 each segment (valued monthly), and the weighted Performance
                 Scores for the several segments are then combined to produce
                 the Investment Performance Score.  Investment expense is not
                 included in determining investment performance vs. benchmark.


<TABLE>
<CAPTION>
                 The Portfolio Segments and Benchmark measures are as follows:
                 <S>                                    <C>

               +-------------------------------------+--------------------------------------------+
               | Portfolio Segment                   |   Investment Benchmark                     |
               +-------------------------------------+--------------------------------------------+
               | Equities                            |   S&P 500 including dividends              |
               +-------------------------------------+--------------------------------------------+
               | High Yield Investments              |   70% of the average of Merrill Lynch      |
               |                                     |   High Yield Index and Merrill Lynch       |
               |                                     |   Bankruptcy Index                         |
               +-------------------------------------+--------------------------------------------+
               | Short Term Fixed Income             |   3 Year Treasury Securities + 75 basis    |
               |                                     |   points, tax equivalent basis             |
               +-------------------------------------+--------------------------------------------+
</TABLE>



<TABLE>
<CAPTION>
                 The scoring table for comparing Investment Performance against the 
                 designated Benchmarks is as follows:

                             <S>                       <C>
                           +-----------------------+----------------+
                           | Investment            |   Investment   |
                           | Performance           |   Performance  |
                           | Versus                |   Score        |
                           | Benchmark             |                |
                           | (weighted)            |                |
                           +-----------------------+----------------+
                           | below 90%             |   0.00         |
                           +-----------------------+----------------+
                           | 90 - 94.99%           |   0.75         |
                           +-----------------------+----------------+
                           | 95 - 99.99%           |   0.90         |
                           +-----------------------+----------------+
                           | 100% and above        |   1.00         |
                           +-----------------------+----------------+
</TABLE>






                                                                    6

<PAGE>   7
         To achieve a given Investment Performance Score for any Plan year,
         Investment Performance results must equal or exceed the required
         performance level indicated in the above scoring table, without
         rounding, and Investment Performance Scores will not be derived from
         or subject to an interpolative or similar process.

8.       The Annual Bonus for any Plan year shall be paid to participants in
         two installments. The first installment, in an amount equal to 90% of
         the Annual Bonus, determined in accordance with the formula set forth
         in Paragraph 4 above, will be paid as soon as practicable after the
         Committee has certified performance results for the Plan year, but no
         later than March 31 of the immediately following year.  The second
         installment, in an amount equal to 10% of the Annual Bonus, will be
         paid to participants on the September 30 immediately following the end
         of the Plan year for which such Annual Bonus is to be paid.  The
         provisions of this Paragraph shall be subject to Paragraph 9 hereof.

9.       Unless otherwise determined by the Committee, in order to be entitled
         to receive any installment of the Annual Bonus for any Plan year, the
         participant must be employed by Progressive on the date designated for
         payment thereof.  Annual Bonus payments made to participants will be
         net of any federal, state and local taxes required to be withheld.

10.      The right to any of the Annual Bonuses hereunder shall not be
         transferred, assigned or encumbered by any participant.  Nothing
         herein shall prevent any participant's interest hereunder from being
         subject to involuntary attachment, levy or other legal process.

11.      The Plan shall be administered by or under the direction of the
         Committee.  The Committee shall have the authority to adopt, alter and
         repeal such rules, guidelines, procedures and practices governing the
         Plan as it shall, from time to time, in its sole discretion deem
         advisable.

         The Committee shall have full authority to determine the manner in
         which the Plan will operate, to interpret the provisions of the Plan
         and to make all determinations thereunder.  All such interpretations
         and determinations shall be final and binding on Progressive, all Plan
         participants and all other parties.  No such interpretation or
         determination shall be relied on as a precedent for any similar action
         or decision.

         As it applies to the senior participants, the Plan shall be 
         administered, by the Committee in accordance with the requirements of 
         Section 162(m) of the Code.





                                                                      7

<PAGE>   8
12.      The Plan may be terminated, amended or revised, in whole or in part,
         at any time and from time to time by the Committee, in its sole
         discretion; provided that the Committee may not increase the amount of
         compensation payable hereunder to any participant above the amount
         that would otherwise be payable upon attainment of the applicable
         performance goals, or accelerate the payment of any portion of the
         Annual Bonus due to any senior participant under the Plan without 
         discounting the amount of such payment in accordance with Section 
         162(m) of the Code, and further provided that any amendment or 
         revision of the Plan required to be approved by shareholders pursuant 
         to Section 162(m) of the Code shall not be effective as to any of the
         senior participants until approved by Progressive's shareholders in
         accordance with the requirements of Section 162(m).

13.      The Plan will be unfunded and all payments due under the Plan shall be
         made from Progressive's general assets.

14.      Nothing in the Plan shall be construed as conferring upon any person
         the right to remain a participant in the Plan or to remain employed by
         Progressive, nor shall the Plan limit Progressive's right to
         discipline or discharge any of its officers or employees or change
         their job duties or compensation.

15.      Progressive shall have the unrestricted right to set off against or
         recover out of any bonuses or other sums owed to any participant under
         the Plan any amounts owed by such participant to Progressive.

16.      This Plan supersedes all prior plans, agreements, understandings and
         arrangements regarding bonuses or other cash incentive compensation
         payable or due to any participant from Progressive.  Without limiting
         the generality of the foregoing, this Plan supersedes and replaces The
         Progressive Corporation Management Bonus Plan, as heretofore in effect
         (the "Prior Plan"), which is and shall be deemed to be terminated as
         of December 31, 1993 (the "Termination Date"); provided, that any
         bonuses or other sums earned under the Prior Plan prior to the
         Termination Date shall be unaffected by such termination and shall be
         paid to the appropriate participants when and as provided thereunder.

17.      This Plan is adopted, and subject to the provisions of Paragraph 3
         hereof is to be effective, as of January 1, 1994. Subject to the 
         provisions of Paragraph 3, this Plan shall be effective for 1994 and 
         for each year thereafter unless and until terminated by the Committee.

18.      This Plan shall be interpreted and construed in accordance with the
         laws of the State of Ohio.





                                                                 8



<PAGE>   1

                                 EXHIBIT NO. 11




                            COMPUTATION OF EARNINGS
                                   PER SHARE

<PAGE>   2

<TABLE>

                          THE PROGRESSIVE CORPORATION
                       COMPUTATION OF EARNINGS PER SHARE
                     (millions - except per share amounts)

<CAPTION>
                                     1993                               1992                       1991
                             ----------------------------------------------------------------------------------
                                             Per                              Per                          Per
                             Amount         Share               Amount       Share          Amount        Share
                             ----------------------------------------------------------------------------------
<S>                          <C>            <C>                 <C>          <C>             <C>          <C>  
 PRIMARY:
 Net income                  $267.3                             $153.8                       $32.9

 Less:  Preferred stock
  dividends                    (9.2)                              (9.4)                       (5.8)
                             ----------------------------------------------------------------------------------
                             $258.1         $3.59               $144.4       $2.32           $27.1        $ .41
                             ==================================================================================

 Average shares
  outstanding                  69.3                               60.7                        65.4
 Net effect of dilutive
  stock options                 2.5                                1.6                         1.2
                             ----------------------------------------------------------------------------------
   Total                       71.8                               62.3                        66.6
                             ==================================================================================

 FULLY DILUTED:

 Net income                  $267.3                             $153.8                       $32.9
 Add:  Interest on
  convertible debt
    instrument (net of           
    taxes)                       --                                3.0                         4.3
 Less:  Preferred stock
  dividends                    (9.2)                              (9.4)                       (5.8)
                             ----------------------------------------------------------------------------------
                             $258.1         $3.58               $147.4       $2.05           $31.4        $  **
                             ==================================================================================

 Average shares
  outstanding                  69.3                               60.7                        65.4
 Net effect of dilutive
  stock options                 2.7                                2.6                         1.2
 Net effect of convertible
  debt instrument                --                                8.6                         9.0
                             ----------------------------------------------------------------------------------
   Total                       72.0                               71.9                        75.6
                             ==================================================================================
<FN>
**1991 earnings were antidilutive and, therefore, reported on a primary basis.

All share and per share amounts were adjusted for the December 8, 1992 3-for-1 stock split.
</TABLE>






<PAGE>   1





     Q - DOES THE PROGRESSIVE CORPORATION HAVE ANY GOOD NEWS TO REPORT?





                                         A - WE'RE GLAD YOU ASKED THAT QUESTION.


     1993 PERFORMANCE HIGHLIGHTS 4   VISION, CORE VALUES AND OBJECTIVES 
     6 LETTER TO SHAREHOLDERS 13 FINANCIAL REVIEW 32 




<PAGE>   2





                Photograph: "Wheels Triptych," Zeke Berman, 1994

<PAGE>   3
                                                                           2 - 3


<TABLE>
FINANCIAL                             HIGHLIGHTS 
<CAPTION>


(millions--except per share amounts)

                                                                                             Average Annual Compounded
                                                                                            Rate of Increase (Decrease)

FOR THE YEAR                                              1993          1992      % CHANGE     1989-1993     1984-1993
<S>                                                  <C>           <C>                  <C>       <C>          <C>
 Direct premiums written  . . . . . . . . . . .      $ 1,966.4     $ 1,636.8            20             8            23
 Net premiums written   . . . . . . . . . . . .        1,819.2       1,451.2            25             7            22
 Net premiums earned  . . . . . . . . . . . . .        1,668.7       1,426.1            17             7            21
 Total revenues   . . . . . . . . . . . . . . .        1,954.8       1,738.9            12             8            22
 Income before cumulative effect of
   accounting change  . . . . . . . . . . . . .          267.3         139.6            91            20            28
 Net income   . . . . . . . . . . . . . . . . .          267.3         153.8            74            20            26
 Per share:
  Income before cumulative effect of
     accounting change  . . . . . . . . . . . .           3.58          1.85            94            24            28
  Net income    . . . . . . . . . . . . . . . .           3.58          2.05            75            24            26
 Underwriting margin  . . . . . . . . . . . . .           10.7%          3.5%

AT YEAR-END

 Consolidated shareholders' equity  . . . . . .      $   997.9     $   629.0            59            19            29
 Common Shares outstanding  . . . . . . . . . .           72.1          67.1             7           (2)            --
 Book Value per Common Share  . . . . . . . . .      $   12.62     $    7.94            59            20            27
 Return on average shareholders' equity   . . .           36.0%         34.7%

STOCK PRICE APPRECIATION 1                              1-YEAR                                    5-YEAR       10-YEAR

 Progressive  . . . . . . . . . . . . . . . . .           39.8%                                     40.7%         28.2%
 S&P 500  . . . . . . . . . . . . . . . . . . .           10.1%                                     14.6%         14.9%

<FN>
1 Assumes dividend reinvestment.
</TABLE>


<PAGE>   4
1993                       PERFORMANCE                         HIGHLIGHTS



Q - HOW DID PROGRESSIVE PERFORM AGAINST THE PROPERTY-CASUALTY INDUSTRY?


              A - GREAT! OUR 10.7 PERCENT COMPANYWIDE UNDERWRITING PROFIT MARGIN
    WAS ALMOST 20 POINTS BETTER THAN THE INDUSTRY, THE 5TH TIME IN 15 YEARS THAT
                                WE EXCEEDED THE INDUSTRY BY MORE THAN 15 POINTS.




Q - HOW DID THE CORE BUSINESS DO?



                A - THE CORE BUSINESS CONTINUES TO GROW PROFITABLY, DESPITE MORE
      COMPANIES TRYING TO WRITE IN THE NONSTANDARD AUTO NICHE. IN 1993, THE CORE
             BUSINESS GREW 25 PERCENT WITH AN UNDERWRITING PROFIT OF 10 PERCENT.



ABOUT THE ART  Five years ago, Progressive set out on the path of change.
 Knowing we have to respond to consumers' dissatisfaction with auto insurance,
 we are learning how to lower consumers' cost and improve their experience
 sufficiently to turn their anger into delight. We have redefined our strategy,
 driven by our strong belief that lower prices, more information, more options
 and immediate service is what is needed to delight customers.
We commissioned artist Zeke Berman to respond visually to this strategy. Berman
 constructed a series of images representing his unique interpretation of the
 "car." His beautifully crafted diagrammatic tableaux are assembled into forms
 that balance whimsy, illusion and invention. Berman's photographs will become
 part of Progressive's growing collection of contemporary art.
Intrigued by the diagrammatic character of Berman's work and the concept of
 redefinition, our annual report designers looked up the word "progressive" in
 the dictionary. That inquiry inspired the use of the Merriam-Webster
 illustrations and many of the graphic elements that appear throughout this
 annual report.

<PAGE>   5
                                                                           4 - 5



Q - IS PROGRESSIVE IN THE STANDARD/PREFERRED AUTO MARKET?




                        A - YES, WE CONTINUE TESTING OUR STANDARD AND PREFERRED
    PRODUCTS, AND, IN 1993, THESE PRODUCTS REPRESENTED 4.5 PERCENT OF OUR TOTAL 
    PRIVATE PASSENGER AUTO PREMIUMS. WE ARE THE NINTH LARGEST PRIVATE PASSENGER
                                                   AUTO INSURER IN THE COUNTRY.



Q - HOW DOES PROGRESSIVE DETERMINE HOW MUCH CAPITAL IT NEEDS?



               A - WHEN WE ANTICIPATE SLOW GROWTH, WE CONSIDER REDUCING CAPITAL.
   WHEN WE EXPECT RAPID GROWTH, WE INCREASE CAPITAL. OVER THE LAST 20 YEARS, OUR
  GROWTH RATE HAS RANGED FROM SMALL DECLINES TO NEARLY 70 PERCENT GROWTH AND OUR
           RATIO OF FUNDED DEBT TO CAPITAL RANGED FROM 61 PERCENT TO 24 PERCENT.


ABOUT PROGRESSIVE The Progressive insurance organization began business in
 1937. Progressive Casualty Insurance Company was founded in 1956. The
 Progressive Corporation, an insurance holding company formed in 1965, owns 52
 operating subsidiaries and has one mutual insurance company affiliate. The
 companies provide personal automobile insurance and other specialty
 property-casualty insurance and related services sold primarily through
 independent insurance agents in the United States and Canada. The 1993
 estimated industry premiums, which include personal auto insurance in the U.S.
 and Ontario, Canada, as well as insurance for commercial vehicles, were $115
 billion and Progressive's share was 1.5 percent.

<PAGE>   6
VISION,          CORE             VALUES           AND              OBJECTIVES



Communicating a clear picture of who we are, what we strive to achieve
 (Vision), what guides our behavior (Core Values), how we measure our
 performance (Objectives), and how we will achieve them (Strategies) permits
 all people associated with Progressive to understand and help us achieve our
 vision and objectives.
VISION  We seek to be an excellent, innovative, growing and enduring business by
 reducing the human trauma and economic costs of auto accidents in
 cost-effective and profitable ways that delight customers. We seek to earn a
 superior return on equity and to provide a positive environment to attract
 quality people and achieve ambitious growth plans.
CORE VALUES  Progressive's Core Values are pragmatic statements of what works
 best for us in the real world. Core Values govern our decisions and behavior.
 We want them understood and embraced by all Progressive people. Core Values are
 standards by which we measure ourselves. Growth and change provide new
 perspective and require regular refinement of Core Values.
INTEGRITY.  We revere honesty. We adhere to high ethical standards, report
 completely, encourage disclosing bad news and welcome disagreement.
GOLDEN RULE.  We respect all people, value the differences among them and deal
 with them in the way we want to be dealt with. This requires us to know
 ourselves and to try to understand others.
OBJECTIVES.  We strive to be clear and open about Progressive's ambitious
 objectives and our people's personal and team objectives.  We evaluate
 performance against all these objectives.
EXCELLENCE.  We strive constantly to improve in order to meet and exceed the
 highest expectations of our customers, shareholders and people. "Quality" is
 Progressive's process for teaching and encouraging our people to improve
 performance and reduce the costs of what they do for customers. We base reward
 on results and promotion on ability.
PROFIT.  The free-enterprise system rewards most those who most enhance the
 health and happiness of their customers, communities and people. Profit
 motivates Progressive to invest in new ways to do this. Enhancing people's
 health and happiness is the ultimate goal, and healthy, happy people do it
 best.





Q - IF I SPENT $1,800 TO BUY 100 SHARES OF PROGRESSIVE STOCK IN THE INITIAL 
PUBLIC OFFERING IN 1971, WHAT WOULD IT BE WORTH TODAY?

<PAGE>   7
                                                                           6 - 7



         A - WHAT A GREAT INVESTMENT. AT THE END OF 1993, AFTER ALL OF THE STOCK
       SPLITS, YOU WOULD HAVE 7,689 SHARES WORTH OVER $311,000 AND RECEIVED OVER
                            $9,000 IN DIVIDENDS -- A 25.5 PERCENT ANNUAL RETURN.




 FINANCIAL OBJECTIVES

Consistent achievement of superior results requires that our people understand
 Progressive's objectives and their specific role, and that their personal
 objectives dovetail with Progressive's. Our objectives are ambitious yet
 realistic. We are committed to achieving financial objectives over successive
 five-year periods. Experience always clarifies objectives and illuminates
 better strategies. We constantly evolve as we monitor the execution of our
 strategies and progress toward achieving our objectives.
Most Progressive businesses are managed by a product manager, who is
 responsible to a Division President. Each business has different capital
 requirements, risks, growth rate, potential, competition, regulatory issues,
 cash flows and investment income.  We consider these differences when reaching
 agreement with the product manager and Division President on their volume and
 profit plans.
RETURN ON SHAREHOLDERS' EQUITY  Our most important financial goal is to achieve
 an after-tax return on shareholders' equity that is at least 15 percentage
 points greater than the rate of inflation (measured by the GDP deflator which
 was 2.8 percent in 1993, and averaged 3.9 percent over the past five years and
 ten years). Return on equity was 36.0 percent in 1993, averaged 24.8 percent
 over the past five years and 25.3 percent over the past ten years.
PROFITABILITY  Progressive is driven by the goal of producing a four percent
 underwriting profit. The Core businesses had an underwriting profit of 10.5
 percent in 1993, an underwriting profit of 5.8 percent for the past five years
 and 6.4 percent for the past ten years. Estimated industry results for the
 personal auto insurance market for the same periods were underwriting losses
 of 2.0 percent, 5.1 percent and 6.4 percent. Profitability in our Diversified
 businesses, which include service operations, is measured on a return on
 revenue basis. We seek a minimum of a ten percent return on revenue in these
 businesses. For 1993, the return on revenue was 33.7 percent.
GROWTH  We seek increases in volume that are at least 15 percentage points
 greater than the rate of inflation. For the Core business, volume is measured
 by net premiums written, which increased 25.5 percent in 1993, 13.3 percent
 compounded annually over the past five years and 22.5 percent over the past
 ten years. Net premiums written in the personal auto insurance market for the
 same periods grew 5.2 percent, 6.0 percent and 8.7 percent. For Diversified
 businesses, volume is measured by operating revenues (net premiums earned plus
 service revenue). Operating revenues decreased 17.1 percent in 1993, decreased
 14.7 percent compounded annually over the past five years and increased 22.1
 percent over the past ten years.
ACHIEVEMENTS  We are convinced that the best way to maximize shareholder value
 is to achieve these financial objectives consistently. A shareholder who
 purchased 100 shares of Progressive for $1,800 at our first public stock
 offering on April 15, 1971, owned 7,689 shares on December 31, 1993, with a
 market value of $311,000, for a 25.5 percent annual return, compared to the
 seven percent return achieved by investors in the Standard & Poor's 500 during
 the same period. In addition, the shareholder received dividends, which were
 $1,500 in 1993.
In the ten years since December 31, 1983, Progressive shareholders have
 realized compound returns of 28.2 percent, compared to 14.9 percent for the
 S&P 500. In the five years since December 31, 1988, Progressive shareholders'
 returns were 40.7 percent, compared to 14.6 percent for the S&P 500. In 1993,
 the returns were 39.8 percent on Progressive shares and 10.1 percent on the
 S&P 500.
The repurchase of Progressive stock is another way the Company increases
 shareholder value. Over the years, when we have adequate capital and
 Progressive's stock is attractively priced, we have repurchased our shares.
 Since 1971, we spent $492.2 million to repurchase shares, at an average cost
 of $6.15 per share.

<PAGE>   8
                                                                           8 - 9




<TABLE>
<CAPTION>
RETURN ON SHAREHOLDERS' EQUITY                                                  1993       LAST 5 YEARS      LAST 10 YEARS
<S>                                                                            <C>                <C>                 <C>
 Goal   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       17.8%              18.9%              18.9%
 Companywide  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       36.0               24.8               25.3


UNDERWRITING PROFIT
 Goal   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        4.0                4.0                4.0
 Core Business  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       10.5                5.8                6.4
 Industry-Personal Auto Insurance Market  . . . . . . . . . . . . . . . .       (2.0)              (5.1)              (6.4)


GROWTH (ANNUALIZED)
 Goal   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       17.8               18.9               18.9
 Net Premiums Written
   Core Business  . . . . . . . . . . . . . . . . . . . . . . . . . . . .       25.5               13.3               22.5
   Industry-Personal Auto Insurance Market  . . . . . . . . . . . . . . .        5.2                6.0                8.7
 Operating Revenues
   Diversified Businesses   . . . . . . . . . . . . . . . . . . . . . . .      (17.1)             (14.7)              22.1
</TABLE>






Q - WHAT IS PROGRESSIVE'S MOST IMPORTANT FINANCIAL OBJECTIVE?

<PAGE>   9





                 Photograph: "Three Wheels," Zeke Berman, 1994

<PAGE>   10





                 Photograph: "Tires Diptych," Zeke Berman, 1993

<PAGE>   11





                 Photograph: "Tires Diptych," Zeke Berman, 1993

<PAGE>   12





                Photograph: "Hubcap Diptych," Zeke Berman, 1993

<PAGE>   13
LETTER             TO                 SHAREHOLDERS                       12 - 13

 RESULTS
I am proud to describe Progressive's best ever financial results. We had record
 annual earnings and insurance premium volume, and achieved the 22nd annual
 underwriting profit since our founding in 1965. Return on shareholders' equity
 was 36.0 percent, compared to 34.7 percent in 1992. Net income increased 74
 percent to $267.3 million, or $3.58 per share, compared to $153.8 million, or
 $2.05 per share, in 1992. Operating income increased 52 percent to $197.3
 million, or $2.61 per share, compared to $129.8 million, or $1.72 per share,
 in 1992. Net premiums written increased 25 percent to $1,819.2 million,
 compared to $1,451.2 million in 1992.  We achieved a 10.7 percent underwriting
 profit, compared to 3.5 percent in 1992. We reduced underwriting and loss
 adjustment expenses by almost six more percentage points in 1993, after a nine
 percentage point reduction in 1992.
Ninety-three percent of Progressive's net premiums written come from 14 Core
 divisions, which write insurance for private passenger autos and small
 commercial and recreational vehicles. Core business net premiums written grew
 25 percent to $1,700 million, compared to $1,355 million in 1992. The Core
 business underwriting profit margin was ten percent, compared to eight percent
 in 1992.
Three smaller Diversified divisions, Financial Services, Risk Management
 Services and Motor Carrier, provide combinations of service and indemnity to
 businesses. Diversified divisions' net premiums written and underwriting
 profit margins were $118 million and 14 percent, respectively, compared to
 $107 million and minus 33 percent in 1992. The Diversified divisions produced
 service revenues and pretax profits of $43.7 million and $6.8 million,
 respectively, compared to $53.3 million service revenue and a $4.3 million
 pretax loss in 1992.





