Document:

Exhibit
4.2

 

SECOND SUPPLEMENTAL INDENTURE OF TRUST

 

 

by and between

 

 

PHEAA STUDENT LOAN TRUST I

 

 

and

 

 

MANUFACTURERS AND TRADERS TRUST COMPANY,

as Indenture Trustee and Eligible Lender Trustee

 

 

Authorizing the Issuance of

 

$400,000,000

PHEAA Student Loan Trust I

Student Loan Asset-Backed Notes

Series 2004-1

 

 

Dated as of July 1, 2004

 

 

TABLE OF CONTENTS

 

	
  ARTICLE I

  	
   

  
	
  DEFINITIONS AND USE OF PHRASES

  	
   

  
	
   

  	
   

  
	
  ARTICLE II

  	
   

  
	
  CREATION OF THE SERIES 2004-1 NOTES,
  SERIES 2004-1 NOTE DETAILS, FORM OF SERIES 2004-1 NOTES, REDEMPTION
  OF SERIES 2004-1 NOTES AND USE OF PROCEEDS OF SERIES 2004-1 NOTES

  	
   

  
	
   

  	
   

  
	
  Section 2.01  Designation

  	
   

  
	
  Section 2.02  Series 2004-1 Note Details.

  	
   

  
	
  Section 2.03  Payment of Principal, Generally;
  Redemption

  	
   

  
	
  Section 2.04  Delivery of Series 2004-1 Notes

  	
   

  
	
  Section 2.05  Form of Series 2004-1 Notes

  	
   

  
	
  Section 2.06  Trustee’s Authentication Certificate

  	
   

  
	
  Section 2.07  Deposit of Series 2004-1 Note
  Proceeds

  	
   

  
	
   

  	
   

  
	
  ARTICLE III

  	
   

  
	
  GENERAL PROVISIONS

  	
   

  
	
   

  	
   

  
	
  ARTICLE IV

  	
   

  
	
  FUNDS

  	
   

  
	
   

  	
   

  
	
  Section 4.01  Maintenance and Creation of Funds and
  Accounts

  	
   

  
	
  Section 4.02  Acquisition Fund

  	
   

  
	
  Section 4.03  Revenue Fund.

  	
   

  
	
  Section 4.04  Distribution Account.

  	
   

  
	
  Section 4.05  Transfers to Depositor

  	
   

  
	
  Section 4.06  Reserve Fund.

  	
   

  
	
   

  	
   

  
	
  ARTICLE V

  	
   

  
	
  LIMITATION ON COUNTERPARTY RIGHTS

  	
   

  
	
   

  	
   

  
	
  ARTICLE VI

  	
   

  
	
  APPLICABILITY OF INDENTURE

  	
   

  

 

i

 

	
  Appendix A – Certain Terms and Provisions of
  the Auction Rate Notes

  	
   

  
	
   

  	
   

  
	
  Exhibit A-1

  	
  Form of Series 2004-1, Senior Class A-1
  Notes

  	
   

  
	
  Exhibit A-2

  	
  Form of Series 2004-1, Senior Class A-2
  Notes

  	
   

  
	
  Exhibit A-3

  	
  Form of Series 2004-1, Senior Class A-3
  Notes

  	
   

  
	
  Exhibit A-4

  	
  Form of Series 2004-1, Subordinate Class
  B-1 Notes

  	
   

  
	
  Exhibit B

  	
  Series 2004-1 Closing Cash Flow
  Projections

  	
   

  
	
  Exhibit C

  	
  Form of Notice of Payment Default

  	
   

  
	
  Exhibit D

  	
  Form of Notice of Cure of Payment Default

  	
   

  
	
  Exhibit E

  	
  Form of Notice of Proposed Change in Length
  of One or More Auction Periods

  	
   

  
	
  Exhibit F

  	
  Form of Notice Establishing Change in Length
  of One or More Auction Periods

  	
   

  
	
  Exhibit G

  	
  Form of Notice of Change in Auction Date

  	
   

  
	
  Exhibit H

  	
  Intentionally Omitted

  	
   

  
	
  Exhibit I

  	
  Form of Moody’s Investor Services’ Student
  Loan Monitoring Report

  	
   

  

 

ii

 

SECOND
SUPPLEMENTAL INDENTURE OF TRUST

 

THIS SECOND SUPPLEMENTAL INDENTURE OF TRUST (this “Supplemental
Indenture”), dated as of July 1, 2004, is by and between PHEAA STUDENT
LOAN TRUST I, a Delaware statutory trust (the “Issuer”), by WACHOVIA BANK OF DELAWARE, N.A., not in its
individual capacity, but solely as Owner Trustee on behalf of the Issuer
and MANUFACTURERS AND TRADERS TRUST COMPANY, a New York corporation (together
with its successors, the “Indenture Trustee”), as Indenture Trustee and
Eligible Lender Trustee hereunder (all capitalized terms used in these
preambles, recitals and granting clauses shall have the same meanings assigned
thereto in Article I hereof), and is executed by the parties hereto in
connection with the issuance of the Series 2004-1 Notes;

 

W I T N E S S E T H:

 

WHEREAS, the Issuer has previously entered into an
Indenture of Trust, dated as of December 1, 2003, as amended by a First
Supplemental Indenture of Trust, dated as of December 1, 2003, and the
First Amendment to Indenture of Trust and First Supplemental Indenture of Trust
dated as of July 1, 2004 (the “Indenture”), between the Issuer and
the Indenture Trustee;

 

WHEREAS, the Issuer desires to enter into this
Supplemental Indenture in order to issue Notes pursuant to the terms of the
Indenture, including Section 2.08 thereof;

 

WHEREAS, the Issuer represents that it is duly created
as a statutory trust under the laws of the State of Delaware and that by proper
action it has duly authorized the issuance of $400,000,000 of its Student Loan
Asset-Backed Notes, Series 2004-1 (the “Series 2004-1 Notes”), and it
has by proper action authorized the execution and delivery of this Supplemental
Indenture;

 

WHEREAS, the Series 2004-1 Notes constitute Notes
as defined in the Indenture;

 

WHEREAS, the Indenture Trustee has agreed to accept
the trusts herein created upon the terms herein set forth; and

 

WHEREAS, Section 2.08 of the Indenture provides
that the Issuer may from time to time issue one or more Series of Notes.  The terms of any Series of Notes are to be
set forth in a Supplemental Indenture. 
Pursuant to this Supplemental Indenture, the Issuer and the Indenture
Trustee shall create the Series 2004-1 Notes and specify the terms
thereof.  The Servicer is acknowledging
this Supplemental Indenture to agree to the terms hereof applicable to the
Servicer.

 

NOW, THEREFORE, it is mutually covenanted and agreed
as follows:

 

1

 

ARTICLE I

 

DEFINITIONS
AND USE OF PHRASES

 

All words and phrases defined in Appendix A
of the Indenture shall have the same meaning in this Supplemental Indenture,
except as otherwise appears in this Article. 
In addition, the following terms have the following meanings in this
Supplemental Indenture unless the context clearly requires otherwise:

 

“Accrual Period” means, with respect to the
Series 2004-1 Class A-1 Notes, initially, the period beginning on the Date of
Issuance of the Series 2004-1 Class A-1 Notes, and ending on October 24,
2004, and thereafter, the period beginning on a Quarterly Distribution Date and
ending on the day before the next Quarterly Distribution Date; and with respect
to each Class of Auction Rate Notes issued pursuant to this Supplemental
Indenture, means, initially, the period beginning on the Closing Date and
ending on the Initial Auction Date for that Class, and thereafter, the period
beginning on an Auction Rate Distribution Date for that Class and ending on the
day before the next Auction Rate Distribution Date for that Class.

 

“Acquisition Fund” means the Acquisition Fund
as described in the Indenture and this Supplemental Indenture.

 

“Additional Notes” means any Senior Notes,
Subordinate Notes or Junior Subordinate Notes duly issued and authenticated
pursuant to Section 2.08 of the Indenture and a related Supplemental
Indenture at any time after the date hereof

 

“Auction Rate Distribution Date” means each
Payment Date (as defined in Appendix A).

 

“Auction Rate Notes” means those notes issued
by the Issuer pursuant to the Indenture and any Supplemental Indenture with
respect to which the applicable Note Rate for any Accrual Period is determined
in accordance with the procedures set forth in Appendix A to such Supplemental
Indenture, and which includes the Series 2003-1 Class A-2 Notes, Series 2003-1
Class A-3 Notes and Series 2003-1 Class B-1 Notes, which, collectively, were
issued on December 10, 2003 pursuant to that certain First Supplemental
Indenture, and the Series 2004-1 Class A-2 Notes, the Series 2004-1
Class A-3 Notes and Series 2004-1 Class B-1 Notes issued under this
Supplemental Indenture, and any Additional Notes with respect to which the
applicable Note Rate is so determined.

 

“Authorized Denominations” means
(i) $100,000 and any additional increments of $1,000 for the LIBOR Rate
Notes, and (ii) $50,000 and any integral multiple thereof for the Auction
Rate Notes.

 

“Available Funds” means, as to a Distribution
Date or any related Monthly Expense Payment Date, the sum of the following
amounts for the related Collection Period or, in the case of an Auction Rate
Distribution Date occurring while any LIBOR Notes remain Outstanding, the
applicable portion of these amounts:

 

2

 

(a)  all collections received by the Servicer on
the Financed Student Loans, including any Guarantee Payments received on the
Financed Student Loans, but net of:

 

(i)  any collections in respect of principal on
the Financed Student Loans applied by the Issuer to repurchase Guaranteed
Student Loans from the Guarantors under the Guarantee Agreements, and

 

(ii)  amounts required by the Higher Education Act
to be paid to the Department or to be repaid to borrowers with respect to the
Financed Student Loans for that Collection Period, whether or not in the form
of a principal reduction of the applicable Financed Student Loan, and including
Consolidation Loan rebate fees;

 

(b)  any Interest Subsidy Payments and Special
Allowance Payments received by the Servicer or the Eligible Lender Trustee
during that Collection Period for the Financed Student Loans;

 

(c)  all proceeds of the liquidation of defaulted
Financed Student Loans that were liquidated during that Collection Period in
accordance with the Servicer’s customary servicing procedures, net of expenses
incurred by the Servicer related to their liquidation and any amounts required
by law to be remitted to the borrower on the liquidated Financed Student Loans,
and all recoveries on liquidated Financed Student Loans that were written off
in prior Collection Periods or during that Collection Period;

 

(d)  the aggregate purchase amounts received
during that Collection Period for those Financed Student Loans repurchased by
the Depositor or purchased by the Servicer or for Financed Student Loans sold
to another Eligible Lender pursuant to the Servicing Agreement;

 

(e)  the aggregate purchase amounts received
during that Collection Period for those Student Loans repurchased by the
Seller;

 

(f)  the aggregate amounts, if any, received from
the Seller, the Depositor or the Servicer, as the case may be, as reimbursement
of non-guaranteed interest amounts, or lost Interest Subsidy Payments and
Special Allowance Payments, on the Financed Student Loans pursuant to the Loan
Sale Agreements or the Servicing Agreement;