   A - THE MOST IMPORTANT OBJECTIVE IS RETURN ON SHAREHOLDERS' EQUITY, WHICH WAS
  36.0 PERCENT IN 1993. HOWEVER, WE ARE COMMITTED TO ACHIEVING ALL OUR FINANCIAL
   OBJECTIVES (ROE, PROFITABILITY AND GROWTH) OVER SUCCESSIVE FIVE-YEAR PERIODS.

<PAGE>   14
 THE STATE OF OUR BUSINESSES

 CORE BUSINESS
We are in the midst of a multi-year strategy to change and greatly enhance the
 Core business. We began as almost entirely a provider of niche products
 through independent insurance agents. Our goal is to become a low-cost
 provider of a full line of auto insurance and related services, distributed
 through many different channels. This full product line will be marketed under
 a distinctive brand based on our commitment to delight customers. The
 transition strategy is to build on the excellent people, customer-focused
 divisionalized product manager organization, superb claim service, broad
 independent agent distribution and creative rate segmentation that are the
 basis for our extraordinary results to date. In 1993, we made substantial
 progress by reducing expenses, improving control of loss costs, expanding
 product offerings, testing new distribution methods and developing the
 Progressive brand experience.
EXPENSES  The Core business underwriting expense ratio was reduced to 25.9
 percent from 28.4 percent in 1992, compared to the personal auto insurance
 industry expense ratio of 22.7 percent. Our achievement in lowering expenses
 was in line with our goal of having a 20 percent expense ratio by the year
 2000. The 1993 reductions came from process improvements developed by
 empowered work teams and from technology like our ProRater (registered trade-
 mark) Plus program where agents quote and submit applications electronically.
LOSS COSTS  Payments for policyholders' losses and the expenses associated with
 handling them were 63.7 percent of 1993 earned premium. Immediate Response
 (Registered trademark) claims service begins with our customers' understanding
 that we are available around-the-clock, 24 hours a day, 365 days a year, and
 WANT THEM TO CALL 1-800-274-4499 immediately--from the scene of their accident
 or as soon as possible thereafter. During 1993, we improved on key claim
 service reporting measurements, including median hours between claims
 occurring and being reported, and the number of claims reported within four
 hours of occurrence.
Once a claim is reported, we try to communicate with all appropriate parties
 within hours to obtain necessary information, determine damages, assess fault
 and make a fair settlement offer. This often involves claim reps meeting 
 personally with our insured or claimant within hours of the accident. 
 The percentage of third-party property damage and first-party collision 
 claims closed within seven days of the accident increased from 51 percent in 
 1992 to 56 percent in 1993.
Delivering this claim service cost 9.1 percent of 1993 earned premium, down
 from 10.7 percent in 1992 and 14.2 percent in 1991. We plan for ten percent
 loss adjustment expense long-term because we believe it achieves the optimum
 balance between the cost of adjusting and the costs of settlements, because it
 takes into account that loss ratios will increase and because we will write
 more policies with high liability limits.
PRODUCT OFFERINGS  Our traditional nonstandard auto product provides coverage
 for people cancelled and rejected by other insurers.  However, more insurers
 are surcharging and retaining the risks they formerly rejected, thereby
 shrinking the market available to Progressive. Also, there is more low-cost
 competition for nonstandard drivers. In response, we now, or soon will, offer
 consumers three different price levels, each with a different commission that
 produces the same amount net to Progressive. This way agents can choose the
 commission rate that matches their costs of servicing particular customers,
 promoting competition and consumer choice.
Progressive divides the $94 billion United States personal auto insurance
 market, which includes recreational vehicles and pick-up trucks, into
 "nonstandard," "standard" and "preferred." Nonstandard private passenger auto
 insurance premiums, including all residual market mechanisms, are $18 billion,
 19 percent of the total. The other 81 percent is standard and preferred.  In
 1993, we continued testing standard and preferred products by writing $64 
 million, 4.5 percent of our total private passenger auto premiums.

Q - HAS PROGRESSIVE'S PRODUCTIVITY INCREASED OVER THE LAST FIVE YEARS?


<PAGE>   15
                                                                         14 - 15




We see the chance to become an increasingly important factor in the standard
 and preferred markets and will expand as we gain understanding of and
 confidence in our pricing, expense structure and service. Taken with our
 programs for recreational vehicles and small fleet commercial vehicles, plus
 auto insurance in Ontario, Canada, our potential market is approximately $115
 billion, making Progressive's share 1.5 percent, and leaving us much room to
 grow.
We continually revise rates in every program to reflect loss costs and
 expenses. During 1993, we became more competitive by reducing rates an average
 of .8 percent in existing private passenger auto programs. We did this by
 decreasing expenses and controlling loss costs. This compares with a 1.9
 percent increase in 1992 and larger increases in prior years. Offering agents
 a choice of lower commissions and serving more customers are steps toward
 offering auto insurance to every auto owner and operator at prices that will
 be competitive for many.
DISTRIBUTION  We want consumers to be able to buy Progressive insurance how,
 when and where THEY choose. We continued testing multiple distribution, which
 we call "Community Marketing," in the Miami and Tampa markets. These
 experiments involve consumer advertising, telephone quoting, and allowing
 customers to buy from an agent, at a company office, over the phone or by
 mail. Test results are encouraging, have produced some premium in new channels
 and, most importantly, have dramatically increased premium volume from
 independent agents, who have been and continue to be Progressive's most
 important channel of distribution.
PROCESS  We define a "process" as a collection of inputs, resources and
 activities focused on creating value for customers and shareholders.
 Resources include people, capital, technology, information and external
 suppliers. The key aspect of process management is  the design of how inputs
 and resources work together to delight customers, by reducing the error rate,
 cost and cycle time of the process.
We have a system for Process Leadership where Division Presidents serve in the
 dual role of line manager for their division and Process Leader for a key
 element of our business, such as Policy Quoting, Billing and Claims. Working
 with cross-divisional and cross-functional teams of line people to address
 specific issues, Process Leaders make key decisions for the process and
 oversee the design and implementation of "best practices" for the entire Core
 business for their process. This additional responsibility reinforces Division
 Presidents becoming a team because they work together not only to decide and
 execute business strategy but also to integrate processes.
EXPERIMENTATION  The transition from a niche provider of nonstandard auto to a
 broad-based provider of personal auto with compelling competitive advantages
 will take several years. Our approach is to test and refine our techniques in
 selected markets before expanding any aspect of the change. We have introduced
 disciplined experimental techniques and closely monitor the performance of all
 market tests against pre-agreed milestones.
CONTROLS  Recognizing the challenge of growing fast and simultaneously improving
 products and processes, we monitor performance against detailed forecasts
 which are updated monthly, and against monthly customer and employee surveys.
 We will curtail growth if service levels deteriorate, or if underwriting
 profit drops below four percent.
BRAND  We have begun to define a "Progressive Brand" for auto insurance,
 focusing on creating distinctive and delightful Buying, Ownership and Claims
 experiences for our customers. The purpose of brand development is to reduce
 the cost of acquiring a new customer and to increase customer retention.
 During 1993, we defined and improved internal methods that create positive
 customer experiences, and created an external com-munication package for the
 Progressive brand, by testing television, radio, print and targeted direct
 mail programs.



                  A - IT SURE HAS. OVER THAT PERIOD, OUR DIRECT PREMIUMS WRITTEN
           GREW 47 PERCENT WHILE THE NUMBER OF EMPLOYEES GREW ONLY FOUR PERCENT.
                      AS A RESULT, OUR DIRECT PREMIUMS PER PERSON INCREASED FROM
                                                           $228,000 TO $322,000.

<PAGE>   16
                                                                         16 - 17



 DIVERSIFIED DIVISIONS
Diversified divisions account for seven percent of Progressive's total volume.
 Past efforts to manage core and diversified divisions in the same way did not
 recognize important differences between them and detracted from the results of
 both. In 1993, we separated the Diversified divisions' information, claim
 handling and incentive compensation systems from those used by the Core
 divisions, and Diversified divisions began to accept risk in one of our
 wholly-owned subsidiary insurers, instead of Progressive Casualty, to keep
 the emerging Progressive brand focused on auto insurance and to insulate the
 Core business from distractions caused by Diversified divisions' operations.
 In 1994, we expect to further reduce both the risk in these businesses and
 their distraction from the Core business.
FINANCIAL SERVICES  Financial Services' principal product is collateral
 protection for automobile lenders. The division, enjoying its fourth
 consecutive profitable year, produced a 13 percent return on $90 million
 revenue, compared to a 14 percent return on $91 million revenue in 1992.
 During the year, we were privileged to begin serving Toyota Motor Services,
 First Interstate Bank and the Associates.
RISK MANAGEMENT SERVICES  Risk Management Services' principal customers are
 community banks. Its principal products are liability insurance for directors
 and officers and employee dishonesty insurance. Progressive shares the risk
 and premium on these coverages with a small mutual insurer controlled by its
 bank customers. The program is sponsored by the American Bankers Association.
 In 1993, Risk Management Services produced a 69 percent return on $16 million
 revenue, compared to 35 percent on $14 million revenue in 1992.
MOTOR CARRIER  The Motor Carrier Division manages involuntary commercial auto
 plans (CAIP) and pricing and risk management for select former customers of
 our defunct Transportation business as well as a growing number of
 intermediate size trucking companies, reinsuring them to limit Progressive's
 loss to $100,000 per occurrence. The Division produced a 13 percent return on
 $44 million revenue, compared to an 11 percent loss on $44 million revenue in
 1992.

 INVESTMENTS AND CAPITAL MANAGEMENT
The balance of revenue and profit comes from interest, dividends and capital
 gains produced by Progressive's invested assets ($2,786.4 million at December
 31, 1993, compared to $2,386.1 million at December 31, 1992). These funds are
 under the management of Progressive Partners, Inc., our investment and capital
 management subsidiary. Total investment income was $242.4 million before taxes
 and $177.2 million after taxes, compared to $153.5 million before taxes and
 $120.0 million after taxes in 1992. On December 31, 1993, our portfolio had
 $70.2 million in total unrealized gains, compared to $138.7 million at
 December 31, 1992. In 1993, we realized $107.9 million in capital gains, of
 which $74.3 million came from selling all the stock we owned in MBNA
 Corporation.
Progressive Partners, which became fully integrated as part of the Company
 during 1993, is guided by conservative investment and capital management
 policies which support Progressive's overriding focus on underwriting and are
 intended to assure that we always have enough capital to support all the
 insurance premium we can write profitably. In addition to the increase in
 capital from 1993's record earnings, we raised $177 million by selling common
 stock, to support the anticipated rapid expansion of our insurance business
 and to reduce the financial leverage which resulted from previous years' stock
 repurchases. To assure adequate capital at relatively low cost, we also raised
 $350 million during 1993 (the last $200 million closed January 12, 1994) by
 issuing long-term debt securities at some of the lowest interest rates
 available during the last twenty years.

Q - HOW DOES PROGRESSIVE PLAN FOR THE FUTURE?

<PAGE>   17
                                            





        Photograph: "Lens (Headlight, Hubcap, Grill)," Zeke Berman, 1994

<PAGE>   18
                                                                         18 - 19









            Photograph: "Headlight, Mirrors, Grill," Zeke Berman, 1993

<PAGE>   19





            Photograph: "Steering-wheel and Shoe," Zeke Berman, 1993

<PAGE>   20
                                                                         20 - 21



   A - WE ANTICIPATE THAT CHANGE IS CONSTANT, ORGANIZE TO EMBRACE IT AND USE OUR
                             ABILITY TO RESPOND QUICKLY AS A TACTICAL ADVANTAGE.





WHAT PROGRESSIVE HAS CHANGED AND WHY

Progressive's consistent success stems from our great people, clear Core
 Values, ambitious objectives, high standards, constant creativity, data-driven
 decision making, customer-focussed organization, excellent partners and
 unusual flexibility. Our Core Value of "Excellence" guides us to "strive
 constantly to improve." From our beginning, Progressive has constantly raised
 standards, added more excellent people, developed better systems and controls,
 and explored new markets. Our ambition to be a major factor in the extremely
 competitive private passenger auto insurance business requires creativity in
 developing ways to attract new customers AND to provide superior service.
Six years ago, Progressive was enjoying what was our greatest year until then.
 As 1987 ended, we were confident that we could sustain profitable growth by
 continuing to do what we were doing. Eleven months later, we learned just how
 fast our circumstances can change. In November 1988, we were shocked into
 action when California voters passed Proposition 103, threatening auto
 insurance as we knew it. It opened our eyes to auto insurance consumers' anger
 and mistrust, and our vulnerability to capricious legislation and regulation.
 Consumer dissatisfaction with auto insurance appeared to put Progressive's
 existence in danger; we knew we had to do something. We pulled back in
 California, but the situation required much
 more positive action.
About the same time, we learned that Allstate had passed us in total U.S.
 volume on OUR specialty of nonstandard auto insurance, making it our most
 threatening competitor. After 25 years of observing Progressive's success,
 Allstate and other competitors, like the Penn Central companies, recognized
 that our high expense ratios and wide profit margins gave them a perfect
 opportunity to take market share from us by mimicking our programs, operating
 at lower cost and accepting slimmer profit margins. We saw that Allstate, with
 its distribution and data advantages, could overwhelm us unless we acted
 quickly and decisively.
Auto owners and operators reward Progressive in direct proportion to how our
 service, quality and cost compare to their options. In five years of intensive
 study of U.S. auto owners and operators, we are learning their needs and
 attitudes. We have concluded that Progressive has an opportunity to continue
 to grow profitably IF we work within our highly regulated, highly competitive,
 very staid industry, figuring out how to lower consumers' cost and improve
 their experience sufficiently to turn their anger with auto insurance to
 delight.
"Re-engineering" is what we have been doing to respond to these threats and
 opportunities, as well as to the changing environment.  The result is
 Progressive's new strategy for the 1990's. When we set on the path of change
 five years ago, not only were we uncertain where it would lead, but also did
 not realize how difficult it would be, how long it would take and how much of
 what we tried would not work. Our profitable growth has obscured many of the
 following profound, steady, incremental, continuing changes:
bullet EXPENSE REDUCTION -- Our underwriting expenses were among the industry's
 highest, but we passed them along by constantly increasing prices. Continuing
 cost reduction is a critically important initiative. We went through painful
 layoffs in 1991 and 1992, dramatically reducing costs, and we continue to
 drive them down by implementing operating efficiencies.

<PAGE>   21
bullet LOWER PROFIT MARGINS -- Our underwriting profit margins have been among
       the industry's highest. We have learned that margins greater than four
       percent are unsustainable and undesirable for the long-term, because
       good results lure effective competitors happy to operate at lower profit
       margins, as well as encouraging onerous regulation and legislation. We
       now strive to achieve our four percent target in each program, but not
       more, so as to keep prices attractive to customers and to make it more
       difficult for competitors to charge less and still make a profit. We
       expect to convert operating improvements into lower prices, written      
       premium growth and subsequent earnings growth.
        
bullet DIVERSIFICATION CURTAILED -- Our diversification efforts--both
       Transportation and Financial Services--were motivated by our not seeing
       the growth opportunities in personal auto insurance that we see today.
       In diversifying, we promoted many programs too fast, before fully
       understanding all the risks and how to price them. We are now more
       restrained and disciplined in how we develop new businesses.     
        
bullet REDUCED VARIATION -- We encouraged individual, relatively undisciplined 
       experimentation, resulting in unnecessarily expensive variation in our
       products and processes and some very unprofitable programs. Now we
       depend on cross-divisional and cross-functional teams, operating under
       careful control, to manage experiments while we seek to align our
       products and implement our best practices, driven by customer needs and
       wants.
bullet REDEFINE OUR BUSINESS -- Our concept was that we were in the
       auto insurance business. Now we know we are in the business of reducing
       the human trauma and economic costs of auto accidents. Our attitude
       about auto accidents was that more accidents costing more created a
       larger auto insurance market and more profit per transaction for us. Now
       we act on our conviction that we and our customers will be healthier and
       happier if there are fewer accidents costing less. 
        
bullet IMMEDIATE RESPONSE (registered trademark) CLAIMS SERVICE -- Our previous
       claim service objective (and accomplishment) was to provide the best
       available from any auto insurer. Now we are creating a whole new 
       standard for auto accident claim service by responding
        




Q - WHAT SERVICE LEVELS CAN CUSTOMERS EXPECT FROM PROGRESSIVE?

<PAGE>   22
                                                                         22 - 23

    THE TYPE OF SERVICE THAT CONSUMERS CAN'T EVEN IMAGINE IS POSSIBLE TODAY, BUT
       WILL BE COMMONPLACE IN THE FUTURE. WE PROVIDE IMMEDIATE RESPONSE TO THEIR
          REQUESTS FOR CLAIMS AND CUSTOMER SERVICE, 24 HOURS A DAY, SEVEN DAYS A
                                                          WEEK, 365 DAYS A YEAR.

 immediately on all claims in ways that delight our customers and claimants.
bullet BROADENED MARKET -- Our target customer was cancelled and rejected auto
       insureds. Now it is all auto owners and operators that can be profitably
       underwritten.
bullet MULTIPLE DISTRIBUTION -- We have historically depended almost entirely
       on the independent agents to distribute our products, despite knowing we
       could not stem the agency system's plummeting market share or the threat
       of that decline to Progressive. Now we are changing consumers'
       experience of auto insurance AND involving agents in a way that can
       REVERSE more than 30 years of market share loss by agents. At the same
       time, we have shifted our focus to the consumer and will distribute our
       products how, when and where the consumer wants to buy.
bullet CONSUMER INFORMATION -- Consumers' comparison shopping for auto insurance
       required a tiresome, confusing, unreliable search of agents and/or
       companies to obtain quotes they often found to be inaccurate and
       difficult to compare. In several states, we now offer consumers
       comparable, competitive quotes for their specific situation from the
       companies with the largest market share in their state.
bullet INVESTMENT AND CAPITAL MANAGEMENT -- Our philosophy, process and people
       for managing investments and capital involved policy setting and
       decision making by a committee comprised of independent money managers,
       investment bankers, consultants, operating managers and directors. Now
       investment professionals employed by Progressive are empowered to
       execute our clear, conservative investment philosophy and to lead it in
       different directions as circumstances change.
bullet CORE AND DIVERSIFIED BUSINESSES -- We worked for years to have all our
       businesses function within one organization, with the result that each
       sacrificed something. We are now separating the "Core" and "Diversified"
       businesses operationally and corporately to achieve the focus that makes
       both more efficient and effective.
bullet TEAMWORK -- Our organization was stable, structured and hierarchical.
       Now it involves interlocking and constantly changing teams established
       to understand and meet specific customer needs. Teams disband when their
       mission is complete. Our people interactions were top down, directive
       and internally competitive (win-lose). Now they are driven by people
       consulting and cooperating with each other to find better ways to serve
       our customers in a Total Quality Management environment (win-win).
bullet NEW COMPENSATION SYSTEM -- Our compensation was based on individual
       skills and scope of authority. It was more generous for the highest paid
       people, was predominantly salary and was applied inconsistently enough
       to irritate people. Now it is market-based with the same standards for
       all people and more aligned with shareholders' interest because total
       compensation can vary greatly from year to year depending on company,
       division, team and individual results. Our best performers earn at the
       top of the market in years we achieve our objectives and more when we
       surpass them. The new companywide bonus plan, which we call
       "gainsharing", reinforced these changes by paying Progressive's people
       $23.4 million for 1993's extraordinary performance.
bullet PROCESS LEADERSHIP -- Managing our important processes was impossible
       when doing so was a staff responsibility, because our excellent,
       strong-willed Division Presidents liked to do things their own way. Now
       we achieve regular cost savings and customer service improvements
       because most Division Presidents are individually responsible for a
       specific key process, and all have agreed to follow the others'
       leadership.
bullet CONSUMER IDENTITY -- Progressive is virtually unknown except to our
       agents and customers. We are now defining our "brand" and its symbolism,
       and beginning to communicate a unified and consistent image in order to
       develop our consumer franchise.
        

<PAGE>   23
                                                                         24 - 25

 CHANGE AND COMPETITION
Making all these changes demanded much of our people. There were
 disappointments, failures and large costs, but what we have done may allow
 Progressive to offer all auto owners and operators lifetime insurance, easy
 comparison shopping, and superb service, as well as providing the lowest cost
 to many. Progressive will reduce its customers' and claimants' trauma and
 costs caused by auto accidents with immediate, around-the-clock service,
 in-person when appropriate on a claim.
These changes will work into our businesses slowly and unevenly. Our divisions
 and departments are in different stages of evolution toward Progressive's
 vision. The strategy is driven by our strong belief that lower prices, more
 information, more options and immediate service will delight customers and
 make it possible for us to achieve our ambitious objectives.
In Florida, we are testing how many of these changes operate together.
 Consumers can now call 1-800-AUTO-PRO( service mark) 24 hours a day, seven
 days a week,  and in ten minutes get an accurate list of the prices charged by
 State Farm, Allstate, Prudential and Progressive for the caller's particular
 insurance package. Progressive will accept and guarantee to renew every
 consumer who chooses to insure with us, and will help them purchase their auto
 insurance either through an independent insurance agent, at a Progressive
 operated location, by telephone or through the mail. We will tell callers who
 ask how to get in touch with the competitors.  
Once insured with Progressive, our customers can call us at any time about
 claims, policy changes, payment status and other services. Whenever our
 customer, the claimant or Progressive feels it is appropriate, a Progressive
 person will almost always be face-to-face with our customer or the claimant
 within hours of our receiving the first call.
To the extent that competitors effectively copy (and improve on) our good
 ideas, Progressive will have less opportunity for rapid growth and unusually
 good profit margins. But that is the beauty of competitive free-enterprise for
 consumers and for society, and why the system should be honored, nurtured and
 sustained. If competitors follow Progressive's lead, auto insurance will
 become less of a political football. Auto insurers will be partners in
 changing insurance regulation and improving traffic safety, not victims of
 sometimes opportunistic finger-pointers. The system will work better for
 consumers, and everybody will win because there will be fewer, less costly
 accidents that cause less human trauma.

Q - WHAT DOES PROGRESSIVE SEE AS AN ESPECIALLY GREAT RISK?

<PAGE>   24





                Photograph: "Belts Triptych," Zeke Berman, 1994

<PAGE>   25





               Photograph: "Seatbelt Diptych," Zeke Berman, 1994

<PAGE>   26
                                                                         26 - 27





     A - INSURANCE LAWS AND REGULATIONS CHANGE CONTINUALLY. WE REACT PROMPTLY TO
      THESE CHANGES WHEN THEY PROHIBIT US FROM MAKING OUR TARGET PROFIT MARGINS.

 RISKS

We perceive Progressive's opportunity as one which must be realized now. The
 risk of competitors copying and improving on what we are doing, or of new
 restrictive regulation (or both) inhibiting our ability to do it, leads us to
 want to develop and spread our new price levels, services and ways of doing
 business throughout the United States as quickly as possible. Here are factors
 shareholders need to understand concerning 1994 earnings and the risks in our
 strategy:
bullet LEGISLATIVE AND REGULATORY RISK -- Insurance laws and regulations change
       continually. We react promptly when they prohibit us from making our
       target profit margins. Such reaction could result in reduced volume.
        

bullet UNPREDICTABLE UNDERWRITING MARGIN AND GROWTH RATE - Margins in auto
       insurance are inherently unstable. In the short run, pricing to produce
       our long-time four percent underwriting profit goal means operating
       earnings may not increase in proportion to volume growth. Our growth
       rate will be influenced by agent and competitor reaction to our
       strategies, and by the trend in loss costs. WE CANNOT PREDICT WITH ANY
       PRECISION THE TIMING AND PACE OF THE DECREASE IN UNDERWRITING MARGINS
       NOR THE RATE OF GROWTH.
        

bullet OPERATING EARNINGS VOLATILITY -- Growth requires investment in training, 
       new systems and improved processes, and rapid growth can generate
       expensive mistakes. This risk and our continuing to do nothing to
       influence current earnings or the price of our stock could make
       short-term earnings trends difficult to predict.
        

bullet UNPREDICTABLE INVESTMENT INCOME -- The average maturity of our $2.6
       billion fixed-income portfolio is approximately two years, meaning
       investment income is unusually sensitive to short-term interest rates.
       This could be a positive if rates go up as many predict.
        

bullet PRICING RISK -- We may not yet have learned quite enough to price
       standard and preferred auto insurance to produce our planned results.
       This risk is small because our commitment to the philosophy that
       "Progressive's alternative to making its targeted underwriting profit is
       not to do business" requires us to change rates immediately when
       experience dictates.
        

bullet GROWTH ITSELF -- To accomplish our objectives, we must build many new
       systems, train thousands of claim and telephone service people, continue
       to improve our claim handling and ability to sell by telephone, align
       our products, validate new pricing criteria AND simultaneously continue
       to reduce costs. We have experience managing our planned level of growth
       (including periods when we grew at 40 percent compounded) but not at our
       current size.

<PAGE>   27
                                                                         28 - 29




 THE FUTURE

Progressive can and will lead a wave of change in the United States system for
 dealing with auto accident injuries and property damage. We believe we will
 reduce accident victims' trauma and costs, improve how consumers feel about
 auto insurance and be rewarded handsomely for our leadership.
1993's results are significant, not only because a profit surge is always
 welcome, but because, heartened by our success, we will pursue our new
 strategy. We will expand our core private passenger auto insurance business at
 a pace that will test our ability to provide the service we guarantee, could
 reduce 1994 and 1995 earnings growth and may unnerve investors who focus
 disproportionately on short-term earnings. This approach is consistent with
 our strategy of creating long-term capital appreciation.
Much will be required to realize our vision. Thus we begin 1994 as we began all
 other years--excited, respectful of the challenge implicit in our objectives
 and strategy, humbled by our failures, proud of having responded to them and
 confident that our excellent people will continue to achieve superior results.
 At Progressive, it is always as if we are just beginning our business and
 looking at a future that is brighter than ever.
We deeply appreciate the customers we are privileged to serve. Thank you for
 your business, and thanks especially to the more than 30,000 independent
 insurance agents who chose to do business with Progressive in 1993. We are
 particularly grateful for our shareholders' continued confidence. Happily,
 1993 was a year in which the men and women of Progressive rebounded from the
 stresses and anxieties implicit in any change. To you, thanks for all your
 contributions in 1993 and the promise you bring to our future.


                         Joy, Love and Peace

                         Peter B. Lewis, Chairman, President
                         and Chief Executive Officer

<PAGE>   28





                Photograph: "Road 1, Road 2," Zeke Berman, 1993

<PAGE>   29





  Photograph: "Tour (Lightbulb and Steering-wheel Diptych)," Zeke Berman, 1993

<PAGE>   30





  Photograph: "Tour (Lightbulb and Steering-wheel Diptych)," Zeke Berman, 1993

<PAGE>   31
1993                 Financial                    Review                 32 - 33









    Consolidated Financial Statements 34 Management's Discussion and Analysis 47
                                                           Ten Year Summaries 50





Loss Reserves 54 Direct Premiums Written by State 54 Quarterly Financial and
Common Share Data 55

<PAGE>   32

REPORT OF COOPERS & LYBRAND, INDEPENDENT ACCOUNTANTS


TO THE BOARD OF DIRECTORS AND SHAREHOLDERS, THE PROGRESSIVE CORPORATION:

We have audited the accompanying consolidated balance sheets of The Progressive
 Corporation and subsidiaries as of December 31, 1993 and 1992, and the related
 consolidated statements of income, changes in shareholders' equity and cash
 flows for each of the three years in the period ended December 31, 1993. These
 financial statements are the responsibility of The Progressive Corporation and
 subsidiaries' management. Our responsibility is to express an opinion on these
 financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
 standards. Those standards require that we plan and perform the audit to
 obtain reasonable assurance about whether the financial statements are free of
 material misstatement. An audit includes examining, on a test basis, evidence
 supporting the amounts and disclosures in the financial statements. An audit
 also includes assessing the accounting principles used and significant
 estimates made by management, as well as evaluating the overall financial
 statement presentation. We believe that our audits provide a reasonable basis
 for our opinion.
In our opinion, the financial statements referred to above present fairly, in
 all material respects, the consolidated financial position of The Progressive
 Corporation and subsidiaries as of December 31, 1993 and 1992, and the
 consolidated results of their operations and their cash flows for each of the
 three years in the period ended December 31, 1993, in conformity with
 generally accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements, in 1993, The
 Progressive Corporation and subsidiaries adopted the provisions of Statement
 of Financial Accounting Standards No. 113, "Accounting and Reporting for
 Reinsurance of Short-Duration and Long-Duration Contracts."

Coopers & Lybrand

Cleveland, Ohio
January 26, 1994

<PAGE>   33

<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>

                                                                                     (millions-except per share amounts)

 For the years ended December 31,                                                        1993          1992          1991
<S>                                                                              <C>            <C>           <C>
NET PREMIUMS WRITTEN                                                             $    1,819.2   $   1,451.2   $   1,324.6
                                                                                 ============   ===========   ===========

REVENUES
 Premiums earned  . . . . . . . . . . . . . . . . . . . . . . . . . . . .        $    1,668.7   $   1,426.1   $   1,286.9
 Investment income  . . . . . . . . . . . . . . . . . . . . . . . . . . .               134.5         139.0         144.8
 Net realized gains on security sales   . . . . . . . . . . . . . . . . .               107.9          14.5           7.4
 Service revenues   . . . . . . . . . . . . . . . . . . . . . . . . . . .                43.7          53.3          54.0
 Proposition 103 reserve reduction  . . . . . . . . . . . . . . . . . . .                  --         106.0            --
                                                                                 ------------   -----------   -----------
   Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . .             1,954.8       1,738.9       1,493.1
                                                                                 ------------   -----------   -----------
EXPENSES
 Losses and loss adjustment expenses  . . . . . . . . . . . . . . . . . .             1,028.0         930.9         858.0
 Policy acquisition costs   . . . . . . . . . . . . . . . . . . . . . . .               311.6         304.1         313.7
 Other underwriting expenses  . . . . . . . . . . . . . . . . . . . . . .               151.3         141.5         162.1
 Investment expenses  . . . . . . . . . . . . . . . . . . . . . . . . . .                10.2          17.0          22.5
 Service expenses   . . . . . . . . . . . . . . . . . . . . . . . . . . .                36.9          57.6          56.1
 Interest expense   . . . . . . . . . . . . . . . . . . . . . . . . . . .                39.7          44.5          47.8
 Non-recurring items1   . . . . . . . . . . . . . . . . . . . . . . . . .                 4.0          64.6            --
                                                                                 ------------   -----------   -----------
   Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .             1,581.7       1,560.2       1,460.2
                                                                                 ------------   -----------   -----------

NET INCOME
 Income before Federal income taxes   . . . . . . . . . . . . . . . . . .               373.1         178.7          32.9
 Provision for Federal income taxes   . . . . . . . . . . . . . . . . . .               105.8          39.1            --
                                                                                 ------------   -----------   -----------
 Income before cumulative effect of accounting change   . . . . . . . . .               267.3         139.6          32.9
 Cumulative effect of adopting SFAS 109   . . . . . . . . . . . . . . . .                  --          14.2            --
                                                                                 ------------   -----------   -----------
 Net income   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        $      267.3   $     153.8   $      32.9
                                                                                 ============   ===========   ===========

PER SHARE
 Income before cumulative effect:
   Primary  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        $       3.59   $      2.09   $       .41
   Fully diluted  . . . . . . . . . . . . . . . . . . . . . . . . . . . .                3.58          1.85           .41
Cumulative effect of adopting SFAS 109:
   Primary  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                 --            .23           --
   Fully diluted  . . . . . . . . . . . . . . . . . . . . . . . . . . . .                 --            .20           --
 Net income:
   Primary  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        $       3.59   $      2.32   $       .41
   Fully diluted  . . . . . . . . . . . . . . . . . . . . . . . . . . . .                3.58          2.05           .41

<FN>
1See Note 5-Debt and Note 10-Related Party Transactions for discussion.

 All per share amounts were adjusted for the December 8, 1992, 3-for-1 stock split.

 See notes to consolidated financial statements.
</TABLE>






The Progressive Corporation and Subsidiaries

<PAGE>   34
                                                                         34 - 35

<TABLE>
CONSOLIDATED BALANCE SHEETS 
<CAPTION>
                                                                                                              (millions)

 December 31,                                                                                          1993          1992
<S>                                                                                             <C>           <C>
ASSETS
 Investments:
   Held-to-maturity:
    Fixed maturities, at amortized cost (market: $327.4 and $271.2)   . . . . . . . . .         $     309.1   $     250.4
   Available-for-sale:
    Fixed maturities, at market (amortized cost: $1,761.9 and $1,408.0)   . . . . . . .             1,792.6       1,437.1
    Equity securities, at market (cost: $433.2 and $310.3)  . . . . . . . . . . . . . .               453.9         398.6
   Short-term investments, at amortized cost (market: $231.3 and $300.5)  . . . . . . .               230.8         300.0
                                                                                                -----------   -----------
      Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             2,786.4       2,386.1
 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                 8.7          22.9
 Accrued investment income  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                33.7          27.1
 Premiums receivable, net of allowance for doubtful accounts of $8.7 and $8.9   . . . .               380.6         312.0
 Reinsurance recoverables   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               380.9         357.8
 Prepaid reinsurance premiums   . . . . . . . . . . . . . . . . . . . . . . . . . . . .                84.6          78.0
 Deferred acquisition costs   . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               124.6         101.3
 Federal income taxes   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                78.5          58.5
 Property and equipment, net of accumulated depreciation of $107.1 and $95.1  . . . . .               106.7          63.5
 Other assets   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                26.6          33.7
                                                                                                -----------   -----------
       Total assets   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         $   4,011.3   $   3,440.9
                                                                                                ===========   ===========

LIABILITIES AND SHAREHOLDERS' EQUITY
 Unearned premiums  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         $     772.0   $     614.8
 Loss and loss adjustment expense reserves  . . . . . . . . . . . . . . . . . . . . . .             1,348.6       1,274.2
 Policy cancellation reserve  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                60.1          52.1
 Accounts payable and accrued expenses  . . . . . . . . . . . . . . . . . . . . . . . .               355.6         302.3
 Funded debt  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               477.1         568.5
                                                                                                -----------   -----------
      Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             3,013.4       2,811.9
                                                                                                -----------   -----------
 Shareholders' equity:
   Serial Preferred Shares (authorized 20.0)
    9 3/8% Serial Preferred Shares, Series A, no par value,
      cumulative, liquidation preference $25.00 per share (issued
      and outstanding 3.6 and 4.0)  . . . . . . . . . . . . . . . . . . . . . . . . . .                87.9          96.4
   Common Shares, $1.00 par value (authorized 200.0, issued 82.2 and 77.1,
      including treasury shares of 10.1 and 10.0) . . . . . . . . . . . . . . . . . . .                72.1          67.1
   Paid-in capital  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               357.6         180.7
   Net unrealized appreciation on investment securities . . . . . . . . . . . . . . . .                33.5          77.5
   Retained earnings  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               446.8         207.3
                                                                                                -----------   -----------
      Total shareholders' equity  . . . . . . . . . . . . . . . . . . . . . . . . . . .               997.9         629.0
                                                                                                -----------   -----------
       Total liabilities and shareholders' equity   . . . . . . . . . . . . . . . . . .         $   4,011.3   $   3,440.9
                                                                                                ===========   ===========

<FN>
See notes to consolidated financial statements.
</TABLE>






The Progressive Corporation and Subsidiaries

<PAGE>   35

<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<CAPTION>

                                                                                     (millions--except per share amounts)

  For the years ended December 31,                                                       1993          1992          1991
<S>                                                                              <C>            <C>           <C>
PREFERRED SHARES, NO PAR VALUE                                                   
 Balance, Beginning of year   . . . . . . . . . . . . . . . . . . . . . .        $       96.4   $      96.4            --
   Sale of Preferred Shares, Series A . . . . . . . . . . . . . . . . . .                  --            --   $      96.4
   Treasury shares purchased-cost basis . . . . . . . . . . . . . . . . .                (8.5)           --            --
                                                                                 ------------   -----------   -----------
 Balance, End of year   . . . . . . . . . . . . . . . . . . . . . . . . .        $       87.9   $      96.4   $      96.4
                                                                                 ------------   -----------   -----------

COMMON SHARES, $1 PAR VALUE
 Balance, Beginning of year   . . . . . . . . . . . . . . . . . . . . . .        $       67.1   $      21.1   $      23.1
   Stock options exercised  . . . . . . . . . . . . . . . . . . . . . . .                  .1            .5            --
   Stock rights issued (cancelled)  . . . . . . . . . . . . . . . . . . .                  --           (.1)           --
   Sale of Common Shares  . . . . . . . . . . . . . . . . . . . . . . . .                 5.0            --            --
   Treasury shares purchased  . . . . . . . . . . . . . . . . . . . . . .                 (.1)         (1.9)         (2.0)
   Capitalization of stock split  . . . . . . . . . . . . . . . . . . . .                  --          38.5            --
   Conversion of convertible debenture  . . . . . . . . . . . . . . . . .                  --           9.0            --
                                                                                 ------------   -----------   -----------
 Balance, End of year   . . . . . . . . . . . . . . . . . . . . . . . . .        $       72.1   $      67.1   $      21.1
                                                                                 ------------   -----------   -----------

PAID-IN CAPITAL
 Balance, Beginning of year   . . . . . . . . . . . . . . . . . . . . . .        $      180.7   $     118.7   $     126.5
   Stock options exercised  . . . . . . . . . . . . . . . . . . . . . . .                 1.7           3.7            --
   Stock rights issued  . . . . . . . . . . . . . . . . . . . . . . . . .                 3.5           2.8           3.2
   Sale of Common Shares  . . . . . . . . . . . . . . . . . . . . . . . .               172.0            --            --
   Treasury shares purchased  . . . . . . . . . . . . . . . . . . . . . .                 (.3)        (10.5)        (11.0)
   Conversion of convertible debenture  . . . . . . . . . . . . . . . . .                  --          66.0            --
                                                                                 ------------   -----------   -----------
 Balance, End of year   . . . . . . . . . . . . . . . . . . . . . . . . .        $      357.6   $     180.7   $     118.7
                                                                                 ------------   -----------   -----------

NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENT SECURITIES
 Balance, Beginning of year   . . . . . . . . . . . . . . . . . . . . . .        $       77.5   $      20.7   $     (28.3)
   Change in net unrealized appreciation (depreciation) . . . . . . . . .               (44.0)         56.8          49.0
                                                                                 ------------   -----------   -----------
 Balance, End of year   . . . . . . . . . . . . . . . . . . . . . . . . .        $       33.5   $      77.5   $      20.7
                                                                                 ------------   -----------   -----------

RETAINED EARNINGS
 Balance, Beginning of year   . . . . . . . . . . . . . . . . . . . . . .        $      207.3   $     208.8   $     287.2
   Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               267.3         153.8          32.9
   Cash dividends on Preferred Shares (9 3/8% annually) . . . . . . . . .                (9.2)         (9.4)         (5.7)
   Cash dividends on Common Shares ($.200, $.191
    and $.172 per share, split effected)  . . . . . . . . . . . . . . . .               (13.9)        (11.4)        (11.3)
   Treasury shares purchased: Preferred Shares  . . . . . . . . . . . . .                (1.3)           --            --
                              Common Shares . . . . . . . . . . . . . . .                (2.0)        (93.5)        (94.3)
   Capitalization of stock split  . . . . . . . . . . . . . . . . . . . .                  --         (38.5)           --
   Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                (1.4)         (2.5)           --
                                                                                 ------------   -----------   -----------
 Balance, End of year   . . . . . . . . . . . . . . . . . . . . . . . . .        $      446.8   $     207.3   $     208.8
                                                                                 ------------   -----------   -----------

 TOTAL SHAREHOLDERS' EQUITY   . . . . . . . . . . . . . . . . . . . . . .        $      997.9   $     629.0   $     465.7
                                                                                 ============   ===========   ===========
<FN>
The 9 3/8% Serial Preferred Shares, Series A, may be redeemed at the Company's option any time on or after May 31, 1996. There are 
5.0 million Voting Preference Shares authorized; no such shares have been issued.

See notes to consolidated financial statements.
</TABLE>






The Progressive Corporation and Subsidiaries

<PAGE>   36
                                                                         36 - 37

<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS 
<CAPTION>
                                                                                                              (millions)

 For the years ended December 31,                                                        1993          1992          1991
<S>                                                                              <C>            <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES

 Income before cumulative effect of accounting change   . . . . . . . . .        $      267.3   $     139.6   $      32.9
 Adjustments to reconcile income to net
   cash provided by operating activities:
  Depreciation and amortization  . . . . . . . . . . . . . . . . . . . .                 16.1          24.3          28.4
  Net realized gains on security sales . . . . . . . . . . . . . . . . .               (107.9)        (14.5)         (7.4)
  Changes in:
   Unearned premiums   . . . . . . . . . . . . . . . . . . . . . . . . .                157.2          19.8          51.0
   Loss and loss adjustment expense reserves   . . . . . . . . . . . . .                 74.4         197.1         149.7
   Accounts payable and accrued expenses   . . . . . . . . . . . . . . .                  6.2        (154.9)        139.4
   Policy cancellation reserve   . . . . . . . . . . . . . . . . . . . .                  8.0         (13.5)         (4.7)
   Prepaid reinsurance   . . . . . . . . . . . . . . . . . . . . . . . .                 (6.6)          5.3         (12.7)
   Reinsurance recoverables  . . . . . . . . . . . . . . . . . . . . . .                (23.1)       (103.0)       (118.3)
   Premiums receivable   . . . . . . . . . . . . . . . . . . . . . . . .                (68.6)         11.3         (43.2)
   Deferred acquisition costs  . . . . . . . . . . . . . . . . . . . . .                (23.3)          8.9          (5.7)
   Federal income taxes  . . . . . . . . . . . . . . . . . . . . . . . .                  2.0          22.7         (32.9)
   Other, net  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                 21.8           7.5          14.1
                                                                                 ------------   -----------   -----------
      Net cash provided by operating activities . . . . . . . . . . . . .               323.5         150.6         190.6

CASH FLOWS FROM INVESTING ACTIVITIES

 Purchases:
   Held-to-maturity:   fixed maturities   . . . . . . . . . . . . . . . .              (118.1)       (135.0)     (1,083.0)
   Available-for-sale: fixed maturities   . . . . . . . . . . . . . . . .            (1,215.6)     (1,089.6)           --
                       equity securities  . . . . . . . . . . . . . . . .              (358.4)       (123.3)       (198.6)
 Sales:
   Available-for-sale:  fixed maturities  . . . . . . . . . . . . . . . .               323.7         419.4            --
                        equity securities . . . . . . . . . . . . . . . .               326.1         134.1          99.6
 Maturities, paydowns, calls and other:
   Held-to-maturity:   fixed maturities   . . . . . . . . . . . . . . . .                59.5         262.2         813.6
   Available-for-sale: fixed maturities   . . . . . . . . . . . . . . . .               528.5         354.1            --
 Net sales of short-term investments  . . . . . . . . . . . . . . . . . .                69.2         188.1         229.5
(Receivable) payable on securities  . . . . . . . . . . . . . . . . . . .                55.9         (21.4)         22.6
 Purchase of property and equipment   . . . . . . . . . . . . . . . . . .               (60.0)        (17.5)        (45.1)
 Sale of property and equipment   . . . . . . . . . . . . . . . . . . . .                  --           5.4            --
                                                                                 ------------   -----------   -----------
      Net cash used in investing activities   . . . . . . . . . . . . . .              (389.2)        (23.5)       (161.4)

CASH FLOWS FROM FINANCING ACTIVITIES

 Proceeds from exercise of stock options  . . . . . . . . . . . . . . . .                 1.8           4.2            --
 Proceeds from issuance of stock    . . . . . . . . . . . . . . . . . . .               177.0            --          96.4
 Proceeds from funded debt  . . . . . . . . . . . . . . . . . . . . . . .               148.2         170.0         170.0
 Payments of funded debt  . . . . . . . . . . . . . . . . . . . . . . . .              (240.2)       (170.9)       (170.8)
 Dividends paid to shareholders   . . . . . . . . . . . . . . . . . . . .               (23.1)        (20.8)        (17.0)
 Acquisition of treasury shares   . . . . . . . . . . . . . . . . . . . .               (12.2)       (105.9)       (107.3)
                                                                                 ------------   -----------   ----------- 
      Net cash provided by (used in) financing activities . . . . . . . .                51.5        (123.4)        (28.7)
                                                                                 ------------   -----------   ----------- 
 Increase (decrease) in cash  . . . . . . . . . . . . . . . . . . . . . .               (14.2)          3.7            .5
 Cash, Beginning of year  . . . . . . . . . . . . . . . . . . . . . . . .                22.9          19.2          18.7
                                                                                 ------------   -----------   -----------
 Cash, End of year  . . . . . . . . . . . . . . . . . . . . . . . . . . .        $        8.7   $      22.9   $      19.2
                                                                                 ============   ===========   ===========