 

(g)  amounts received by the Issuer pursuant to
the Servicing Agreement during that Collection Period as to yield or principal
adjustments; and

 

(h)  investment earnings on that Distribution
Date and any interest remitted by the Indenture Trustee to the Revenue Fund
prior to such Distribution Date or Monthly Expense Payment Date;

 

provided that if on any Distribution Date there would
not be sufficient funds, after application of Available Funds, as defined
above, and application of amounts available from the Acquisition Fund and the
Reserve Fund, to pay the Monthly Operating Expenses and the items specified in
clauses (i) and (ii) of each of Sections 4.03(d) and (e)
(but excluding each clause (ii), and including
clauses (iii) through (v)(B) of Section 4.03(d), in the event
that a condition exists as

 

3

 

described in either of clause (i) or
(ii) of Section 2.03(d)), then Available Funds on that Distribution
Date will include, in addition to the Available Funds as defined above, amounts
on deposit in the Revenue Fund, or amounts held by the Indenture Trustee, or
which the Indenture Trustee reasonably estimates to be held by the Indenture
Trustee, for deposit into the Revenue Fund that would have constituted
Available Funds for the next succeeding Distribution Date, up to the amount necessary
to pay such items, and the Available Funds for the succeeding Distribution Date
will be reduced for any amounts so applied.

 

“Calculation Agent” shall mean Manufacturers
and Traders Trust Company.

 

“Carryover Amount” shall have the meaning
assigned to it in Appendix A.

 

“Class” means those Notes, within a series, to
which all the same terms and conditions apply and which can be identified by
its own alpha-numeric designation (e.g. “A-1”) and which is so designated in a
Supplemental Indenture.

 

“Class A Auction Rate Notes” shall mean
the Series 2003-1 Class A-2 Notes, the Series 2003-1 Class A-3 Notes, the
Series 2004-1 Class A-2 Notes, and the Series 2004-1 Class A-3 Notes, together
with any Additional Notes which are Auction Rate Notes and which are issued on
a parity with such Class A Auction Rate Notes.

 

 “Class A
Auction Rate Noteholders” shall mean the holders of the Class A
Auction Rate Notes.

 

“Class A Carryover Amount” shall mean the
Carryover Amount attributable to the Class A Auction Rate Notes.

 

“Class A LIBOR Rate Notes” shall mean,
collectively, the Series 2003-1 Class A-1 Notes and the Series 2004-1
Class A-1 Notes together with any Additional Notes which are LIBOR Rate Notes
and which are issued on a parity with such Class A LIBOR Rate Notes.

 

“Class A Noteholders” shall mean the
holders of the Class A Notes.

 

“Class A Noteholders’ Distribution Amount”
shall mean, for any Distribution Date, the sum of the Class A Noteholders’
Interest Distribution Amount and the Class A Noteholders’ Principal
Distribution Amount on that Distribution Date.

 

“Class A Noteholders’ Interest Distribution
Amount” means, for any Distribution Date, the sum of:

 

(a)  the amount of interest accrued at the
related Class A Note interest rates for the related Accrual Period with respect
to all Class A Notes entitled to a distribution on such Distribution Date on
the aggregate outstanding principal balances of the related Class A Notes on
the applicable immediately preceding Distribution Date(s) after giving effect
to all principal distributions made to Class A Noteholders on all preceding
Distribution Dates or, in the case of the first Distribution Date for these
Class A Notes, on the Closing Date, and

 

4

 

(b)  the Class A Note Interest Shortfall on that
Distribution Date.

 

“Class A Noteholders’ Principal Distribution
Amount” shall mean, for any Distribution Date (a) while LIBOR Rate
Notes are Outstanding, an amount equal to the Principal Distribution Amount on
such Distribution Date plus the Class A Note Principal Shortfall as
of the close of the immediately preceding Distribution Date, and (b) once
no LIBOR Rate Notes remain Outstanding, and until the date on which the
Class A Auction Rate Noteholders have been paid in full, an amount equal
to the Principal Distribution Amount on such Distribution Date plus the
Class A Note Principal Shortfall as of the close of the immediately
preceding Distribution Date less the greatest amount that can be paid as
principal on the Class B Notes without reducing the Senior Parity
Percentage below the Required Senior Parity Percentage or reducing the Parity
Percentage below the Required Parity Percentage, with those percentages
computed assuming that immediately prior to the computation, that such
principal payment was actually made on the Class B Notes; provided
that the Class A Noteholders’ Principal Distribution Amount
will not exceed the outstanding principal balance of the Class A
Notes.  In addition:

 

(a)  on the Stated Maturity of the Series 2003-1
Class A-1 Notes, the principal required to be distributed to the holders of the
Series 2003-1 Class A-1 Notes will include the amount required to reduce the
outstanding principal balance of the Series 2003-1 Class A-1 Notes to zero; and

 

(b)  on the Stated Maturity of the Series 2003-1
Class A-2 Notes, the principal required to be distributed to the holders of the
Series 2003-1 Class A-2 Notes will include the amount required to reduce the
outstanding principal balance of the Series 2003-1 Class A-2 Notes to zero; and

 

(c)  on the Stated Maturity of the Series 2003-1
Class A-3 Notes, the principal required to be distributed to the holders of the
Series 2003-1 Class A-3 Notes will include the amount required to reduce the
outstanding principal balance of the Series 2003-1 Class A-3 Notes to zero; and

 

(d)  on the Stated Maturity of the Series 2004-1
Class A-1 Notes, the principal required to be distributed to the holders of the
Series 2004-1 Class A-1 Notes will include the amount required to reduce the
outstanding principal balance of the Series 2004-1 Class A-1 Notes to zero; and

 

(e)  on the Stated Maturity of the Series 2004-1
Class A-2 Notes, the principal required to be distributed to the holders of the
Series 2004-1 Class A-2 Notes will include the amount required to reduce the
outstanding principal balance of the Series 2004-1 Class A-2 Notes to zero; and

 

(f)  on the Stated Maturity of the Series 2004-1
Class A-3 Notes, the principal required to be distributed to the holders of the
Series 2004-1 Class A-3 Notes will include the amount required to reduce the
outstanding principal balance of the Series 2004-1 Class A-3 Notes to zero.