<FN>
 See notes to consolidated financial statements.
</TABLE>






The Progressive Corporation and Subsidiaries

<PAGE>   37

NOTES          TO           CONSOLIDATED          FINANCIAL          STATEMENTS

December 31, 1993, 1992 and 1991



1.  REPORTING AND ACCOUNTING POLICIES

BASIS OF CONSOLIDATION AND REPORTING  The accompanying consolidated financial
 statements include the accounts of The Progressive Corporation and
 subsidiaries (the Company), all of which are wholly owned. All significant
 intercompany accounts and transactions are eliminated in consolidation. The
 Company's investments in subsidiaries exceeded their underlying book value at
 dates of acquisition by $4.0 million. In the opinion of management, there is
 no present indication of diminished value; however, in accordance with
 generally accepted accounting principles, $2.4 million of that amount is being
 amortized over 25 years.
INVESTMENTS  Held-to-maturity: fixed maturity securities are securities which
 the Company has the positive intent and ability to hold to maturity. These
 securities are reported at amortized cost with the difference between the
 original cost and redemption value of these securities earned over the lives
 of the respective issues and included in investment income.
Available-for-sale: fixed maturity securities are securities held for
 indefinite periods of time, and may be used as a part of the Company's
 asset/liability strategy or sold in response to changes in interest rates,
 anticipated prepayments, risk/reward characteristics, liquidity needs or other
 similar economic factors. These securities are carried at market value with
 the corresponding unrealized appreciation or depreciation, net of deferred
 income taxes, reflected in shareholders' equity.
Available-for-sale: equity securities include common stocks and nonredeemable
 preferred stocks and are reported at quoted market values. Changes in the
 market values of these securities, net of deferred income taxes, are reflected
 directly as unrealized appreciation or depreciation in shareholders' equity.
Trading securities are securities bought and held principally for the purpose
 of selling them in the near term and are reported at market value. Changes in
 market value are reflected in earnings. The Company has no trading securities
 as of December 31, 1993.
Short-term investments include certificates of deposit, commercial paper and
 other securities maturing within one year and are reported at amortized cost,
 which approximates market.
Financial instruments with off-balance-sheet risk are used in normal investment
 activities and include commitments to extend credit and various forward,
 future and interest rate swap positions. Risk is individually evaluated for
 each position. The difference between the cost and market value of these
 instruments is included in "net realized gains (losses) on security sales"
 when realized.
Realized gains and losses on sales of securities are computed based on the
 first-in first-out method.  
PROPERTY AND EQUIPMENT  Property and equipment is recorded at cost. 
 Depreciation is provided over the estimated useful lives for assets using 
 accelerated methods.
As of December 31, 1993, the Company had contractual commitments related to the
 construction of its new corporate office complex totalling $69.4 million, of
 which $50.5 million had been paid through 1993. Capitalized interest costs
 were $2.7 million in 1993 and $.3 million in 1992.
INSURANCE PREMIUMS AND RECEIVABLES  Insurance premiums written are earned
 primarily on a pro rata basis over the period of risk. For products where more
 than 50 percent cancellations are anticipated, premiums written and earned are
 reduced, though cancellations have not yet occurred.
The Company provides insurance and related services to individuals, lenders and
 motor carriers throughout the United States and in Canada, and offers a
 variety of payment plans to meet individual customer needs. Generally,
 premiums are collected in advance of providing risk coverage, minimizing the
 Company's exposure to credit risk.
Prior to the second quarter 1992, the Company established a reserve for
 potential premium refunds under provisions of California Proposition 103; this
 reserve reduced premiums written and earned $10.2 million in 1992 and $49.7
 million in 1991.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES  Loss reserves represent the estimated
 liability on claims reported to the Company, plus reserves for losses incurred
 but not yet reported. Loss adjustment expense reserves represent the estimated
 expenses required to settle these claims and losses. These estimates are
 reported net of amounts recoverable from salvage and subrogation. The methods
 of making estimates and establishing these reserves are reviewed regularly,
 and resulting adjustments are reflected in income currently. A supplemental
 loss reserve provides 98 percent statistical confidence that reserves are
 adequate. The supplemental reserve was $73.1 million (net of $17.6 million of
 reinsurance recoverables) at both December 31, 1993 and 1992. See Management's
 Discussion and Analysis for further discussion.
REINSURANCE  The Company's reinsurance transactions are primarily attributable
 to premiums written under state-mandated involuntary plans for commercial
 vehicles (Commercial Auto Insurance Plans-CAIP), for which the Company retains
 no indemnity risk. The remaining reinsurance arises from the Company seeking
 to reduce its loss exposure in its non-auto businesses. Prepaid reinsurance
 premiums are recognized on a pro rata basis over the period of risk.
EARNINGS PER SHARE  Net income is reduced by Preferred Share dividends earned
 during the period for both the primary and fully diluted earnings per share
 calculations. Primary earnings per share are computed using the weighted
 number of Common Shares and equivalents, including stock options, assumed
 outstanding during the period. For 1992 and prior, fully diluted earnings per
 share assumed the conversion of the convertible debt instrument and the
 effects of related interest expense and income taxes.



The Progressive Corporation and Subsidiaries

<PAGE>   38
                                                                         38 - 39



DEFERRED ACQUISITION COSTS  Deferred acquisition costs include commissions,
 premium taxes and other costs incurred in connection with writing business.
 These costs are deferred and amortized over the period in which the related
 premiums are earned. The Company considers anticipated investment income in
 determining the recoverability of these costs.
In 1993, the Company early adopted Statement of Position 93-7, "Reporting on
 Advertising Costs," which provides guidance on financial reporting of
 advertising costs. Included in "other assets" for 1993 are $1.6 million of
 direct-response advertising costs, which are capitalized and amortized over
 the estimated period of the benefits. Direct-response advertising costs
 consist primarily of direct mail expenses and are amortized over a two- to
 four-year period.
SERVICE REVENUES AND EXPENSES  Service revenues are earned on a pro rata basis
 over the term of the related policies; acquisition expenses are deferred and
 amortized over the period in which the related revenues are earned.
SUPPLEMENTAL CASH FLOW INFORMATION  Cash includes only bank demand deposits. The
 Company paid Federal income taxes of $91.0 million, $4.0 million and $30.4
 million in 1993, 1992 and 1991, respectively. Total interest paid was $38.3
 million for 1993, $44.2 million for 1992 and $47.2 million for 1991. In 1992,
 the $75.0 million Floating Rate Convertible Subordinated Debenture due 2008
 was converted into 9.0 million Common Shares.
The Company effected a 3-for-1 stock split in the form of a dividend to
 shareholders on December 8, 1992. The Company reflected the issuance of the
 additional Common Shares by transferring $38.5 million from retained earnings
 to the common stock account. All per share, average equivalent share amounts
 and stock prices were adjusted to give effect to the split. Treasury shares
 were not split.
RECLASSIFICATIONS  Certain amounts in the financial statements for prior periods
 were reclassified to conform with the 1993 presentation.

2.  INVESTMENTS

As of December 31, 1993, the Company elected to early adopt Statement of
 Financial Accounting Standards (SFAS) 115 "Accounting for Certain Investments
 in Debt and Equity Securities." For 1993, the adoption of SFAS 115 did not
 have any effect on the Company's results of operations or financial position.

The components of pretax investment income at December 31 were:


<TABLE>
<CAPTION>
    (millions)                                                                1993            1992            1991
 <S>                                                                     <C>             <C>             <C>
 Held-to-maturity:   fixed maturities   . . . . . . . . . .              $    17.4       $    23.2       $    92.2
 Available-for-sale: fixed maturities   . . . . . . . . . .                   88.7            82.4              --
                     equity securities  . . . . . . . . . .                   19.8            23.4            21.4
 Short-term investments   . . . . . . . . . . . . . . . . .                    8.6            10.0            31.2
                                                                     --------------  --------------  --------------
   Investment income  . . . . . . . . . . . . . . . . . . .                  134.5           139.0           144.8

 Gross realized gains:
   Held-to-maturity: fixed maturities . . . . . . . . . . .                    1.0              .5            16.2
   Available-for-sale: fixed maturities . . . . . . . . . .                   20.9            14.9              --
                       equity securities  . . . . . . . . .                  102.3             4.5             8.8
   Short-term investments . . . . . . . . . . . . . . . . .                     --              --              .1
 Gross realized losses:
   Held-to-maturity: fixed maturities . . . . . . . . . . .                     --              --            (1.0)
   Available-for-sale: fixed maturities . . . . . . . . . .                   (4.6)           (4.2)             --
                       equity securities  . . . . . . . . .                  (11.7)           (1.2)          (16.7)
                                                                     --------------  --------------  --------------
    Net realized gains on security sales  . . . . . . . . .                  107.9            14.5             7.4
                                                                     --------------  --------------  --------------
                                                                         $   242.4       $   153.5       $   152.2
                                                                     ==============  ==============  ==============
</TABLE>


Changes in unrealized gains (losses) on fixed maturities and equity securities 
were:


<TABLE>
<CAPTION>
    (millions)                                                                1993            1992            1991
 <S>                                                                     <C>             <C>             <C>
 Unrealized gains (losses):
   Held-to-maturity: fixed maturities . . . . . . . . . . .              $    (2.5)      $   (28.3)      $    35.6
                                                                     ==============  ==============  ==============
   Available-for-sale: fixed maturities . . . . . . . . . .              $     1.6       $    29.1       $      --
                       equity securities  . . . . . . . . .                  (67.6)           56.9            74.2
   Deferred income taxes  . . . . . . . . . . . . . . . . .                   22.0           (29.2)          (25.2)
                                                                     --------------  --------------  --------------
                                                                         $   (44.0)      $    56.8       $    49.0
                                                                     ==============  ==============  ==============
</TABLE>


<PAGE>   39
 The composition of the investment portfolio at December 31 was:

<TABLE>
<CAPTION>
                                                                                        GROSS         GROSS
                                                                                   UNREALIZED    UNREALIZED        MARKET
    (millions)                                                           COST           GAINS        LOSSES         VALUE
<S>                                                                 <C>           <C>             <C>           <C>
1993
 Held-to-maturity:
  State and local government obligations  . . . . . . . .           $   309.1     $      19.8     $    (1.5)    $   327.4

 Available-for-sale:
  U.S. government obligations   . . . . . . . . . . . . .                20.5              .3            --          20.8
  State and local government obligations  . . . . . . . .               819.8            18.2          (2.3)        835.7
  Foreign government obligations  . . . . . . . . . . . .                31.8             3.8          (1.8)         33.8
  Corporate debt securities   . . . . . . . . . . . . . .               107.5             5.4           (.2)        112.7
  Asset-backed securities   . . . . . . . . . . . . . . .               732.8             8.3          (4.9)        736.2
  Other debt securities   . . . . . . . . . . . . . . . .                49.5             4.7           (.8)         53.4
                                                                 -------------   -------------   ------------  -----------
                                                                      1,761.9            40.7         (10.0)      1,792.6
  Equity securities   . . . . . . . . . . . . . . . . . .               433.2            21.1           (.4)        453.9
 Short-term investments . . . . . . . . . . . . . . . . .               230.8              .5            --         231.3
                                                                 -------------   -------------   ------------  -----------
                                                                    $ 2,735.0     $      82.1     $   (11.9)    $ 2,805.2
                                                                 =============   =============   ============  ===========
1992
 Held-to-maturity:  . . . . . . . . . . . . . . . . . . .
  State and local government obligations  . . . . . . . .           $   250.4     $      21.2     $     (.4)    $   271.2

 Available-for-sale:
  U.S. government obligations   . . . . . . . . . . . . .                56.0              .8           (.1)         56.7
  State and local government obligations  . . . . . . . .               350.8            15.8           (.1)        366.5
  Foreign government obligations  . . . . . . . . . . . .                31.7              .8           (.1)         32.4
  Corporate debt securities   . . . . . . . . . . . . . .                88.4             2.3           (.2)         90.5
  Asset-backed securities   . . . . . . . . . . . . . . .               840.9            11.0           (.7)        851.2
  Other debt securities   . . . . . . . . . . . . . . . .                40.2              .2           (.6)         39.8
                                                                 -------------   -------------   ------------  -----------
                                                                      1,408.0            30.9          (1.8)      1,437.1
  Equity securities   . . . . . . . . . . . . . . . . . .               310.3            93.0          (4.7)        398.6
 Short-term investments . . . . . . . . . . . . . . . . .               300.0              .5            --         300.5
                                                                 -------------   -------------   ------------  -----------
                                                                    $ 2,268.7     $     145.6     $    (6.9)    $ 2,407.4
                                                                 =============   =============   ============  ===========
</TABLE>



The composition of fixed maturities by maturity at December 31, 1993 was:


<TABLE>
<CAPTION>
  (millions)                                                               HELD-TO-MATURITY              AVAILABLE-FOR-SALE

                                                                                       MARKET                         MARKET 
                                                                         COST           VALUE           COST           VALUE 
                                                                      
 <S>                                                                <C>             <C>            <C>             <C>
 Less than one year . . . . . . . . . . . . . . . . . . .           $    42.7       $    43.0      $   464.6       $   477.2
 One to five years  . . . . . . . . . . . . . . . . . . .               213.4           223.1        1,057.5         1,070.0
 Five to ten years  . . . . . . . . . . . . . . . . . . .                24.3            26.1          185.3           188.6
 More than ten years  . . . . . . . . . . . . . . . . . .                28.7            35.2           54.5            56.8
                                                                 -------------   -------------   ------------    ------------
 Total fixed maturities . . . . . . . . . . . . . . . . .           $   309.1       $   327.4      $ 1,761.9       $ 1,792.6
                                                                 =============   =============   ============    ============
<FN>
Securities which do not have a single maturity date are reported at average maturity.
</TABLE>



At December 31, 1993, bonds in the principal amount of $51.9 million were on
 deposit with various regulatory agencies to meet statutory requirements.
As of December 31, 1993 and 1992, the Company had committed $46.0 million in
 uncollateralized lines and letters of credits, of which $0 and $1.7 million,
 respectively, were outstanding and subject to credit risk as of December 31,
 1993 and 1992. In addition, as of December 31, 1993 and 1992, the Company had
 forward and future positions with contract values of $901.2 million and $375.9
 million, respectively, offset by short forward, future or interest rate swap
 positions (market values of $3.5 million and $1.7 million, respectively), and
 unmatched short foreign currency positions as of December 31, 1993 with
 contract values of $80.9 million (market values of $1.9 million); net cash
 requirements are limited to changes in market values which may vary based upon
 changes in interest rates and other factors.

<PAGE>   40
                                                                         40 - 41



3.  REINSURANCE

In 1993, the Company adopted SFAS 113, "Accounting and Reporting for
 Reinsurance of Short-Duration and Long-Duration Contracts."SFAS 113 requires
 amounts related to ceded reinsurance to be shown gross on the financial
 statements. Prior practice allowed ceding enterprises to report insurance
 activities net of the effects of reinsurance. The implementation of SFAS 113
 has resulted in the Company reporting ceded unearned premium reserves as
 "prepaid reinsurance premiums" on the balance sheet and reporting ceded unpaid
 losses and amounts recoverable on paid losses as "reinsurance recoverables."
 The balance sheet has been restated for the prior period. SFAS 113 also
 provides risk transfer criteria and prescribes the accounting and reporting
 standards for reinsurance contracts. The Company reviewed all contracts and
 determined that there was no impact to its results of operations.
Reinsurance contracts do not relieve the Company from its obligations to
 policyholders. Failure of reinsurers to honor their obligations could result
 in losses to the Company. See Management's Discussion and Analysis for further
 discussion. The Company evaluates the financial condition of its reinsurers
 and monitors concentrations of credit risk to minimize its exposure to
 significant losses from reinsurer insolvencies. As of December 31, 1993, 69
 percent of the "prepaid reinsurance premiums" and 75 percent of the
 "reinsurance recoverables" relate to CAIP, for which the Company retains no
 indemnity risk.


The effect of reinsurance on premiums written and earned as of December 31 is
as follows:


<TABLE>
<CAPTION>
    (millions)                                             1993                    1992                    1991

                                                    WRITTEN       EARNED      WRITTEN       EARNED      WRITTEN       EARNED
 <S>                                               <C>          <C>          <C>          <C>          <C>          <C>
 Direct premiums  . . . . . . . . . . . . .        $1,966.4     $1,808.8     $1,636.8     $1,619.4     $1,536.8     $1,486.3
 Assumed  . . . . . . . . . . . . . . . . .             9.2          9.7          4.3          1.9           .1           .2
 Ceded  . . . . . . . . . . . . . . . . . .          (156.4)      (149.8)      (189.9)      (195.2)      (212.3)      (199.6)
                                                 -----------  -----------  -----------  -----------  -----------  ----------- 
 Net premiums   . . . . . . . . . . . . . .        $1,819.2     $1,668.7     $1,451.2     $1,426.1     $1,324.6     $1,286.9
                                                 ===========  ===========  ===========  ===========  ===========  =========== 

<FN>
Losses and loss adjustment expenses are net of reinsurance ceded of $138.8 million in 1993, $196.7 million in 1992 and $155.3 
 million in 1991.
</TABLE>


4.  FEDERAL INCOME TAXES

The provision for Federal income taxes in the accompanying consolidated
 statements of income differs from the statutory rates as follows:


<TABLE>
<CAPTION>
    (millions)                                                 1993                    1992                     1991

 <S>                                               <C>                <C>    <C>                <C>     <C>              <C>
 Income before Federal income taxes   . . .        $   373.1                 $  178.7                   $  32.9
                                                 ===========               ===========               ===========              
 Tax at statutory rate  . . . . . . . . . .        $  130.6           35%    $   60.8           34%     $  11.2           34%
 Tax effect of--
   Exempt interest income . . . . . . . . .           (15.4)          (4)       (12.9)          (7)       (16.5)         (50)
   Dividends received deduction . . . . . .            (4.3)          (1)        (6.4)          (4)        (8.9)         (27)
   Deferred tax asset write-down  . . . . .              --           --           --           --         14.2           43
   Other items, net . . . . . . . . . . . .            (5.1)          (2)        (2.4)          (1)          --           --
                                                 -----------  -----------  -----------  -----------  -----------  ----------- 
                                                   $  105.8           28%    $   39.1           22%     $    --           --%
                                                 ===========  ===========  ===========  ===========  ===========  =========== 
</TABLE>



The current portion of the Federal income tax provision was $90.3 million in
 1993, $8.2 million in 1992 and $20.5 million in 1991. For tax purposes, the
 alternative minimum tax (AMT) credit carryover was $0 and $13.3 million at
 December 31, 1993 and 1992, respectively. Due to strong underwriting earnings
 in the current year, the entire AMT credit carryover was used in 1993.

<PAGE>   41
Deferred Federal income taxes reflect the impact for financial statement
 reporting purposes of "temporary differences" between the financial statement
 carrying amounts and tax bases of assets and liabilities. At December 31, 1993
 and 1992, the components of the net deferred tax asset were as follows:


<TABLE>
<CAPTION>
    (millions)
                                                                                                     1993          1992
 <S>                                                                                            <C>           <C>
 Deferred tax assets:
   Unearned premium reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         $    48.1     $    36.1
   Non-deductible accruals  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              25.4          23.1
   AMT credit carryover . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                --          13.3
   Capitalized expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               2.1           4.3
   Loss discounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               5.2           5.3
   Other  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                --           4.5
 Deferred tax liabilities:
   Deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             (43.6)        (34.4)
   Unrealized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             (18.0)        (40.0)
   Other  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              (5.5)           --
                                                                                              ------------  ------------
 Net deferred tax asset   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         $    13.7     $    12.2
                                                                                              ============  ============
</TABLE>



Deferred Federal income taxes include noninterest bearing special estimated tax
 deposits made pursuant to Section 847 of the Internal Revenue Code of $40.5
 million, $36.5 million and $33.7 million at December 31, 1993, 1992 and 1991,
 respectively.
The Omnibus Budget Reconciliation Act of 1993 increased the maximum tax rate
 for corporations from 34 percent to 35 percent, effective for tax years
 beginning after December 31, 1992. As a result of this change in rate, the
 Company was able to write up the value of its deferred tax asset. The effect
 of this write-up was to increase net deferred tax assets which increased net
 income by $2.1 million, or $.03 per share, in 1993.
The $14.2 million write-down of the deferred tax asset in 1991 was required
 under SFAS 96, "Accounting for Income Taxes," because, based on facts at
 December 31, 1991, the Company could not demonstrate absolute assurance that
 the benefit of AMT credit carryover for financial statement purposes would be
 realized in the future. Effective January 1, 1992, the Company adopted SFAS 
 109, "Accounting for Income Taxes," which changed the method of accounting for
 income taxes. Under SFAS 109, the Company was able to demonstrate that the
 benefit of deferred tax assets was fully realizable. The cumulative effect of
 adopting SFAS 109 was to restore deferred tax assets and increased net income
 $14.2 million, or $.20 per share, in 1992.  
As of December 31, 1993, the Company included in "Federal income taxes" $6.4 
 million of foreign tax credit carryover. Of this amount, $1.9 million, $2.8 
 million and $1.7 million will expire at the end of 1996, 1997 and 1998, 
 respectively, unless previously used.


5.    DEBT

During 1993, the maximum amount of bank borrowings outstanding was $170.0
 million, and the daily average amount outstanding was $3.4 million, at an
 average annual interest rate of 5.3 percent.

Funded debt at December 31 consisted of:


<TABLE>
<CAPTION>
    (millions)                                                                                       1993          1992

<S>                                                                                             <C>           <C>
 Revolving credit agreements  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         $      --     $    50.0
 Credit facilities  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                --         120.0
 7% Notes   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             148.2            --
 8 3/4% Debentures  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                --          69.7
 8 3/4% Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              28.8          28.6
 10% Notes  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             149.3         149.3
 10 1/8% Subordinated Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             149.2         149.1
 Other funded debt  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               1.6           1.8
                                                                                              ------------  ------------
                                                                                                $   477.1     $   568.5
                                                                                              ============  ============
</TABLE>



Funded debt includes amounts the Company has borrowed and contributed to the
 capital of its insurance subsidiaries or borrowed for other long-term
 purposes.
In May 1990, the Company entered into a revolving credit arrangement with
 National City Bank, which is reviewed by the bank annually. Under this
 agreement, the Company had the right to borrow up to $50.0 million. In
 February 1994, the Company reduced this revolving credit arrangement to $20.0
 million. See Note 12-Subsequent Events. By selecting from available credit
 options, the Company may elect to pay interest at rates related

<PAGE>   42
                                                                         42 - 43



 to the London interbank offered rate, the bank's base rate or at a money
 market rate. A commitment fee is payable on any unused portion of the
 committed amount at the rate of .125 percent per annum. At December 31, 1993,
 the Company had no borrowings under this arrangement; at December 31, 1992,
 $50.0 million was outstanding.
In May 1990, the Company also entered into a four-year credit facility with
 Morgan Guaranty Trust Company of New York under which the Company had the
 right to borrow up to $75.0 million. By selecting from available credit
 options, the Company could have elected to pay interest at rates related to
 the London interbank offered rate, the bank's CD rate, a base lending rate or
 a quoted rate. A commitment fee was payable on any unused portion of the
 committed facility at the rate of .15 percent per annum. At December 31, 1993
 and 1992, the Company had no borrowings under this agreement. In February
 1994, the Company terminated this credit facility. See Note 12--Subsequent
 Events.
In October 1989, the Company entered into a five-year credit facility agreement
 with a group of banks under which the Company secured the right to borrow up
 to $235.0 million and request an additional $235.0 million. By selecting from
 available credit options, the Company could have elected to pay interest at
 rates related to the London interbank offered rate or the greater of the agent
 bank's base lending rate or a rate based on the Federal funds' rate. A
 commitment fee was payable on any unused portion of the committed facility at
 the rate of .125 percent per annum. The agreement provided for a utilization
 fee not to exceed .10 percent on the average amount of outstanding borrowings.
 At December 31, 1993, no borrowings were outstanding under this arrangement;
 at December 31, 1992, $120.0 million was outstanding. In February 1994, the
 Company terminated this agreement. See Note 12--Subsequent Events.
In October 1993, the Company sold $150.0 million of noncallable 7% Notes due
 2013 with interest payable semiannually. The fair value of these Notes was
 $145.3 million at December 31, 1993.
In February 1987, the Company sold $100.0 million, $70.0 million after the May
 1989 debt exchange, of 8 3/4% Debentures due 2017 with interest payable
 semiannually. In December 1993, the Company redeemed the entire $70.0 million
 principal amount of these Debentures. The Company redeemed the Debentures at
 105.425 percent of the principal amount, plus accrued interest, with the
 proceeds of the sale of certain securities in its investment portfolios. A
 $4.0 million charge on debt extinguishment was recorded as a "non-recurring
 item." The fair value of this debt was $69.2 million at December 31, 1992.
In May 1989, the Company issued $30.0 million of 8 3/4% Notes due 1999 in
 exchange for $30.0 million of the 8 3/4% Debentures due 2017. These Notes are
 noncallable and interest is payable semiannually. The fair value of these
 Notes was $33.7 million and $31.8 million at December 31, 1993 and 1992,
 respectively.
In December 1988, the Company sold $150.0 million of 10% Notes due 2000 and
 $150.0 million of 10 1/8% Subordinated Notes due 2000.  All such Notes are
 noncallable. Interest is payable semiannually on both issues. The fair values
 of the 10% Notes and 10 1/8% Subordinated Notes were $180.6 million and $181.2
 million, respectively, at December 31, 1993 and $170.4 million and $169.1
 million, respectively, at December 31, 1992.
As of December 31, 1993, the Company is in compliance with its financial debt
 covenants. The most restrictive financial covenant, which appeared under the
 recently terminated credit facilities, provided that senior indebtedness could
 not exceed 200 percent of long-term capital.
In January 1994, the Company sold $200.0 million of its 6.60% Notes due 2004.
 See Note 12--Subsequent Events. 
Aggregate principal payments on funded debt outstanding at December 31, 1993 
 are $.4 million for 1994, 1995 and 1996, $.3 million for 1997, $.1 million for
 1998 and $480.0 million thereafter.

6.   LITIGATION

The Company, or its subsidiaries, are named as defendant in various lawsuits
 generally relating to their business. Numerous legal actions arise from claims
 made under insurance policies issued by the subsidiaries or in connection with
 previous reinsurance agreements. These actions were considered by the Company
 in establishing its loss reserves. The Company believes that the ultimate
 disposition of these and other pending lawsuits will not materially impact the
 Company's operations or financial position.

7.   STATUTORY FINANCIAL INFORMATION

At December 31, 1993, $91.5 million of consolidated statutory policyholders'
 surplus represents net admitted assets of the Company's insurance subsidiaries
 that are not transferable in the form of dividends, loans or advances to the
 Company. Generally, the net admitted assets of insurance subsidiaries
 available for transfer to the Company are restricted by state law and are
 limited to those net admitted assets, as determined in accordance with
 statutory accounting principles, which exceed minimum statutory capital
 requirements.
During 1993, the insurance subsidiaries paid aggregate cash dividends of $131.3
 million, and one subsidiary returned $32.9 million of previously contributed
 capital to the Company. Based on the dividend laws currently in effect, the
 insurance subsidiaries may pay aggregate dividends of $117.1 million in 1994
 without prior approval from regulatory authorities. These limitations may
 change during 1994, which could affect the dividends permitted to be paid
 without prior approval. Statutory policyholders' surplus was $703.6 million
 and $658.3 million at December 31, 1993 and 1992, respectively. Statutory net
 income was $188.6 million, $61.7 million and $76.8 million for the years ended
 December 31, 1993, 1992 and 1991, respectively.

8.   LEASE COMMITMENTS

The Company has operating lease commitments with terms greater than one year
 for equipment and office space, some with options to renew at the end of the
 lease periods. The minimum rental commitments under all such noncancelable
 leases at December 31, 1993 are as follows (in millions): 1994--$20.2;
 1995--$14.5; 1996--$8.8; 1997--$2.6; 1998--$.7; and thereafter--$.1. Total 
 rental expense incurred by the Company for 1993, 1992 and 1991 was $31.3 
 million, $35.4 million and $33.4 million, respectively.

<PAGE>   43
9.   EMPLOYEE BENEFIT PLANS

RETIREMENT PLANS  In 1990, the Company adopted a defined contribution pension
 plan covering employees hired after December 31, 1988, who meet requirements
 as to age and length of service. The Company's funding policy was to
 contribute 1.3 percent of each eligible employee's compensation up to the
 Social Security wage base. Company contributions were $.7 million in 1993, $.5
 million in 1992 and $.3 million in 1991. Effective January 1, 1994, the plan
 was amended to include all employees who meet requirements as to age and
 length of service. Under the amended plan, contributions vary from one percent
 to five percent of compensation up to the Social Security wage base, based on
 years of eligible service.
The Company has a defined benefit pension plan which covered employees hired
 before January 1, 1989 who met requirements as to age and length of service.
 This plan was curtailed on December 31, 1993, and the Company recognized a
 $1.5 million gain. The benefits accruals, based on years of service and the
 employee's career average compensation up to the Social Security tax base,
 were frozen as of December 31, 1993. The Company's funding policy is to
 contribute annually the maximum amount that can be deducted for Federal income
 tax purposes.


The following table sets forth the defined benefit plan information as of
 December 31:


<TABLE>
<CAPTION>
  (millions)                                                                           1993              1992              1991
 <S>                                                                              <C>               <C>              <C>
 Actuarial present value of benefit obligations:
  Vested benefit obligation   . . . . . . . . . . . . . . . . . . . . . .         $    15.8         $     9.2        $      5.5
                                                                                  =========         =========        ==========
  Accumulated benefit obligation  . . . . . . . . . . . . . . . . . . . .         $    16.8         $    12.3        $      8.8
                                                                                  =========         =========        ==========
  Projected benefit obligation for service
   rendered to date . . . . . . . . . . . . . . . . . . . . . . . . . . .         $    16.8         $    16.6        $     12.3
 Plan assets at fair value, primarily government
   and corporate taxable bonds  . . . . . . . . . . . . . . . . . . . . .              17.9              13.6              16.4
 Plan assets net of projected benefit obligation  . . . . . . . . . . . .               1.1              (3.0)              4.1
 Unrecognized actuarial gains   . . . . . . . . . . . . . . . . . . . . .              (1.9)             (3.6)             (8.8)
 Unrecognized prior service cost  . . . . . . . . . . . . . . . . . . . .                --                .7                .8
 Unrecognized transition asset at January 1, 1987,
   recognized over 21 years . . . . . . . . . . . . . . . . . . . . . . .               (.3)              (.3)              (.4)
                                                                                  ---------         ---------        ----------
 Pension liability recognized in the
   consolidated balance sheets  . . . . . . . . . . . . . . . . . . . . .         $    (1.1)        $    (6.2)       $     (4.3)
                                                                                  =========         =========        ==========
 Net pension cost included the following components:
  Service cost-benefits earned during the period  . . . . . . . . . . . .         $     1.9         $     2.5        $      2.1
  Interest cost on projected benefit obligation   . . . . . . . . . . . .               1.2               1.1                .9
  Actual return on plan assets  . . . . . . . . . . . . . . . . . . . . .              (1.2)             (1.3)             (2.2)
  Net amortization and deferral   . . . . . . . . . . . . . . . . . . . .               (.5)              (.4)               .2
                                                                                  ---------         ---------        ----------
  Net periodic pension cost   . . . . . . . . . . . . . . . . . . . . . .         $     1.4         $     1.9        $      1.0
                                                                                  =========         =========        ==========
</TABLE>



The weighted average discount rate used in determining the actuarial present
 value of the projected benefit obligation was 7.0 percent for 1993, 8.0
 percent for 1992 and 9.0 percent for 1991. The expected long-term rate of
 return on assets was 8.0 percent for 1993 and 1992 and 9.0 percent for 1991.
 The rate of increase in future compensation levels was 8.0 percent in 1992 and
 1991.
POSTEMPLOYMENT BENEFITS  The Company provides various postemployment benefits to
 former or inactive employees, their beneficiaries and covered dependents.
 Postemployment benefits include salary continuation and disability-related
 benefits including workers' compensation and continuation of health care
 benefits. In 1993, the Company early adopted SFAS 112, "Accounting for
 Postemployment Benefits," and recognized its obligation of $.9 million at
 December 31, 1993. The Company's policy is to fund annually the maximum amount
 of its obligation that can be deducted for Federal income tax purposes.
POSTRETIREMENT BENEFITS  The Company provides postretirement health and life
 benefits to all employees who met requirements as to age and length of service
 at December 31, 1988. The Company recognized its obligation of $.4 million at
 December 31, 1993 and 1992 and $1.4 million at December 31, 1991. The
 Company's policy is to fund annually the maximum amount of its obligation that
 can be deducted for Federal income tax purposes. Contributions are intended to
 provide not only for benefits attributed to services to date, but also for
 those expected to be earned in the future.
LONG-TERM SAVINGS PLAN  The Company has a Long-Term Savings Plan (LTSP) under
 which the Company matches, into Company stock purchase accounts, a maximum of
 3.0 percent of an employee's eligible salary or wages contributed to the LTSP.
 Company contributions were $3.8 million in 1993, $3.6 million in 1992 and $3.7
 million in 1991.

<PAGE>   44
                                                                         44 - 45



INCENTIVE COMPENSATION PLANS  Under the Company's 1985 Restricted Stock Plan,
 key employees were awarded Common Shares which vested over future employment
 periods. An amount equal to the market value of the shares at the date of
 grant was charged to income over the vesting period. During 1993, the
 remaining 297,419 shares under this plan vested. No awards may be granted
 under this plan after December 31, 1993.
The Company's 1989 Incentive Plan provides for the granting of stock options
 and other stock-based awards to key employees of the Company. The 6,500,000
 Common Shares authorized under the Incentive Plan have been registered.
 Outside of the Incentive Plan, the Company registered 1,425,000 Common Shares
 relating to stock options granted to key employees of the Company. The
 nonqualified stock options granted are for periods up to ten years, become
 exercisable at various dates not earlier than six months after the date of
 grant, and remain exercisable for specified periods thereafter. All options
 were granted at the fair market value at the date of grant.


A summary of all stock option activity (adjusted for the December 1992 3-for-1
 stock split) during the three years ended December 31, follows:


<TABLE>
<CAPTION>
                                           1993                               1992                                1991

                                 NUMBER OF        OPTION PRICES    NUMBER OF        OPTION PRICES    NUMBER OF        OPTION PRICES
OPTIONS OUTSTANDING                 SHARES            PER SHARE       SHARES            PER SHARE       SHARES            PER SHARE
<S>                              <C>          <C>                  <C>          <C>                  <C>          <C>
Beginning of year . . . . . .    4,123,003    $ 7.666 to 19.833    3,301,176    $ 7.666 to 19.833    2,744,976    $ 7.666 to 18.291
 Add (deduct):                                                                                                   
 Granted  . . . . . . . . . .      693,325     29.625              1,581,750     15.458 to 18.833      767,100     14.458 to 20.208
 Exercised  . . . . . . . . .      (96,443)     9.250 to 19.666     (531,497)     7.666 to 18.291           --                   --
 Cancelled  . . . . . . . . .     (230,998)     9.125 to 29.625     (228,426)     9.125 to 19.375     (210,900)     9.250 to 20.208
                                -----------  -------------------  -----------  -------------------  -----------  -------------------
End of year . . . . . . . . .    4,488,887    $ 7.666 to 29.625    4,123,003    $ 7.666 to 19.833    3,301,176    $ 7.666 to 19.833
                                ===========  ===================  ===========  ===================  ===========  ===================
Exercisable, end of year. . .      934,592    $ 7.666 to 19.833      759,238    $ 7.666 to 19.666      788,997    $ 7.666 to 18.291
                                ===========  ===================  ===========  ===================  ===========  ===================
Available, end of year. . . .    2,808,173                         1,270,500                         2,623,824
                                ===========                       ===========                       =========== 
</TABLE>
                       

The amounts charged to income for incentive compensation plans, including a
 cash bonus program for key members of management and a gainsharing payment to
 all other employees, were $24.7 million in 1993, $12.0 million in 1992 and
 $4.7 million in 1991.

10.  RELATED PARTY TRANSACTIONS

In April 1988, the Company sold to Alfred Lerner, then Chairman of the
 Company's Board of Directors, a $75.0 million Floating Rate Convertible
 Subordinated Debenture due 2008 (convertible debenture). On December 16, 1992,
 the convertible debenture was converted into 9,000,000 Common Shares. On the
 same date, Mr. Lerner sold, in an underwritten public offering, 5,175,000 of
 the Common Shares received upon such conversion. In 1993, Mr. Lerner sold the
 remaining 3,825,000 shares. The public offering was completed pursuant to the
 terms of the registration rights provisions of the convertible debenture,
 under which the Company paid $5.1 million in underwriting and other expenses
 of the offering, which were charged directly to shareholders' equity. In
 addition, Mr. Lerner ended his employment agreement with the Company, and the
 Company paid him $10.0 million. Prior to the conversion, the Company incurred
 interest expense on the convertible debenture of $4.5 million in 1992 and $6.5
 million in 1991.
As of June 30, 1992, the Company exercised its right to terminate the
 Investment Management Agreement with Progressive Partners Limited Partnership
 (Progressive Partners) as part of its strategy to compete more effectively by
 lowering costs. Mr. Lerner had a 50 percent interest in Progressive Partners.
 Upon such termination, the Company paid Progressive Partners a one-time
 termination fee, and an additional incentive fee for the period ended June 30,
 1992, in the aggregate amount of $54.6 million, determined according to a
 formula contained in the Investment Management Agreement. Progressive
 Partners' investment staff became employed by a wholly-owned subsidiary of the
 Company and continues to provide the Company with investment and capital
 management services.  Prior to the termination of the Agreement, the Company
 incurred investment management service fees to Progressive Partners of $10.5
 million for 1992 and $19.1 million for 1991.
In January 1991, the Company purchased 4,851,000 shares (adjusted for the
 2-for-1 stock split paid February 12, 1993), or 4.9 percent, of MBNA
 Corporation in connection with its initial public offering. At the time of the
 transaction, Mr. Lerner was Chairman of the Board and Chief Executive Officer
 of MBNA Corporation and owned 10 percent of its common stock. During 1993, the
 Company sold its entire holding of MBNA Corporation, recognizing realized
 gains of $74.3 million.

<PAGE>   45
                                                                         46 - 47



11.  SEGMENT INFORMATION

The operating segments of the Company and subsidiaries are classified into
 Insurance and Service. Expense allocations are based on assumptions and
 estimates; stated segment operating results would change if different methods
 were applied. The Company does not allocate assets to segments.


<TABLE>
For the years ended December 31,
<CAPTION>
    (millions)                                  1993                          1992                          1991

                                                        PRETAX                         PRETAX                         PRETAX
                                       REVENUES   PROFIT (LOSS)      REVENUES    PROFIT (LOSS)      REVENUES    PROFIT (LOSS)
 <S>                                  <C>           <C>             <C>             <C>            <C>             <C>
 Insurance operations . . .           $ 1,668.7     $   177 .8      $ 1,426.1       $    49.6      $ 1,286.9       $   (46.9)
 Service operations   . . .                43.7           6 .8           53.3            (4.3)          54.0            (2.1)
                                   -------------  -------------   ------------    ------------   ------------    ------------ 
   Total operations . . . .             1,712.4         184 .6        1,479.4            45.3        1,340.9           (49.0)
 Proposition 103
    reserve reduction . . .                  --             --          106.0           106.0             --              --
 Investment income  . . . .               242.4         242 .4          153.5           153.5          152.2           152.2
 Interest expense and
    other costs   . . . . .                  --          (53.9)            --          (126.1)            --           (70.3)
                                   -------------  -------------   ------------    ------------   ------------    ------------ 
   Total  . . . . . . . . .           $ 1,954.8     $   373 .1      $ 1,738.9       $   178.7      $ 1,493.1       $    32.9
                                   =============  =============   ============    ============   ============    ============ 
</TABLE>


12.  SUBSEQUENT EVENTS

On January 12, 1994, the Company sold $200.0 million of its 6.60% Notes due
 2004 in an underwritten public offering. The Notes were priced to yield 6.62
 percent. The Notes are noncallable, and interest is payable semiannually.
Effective February 1, 1994, the Company cancelled its $75.0 million credit
 facility with Morgan Guaranty Trust Company of New York and reduced its
 revolving credit arrangement with National City Bank to $20.0 million from
 $50.0 million. Effective February 10, 1994, the Company cancelled the
 remaining $185.0 million under the credit facility agreement with a group of
 banks. Since the first half of 1993, the Company raised over $500 million
 through the sale of its debt and equity securities in the public market and,
 therefore, is not currently in need of these credit facilities.

<PAGE>   46
M
ANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

The consolidated financial statements and the related notes on pages 34 through
  46, together with the supplemental information on pages 50 through 55, should
  be read in conjunction with the following discussion of our consolidated
  financial condition and results of operations.

FINANCIAL CONDITION The Progressive Corporation is a holding company and does
  not have any revenue producing operations of its own. It receives cash
  through borrowings, equity sales, subsidiary dividends and other
  transactions, and may use the proceeds to contribute to the capital of its
  insurance subsidiaries in order to support premium growth, to repurchase its
  Common Shares and other outstanding securities, to redeem debt, and for other
  business purposes. In 1993, the Company sold 4,950,000 Common Shares for net
  proceeds of $177.0 million, $150.0 million of its 7% Notes due 2013 and filed
  a shelf registration for $200.0 million of its debt securities (in January
  1994, the Company sold $200.0 million of its 6.60% Notes due 2004 under the
  shelf registration statement). During 1993, the Company repurchased .4
  million of its Serial Preferred Shares, Series A, for a cost of $9.8 million,
  repaid $170.0 million borrowed under its credit facilities and redeemed the
  entire $70.0 million of its 8 1/4 % Debentures.
During the three-year period ended December 31, 1993, the Company also sold
  4,000,000 Serial Preferred Shares, Series A, for net proceeds of $96.4
  million, repurchased 4.4 million Common and Serial Preferred Shares at a
  total cost of $225.4 million, and decreased its aggregate borrowings $167.3
  million. During the same period, The Progressive Corporation received $393.3
  million from its insurance subsidiaries, net of capital contributions made to
  these subsidiaries. The regulatory restrictions on subsidiary dividends are
  described in Note 7 to the financial statements.
The Company has substantial capital resources and is unaware of any trends,
  events or circumstances that are reasonably likely to affect its capital
  resources in a material way. The Company also has available a $20.0 million
  revolving credit agreement. The Company believes it has sufficient borrowing
  capacity and other capital resources to support current and anticipated
  growth.
The Company's insurance operations create liquidity by collecting and investing
  premiums written from new and renewal business in advance of paying claims.
  For the three years ended December 31, 1993, operations generated a positive
  cash flow of $664.7 million, and cash flow is expected to be positive in both
  the short-term and reasonably foreseeable future. The Company's substantial
  investment portfolio is highly liquid, consisting almost entirely of readily
  marketable securities. The Company does not expect any material changes in
  its cash requirements and is not aware of any trends, events or uncertainties
  that are reasonably likely to have a material effect on its liquidity.
Total capital expenditures for the three years ended December 31, 1993,
  aggregated $122.6 million. In spring 1992, construction began on the
  Company's new corporate office complex in Mayfield Village, Ohio, and in
  December 1993, the Company began occupying a portion of this complex.
  Construction is expected to be completed in 1994. The new facility will
  consist of approximately 520,000 square feet of space and will replace office
  space held under expiring leases in a number of locations in the Cleveland
  area. The cost of the project is currently estimated at $74.8 million, and is
  being funded through operating cash flows. As of December 31, 1993, $50.5
  million of the project's cost had been paid.
In June 1992, the Company reached an agreement with the California Department
  of Insurance to refund approximately $50 million of premiums (including
  interest) on business written between November 8, 1988 and November 7, 1989
  to approximately 260,000 policyholders, thereby settling all rollback and
  refund exposure since Proposition 103 was adopted in November 1988. As a
  result, the Proposition 103 premium refund and rollback reserve was reduced
  by $106.0 million.
During the second quarter 1992, the Company changed its financial arrangement
  with Progressive Partners Limited Partnership (Progressive Partners), its
  investment manager, as part of its strategy to compete more effectively for
  private passenger auto insurance by lowering costs. Under the new
  arrangement, Progressive Partners' people, now employed by a wholly-owned
  Progressive subsidiary, continue to provide the Company with investment and
  capital management. The transaction involved paying Progressive Partners a
  one-time fee for terminating the investment management contract, and an
  additional incentive fee for the period ended June 30, 1992, in the aggregate
  amount of $54.6 million. This transaction reduced the Company's costs for
  investment and capital management.
In December 1992, Mr. Alfred Lerner, then Chairman of the Company, converted
  his $75.0 million Floating Rate Convertible Subordinated Debenture due 2008
  into 9,000,000 Common Shares and sold 5,175,000 of those Common Shares in an
  underwritten public offering. The public offering was completed pursuant to
  the registration rights provisions of the convertible debenture, under which
  the Company paid $5.1 million in underwriting and other expenses of the
  offering. These expenses were charged directly to shareholders' equity in
  accordance with generally accepted accounting principles. On the