 

5

 

“Class A Notes” shall mean, collectively,
the Series 2003-1 Class A-1 Notes, the Series 2003-1 Class A-2 Notes, the
Series 2003-1 Class A-3 Notes, the Series 2004-1 Class A-1 Notes, the
Series 2004-1 Class A-2 Notes, and the Series 2004-1 Class A-3 Notes, together
with any Additional Notes issued on a parity with the Class A Notes, and each
of which shall constitute Senior Notes.

 

“Class A Note Interest Shortfall” means,
for any Distribution Date, the sum, for all of the Class A Notes with a
Distribution Date on such Distribution Date, of the excess of:

 

(a)  the amount of interest (excluding Carryover
Amounts) that was payable on such Class A Notes on their preceding Distribution
Date, over

 

(b)  the amount of interest actually distributed
with respect to such Class A Notes on that preceding Distribution Date, plus interest
on the amount of that excess, to the extent permitted by law, at the interest
rates on the Class A Notes from that preceding Distribution Date to the current
Distribution Date.

 

“Class A Note Principal Shortfall” means,
as of the close of any Distribution Date, the excess of:

 

(a)  the Class A Noteholders’ Principal
Distribution Amount on that Distribution Date, over

 

(b)  the amount of principal actually distributed
or allocated to the Class A Noteholders on that Distribution Date.

 

“Class B Auction Rate Notes” shall mean
the Series 2003-1 Class B-1 Notes and the Series 2004-1 Class B-1 Notes,
together with any Additional Notes which are Auction Rate Notes and which are
issued on a parity with such Class B Auction Rate Notes.

 

“Class B Auction Rate Noteholders” shall
mean the holders of the Class B Auction Rate Notes.

 

“Class B Carryover Amount” shall mean the
Carryover Amount attributable to the Class B Notes.

 

“Class B Noteholders” shall mean the
holders of the Class B Notes.

 

“Class B Noteholders’ Distribution Amount”
means, for any Distribution Date, the sum of the Class B Noteholders’
Interest Distribution Amount and the Class B Noteholders’ Principal
Distribution Amount on that Distribution Date.

 

“Class B Noteholders’ Interest Distribution
Amount” means, for any Distribution Date, the sum of:

 

(a)  the amount of interest accrued at the
applicable Note Rate for the related Accrual Period on the outstanding
principal balance of each Class of the Class B Notes on the

 

6

 

immediately preceding
Distribution Date, after giving effect to all principal distributions to
Class B Noteholders on that immediately preceding Distribution Date, and

 

(b)  the Class B Note Interest Shortfall on that
Distribution Date.

 

“Class B Note Interest Shortfall” means,
for any Distribution Date, the excess of:

 

(a)  the Class B Noteholders’ Interest
Distribution Amount on the preceding Distribution Date, over

 

(b)  the amount of interest actually distributed
to the Class B Noteholders on that preceding Distribution Date, plus interest
on the amount of that excess, to the extent permitted by law, at the Class B
Note interest rate from that preceding Distribution Date to the current
Distribution Date.

 

“Class B Note Principal Shortfall” means,
as of the close of any Distribution Date, the excess of:

 

(a)  the Class B Noteholders’ Principal
Distribution Amount on that Distribution Date, over

 

(b)  the amount of principal actually distributed
or allocated to the Class B Noteholders on that Distribution Date.

 

“Class B Noteholders’ Principal Distribution
Amount” means:

 

(a)  for any Distribution Date occurring after
the date on which all the principal balances of Class A LIBOR Rate Notes have
been reduced to zero and before the date on which the Class A Auction Rate
Noteholders have been paid in full, the greatest amount that can be paid as
principal on the Class B Notes without reducing the Senior Parity Percentage
below the Required Senior Parity Percentage or reducing the Parity Percentage
below the Required Parity Percentage; and

 

(b)  for any Distribution Date occurring after
the date on which the Class A Noteholders have been paid in full, the sum of
the Principal Distribution Amount on that Distribution Date and the Class B
Note Principal Shortfall as of the close of the preceding Distribution Date;

 

provided that the
Class B Noteholders’ Principal Distribution Amount will not exceed the
principal balance of the Class B Notes.

 

In addition, on the Stated Maturity of any Class of the
Class B Notes, the principal required to be distributed to the Class B
Noteholders will include the amount required to reduce the outstanding
principal balance of the Class B Notes to zero.

 

“Class B Notes” shall mean the Series
2003-1 Class B-1 Notes and the Series 2004-1 Class B-1 Notes, together
with any Additional Notes issued on a parity with the Class B Notes, and each
of which shall constitute Subordinate Notes.

 

7

 

“Collection Period” means (a) with respect
to the Series 2004-1 Class A-1 Notes, initially the period from the Date of
Issuance through September 30, 2004, and thereafter, and with respect to
all other Class A LIBOR Rate Notes Outstanding as of the date hereof, the
three-month period ending on the last day of March, June, September or
December, in each case for the Quarterly Distribution Date in the following
month, and (b) with respect to the Series 2004-1 Class A-2 Notes, the
Series 2004-1 Class A-3 Notes, and the Series 2004-1 Class B-1 Notes,
initially, the period from the Closing Date through July 31, 2004, and
thereafter, and with respect to all other Auction Rate Notes Outstanding as of
the date hereof, the period beginning on the first day of each month and ending
on the last day of the same month.