<PAGE>   47
  same date, Mr. Lerner agreed to a termination of his employment agreement
  with the Company, and, in connection with these transactions, the Company
  paid Mr. Lerner $10.0 million.
The Company invests in fixed maturity, short-term and equity securities. The
  Company's investment strategy recognizes its need to maintain capital
  adequate to support its insurance operations. Therefore, the Company
  evaluates the risk/reward trade-offs of investment opportunities, measuring
  their effects on stability, diversity, overall quality and liquidity of the
  investment portfolio. The majority of the portfolio at December 31, 1993, was
  in short-term and intermediate-term, investment-grade fixed-income
  securities. Fixed maturity securities which are held-to-maturity and
  short-term securities are reported at amortized cost; amortized cost of
  short-term securities approximates market. Available-for-sale securities are
  held for indefinite periods of time and include fixed maturities and equity
  securities. The available-for-sale securities are reported at market value
  with the changes in market value, net of deferred income taxes, reported
  directly in shareholders' equity as unrealized appreciation or depreciation.
  As of December 31, 1993, the mark-to-market net gains in the Company's
  available-for-sale portfolio were $51.4 million ($33.5 million, net of
  deferred income taxes), compared to $117.4 million ($77.5 million, net of
  taxes). The weighted average fully taxable equivalent yield of the portfolio
  was 8.7 percent, 8.6 percent and 9.4 percent as of December 31, 1993, 1992
  and 1991, respectively. (See Note 2--Investments, for a more detailed
  breakdown of the investment portfolio.)
As of December 31, 1993, the Company held $122.5 million of Collateralized
  Mortgage Obligations (CMOs), compared to $189.8 million last year. CMOs held
  by the Company are highly liquid with readily available quotes, and, at
  December 31, 1993, have an average life of 1.6 years. Eighty-nine percent of
  the CMOs held by the Company are rated AAA by Moody's and Standard & Poor's.
  As of December 31, 1993, the Company's total CMO portfolio had an unrealized
  loss of $3.7 million, compared to an unrealized gain of $.5 million last
  year.
Investments in the Company's portfolio have varying degrees of risk. Equity
  securities generally have greater risks than the non-equity portion of the
  portfolio since these securities are subordinate to the rights of debt
  holders and other creditors of the issuer. As of December 31, 1993, the
  mark-to-market net gains in the Company's equity portfolio were $20.7 million
  ($13.5 million, net of taxes), compared to $88.3 million ($58.3 million, net
  of taxes). The Company continually evaluates the creditworthiness of each
  issuer for all securities held in its portfolio. Changes in market value are
  evaluated to determine the extent to which such changes are attributable to:
  (i) interest rates, (ii) market-related factors other than interest rates,
  and (iii) financial conditions, business prospects and other fundamental
  factors specific to the issuer. It is the Company's general policy to dispose
  of securities when the Company determines that the issuer is unable to
  reverse its deteriorating financial condition and the prospects for its
  business within a reasonable period of time. In less severe circumstances,
  the Company may decide to dispose of a portion of its holdings in a specific
  issuer when the risk profile of the investment becomes greater than its
  tolerance for such risk.

RESULTS OF OPERATIONS Direct premiums written increased 20 percent to $1,966.4
  million in 1993, compared to $1,636.8 million in 1992 and $1,536.8 million in
  1991. These amounts include premiums written under state-mandated involuntary
  Commercial Auto Insurance Plans (CAIP), for which the Company retains no
  indemnity risk, of $98.0 million in 1993, $142.2 million in 1992 and $180.0
  million in 1991. The Company provides policy and claim processing services to
  28 state CAIPs, compared to 26 in 1992 and 25 in 1991; the size of the CAIP
  market continues to decrease. Net premiums written increased 25 percent to
  $1,819.2 million, compared to $1,451.2 million in 1992 and $1,324.6 million
  in 1991. Premiums earned, which are a function of the amount of premiums
  written in the current and prior periods, increased 17 percent in 1993,
  compared to 11 percent in 1992 and 8 percent in 1991. In 1989, the Company
  established a reserve for potential premium rollbacks and refunds under
  provisions of Proposition 103 and added to the reserve in subsequent years;
  the reserve reduced premiums written and earned $10.2 million and $49.7
  million in 1992 and 1991, respectively. In 1992, the Company settled its
  financial responsibility under California Proposition 103 and reduced its
  reserve as described above.
In 1993, the Company's Core business' net premiums written grew 25 percent,
  driven by an increase in unit sales. The Company anticipates continued growth
  in its Core business in 1994; however, it has begun to price so underwriting
  margins move down to four percent. As a result, in the short run, operating
  earnings may not increase in proportion to volume growth.
Claim costs, the Company's most significant expense, represent actual payments
  made and changes in estimated future payments to be made to or on behalf of
  its policyholders, including expenses required to settle claims and losses.
  These costs include a loss estimate for future assignments and assessments,
  based on current business, under state-mandated involuntary automobile
  programs.  Claims costs are influenced by inflation and loss severity and
  frequency, the impact of which is mitigated by adequate pricing.  Increases
  in the rate of inflation increase loss payments which are made after premiums
  are collected. Accordingly, anticipated rates of inflation are taken into
  account when the Company establishes premium rates and loss reserves. Claim
  costs, expressed as a percentage of premiums earned, were 62 percent in 1993,
  compared to 65 percent in 1992 and 67 percent in 1991. The personnel
  reductions in late 1991 and early 1992, along with other cost-cutting
  measures and the favorable run-off of the Transportation business, reduced
  the Company's losses and loss adjustment expenses.
Policy acquisition and other underwriting expenses as a percentage of premiums
  earned were 28 percent in 1993, compared to 31 percent in 1992 and 37 percent
  in 1991. The decrease re-

<PAGE>   48
  flects the cost-cutting measures discussed above, as well as process 
  improvements, changed workflows and lower commission programs.
Service revenues were $43.7 million in 1993, compared to $53.3 million in 1992
  and $54.0 million in 1991; the decrease in revenues is in conjunction with
  the decrease in CAIP premiums written. Service businesses generated a pretax
  operating profit of $6.8 million in 1993, compared to a pretax loss of $4.3
  million in 1992 and a pretax loss of $2.1 million in 1991. During 1992, we
  increased loss adjustment expense reserves $6.2 million.
Recurring investment income (interest and dividends) decreased 3 percent to
  $134.5 million in 1993, 4 percent to $139.0 million in 1992 and 5 percent to
  $144.8 million in 1991, primarily due to lower prevailing interest rates. Net
  realized gains on security sales were $107.9 million in 1993, $14.5 million
  in 1992 and $7.4 million in 1991. A significant portion of the 1993 realized
  gains resulted from the sale of certain equity securities held in the
  Company's investment portfolio.
President Clinton signed the Omnibus Budget Reconciliation Act of 1993, which,
  among other items, increased the statutory tax rate to 35 percent. Effective
  January 1, 1992, the Company adopted SFAS 109 and was able to demonstrate
  that the benefit of deferred tax assets was fully realizable. The cumulative
  effect of adopting SFAS 109 increased net income $14.2 million, or $.20 per
  share.  In 1991, the deferred tax asset write-down, as required under SFAS
  96, was included in the Federal income tax provision.

ENVIRONMENTAL AND PRODUCT LIABILITY EXPOSURES  Because the Company has been
  primarily an insurer of motor vehicles, it has limited exposure for
  environmental, product and general liability claims. The Company has
  established reserves for these exposures, in amounts which it believes to be
  adequate based on information currently known by it and, in addition, has a
  supplemental reserve that is in an amount substantially in excess of the
  potential exposure for such claims. The Company does not believe that these
  claims will have a material impact on the Company's liquidity, results of
  operations or financial condition.
However, the ultimate costs of the environmental and product liability claims
  are inherently difficult to project due to numerous uncertainties, including
  causation and policy coverage issues, the possible uncollectability of
  related reinsurance and third party indemnity arrangements, unsettled and
  sometimes conflicting case law, difficulties in determining the scope of any
  contamination or injury and the nature and cost of the appropriate remedial
  action and the number and financial condition of responsible parties and
  their insurers, among other factors.
Most of the Company's exposure for such claims results from Progressive's
  acquisition in 1985 of American Star Insurance Company, since renamed
  National Continental Insurance Company. When American Star was acquired, the
  seller agreed to administer all claims asserted under policies previously
  written by American Star and to pay all losses incurred under such policies,
  including those covered by reinsurance then in place on some of the policies.
  The seller encountered major financial difficulties as a result of losses in
  Hurricane Andrew and, despite having paid all losses and adjusted all claims
  on the old business since 1985, has contested its obligation to administer
  these claims and to pay the losses not being paid by some of the reinsurers.
  The dispute has been submitted to arbitration and is scheduled to be heard by
  an arbitration panel during the second quarter. If it is determined that the
  seller is responsible for all of these losses, the amounts could be material
  to it. According to a recent study by independent actuaries for the seller,
  aggregate reserves on this business are about $19.2 million. Of that amount,
  about $6.3 million is being contested in the arbitration, $7.8 million is the
  admitted obligation of the seller and the balance is the responsibility of
  reinsurance sources that are paying their obligations.
The Company will continue to monitor these exposures, adjust the related
  reserves appropriately as additional information becomes known and disclose
  any material developments.

<PAGE>   49

<TABLE>
TEN           YEAR           SUMMARY     --      FINANCIAL           HIGHLIGHTS

<CAPTION>

Not covered by report of independent accountants

                                                                   (millions-except per share amounts and number of people employed)


                                                                                                   1993           1992
<S>                                                                                            <C>             <C>
INSURANCE COMPANIES' SELECTED FINANCIAL INFORMATION
   AND OPERATING STATISTICS-STATUTORY BASIS

 Reserves:
   Loss and loss adjustment expense . . . . . . . . . . . . . . . . . . . . . . . . .          $1,053.7        $  994.7
   Unearned premiums  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             688.9           538.5

 Policyholders' surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             703.6           658.3

 Ratios:
   Net premiums written to policyholders' surplus   . . . . . . . . . . . . . . . . .               2.6             2.2

   Loss and loss adjustment expense reserves to policyholders' surplus  . . . . . . .               1.5             1.5

   Loss and loss adjustment expense . . . . . . . . . . . . . . . . . . . . . . . . .              62.6            68.3
   Underwriting expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              25.4            29.8 
                                                                                               ---------       ---------
   Statutory combined ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              88.0            98.1


SELECTED CONSOLIDATED FINANCIAL INFORMATION-GAAP BASIS

 Total revenues   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          $1,954.8        $1,738.9

 Total assets1  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           4,011.3         3,440.9

 Total shareholders' equity   . . . . . . . . . . . . . . . . . . . . . . . . . . . .             997.9           629.0

 Common Shares outstanding  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              72.1            67.1

 Book value per Common Share  . . . . . . . . . . . . . . . . . . . . . . . . . . . .          $  12.62        $   7.94

 Return on average shareholders' equity2  . . . . . . . . . . . . . . . . . . . . . .              36.0%           34.7%

 Funded debt outstanding  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          $  477.1        $  568.5

 Ratio of funded debt to capital  . . . . . . . . . . . . . . . . . . . . . . . . . .                32%             47%

 GAAP underwriting margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              10.7             3.5

 Number of people employed  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             6,101           5,591


<FN>
1 Pursuant to SFAS 113, amounts for 1990 through 1992 were restated. (See Note 3--Reinsurance)

2 Net income minus preferred share dividends divided by average common shareholders' equity.

  All share and per share amounts were adjusted for stock splits.
</TABLE>






The Progressive Corporation and Subsidiaries
                                                50

<PAGE>   50

<TABLE>


<CAPTION>






         1991           1990           1989           1988           1987           1986           1985           1984
    <S>            <C>            <C>            <C>            <C>            <C>             <C>             <C>




    $   901.7      $   827.4      $   787.7      $   685.5      $   496.1      $   342.0       $  226.6        $ 153.3
        513.6          474.1          467.6          505.0          446.8          323.9          219.4          141.1

        676.7          636.7          578.1          495.0          452.0          312.0          230.1          118.9


          2.0            1.9            2.0            2.6            2.5            2.5            2.3            2.6

          1.3            1.3            1.4            1.4            1.1            1.1            1.0            1.3

         65.7           62.1           65.9           62.9           58.3           61.0           65.6           65.0
         33.5           31.1           31.4           33.2           35.8           34.3           33.6           37.4
    ----------     ----------     ----------     ----------     ----------     ----------      ---------       --------
         99.2           93.2           97.3           96.1           94.1           95.3           99.2          102.4




    $ 1,493.1      $ 1,376.2      $ 1,392.7      $ 1,355.8      $ 1,066.2      $   749.4       $  507.1        $ 303.3

      3,317.2        2,912.4        2,643.7        2,316.3        1,782.5        1,259.2          810.8          538.1

        465.7          408.5          435.2          417.2          395.0          311.4          118.4           74.8

         63.3           69.3           76.2           80.7           86.1           84.0           65.1           65.1

    $    5.83      $    5.89      $    5.71      $    5.17      $    4.59      $    3.71       $   1.82        $  1.15

          6.7%          21.5%          17.4%          25.9%          24.7%          26.9%          36.9%          18.0%

    $   644.0      $   644.4      $   645.9      $   479.2      $   216.9      $   100.8       $  158.7        $ 102.4

           58%            61%            60%            53%            35%            24%            57%            58%

         (3.7)           1.0           (1.2)           2.9            5.6            4.3            0.0           (2.4)

        6,918          6,370          6,049          5,854          5,879          4,711          3,266          2,243

</TABLE>














                                                51

<PAGE>   51

<TABLE>
TEN     YEAR     SUMMARY    --    GAAP     CONSOLIDATED     OPERATING    RESULTS

<CAPTION>

Not covered by report of independent accountants


                                                                                    (millions-except per share amounts)

                                                                                                   1993           1992
<S>                                                                                            <C>            <C>
Direct premiums written:
 Personal lines   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          $1,548.9       $1,214.6
 Commercial lines   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             417.5          422.2
                                                                                              ----------     ----------
Total direct premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . .           1,966.4        1,636.8
 Reinsurance assumed  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               9.2            4.3
 Reinsurance ceded  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            (156.4)        (189.9)
                                                                                              ----------     ----------
Net premiums written  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           1,819.2        1,451.2
 Net change in unearned premiums reserve1   . . . . . . . . . . . . . . . . . . . . .            (150.5)         (25.1)
                                                                                              ----------     ----------
Premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           1,668.7        1,426.1
                                                                                              ----------     ----------
Expenses:
 Losses and loss adjustment expenses  . . . . . . . . . . . . . . . . . . . . . . . .           1,028.0          930.9
 Policy acquisition costs   . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             311.6          304.1
 Other underwriting expenses  . . . . . . . . . . . . . . . . . . . . . . . . . . . .             151.3          141.5
                                                                                              ----------     ----------
Total underwriting expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           1,490.9        1,376.5
                                                                                              ----------     ----------
Underwriting profit (loss) before taxes . . . . . . . . . . . . . . . . . . . . . . .             177.8           49.6
Provision (benefit) for Federal income taxes  . . . . . . . . . . . . . . . . . . . .              62.2           16.9
                                                                                              ----------     ----------
Underwriting profit (loss) after taxes  . . . . . . . . . . . . . . . . . . . . . . .             115.6           32.7
Service operations profit (loss) after taxes  . . . . . . . . . . . . . . . . . . . .               4.4           (2.8)
                                                                                              ----------     ----------
                                                                                                  120.0           29.9
Investment income after taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . .             107.1          110.4
Net realized gains (losses) on security sales after taxes . . . . . . . . . . . . . .              70.1            9.6
Interest expense after taxes  . . . . . . . . . . . . . . . . . . . . . . . . . . . .             (25.8)         (29.4)
Proposition 103 reserve reduction after taxes . . . . . . . . . . . . . . . . . . . .                --           70.0
Non-recurring items after taxes . . . . . . . . . . . . . . . . . . . . . . . . . . .              (2.6)         (42.6)
Other income (expense) after taxes 2  . . . . . . . . . . . . . . . . . . . . . . . .              (1.5)          (8.3)
                                                                                              ----------     ----------
Income before Federal tax adjustments
   and cumulative effect of accounting change . . . . . . . . . . . . . . . . . . . .             267.3          139.6
Federal tax adjustments 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                --             --
Cumulative effect of accounting change 4  . . . . . . . . . . . . . . . . . . . . . .                --           14.2
                                                                                              ----------     ----------
Net income  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          $  267.3       $  153.8
                                                                                              ==========     ==========
Per share
 Net income   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          $   3.58       $   2.05
 Dividends  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              .200           .191
Average equivalent shares
 Primary  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              71.8           62.3
 Fully diluted  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              72.0           71.9
Common Share Price Range
 High   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          $ 46 1/8       $ 29 3/8
 Low  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            26 5/8         14 3/4


<FN>
1 Amount represents change in unearned premiums reserve less change in prepaid reinsurance premiums.

2 Reflects investment expenses after taxes and other tax adjustments.

3 1991 reflects a deferred tax asset write-down; 1990 reflects a fresh start tax benefit; and 1985 reflects benefits from capital
  loss carry forwards.

4 1992 reflects adoption of SFAS 109, "Accounting for Income Taxes," and 1987 reflects adoption of SFAS 96, "Accounting for Income
  Taxes."

  All share and per share amounts were adjusted for stock splits.
</TABLE>






The Progressive Corporation and Subsidiaries

<PAGE>   52
                                                                         52 - 53




<TABLE>
<CAPTION>
         1991           1990           1989           1988           1987           1986           1985           1984
    <S>            <C>            <C>            <C>            <C>             <C>            <C>            <C>

    $ 1,047.4      $   876.0      $   800.1      $   817.0      $   690.2       $  526.2       $  396.4       $  264.1
        489.4          482.8          487.0          521.0          488.0          303.9          145.0           47.1
   -----------    -----------    -----------    -----------    -----------     ----------     ----------     ----------
      1,536.8        1,358.8        1,287.1        1,338.0        1,178.2          830.1          541.4          311.2
           .1             .1            7.2            9.4           19.5            9.2            1.6             .1
       (212.3)        (162.6)        (134.0)         (72.4)         (81.2)         (58.4)         (20.1)          (2.8)
   -----------    -----------    -----------    -----------    -----------     ----------     ----------     ----------
      1,324.6        1,196.3        1,160.3        1,275.0        1,116.5          780.9          522.9          308.5
        (37.7)          (5.1)          36.2          (59.6)        (122.1)        (103.7)         (78.1)         (35.0)
   -----------    -----------    -----------    -----------    -----------     ----------     ----------     ----------
      1,286.9        1,191.2        1,196.5        1,215.4          994.4          677.2          444.8          273.5
   -----------    -----------    -----------    -----------    -----------     ----------     ----------     ----------

        858.0          762.9          799.3          752.0          571.9          406.6          288.4          176.2
        313.7          292.7          296.7          321.3          292.6          190.2          130.1           82.5
        162.1          123.7          114.9          106.6           74.4           51.8           26.4           21.4
   -----------    -----------    -----------    -----------    -----------     ----------     ----------     ----------
      1,333.8        1,179.3        1,210.9        1,179.9          938.9          648.6          444.9          280.1
   -----------    -----------    -----------    -----------    -----------     ----------     ----------     ----------
        (46.9)          11.9          (14.4)          35.5           55.5           28.6            (.1)          (6.6)
        (15.9)           4.0           (2.9)          10.0           12.2           13.1            (.7)          (3.8)
   -----------    -----------    -----------    -----------    -----------     ----------     ----------     ----------
        (31.0)           7.9          (11.5)          25.5           43.3           15.5             .6           (2.8)
         (1.4)           2.8            2.5           (1.3)          (1.0)            --             --             --
   -----------    -----------    -----------    -----------    -----------     ----------     ----------     ----------
        (32.4)          10.7           (9.0)          24.2           42.3           15.5             .6           (2.8)
        121.1          126.4          135.3           91.3           59.3           49.4           35.9           20.9
          4.9           (8.4)           (.4)          12.3           (1.9)           5.1            5.4           (2.3)
        (31.6)         (32.0)         (32.5)         (10.5)          (6.5)          (3.3)          (4.8)          (3.3)
           --             --             --             --             --             --             --             -- 
           --             --             --             --             --             --             --             --
        (14.9)         (13.2)         (15.4)          (9.2)          (3.4)          (2.0)          (1.7)           1.4
   -----------    -----------    -----------    -----------    -----------     ----------     ----------     ----------

         47.1           83.5           78.0          108.1           89.8           64.7           35.4           13.9
        (14.2)           9.9             --             --             --             --             .2             --
           --             --             --             --            3.7             --             --             --
   -----------    -----------    -----------    -----------    -----------     ----------     ----------     ----------
    $    32.9      $    93.4      $    78.0      $   108.1      $    93.5       $   64.7       $   35.6       $   13.9
   ===========    ===========    ===========    ===========    ===========     ==========     ==========     ==========

    $     .41      $    1.19      $     .94      $    1.23      $    1.08       $    .77       $    .52       $    .21
         .172           .160           .147           .133           .077           .019           .017           .016

         66.6           72.9           79.8           84.0           86.7           85.5           70.5           65.1
         75.6           82.5           89.1           90.9           86.7           85.5           70.5           65.1

    $  20 5/8      $  18 3/4      $  14 1/2      $  10 3/4      $  11 7/8       $ 12 7/8       $  7           $  3 3/4
       15             11              7 1/2          7 1/4          8 1/2          6 3/4          3 3/8          3
</TABLE>


<PAGE>   53
                                                                         54 - 55


<TABLE>
LOSS                            RESERVES                                

<CAPTION>
Not covered by report of independent accountants
                                                                                               GAAP COMBINED RATIO

                                                                                                           ADJUSTED TO
                                        YEAR-END           CURRENT            % YEAR-END                       REFLECT
                                         RESERVE          ESTIMATE        RESERVE AMOUNT                          LOSS
                                          AMOUNT1         OF TOTAL             UNPAID AT           AS          RESERVE
YEAR                                  (MILLIONS)        REDUNDANCY2    DECEMBER 31, 1993     REPORTED      DEVELOPMENT
<S>                                       <C>                   <C>                  <C>        <C>              <C>
1993  . . . . . . . . . . . . .           $1,349                NA                   100%        89.3               NA
1992  . . . . . . . . . . . . .            1,274                6%                    52         96.5             96.4
1991  . . . . . . . . . . . . .            1,077                 7                    29        103.7            104.4
1990  . . . . . . . . . . . . .              858                 8                    18         99.0             99.1
1989  . . . . . . . . . . . . .              750                 9                    13        101.2             99.7
1988  . . . . . . . . . . . . .              654                 7                     6         97.1             99.0
1987  . . . . . . . . . . . . .              475                15                     3         94.4             93.0


<FN>
The chart represents what the underwriting results for prior years would have been if year-end reserves were as subsequent payments
and current reserves now suggest. For example, the 96.5 GAAP combined ratio as reported for 1992 was negatively impacted 0.1 points
because reserve redundancy which existed at December 31, 1991 increased by $1.8 million during 1992.