 

“Date of Issuance” shall mean, with respect to
the Series 2004-1 Notes, July 14, 2004.

 

“Distribution Account” shall mean the
distribution account of the Revenue Fund established pursuant to
Section 4.01.

 

“Distribution Date” shall mean with respect to
the LIBOR Rate Notes each Quarterly Distribution Date, and with respect to the
Auction Rate Notes means each Auction Rate Distribution Date, and means, for
any Note, its Stated Maturity or the date of any other regularly scheduled
principal payment with respect thereto.

 

“First Amendment” shall mean that certain First
Amendment to the Indenture of Trust and First Supplemental Indenture of Trust,
dated as of July 1, 2004, by and between the Issuer and the Indenture Trustee.

 

“LIBOR Note Principal Distribution Amount”
shall mean, with respect to a Distribution Date, the aggregate of the Targeted
Principal Amounts for each Class of LIBOR Rate Notes then Outstanding which is
scheduled to be paid on such Distribution Date.

 

“LIBOR Rate Notes” shall mean notes issued by
the Issuer pursuant to the Indenture and any Supplemental Indenture which are
indexed on One-Month LIBOR, Two-Month LIBOR, Three-Month LIBOR, Four-Month,
Six-Month LIBOR or One-Year LIBOR, and which include the Series 2003-1 Class A-1
Notes, the Series 2004-1 Class A-1 Notes, and any Additional Notes which are
similarly indexed.

 

“Monthly Allocation Date” shall mean the
25th day of each calendar month and if such 25th day is not a
Business Day, the Business Day immediately following such 25th day.

 

“Monthly Expense Payment Date” shall mean the
25th day of each calendar month and if such 25th day is not a
Business Day, the Business Day immediately following such 25th day.

 

“Principal Distribution Amount” shall mean:

 

(c)  as to the initial Distribution Date, the
amount by which the initial Pool Balance exceeds the Pool Balance on that
Distribution Date plus any amounts transferred from the Acquisition Fund to the
Revenue Fund during the initial Collection Period, and

 

8

 

(d)  as to each subsequent Distribution Date, the
amount by which the Pool Balance for the preceding Distribution Date exceeds
the Pool Balance on that Distribution Date plus the amounts transferred from
the Acquisition Fund to the Revenue Fund upon the expiration of the period
prescribed for the purchase of Add-On Consolidation Loans, if any.

 

“Quarterly Distribution Date” shall mean the
25th day of each January, April, July and October, beginning, with
respect to the Series 2004-1 Notes, October 25, 2004; provided, however,
if any such 25th day is not a Business Day, the Quarterly Distribution
Date shall be the next Business Day.

 

“Realized Loss” shall mean the excess of the
principal balance, including any interest that had been or had been expected to
be capitalized, of any liquidated Financed Student Loan over liquidation
proceeds for such Financed Student Loan to the extent allocated to principal,
including any interest that had been or had been expected to be capitalized.

 

“Record Date” shall mean:

 

(e)  for the LIBOR Notes, the day before the
related Distribution Date; and

 

(f)  for the Auction Rate Notes,

 

(i)  for payments of interest at the applicable
interest rate and for payments of principal, two Business Days before the
related Distribution Date, and

 

(ii)  for payments of Carryover Amounts and
interest accrued thereon, the record date relating to the Distribution Date for
which the Carryover Amount accrued.

 

“Required Parity Percentage” shall mean 101.5%;
provided, however, that the Required Parity Percentage may be reduced upon
receipt of a Rating Confirmation.

 

“Required Senior Parity Percentage” shall mean
105.0%; provided, however, that the Required Senior Parity Percentage may be
reduced upon receipt of a Rating Confirmation.

 

“Reserve Fund” shall mean the Reserve Fund as
described in the Indenture and this Supplemental Indenture.

 

“Reserve Fund Requirement” shall mean 1.0% of
the aggregate principal amount of Class A Notes and Class B Notes
Outstanding; provided, however, that so long as any Class A Notes or
Class B Notes remain Outstanding there shall be at least $500,000 on
deposit in the Reserve Fund; provided, further, that in no event shall the
Reserve Fund Requirement exceed the principal amount of Notes Outstanding on
any date of determination.  Further,
such percentages and amounts may be changed upon satisfaction of the Rating
Agency Condition.

 

“Revenue Fund” shall mean the Revenue Fund as
described in the Indenture and this Supplemental Indenture.

 

9

 

“Series 2003-1 Class A-1 Notes” shall mean
the $200,000,000 PHEAA Student Loan Trust I, Student Loan Asset-Backed
Notes, Series 2003-1, Class A-1 LIBOR Rate Notes.

 

“Series 2003-1 Class A-1 Principal Distribution
Amount” shall mean, as of any date of Determination, the lesser of
(a) the amount required to reduce the outstanding principal amount of the
Series 2003-1 Class A-1 Notes to the scheduled principal amount listed on
Schedule I attached hereto, or (b) the Class A Noteholders’
Principal Distribution Amount.

 

“Series 2003-1 Class A-2 Notes” shall mean
the $90,000,000 PHEAA Student Loan Trust I, Student Loan Asset-Backed
Notes, Series 2003-1, Class A-2 Auction Rate Notes.

 

“Series 2003-1 Class A-3 Notes” shall mean
the $90,000,000 PHEAA Student Loan Trust I, Student Loan Asset-Backed
Notes, Series 2003-1, Class A-3 Auction Rate Notes.

 

“Series 2003-1 Class B-1 Notes” shall mean the
$20,000,000 PHEAA Student Loan Trust I, Student Loan Asset-Backed Notes, Series
2003-1, Class B-1 Auction Rate Notes.

 

“Series 2003-1 Notes” shall mean the PHEAA
Student Loan Trust I, Student Loan Asset-Backed Notes, Series 2003-1
issued pursuant to that certain First Supplemental Indenture dated
December 1, 2003 consisting of the Series 2003-1 Class A-1 Notes, the
Series 2003-1 Class A-2 Notes, the Series 2003-1 Class A-3 Notes and the Series
2003-1 Class B-1 Notes.

 

“Series 2004-1 Class A-1 Notes” shall mean
the $200,000,000 PHEAA Student Loan Trust I, Student Loan Asset-Backed
Notes, Series 2004-1, Class A-1 LIBOR Rate Notes.

 

“Series 2004-1 Class A-1 Principal
Distribution Amount” shall mean, as of any date of Determination, the
lesser of (a) the amount required to reduce the outstanding principal
amount of the Series 2004-1 Class A-1 Notes to the scheduled principal
amount listed on Schedule II attached hereto, or (b) the Class A
Noteholders’ Principal Distribution Amount less the Series 2003-1 Class A-1
Principal Distribution Amount.

 

 “Series
2004-1 Class A-2 Notes” shall mean the $90,000,000 PHEAA Student Loan
Trust I, Student Loan Asset-Backed Notes, Series 2004-1,
Class A-2 Auction Rate Notes.

 

“Series 2004-1 Class A-3 Notes” shall mean
the $90,000,000 PHEAA Student Loan Trust I, Student Loan Asset-Backed
Notes, Series 2004-1, Class A-3 Auction Rate Notes.

 

“Series 2004-1 Class B-1 Notes” shall mean the
$20,000,000 PHEAA Student Loan Trust I, Student Loan Asset-Backed Notes, Series
2004-1, Class B-1 Auction Rate Notes.

 

“Series 2004-1 Notes” shall mean the PHEAA
Student Loan Trust I, Student Loan Asset-Backed Notes, Series 2004-1
issued pursuant to this Supplemental Indenture in the aggregate principal
amount of $400,000,000 consisting of the Series 2004-1 Class A-1 Notes,
the Series 2004-1 Class A-2 Notes, the Series 2004-1 Class A-3 Notes and the
Series 2004-1 Class B-1 Notes.

 

10

 

“Servicer” shall mean Pennsylvania Higher
Education Assistance Agency, and any successor Servicer permitted under the
Servicing Agreement, and with respect to which a Rating Confirmation has been
obtained.

 

“Servicing Agreement” shall mean the Servicing
Agreement, dated as of December 1, 2003, as supplemented and amended from
time to time, between the Issuer and the Servicer.

 

“Targeted Principal Amount” shall mean, with
respect to any Class of LIBOR Rate Notes and a Distribution Date, the amount of
principal which is scheduled to be paid to reduce the principal balance of such
LIBOR Rate Notes on such Distribution Date to the principal amount set forth in
the Supplemental Indenture pursuant to which such LIBOR Rate Notes were issued.
The Targeted Principal Amounts with respect to the Series 2003-1 Class A-1
Notes and the Series 2004 Class A-1 Notes are attached hereto as Schedule I and
Schedule II, respectively.

 

“Underwriter” shall mean, with respect to the
Series 2004-1 Notes, UBS Financial Services Inc.

 

“Underwriting Agreement” shall mean, with
respect to the Series 2004-1 Notes, that certain Underwriting Agreement dated
July 8, 2004 by and between the Seller, the Depositor, the Administrator,
acting on behalf of the Issuer, and the Underwriter.

 

Words importing the masculine gender include the
feminine gender.  Words importing
persons include firms, associations and corporations.  Words importing the singular number include the plural number and
vice versa.  Additional terms are
defined in the body of this Supplemental Indenture and the Appendices hereto.

 

In the event that any term or provision contained
herein with respect to the Series 2004-1 Notes shall conflict with or be
inconsistent with any term or provision contained in the Indenture, the terms
and provisions of this Supplemental Indenture shall govern.

 

ARTICLE II

 

CREATION
OF THE SERIES 2004-1 NOTES, SERIES 2004-1 NOTE DETAILS,

FORM OF SERIES 2004-1 NOTES, REDEMPTION OF SERIES 2004-1 NOTES

AND USE OF PROCEEDS OF SERIES 2004-1 NOTES

 

Section 2.01  Designation.  There is hereby created a Series of Notes to
be issued pursuant to the Indenture and this Supplemental Indenture and to be
known as the “Series 2004-1 Student Loan Asset-Backed Notes” (the
“Series 2004-1 Notes”).  The
Series 2004-1 Notes shall be comprised of four (4) Classes, as
described in Section 2.02 hereof.

 

Section 2.02  Series 2004-1
Note Details.