1 Pursuant to SFAS 113, amounts for 1990 through 1992 were restated. (See Note 3-Reinsurance.)

2 The percentage will change as claims unpaid at December 31, 1993 are ultimately settled or the reserves adjusted.

NA = Not applicable
</TABLE>




<TABLE>
DIRECT                           PREMIUMS                                WRITTEN
<CAPTION>
Not covered by report of independent accountants
                                                                                                                          (millions)

                          1993                   1992                     1991                     1990                  1989
<S>             <C>           <C>       <C>           <C>        <C>            <C>       <C>           <C>      <C>          <C>
Florida         $   265.6      13.5%    $  195.3       11.9%     $  173.9        11.3%    $  169.3       12.5%   $  160.4      12.5%
Ohio                175.9       8.9        140.7        8.6         137.1         8.9        116.8        8.6        92.9       7.2
New York            170.4       8.7        156.8        9.6         132.1         8.6        105.2        7.7        79.9       6.2
Texas               146.6       7.4        117.0        7.2          96.2         6.3         64.4        4.7        46.9       3.7
Georgia             120.0       6.1        114.6        7.0         122.9         8.0        106.4        7.8        93.3       7.2
Pennsylvania        113.0       5.8         70.1        4.3          52.8         3.4         53.0        3.9        43.8       3.4
California           80.2       4.1         90.6        5.5         156.1        10.2        177.8       13.1       262.5      20.4
All Other           894.7      45.5        751.7       45.9         665.7        43.3        565.9       41.7       507.4      39.4
                ---------     -----     --------      -----      --------       -----     --------      -----    --------     -----
 Total          $ 1,966.4     100.0%    $1,636.8      100.0%     $1,536.8       100.0%    $1,358.8      100.0%   $1,287.1     100.0%
                =========     =====     ========      =====      ========       =====     ========      =====    ========     =====
</TABLE>



The Progressive Corporation and Subsidiaries

<PAGE>   54

<TABLE>
QUARTERLY       FINANCIAL         AND          COMMON        SHARE          DATA

<CAPTION>
Not covered by report of independent accountants

                                                                                                (millions--except per share amounts)

                                        NET INCOME          OPERATING INCOME2

                        OPERATING                   PER                    PER          HIGH-LOW       DIVIDENDS    STOCK PRICE
YEAR          QUARTER    REVENUES      TOTAL     SHARE1      TOTAL3      SHARE1           PRICE4       PER SHARE   APPRECIATION5
<S>                 <C>   <C>         <C>         <C>        <C>        <C>          <C>                   <C>              <C>    
1993  . . . . . . . 1     $ 382.8     $ 51.6      $ .71      $ 39.9     $  .54       $ 36 1/8-26 5/8       $.050                   
                    2       423.3       79.7       1.11        54.5        .75         36 1/4-27 1/2        .050                   
                    3       442.8       82.6       1.09        54.7        .71         44 1/4-31 3/4        .050                   
                    4       463.5       53.4        .68        49.3        .63         46 1/8-38 3/8        .050                   
                          -------     ------      -----      ------     ------       ---------------       -----            ----
                          1,712.4      267.3       3.58       197.3       2.61         46 1/8-26 5/8        .200            39.8%  
                          =======     ======      =====      ======     ======       ===============       =====            ====
                                                                                                                                   
1992  . . . . . . . 1       346.4       36.1        .47(6)     18.0        .22         18 7/8-14 3/4        .047                   
                    2       365.7       40.1        .53        32.4        .41         19    -15 5/8        .047                   
                    3       373.7       44.7        .62        42.0        .58         22    -18 7/8        .047                   
                    4       393.6       32.9        .45(7)     37.4        .51         29 3/8-21 3/8        .050                   
                          -------     ------      -----      ------     ------       ---------------       -----            ----
                          1,479.4      153.8       2.05       129.8       1.72         29 3/8-14 3/4        .191            63.3%  
                          =======     ======      =====      ======     ======       ===============       =====            ====
                                                                                                                                   
1991  . . . . . . . 1       318.3       25.7        .34        35.5        .47         20 1/4-15 3/8        .043                   
                    2       338.6        9.7        .13        18.6        .24         20 5/8-17 3/8        .043                   
                    3       349.3       11.2        .13        25.8        .33         18 3/4-15 1/2        .043                   
                    4       334.7      (13.7)      (.25)(8)     5.2        .04         18    -15            .043                   
                          -------     ------      -----      ------     ------       ---------------       -----            ----
                          1,340.9       32.9        .41        85.1       1.19         20 5/8-15            .172             6.4%  
                          =======     ======      =====      ======     ======       ===============       =====            ====

<FN>
All per share amounts and stock prices were adjusted for the December 8, 1992, 3-for-1 stock split.

1 Presented on a fully diluted basis. For 1993 and 1992, the sum does not equal the total because the average equivalent shares 
  differ in the periods. For 1991, the sum of the quarterly earnings per share does not equal the total because fourth quarter 
  earnings per share were antidilutive and, therefore, reported on a primary basis.

2 Represents net income less realized gains and losses and one-time non-operating items.

3 For 1993, the sum of the quarterly operating income does not equal the total due to the retroactive impact of the Omnibus Budget 
  Reconciliation Act of 1993.

4 Prices as reported on the New York Stock Exchange.

5 Represents annual rate of return on Progressive Common Shares, including quarterly dividend reinvestment.

6 For the first quarter 1992, income before cumulative effect of accounting change was $21.9 million, or $.28 per share.

7 Adjustments which adversely impacted earnings during the fourth quarter 1992 were the payment to Alfred Lerner (see Note 
  10-Related Party Transactions for further discussion) and reserve adjustments based on routine actuarial analysis completed 
  during the quarter.

8 Adjustments which adversely impacted earnings during the fourth quarter 1991  were an additional write-down of a deferred tax 
  asset due to the Company's inability to realize this asset under the provisions of SFAS 96, an accrual for severance costs as 
  part of the program finalized during the fourth quarter to further align staffing with declining California volume and to 
  streamline other operations, and reserve adjustments based on routine actuarial analysis completed during the period.
</TABLE>


The Progressive Corporation and Subsidiaries

<PAGE>   55
DIRECTORS

Milton N. Allen1,2,3
Director,
Various Corporations

B. Charles Ames
Partner,
Clayton, Dubilier & Rice, Inc.
(management consulting)

Stephen R. Hardis1,2
Vice Chairman, Chief
 Financial and Administrative
 Officer,
Eaton Corporation
(manufacturing)

Peter B. Lewis2
Chairman of the Board,
 President and Chief
 Executive Officer

Norman S. Matthews3
Consultant,
Formerly President,
Federated Department
 Stores, Inc.
(retailing)

Donald B. Shackelford1,3
Chairman,
State Savings Bank
(savings and loan)

Dr. Paul B. Sigler1
Professor, Yale University and
Investigator,
Howard Hughes Medical
 Institute
(education)

1 Audit Committee member

2 Executive Committee member

3 Executive Compensation Committee member


CORPORATE OFFICERS

Peter B. Lewis, Chairman,
 President and Chief
 Executive Officer
David M. Schneider, Secretary
Daniel R. Lewis, Treasurer

CORPORATE SUPPORT TEAM

Charles B. Chokel
Peter B. Lewis
Bruce W. Marlow
Michael C. Murr
David M. Schneider
Tiona M. Thompson

DIVISION PRESIDENTS, PRODUCT AND PROCESS LEADERS

Alan R. Bauer
William P. Cadden
G. Edward Combs
Jeffrey J. Dailey
Allan W. Ditchfield
W. Thomas Forrester
Steven B. Gellen
William H. Graves
Michael J. Hanerty
Stephen G. Klug
Moira A. Lardakis
Daniel R. Lewis
Robert E. Mathe
Robert J. McMillan
Glenn M. Renwick
Andrew W. Rogacki
David L. Roush
Gregory J. Trapp
Robert T. Williams

ANNUAL MEETING

The Annual Meeting of Shareholders will be held at the offices of The
Progressive Corporation, 6671 Beta Drive, Mayfield Village, Ohio 44143 on April
22, 1994, at 10:00 a.m. There were 4,859 shareholders of record on December 31,
1993.

PRINCIPAL OFFICE

The principal office of The Progressive Corporation is at 6300 Wilson Mills
Road, Mayfield Village, Ohio 44143.

TRANSFER AGENT AND REGISTRAR

If you have questions about a specific stock ownership account, write or call:
Corporate Trust Customer Service, National City Bank, 1900 East Ninth Street,
Cleveland, Ohio 44114.  Phone: (216) 575-2498 or (800) 622-6757

COUNSEL

Baker & Hostetler, Cleveland, Ohio

COMMON AND PREFERRED SHARES

The Progressive Corporation's Common Shares (symbol PGR) and Series A Preferred
Shares (symbol PGRPrA) are traded on the New York Stock Exchange. Dividends are
customarily paid on the last day of each quarter.

INTERIM REPORT DISTRIBUTION

The Progressive Corporation has discontinued its practice of automatically
mailing quarterly reports to shareholders whose shares are registered in the
name of a bank, broker or nominee. Any such shareholder wishing to receive
copies of the Company's quarterly shareholder reports may annually send a
letter requesting the reports to The Progressive Corporation, Investor
Relations, 6300 Wilson Mills Road, Box E61, Mayfield Village, Ohio 44143. All
requests must be received by April 15 of the year for which such reports are
requested.




<PAGE>   1
                                 EXHIBIT NO. 21





                                SUBSIDIARIES OF

                          THE PROGRESSIVE CORPORATION

<PAGE>   2

<TABLE>
SUBSIDIARIES OF THE PROGRESSIVE CORPORATION
<CAPTION>
                                                                            Jurisdiction
           Name of Subsidiary                                               of Incorporation
           ------------------                                               ----------------
<S>                                                                         <C>
Airy Insurance Center, Inc.                                                 Pennsylvania
Allied Insurance Agency, Inc.                                               Ohio
Auto Insurance Solutions, Inc.                                              Maryland
Classic Insurance Company                                                   Wisconsin
Express Quote Services, Inc.                                                Florida
Gold Key Insurance Agency                                                   California
Greenberg Financial Insurance Services, Inc.                                California
Halcyon Insurance Company                                                   Ohio
Insurance Confirmation Services, Inc.                                       Delaware
Lakeside Insurance Agency, Inc.                                             Ohio
Mountain Laurel Assurance Company                                           Pennsylvania
Mountainside Insurance Agency, Inc.                                         Colorado
National Continental Insurance Company                                      New York
Pacific Motor Club                                                          California
Paloverde Insurance Company of Arizona                                      Arizona
PCIC Canada Holdings, Ltd.                                                  Canada
       Progressive Casualty Insurance Company of Canada                     Canada
Progressive Adjusting Company, Inc.                                         Ohio
Progressive American Insurance Company                                      Florida
       Bayside Underwriters Insurance Agency, Inc.                          Florida
       Progressive Gulf Insurance Company                                   Mississippi
Progressive American Life Insurance Company                                 Ohio
       Progressive Life Insurance, Ltd.                                     Turks & Caicos Islands

Progressive Bayside Insurance Company                                       Florida
Progressive Casualty Insurance Company                                      Ohio
       PC Investment Company                                                Delaware
       Progressive Specialty Insurance Company                              Ohio
Progressive Insurance Agency, Inc.                                          Ohio
Progressive Investment Company, Inc.                                        Delaware
Progressive Max Insurance Company                                           Ohio
Progressive Mountain Insurance Company                                      Colorado
Progressive Northern Insurance Company                                      Wisconsin
       Progressive Premier Insurance Company of Illinois                    Illinois
       Progressive Universal Insurance Company of Illinois                  Illinois
Progressive Northwestern Insurance Company                                  Washington
Progressive Partners, Inc.                                                  New York
Progressive Preferred Insurance Company                                     Ohio
Progressive Premium Budget, Inc.                                            Ohio
Progressive Risk Management Services, Inc.                                  Ohio
Progressive Southeastern Insurance Company                                  Florida
Progressive Transportation Software, Inc.                                   Ohio
Pro-West Insurance Company                                                  California
       Marathon Insurance Company                                           California
Richmond Transport Corp.                                                    Ohio
Tampa Insurance Services, Inc.                                              Florida
The Paradyme Corporation                                                    Ohio
The Progressive Agency, Inc.                                                Virginia
Transportation Recoveries, Inc.                                             Ohio
United Financial Adjusting Company                                          Ohio
United Financial Casualty Company                                           Missouri
Village Transport Corp.                                                     Delaware
Wilson Mills Land Co.                                                       Ohio
                                                                
<FN>                                                                
Each subsidiary is wholly owned by its parent.
</TABLE>




<PAGE>   1
                               POWER OF ATTORNEY
                               -----------------

     KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint Peter
B.  Lewis, David M. Schneider and Dane A. Shrallow, and each of them, my true
and lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for me and in my name, place and stead, in any and all
capacities, to sign and file with the Securities and Exchange Commission the
Annual Report on Form 10-K of The Progressive Corporation for the year 1993,
and any and all amendments relating thereto and other documents in connection
therewith, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
necessary and requisite to be done in connection with the foregoing, as fully
to all intents and purposes as I might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or any of them, or
their respective substitutes, may lawfully do or cause to be done by virtue
hereof.

     IN WITNESS WHEREOF, I have hereunto subscribed my name in the
capacity(ies) set forth below this  18th   day of March, 1994.
                                   ------

                              Position(s) with
Signature                     The Progressive Corporation
- - - ---------                     ---------------------------


 /s/ Milton N. Allen            
- - - -----------------------
Milton N. Allen               Director






<PAGE>
   2
                               POWER OF ATTORNEY
                               -----------------

     KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint Peter
B.  Lewis, David M. Schneider and Dane A. Shrallow, and each of them, my true
and lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for me and in my name, place and stead, in any and all
capacities, to sign and file with the Securities and Exchange Commission the
Annual Report on Form 10-K of The Progressive Corporation for the year 1993,
and any and all amendments relating thereto and other documents in connection
therewith, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
necessary and requisite to be done in connection with the foregoing, as fully
to all intents and purposes as I might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or any of them, or
their respective substitutes, may lawfully do or cause to be done by virtue
hereof.

     IN WITNESS WHEREOF, I have hereunto subscribed my name in the
capacity(ies) set forth below this  18th   day of March, 1994.
                                   ------

                              Position(s) with
Signature                     The Progressive Corporation
- - - ---------                     ---------------------------


 /s/ B. Charles Ames           
- - - ---------------------------
B. Charles Ames               Director






<PAGE>   3
                               POWER OF ATTORNEY
                               -----------------


     KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint Peter
B.  Lewis, David M. Schneider and Dane A. Shrallow, and each of them, my true
and lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for me and in my name, place and stead, in any and all
capacities, to sign and file with the Securities and Exchange Commission the
Annual Report on Form 10-K of The Progressive Corporation for the year 1993,
and any and all amendments relating thereto and other documents in connection
therewith, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
necessary and requisite to be done in connection with the foregoing, as fully
to all intents and purposes as I might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or any of them, or
their respective substitutes, may lawfully do or cause to be done by virtue
hereof.

     IN WITNESS WHEREOF, I have hereunto subscribed my name in the
capacity(ies) set forth below this  18th  day of March, 1994.
                                   ------

                              Position(s) with
Signature                     The Progressive Corporation
- - - ---------                     ---------------------------


 /s/ Stephen R. Hardis        
- - - ---------------------------
Stephen R. Hardis             Director






<PAGE>   4
                               POWER OF ATTORNEY
                               -----------------

     KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint Peter
B.  Lewis, David M. Schneider and Dane A. Shrallow, and each of them, my true
and lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for me and in my name, place and stead, in any and all
capacities, to sign and file with the Securities and Exchange Commission the
Annual Report on Form 10-K of The Progressive Corporation for the year 1993,
and any and all amendments relating thereto and other documents in connection
therewith, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
necessary and requisite to be done in connection with the foregoing, as fully
to all intents and purposes as I might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or any of them, or
their respective substitutes, may lawfully do or cause to be done by virtue
hereof.

     IN WITNESS WHEREOF, I have hereunto subscribed my name in the
capacity(ies) set forth below this  18th   day of March, 1994.
                                   ------

                              Position(s) with
Signature                     The Progressive Corporation
- - - ---------                     ---------------------------


 /s/ Norman S. Matthews      
- - - ---------------------------
Norman S. Matthews            Director






<PAGE>   5
                               POWER OF ATTORNEY
                               -----------------

     KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint Peter
B.  Lewis, David M. Schneider and Dane A. Shrallow, and each of them, my true
and lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for me and in my name, place and stead, in any and all
capacities, to sign and file with the Securities and Exchange Commission the
Annual Report on Form 10-K of The Progressive Corporation for the year 1993,
and any and all amendments relating thereto and other documents in connection
therewith, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
necessary and requisite to be done in connection with the foregoing, as fully
to all intents and purposes as I might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or any of them, or
their respective substitutes, may lawfully do or cause to be done by virtue
hereof.

     IN WITNESS WHEREOF, I have hereunto subscribed my name in the
capacity(ies) set forth below this  17th    day of March, 1994.
                                   ------

                              Position(s) with
Signature                     The Progressive Corporation
- - - ---------                     ---------------------------


 /s/ Donald B. Shackelford     
- - - ---------------------------
Donald B. Shackelford         Director






<PAGE>   6
                               POWER OF ATTORNEY
                               -----------------

     KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint Peter
B.  Lewis, David M. Schneider and Dane A. Shrallow, and each of them, my true
and lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for me and in my name, place and stead, in any and all
capacities, to sign and file with the Securities and Exchange Commission the
Annual Report on Form 10-K of The Progressive Corporation for the year 1993,
and any and all amendments relating thereto and other documents in connection
therewith, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
necessary and requisite to be done in connection with the foregoing, as fully
to all intents and purposes as I might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or any of them, or
their respective substitutes, may lawfully do or cause to be done by virtue
hereof.

     IN WITNESS WHEREOF, I have hereunto subscribed my name in the
capacity(ies) set forth below this  17th   day of March, 1994.
                                   ------

                              Position(s) with
Signature                     The Progressive Corporation
- - - ---------                     ---------------------------


 /s/ Paul B. Sigler              
- - - -------------------------
Paul B. Sigler                Director








<PAGE>   1
Form 2        
                  ANNUAL STATEMENT FOR THE YEAR 1993 OF THE 
            PROGRESSIVE CASUALTY INSURANCE COMPANY - CONSOLIDATED

SCHEDULE P - ANALYSIS OF LOSSES AND LOSS EXPENSES

Notes to Schedule P
(1) The Parts of Schedule P:
    Part 1 - Detailed information on losses and loss expenses.
    Part 2 - History of incurred losses and allocated expenses.
    Part 3 - History of loss and allocated expense payments.
    Part 4 - History of bulk and incurred but not reported reserves.
    Schedule P Interrogatories

(2) Lines of business A through M and R are groupings of the lines of business
    used on page 14, the state page.

(3) Reinsurance A, B, C, and D (lines N to Q) are:
    Reinsurance A = nonproportional property (1988 and subsequent)
    Reinsurance B = nonproportional liability (1988 and subsequent)
    Reinsurance C = financial lines (1988 and subsequent)
    Reinsurance D = old Schedule O line 30 (1987 and prior)

(4) The Instructions to Schedule P contain directions necessary for filling out
    Schedule P.