 

(a)  The aggregate principal amount of the Series
2004-1 Notes which may be initially authenticated and delivered under this
Supplemental Indenture is limited to $400,000,000, and shall be individually
issued in four (4) separate Classes consisting of

 

11

 

$200,000,000 of Series
2004-1 Class A-1 Notes, $90,000,000 of Series 2004-1 Class A-2 Notes,
$90,000,000 of Series 2004-1 Class A-3 Notes, and $20,000,000 of Series
2004-1 Class B-1 Notes. Except for Series 2004-1 Notes authenticated and
delivered upon transfer of, or in exchange for, or in lieu of Notes pursuant to
Sections 2.03 and 2.04 of the Indenture, if any, Series 2004-1 Notes shall
be issuable only as fully registered notes in the Authorized Denominations.  Each Class of Notes issued pursuant to the
Indenture shall, in each case, be designated by an alphanumeric identifier,
which shall be lettered either “A” to indicate Senior Notes, “B” to indicate
Subordinate Notes, or “C” to indicate Junior Subordinate Notes, which alpha-designation
shall be followed by a hyphenated numeral, in sequential ascending order,
beginning with one (1), for each such Class of Notes issued and designated as
either Class A, Class B or Class C.

 

The Series 2004-1 Class A-1 Notes shall be dated
their Date of Issuance and shall bear interest at an interest rate equal to the
Three-Month LIBOR plus twelve-hundredths percent (0.12%); provided, however,
that the interest rate for the first Accrual Period shall be determined by the
Calculation Agent by reference to straight line interpolation between
Three-Month LIBOR and Four-Month LIBOR based on the actual number of days in
the first Accrual Period.  Interest
shall be payable on each Quarterly Distribution Date, except that LIBOR Rate
Notes which are issued upon transfer, exchange or other replacement shall bear
interest from the most recent Quarterly Distribution Date to which interest has
been paid, or if no interest has been paid, from their respective Date of
Issuance.  The Series 2004-1 Class A-1
Notes shall mature on April 25, 2016. 
Interest on the LIBOR Rate Notes shall be computed on the basis of a
360-day year and actual days elapsed.

 

The Series 2004-1 Class A-2 Notes, the Series
2004-1 Class A-3 Notes and the Series 2004-1 Class B-1 Notes shall be
dated their Date of Issuance and shall bear interest from their Date of
Issuance, payable on each Payment Date (as defined in Appendix A to
this Supplemental Indenture), except that Auction Rate Notes which are issued
upon transfer, exchange or other replacement shall bear interest from the most
recent Payment Date to which interest has been paid, or if no interest has been
paid, from the respective Date of Issuance of such Auction Rate Notes.  The Series 2004-1 Class A-2 Notes, the
Series 2004-1 Class A-3 Notes and the Series 2004-1 Class B-1 Notes shall
mature on April 25, 2044.  Interest
on the Auction Rate Notes shall be computed on the basis of actual days in the
applicable year and actual days elapsed. 
The terms of and definitions related to the Auction Rate Notes are found
in Article I hereof and Appendix A to this Supplemental
Indenture.

 

The principal of the Series 2004-1 Notes due at
their Stated Maturity or upon redemption in whole shall be payable at the
Corporate Trust Office of the Indenture Trustee, or such other location as
directed by the Indenture Trustee, or at the principal office of its successor
in trust upon presentation and surrender of the Series 2004-1 Notes.  Payment of interest and principal paid
subject to a redemption of any Series 2004-1 Note shall be made to the
Noteholder thereof by check or draft mailed on the Distribution Date by the
Indenture Trustee to the Noteholder at his address as it last appears on the
registration books kept by the Indenture Trustee at the close of business on
the Record Date for such Distribution Date, but any such interest not so timely
paid or duly provided for shall cease to be payable to the Noteholder thereof
at the close of business on the Record Date and such defaulted interest shall
be payable to the Noteholder thereof at the close of business on a special
record date to be fixed by the

 

12

 

Indenture Trustee whenever moneys become available for
payment of such defaulted interest, (each, a “Special Record Date”).  Notice of any such Special Record Date shall
be given to the Noteholders of the Series 2004-1 Notes entitled to any
payment of defaulted interest not less than ten (10) days prior thereto by
first-class mail to each such Noteholder as shown on the Indenture Trustee’s
registration books on the date selected by the Indenture Trustee, stating the
date of the Special Record Date and the date fixed for the payment of such
defaulted interest.  Payment of interest
to (i) the Securities Depository or its nominee and (ii) any other
Noteholder owning at least $1,000,000 principal amount of the
Series 2004-1 Notes, but only upon the written request of such Noteholder
addressed to the Indenture Trustee, shall be paid by wire transfer within the
United States to the bank account number filed no later than the Record Date or
Special Record Date with the Indenture Trustee for such purpose.  All payments on the Series 2004-1 Notes
shall be made in lawful money of the United States of America.

 

Notwithstanding anything to the contrary set forth
herein or in any Supplemental Indenture, as originally provided in the First
Amendment, Additional Notes may be issued, from time to time, pursuant to
Section 2.08 of the Indenture that, prior to the occurrence of an Event of
Default, may be entitled to receive:

 

(i)  principal payments and/or allocations of
principal (in each case, including but not limited to principal redemptions) at
a time prior to, concurrently with, or after principal payments and/or
allocations of principal to any Senior Notes, any Subordinate Notes, and any
Junior Subordinate Notes then Outstanding; and

 

(ii)  payments of interest, the allocation of
which shall be determined concurrently (in all material respects) with interest
upon the Issuer’s other Senior Notes, Subordinate Notes, or Junior Subordinate
Notes, as applicable, at any time Outstanding, but which may be paid upon
different dates in accordance with the terms of such Notes;

 

provided,
however, that nothing contained in this Section or the
First Amendment shall affect the respective rights of any Outstanding Notes or
Additional Notes in the Trust Estate as set forth in Section 6.02 of the
Indenture, upon the occurrence of an Event of Default; and, provided
further that, no Additional Notes will be issued that, absent
the existence of an Event of Default, are entitled to receive principal
payments and/or allocations of principal (in each case, including principal
redemptions) on any Quarterly Distribution Date or Monthly Allocation Date until
principal has first been paid or allocated, as applicable, to reduce the
principal amount of the Series 2003-1 Class A-1 Notes or the Series 2004-1
Class A-1 Notes then Outstanding to the applicable Targeted Principal Amount
for such Distribution Date, and no Additional Notes will be issued unless the
Trustee first receives a Rating Confirmation from each Rating Agency then
rating Outstanding Notes that the issuance of such Additional Notes will not
result in a downgrade or withdrawal of its ratings on the Outstanding Notes. To
the extent that any provision of this Second Supplemental Indenture or any
Supplemental Indenture issued in the future conflicts with the terms of the
First Amendment as it relates to the timing of payments on the Series 2003-1 Class
A-1 Notes, the terms of the First Amendment shall govern.