                           SCHEDULE P-PART 1-SUMMARY
                                 (000 omitted)

<TABLE>
<S>          <C>           <C>           <C>           <C>           <C>           <C>           <C>
________________________________________________________________________________________________________________
      1      |              Premiums Earned            |               Loss and Loss Expense Payments          |
             |_________________________________________|_______________________________________________________|
  Years In   |      2      |      3      |      4      |        Loss Payments      |        Allocated Loss     |
    Which    |             |             |             |                           |       Expense Payments    |
Premiums Were|             |             |             |___________________________|___________________________|
 Earned and  |   Direct    |             |     Net     |      5      |      6      |      7      |      8      |
 Losses Were |     and     |    Ceded    |  (2 - 3)    |   Direct    |             |   Direct    |             |
  Incurred   |   Assumed   |             |             |     and     |    Ceded    |     and     |    Ceded
    |
             |             |             |             |   Assumed   |             |   Assumed   |             |
_____________|_____________|_____________|_____________|_____________|_____________|_____________|_____________|
  1. Prior...|   X X X X   |   X X X X   |   X X X X   |         166 |          -- |          -- |          -- |
  2. 1984....|     278,917 |       2,710 |     276,207 |     151,693 |       3,395 |       9,603 |         558 |
  3. 1985....|     461,512 |       9,660 |     451,852 |     249,322 |       6,052 |      15,616 |         896 |
  4. 1986....|     726,141 |      42,619 |     683,522 |     323,320 |      14,867 |      21,454 |       1,092 |
  5. 1987....|   1,066,680 |      64,496 |   1,002,184 |     483,181 |      31,692 |      30,297 |       1,361 |
  6. 1988....|   1,292,530 |      67,431 |   1,225,099 |     639,622 |      38,605 |      36,928 |       1,167 |
  7. 1989....|   1,357,845 |     109,736 |   1,248,109 |     699,815 |      77,904 |      37,234 |       1,275 |
  8. 1990....|   1,397,185 |     144,903 |   1,252,282 |     648,489 |      77,979 |      29,603 |       1,280 |
  9. 1991....|   1,529,118 |     199,174 |   1,329,944 |     679,480 |      85,984 |      23,269 |       1,877 |
 10. 1992....|   1,580,457 |     195,140 |   1,385,317 |     646,074 |      66,034 |      19,080 |       1,504 |
 11. 1993....|   1,795,493 |     150,074 |   1,645,419 |     536,547 |      30,449 |       8,649 |         837 |
_____________|_____________|_____________|_____________|_____________|_____________|_____________|_____________|
 12. Totals  |   X X X X   |   X X X X   |   X X X X   |   5,057,709 |     432,961 |     231,733 |      11,847 |
- - - ----------------------------------------------------------------------------------------------------------------
</TABLE>



<TABLE>
<S>          <C>           <C>           <C>           <C>         
_______________________________________________________________________
      1      |     Loss and Loss Expense Payments       |              |
             |__________________________________________|              |
  Years In   |      9      |     10      |      11      |     12       |
    Which    |             |             |              |              |
Premiums Were|   Salvage   | Unallocated |    Total     |  Number of   |
 Earned and  |     and     |    Loss     |   Net Paid   |   Claims     |
 Losses Were | Subrogation |   Expense   |  (5 - 6 + 7  |  Reported-   |
  Incurred   |  Received   |  Payments   |   - 8 + 10)  | Direct and   |
             |             |             |              |   Assumed    |
_____________|_____________|_____________|______________|______________|
  1. Prior...|          -- |          -- |         166  |   X X X X    |
  2. 1984....|       8,426 |      16,448 |     173,791  |   X X X X    |
  3. 1985....|      13,873 |      25,947 |     283,937  |   X X X X    |
  4. 1986....|      16,668 |      40,855 |     369,670  |   X X X X    |
  5. 1987....|      23,777 |      66,641 |     547,066  |   X X X X    |
  6. 1988....|      33,442 |      93,709 |     730,487  |   X X X X    |
  7. 1989....|      36,059 |     107,397 |     765,267  |   X X X X    |
  8. 1990....|      31,514 |     118,799 |     717,632  |   X X X X    |
  9. 1991....|      28,750 |     137,091 |     751,979  |   X X X X    |
 10. 1992....|      28,585 |     104,152 |     701,768  |   X X X X    |
 11. 1993....|      20,711 |      94,786 |     608,696  |   X X X X    |
_____________|_____________|_____________|______________|______________|
 12. Totals  |     241,806 |     805,825 |   5,650,459  |   X X X X    |
- - - ----------------------------------------------------------------------- 
<FN>
Note:  For "prior," report amounts paid or received in current year only. 
       Report cumulative amounts paid or received for specific years.
       Report loss payments net of salvage and subrogation received.
</TABLE>



<TABLE>
<S>          <C>           <C>           <C>           <C>           <C>           <C>           <C>           <C>
______________________________________________________________________________________________________________________________
             |                      Losses Unpaid                    |             Allocated Loss Expenses Unpaid            |
  Years In   |_______________________________________________________|_______________________________________________________|
    Which    |          Case Basis       |         Bulk + IBNR       |          Case Basis       |         Bulk + IBNR       |
Premiums Were|___________________________|___________________________|___________________________|___________________________|
 Earned and  |     13      |     14      |     15      |     16      |     17      |     18      |     19      |     20      |
 Losses Were |   Direct    |             |   Direct    |             |   Direct    |             |   Direct    |             |
  Incurred   |     and     |    Ceded    |     and     |    Ceded    |     and     |    Ceded    |     and     |    Ceded    |
             |   Assumed   |             |   Assumed   |             |   Assumed   |             |   Assumed   |             |
_____________|_____________|_____________|_____________|_____________|_____________|_____________|_____________|_____________|
  1. Prior...|       8,397 |       4,121 |       1,263 |          -- |          -- |         --  |          -- |          -- |
  2. 1984....|          -- |          -- |          -- |          -- |          -- |         --  |          -- |          -- |
  3. 1985....|         124 |          -- |          -- |          -- |          26 |           1 |           5 |          -- |
  4. 1986....|       1,828 |          62 |          -- |          -- |         223 |          15 |          37 |           1 |
  5. 1987....|       2,881 |         297 |         650 |          -- |         477 |         118 |         172 |           8 |
  6. 1988....|      21,758 |       2,801 |       5,553 |          82 |       2,173 |         476 |       1,242 |          50 |
  7. 1989....|      33,238 |       9,264 |      14,991 |       3,088 |       4,817 |         719 |       2,290 |          97 |
  8. 1990....|      60,527 |      21,457 |      22,044 |       7,216 |       9,128 |       1,604 |       3,194 |         447 |
  9. 1991....|     113,194 |      48,817 |      38,732 |      13,185 |      19,497 |       2,703 |       5,070 |         685 |
 10. 1992....|     228,582 |      75,792 |      67,768 |      20,490 |      32,435 |       4,082 |       8,403 |         970 |
 11. 1993....|     406,935 |      79,218 |     162,258 |      42,556 |      44,602 |       4,814 |      13,646 |       1,098 |
_____________|_____________|_____________|_____________|_____________|_____________|_____________|_____________|_____________|
 12. Totals  |     877,464 |     241,829 |     313,259 |      86,617 |     113,378 |      14,532 |      34,059 |       3,356 |
- - - ------------------------------------------------------------------------------------------------------------------------------
</TABLE>



<TABLE>
<S>          <C>           <C>           <C>           <C>         
_______________________________________________________________________
             |             |              |              |            |
  Years In   |     21      |      22      |     23       |     24     |
    Which    |             |              |              |            |
Premiums Were|   Salvage   | Unallocated  |    Total     |  Number of |
 Earned and  |     and     |    Loss      |  Net Losses  |   Claims   |
 Losses Were | Subrogation |  Expenses    | and Expenses |Outstanding-|
  Incurred   | Anticipated |   Unpaid     |    Unpaid    | Direct and |
             |             |              |              |   Assumed  |
_____________|_____________|______________|______________|____________|
  1. Prior...|          -- |          --  |       5,539  |   X X X X  |
  2. 1984....|          -- |          --  |          --  |   X X X X  |
  3. 1985....|          -- |          --  |         154  |   X X X X  |
  4. 1986....|          -- |          31  |       2,041  |   X X X X  |
  5. 1987....|         179 |          81  |       3,838  |   X X X X  |
  6. 1988....|         894 |         261  |      27,578  |   X X X X  |
  7. 1989....|       1,422 |         723  |      42,891  |   X X X X  |
  8. 1990....|       2,270 |       1,605  |      65,774  |   X X X X  |
  9. 1991....|       4,231 |       3,753  |     114,856  |   X X X X  |
 10. 1992....|       7,311 |      10,061  |     245,915  |   X X X X  |
 11. 1993....|       7,108 |      35,166  |     534,921  |   X X X X  |
_____________|_____________|______________|______________|____________|
 12. Totals  |      23,415 |      51,681  |   1,043,507  |   X X X X  |
- - - -----------------------------------------------------------------------
</TABLE>
      


<TABLE>
<S>          <C>           <C>           <C>           <C>           <C>           <C>           <C>           <C>
______________________________________________________________________________________________________________________________
             |                                         |      Loss and Loss Expense Percentage   |      Discount for Time    |
  Years In   |  Total Losses and Loss Expenses Incurred|         (Incurred/Premiums Earned)      |       Value of Money      |
    Which    |_________________________________________|_________________________________________|___________________________|
Premiums Were|             |             |             |             |             |             |             |             |
 Earned and  |     25      |     26      |     27      |     28      |     29      |     30      |     31      |     32      |
 Losses Were |   Direct    |             |             |   Direct    |             |             |             |             |
  Incurred   |     and     |    Ceded    |    Net*     |     and     |    Ceded    |     Net     |    Loss     |    Loss     |
             |   Assumed   |             |             |   Assumed   |             |             |             |   Expense   |
_____________|_____________|_____________|_____________|_____________|_____________|_____________|_____________|_____________|
  1. Prior...|   X X X X   |   X X X X   |   X X X X   |   X X X X   |   X X X X   |   X X X X   |         --  |         --  |
  2. 1984....|     177,744 |       3,953 |     173,791 |        63.7 |       145.9 |        62.9 |         --  |         --  |
  3. 1985....|     291,040 |       6,949 |     284,091 |        63.1 |        71.9 |        62.9 |         --  |         --  |
  4. 1986....|     387,748 |      16,037 |     371,711 |        53.4 |        37.6 |        54.4 |         --  |         --  |
  5. 1987....|     584,380 |      33,476 |     550,904 |        54.8 |        51.9 |        55.0 |         --  |         --  |
  6. 1988....|     801,246 |      43,181 |     758,065 |        62.0 |        64.0 |        61.9 |         --  |         --  |
  7. 1989....|     900,505 |      92,347 |     808,158 |        66.3 |        84.2 |        64.8 |         --  |         --  |
  8. 1990....|     893,389 |     109,983 |     783,406 |        63.9 |        75.9 |        62.6 |         --  |         --  |
  9. 1991....|   1,020,086 |     153,251 |     866,835 |        66.7 |        76.9 |        65.2 |         --  |         --  |
 10. 1992....|   1,116,555 |     168,872 |     947,683 |        70.6 |        86.5 |        68.4 |         --  |         --  |
 11. 1993....|   1,302,589 |     158,972 |   1,143,617 |        72.5 |       105.9 |        69.5 |         --  |         --  |
_____________|_____________|_____________|_____________|_____________|_____________|_____________|_____________|_____________|
 12. Totals  |   X X X X   |   X X X X   |   X X X X   |   X X X X   |   X X X X   |   X X X X   |             |             |
- - - ------------------------------------------------------------------------------------------------------------------------------
</TABLE>

















<TABLE>
<S>          <C>           <C>            <C>
_________________________________________________________
             |             |  Net Balance Sheet Reserves |
  Years In   |     33      |        After Discount       |
    Which    |             |_____________________________|
Premiums Were|             |              |              |
 Earned and  |Inter-Company|      34      |     35       |
 Losses Were |   Pooling   |              |    Loss      |
  Incurred   |Participation|    Losses    |  Expenses    |
             | Percentage  |    Unpaid    |   Unpaid     |
_____________|_____________|______________|______________|
  1. Prior...|   X X X X   |       5,539  |          --  |
  2. 1984....|             |          --  |          --  |
  3. 1985....|             |         124  |          30  |
  4. 1986....|             |       1,766  |         275  |
  5. 1987....|             |       3,234  |         604  |
  6. 1988....|             |      24,428  |       3,150  |
  7. 1989....|             |      35,877  |       7,014  |
  8. 1990....|             |      53,898  |      11,876  |
  9. 1991....|             |      89,924  |      24,932  |
 10. 1992....|             |     200,068  |      45,847  |
 11. 1993....|             |     447,419  |      87,502  |
_____________|_____________|______________|______________|
 12. Totals  |   X X X X   |     862,277  |     181,230  |
- - - --------------------------------------------------------- 
<FN>              
*Net = (25 - 26) = (11 + 23)
</TABLE>


                                       62


<PAGE>   2
Form 2      
                  ANNUAL STATEMENT FOR THE YEAR 1993 OF THE
             PROGRESSIVE CASUALTY INSURANCE COMPANY - CONSOLIDATED

SCHEDULE P - PART 2 - SUMMARY

<TABLE>
<S>              <C>           <C>          <C>          <C>          <C>          <C>          <C>          <C>
___________________________________________________________________________________________________________________________
        1        |                INCURRED LOSSES AND ALLOCATED EXPENSES REPORTED AT YEAR END (000 OMITTED)               | 
                 |________________________________________________________________________________________________________|
                 |             |            |            |            |            |            |            |            |
      Years      |      2      |     3      |     4      |     5      |     6      |     7      |     8      |     9      |
    in Which     |             |            |            |            |            |            |            |            |
   Losses Were   |             |            |            |            |            |            |            |            |
    Incurred     |     1984    |    1985    |    1986    |    1987    |    1988    |    1989    |    1990    |    1991    |
                 |             |            |            |            |            |            |            |            |
                 |             |            |            |            |            |            |            |            |
_________________|_____________|____________|____________|____________|____________|____________|____________|____________|
                 |             |            |            |            |            |            |            |            |
  1. Prior.......|*     65,434 |     69,540 |     69,142 |     65,204 |     59,965 |     59,312 |     59,171 |     60,014 |
  2. 1984........|     165,858 |    159,649 |    160,978 |    159,295 |    158,162 |    157,463 |    156,825 |    156,992 |
  3. 1985........|   X X X X   |    274,757 |    269,226 |    268,315 |    262,237 |    261,392 |    258,581 |    258,380 |
  4. 1986........|   X X X X   |  X X X X   |    382,994 |    353,616 |    351,417 |    340,706 |    334,564 |    331,385 |
  5. 1987........|   X X X X   |  X X X X   |  X X X X   |    555,993 |    524,333 |    504,689 |    492,954 |    490,684 |
  6. 1988........|   X X X X   |  X X X X   |  X X X X   |  X X X X   |    719,839 |    684,469 |    663,722 |    666,604 |
  7. 1989........|   X X X X   |  X X X X   |  X X X X   |  X X X X   |  X X X X   |    786,249 |    734,190 |    710,990 |
  8. 1990........|   X X X X   |  X X X X   |  X X X X   |  X X X X   |  X X X X   |  X X X X   |    751,597 |    692,671 |
  9. 1991........|   X X X X   |  X X X X   |  X X X X   |  X X X X   |  X X X X   |  X X X X   |  X X X X   |    792,930 |
 10. 1992........|   X X X X   |  X X X X   |  X X X X   |  X X X X   |  X X X X   |  X X X X   |  X X X X   |  X X X X   |
 11. 1993........|   X X X X   |  X X X X   |  X X X X   |  X X X X   |  X X X X   |  X X X X   |  X X X X   |  X X X X   |
___________________________________________________________________________________________________________________________
</TABLE>



<TABLE>
<S>              <C>          <C>          <C>           <C>
_______________________________________________________________________
        1        | (cont.) INCURRED LOSSES |       DEVELOPMENT**       |
                 |_________________________|___________________________|
                 |            |            |             |             |
      Years      |     10     |     11     |     12      |     13      |
    in Which     |            |            |             |             |
   Losses Were   |            |            |    One      |    Two      |
    Incurred     |    1992    |    1993    |    Year     |    Year     |
                 |            |            |             |             |
                 |            |            |             |             |
_________________|____________|____________|_____________|_____________|
                 |            |            |             |             |
  1. Prior.......|     60,783 |     62,423 |       1,640 |       2,409 |
  2. 1984........|    157,399 |    157,343 |         (56)|         351 |
  3. 1985........|    258,206 |    258,144 |         (62)|        (236)|
  4. 1986........|    330,779 |    330,825 |          46 |        (560)|
  5. 1987........|    485,339 |    484,182 |      (1,157)|      (6,502)|
  6. 1988........|    663,150 |    664,095 |         945 |      (2,509)|
  7. 1989........|    704,871 |    700,038 |      (4,833)|     (10,952)|
  8. 1990........|    676,616 |    663,002 |     (13,614)|     (29,669)|
  9. 1991........|    753,500 |    725,991 |     (27,509)|     (66,939)|
 10. 1992........|    900,892 |    833,470 |     (67,422)|   X X X X   |
 11. 1993........|  X X X X   |  1,013,665 |   X X X X   |   X X X X   |
___________________________________________|_____________|_____________|
                                12. Totals |    (112,022)|    (114,607)|
                                           -----------------------------

<FN>                  
  *Reported reserves only. Subsequent development relates only to subsequent payments and reserves.
**Current year less first or second prior year, showing (redundant) or adverse.
</TABLE>



SCHEDULE P - PART 3 - SUMMARY

<TABLE>
<S>              <C>           <C>          <C>          <C>          <C>          <C>          <C>          <C>
___________________________________________________________________________________________________________________________
        1        |            CUMULATIVE PAID LOSSES AND ALLOCATED EXPENSES REPORTED AT YEAR END (000 OMITTED)            |
                 |________________________________________________________________________________________________________|
                 |             |            |            |            |            |            |            |            |
      Years      |      2      |     3      |     4      |     5      |     6      |     7      |     8      |     9      |
    in Which     |             |            |            |            |            |            |            |            |
   Losses Were   |             |            |            |            |            |            |            |            |
    Incurred     |     1984    |    1985    |    1986    |    1987    |    1988    |    1989    |    1990    |    1991    |
                 |             |            |            |            |            |            |            |            |
                 |             |            |            |            |            |            |            |            |
_________________|_____________|____________|____________|____________|____________|____________|____________|____________|
                 |             |            |            |            |            |            |            |            |
  1. Prior.......|     000     |     25,067 |     40,710 |     49,780 |     53,380 |     53,955 |     54,843 |     55,936 |
  2. 1984........|      81,358 |    122,069 |    137,889 |    147,816 |    151,498 |    154,009 |    155,729 |    156,060 |
  3. 1985........|   X X X X   |    134,374 |    202,467 |    228,629 |    243,849 |    251,045 |    255,162 |    256,497 |
  4. 1986........|   X X X X   |  X X X X   |    168,353 |    255,882 |    291,744 |    312,656 |    322,815 |    326,820 |
  5. 1987........|   X X X X   |  X X X X   |  X X X X   |    240,199 |    360,939 |    420,316 |    447,789 |    467,599 |
  6. 1988........|   X X X X   |  X X X X   |  X X X X   |  X X X X   |    318,747 |    482,587 |    545,480 |    582,880 |
  7. 1989........|   X X X X   |  X X X X   |  X X X X   |  X X X X   |  X X X X   |    362,510 |    521,039 |    595,914 |
  8. 1990........|   X X X X   |  X X X X   |  X X X X   |  X X X X   |  X X X X   |  X X X X   |    354,849 |    499,445 |
  9. 1991........|   X X X X   |  X X X X   |  X X X X   |  X X X X   |  X X X X   |  X X X X   |  X X X X   |    369,194 |
 10. 1992........|   X X X X   |  X X X X   |  X X X X   |  X X X X   |  X X X X   |  X X X X   |  X X X X   |  X X X X   |
 11. 1993........|   X X X X   |  X X X X   |  X X X X   |  X X X X   |  X X X X   |  X X X X   |  X X X X   |  X X X X   |
- - - ---------------------------------------------------------------------------------------------------------------------------
</TABLE>



<TABLE>
<S>              <C>           <C>          <C>          <C>        
_______________________________________________________________________
        1        | (cont.) CUMULATIVE PAID |             |            |
                 |_________________________|     12      |     13     |
                 |            |            |             |            |
      Years      |     10     |     11     |  Number of  |  Number of |
    in Which     |            |            |   Claims    |   Claims   |
   Losses Were   |            |            |   Closed    |   Closed   |
    Incurred     |    1992    |    1993    |  With Loss  |   Without  |
                 |            |            |   Payment   |    Loss    |
                 |            |            |             |   Payment  |
_________________|____________|____________|_____________|____________|
                 |            |            |             |            |
  1. Prior.......|     56,718 |     56,884 |   X X X X   |   X X X X  |
  2. 1984........|    157,239 |    157,343 |   X X X X   |   X X X X  |
  3. 1985........|    257,708 |    257,991 |   X X X X   |   X X X X  |
  4. 1986........|    328,152 |    328,815 |   X X X X   |   X X X X  |
  5. 1987........|    476,252 |    480,425 |   X X X X   |   X X X X  |
  6. 1988........|    617,027 |    636,778 |   X X X X   |   X X X X  |
  7. 1989........|    636,386 |    657,870 |   X X X X   |   X X X X  |
  8. 1990........|    569,700 |    598,833 |   X X X X   |   X X X X  |
  9. 1991........|    533,684 |    614,888 |   X X X X   |   X X X X  |
 10. 1992........|    415,371 |    597,616 |   X X X X   |   X X X X  |
 11. 1993........|  X X X X   |    513,910 |   X X X X   |   X X X X  |
- - - -----------------------------------------------------------------------
<FN>              
 Note: Net of salvage and subrogation received.
</TABLE>


SCHEDULE P - PART 4 - SUMMARY

<TABLE>
<S>              <C>           <C>          <C>          <C>          <C>          <C>          <C>          <C>
___________________________________________________________________________________________________________________________
        1        | BULK AND INCURRED BUT NOT REPORTED RESERVES ON LOSSES AND ALLOCATED EXPENSES AT YEAR END (000 OMITTED) |
                 |________________________________________________________________________________________________________|
                 |             |            |            |            |            |            |            |            |
      Years      |      2      |     3      |     4      |     5      |     6      |     7      |     8      |     9      |
    in Which     |             |            |            |            |            |            |            |            |
   Losses Were   |             |            |            |            |            |            |            |            |
    Incurred     |     1984    |    1985    |    1986    |    1987    |    1988    |    1989    |    1990    |    1991    |
                 |             |            |            |            |            |            |            |            |
                 |             |            |            |            |            |            |            |            |
_________________|_____________|____________|____________|____________|____________|____________|____________|____________|
                 |             |            |            |            |            |            |            |            |
  1. Prior.......|      21,330 |     15,292 |     10,493 |      7,382 |      1,830 |      1,798 |      1,671 |      1,667 |
  2. 1984........|      30,587 |     12,165 |      7,458 |      4,856 |      2,267 |      1,633 |         57 |         -- |
  3. 1985........|   X X X X   |     52,241 |     23,471 |     15,767 |      7,600 |      4,247 |        117 |         -- |
  4. 1986........|   X X X X   |  X X X X   |     83,987 |     35,929 |     23,115 |     10,239 |      3,162 |         -- |
  5. 1987........|   X X X X   |  X X X X   |  X X X X   |    126,103 |     57,172 |     31,435 |     13,026 |      4,203 |
  6. 1988........|   X X X X   |  X X X X   |  X X X X   |  X X X X   |    161,589 |     70,035 |     33,821 |     14,301 |
  7. 1989........|   X X X X   |  X X X X   |  X X X X   |  X X X X   |  X X X X   |    179,116 |     62,544 |     27,935 |
  8. 1990........|   X X X X   |  X X X X   |  X X X X   |  X X X X   |  X X X X   |  X X X X   |    146,165 |     57,375 |
  9. 1991........|   X X X X   |  X X X X   |  X X X X   |  X X X X   |  X X X X   |  X X X X   |  X X X X   |    155,871 |
 10. 1992........|   X X X X   |  X X X X   |  X X X X   |  X X X X   |  X X X X   |  X X X X   |  X X X X   |  X X X X   |
 11. 1993........|   X X X X   |  X X X X   |  X X X X   |  X X X X   |  X X X X   |  X X X X   |  X X X X   |  X X X X   |
- - - ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
 


<TABLE>
<S>              <C>          <C>
_____________________________________________
        1        | (cont.) BULK AND INCURRED|
                 |__________________________|
                 |            |             |
      Years      |     10     |     11      |
    in Which     |            |             |
   Losses Were   |            |             |
    Incurred     |    1992    |    1993     |
                 |            |             |
                 |            |             |
_________________|____________|_____________|
                 |            |             |
  1. Prior.......|      1,614 |      1,263  |
  2. 1984........|         -- |         --  |
  3. 1985........|          2 |          5  |
  4. 1986........|         63 |         36  |
  5. 1987........|        178 |        814  |
  6. 1988........|      2,013 |      6,663  |
  7. 1989........|     15,702 |     14,096  |
  8. 1990........|     28,293 |     17,575  |
  9. 1991........|     51,534 |     29,932  |
 10. 1992........|    151,702 |     54,711  |
 11. 1993........|  X X X X   |    132,250  |
- - - --------------------------------------------- 
</TABLE>
          
                                       63