 

(b)  Except as otherwise provided in this
Section, the Series 2004-1 Notes in the form of one global note for each Stated
Maturity date of each Class shall be registered in the

 

13

 

name of the
Securities Depository or its nominee and ownership thereof shall be maintained
in book-entry form by the Securities Depository for the account of the
Participants.  Initially, each
Class of the Series 2004-1 Notes shall be registered in the name of
CEDE & CO., as the nominee of The Depository Trust Company.  Except as provided in subsection (d) of this
Section, the Series 2004-1 Notes may be transferred, in whole but not in part,
only to the Securities Depository or a nominee of the Securities Depository or
to a successor Securities Depository selected or approved by the Issuer or to a
nominee of such successor Securities Depository.  Each global note shall bear a legend substantially to the
following effect:  “Except as otherwise
provided in the Indenture, this global note may be transferred, in whole but
not in part, only to another nominee of the Securities Depository (as defined
in the Indenture) or to a successor Securities Depository or to a nominee of a successor
Securities Depository.”

 

(c)  Except as otherwise provided herein, the
Issuer and the Indenture Trustee shall have no responsibility or obligation
with respect to (i) the accuracy of the records of the Securities Depository or
any Participant with respect to any beneficial ownership interest in the Series
2004-1 Notes; (ii) the delivery to any Participant, beneficial owner of the
Series 2004-1 Notes or other Person, other than the Securities Depository, of
any notice with respect to the Series 2004-1 Notes, or (iii) the payment to any
Participant, beneficial owner of the Series 2004-1 Notes or other Person, other
than the Securities Depository, of any amount with respect to the principal of
or interest on the Series 2004-1 Notes. 
So long as the certificates for the Series 2004-1 Notes issued under
this Supplemental Indenture are not issued pursuant to subsection (d) of this
Section, the Issuer and the Indenture Trustee may treat the Securities
Depository as, and deem the Securities Depository to be, the absolute owner of
the Series 2004-1 Notes for all purposes whatsoever, including, without
limitation, (A) the payment of principal of and interest on such Series 2004-1
Notes, (B) giving notices of redemption and other matters with respect to such Series
2004-1 Notes and (C) registering transfers with respect to such Series 2004-1
Notes.  In connection with any notice or
other communication to be provided to the Noteholders pursuant to this
Supplemental Indenture by the Issuer or the Indenture Trustee with respect to
any consent or other action to be taken by the Noteholders, the Issuer or the
Indenture Trustee, as the case may be, shall establish a record date for such
consent or other action and, if the Securities Depository shall hold all of the
Series 2004-1 Notes, give the Securities Depository notice of such record date
not less than 15 calendar days in advance of such record date to the extent
possible.  Such notice to the Securities
Depository shall be given only when the Securities Depository is the sole
Noteholder.

 

(d)  If at any time the Securities Depository
notifies the Issuer and the Indenture Trustee that it is unwilling or unable to
continue as Securities Depository with respect to any or all of the Series
2004-1 Notes or if at any time the Securities Depository shall no longer be
registered or in good standing under the Securities Exchange Act or other
applicable statute or regulation and a successor Securities Depository is not
appointed by the Issuer within 90 days after the Issuer receives notice or
becomes aware of such condition, as the case may be, subsections (b) and (c) of
this Section shall no longer be applicable and the Issuer shall execute and the
Indenture Trustee shall authenticate and deliver certificates representing the
Series 2004-1 Notes as provided below. 
In addition, the Issuer may determine at any time that the Series 2004-1
Notes shall no longer be represented by global certificates and that the
provisions of subsections (b) and (c) of this Section shall no longer apply to
the Series 2004-1 Notes.  In such event,
the Issuer shall execute and the Indenture Trustee shall authenticate and
deliver

 

14

 

certificates
representing the Series 2004-1 Notes as provided below.  Certificates for the Series 2004-1
Notes issued in exchange for a global certificate pursuant to this subsection
shall be registered in such names and authorized denominations as the
Securities Depository, pursuant to instructions from the Participant or otherwise,
shall instruct in writing to the Issuer and the Indenture Trustee, and upon
which written instructions the Indenture Trustee may rely without
investigation.  The Indenture Trustee
shall promptly deliver such certificates representing the Series 2004-1
Notes to the Persons in whose names such Notes are so registered.

 

Section 2.03  Payment
of Principal, Generally; Redemption. 
To the extent not modified in a Supplemental Indenture executed in
connection with the issuance of Additional Notes pursuant to Section 2.08
of the Indenture and Section 2.03(c) hereof,

 

(a)  Principal shall be payable on the Class A
Notes, to the extent of the Class A Noteholders’ Principal Distribution Amount
as follows: (i) on the Series 2003-1 Class A-1 Notes and the Series 2004-1
Class A-1 Notes, on each Quarterly Distribution Date in an amount equal to the
LIBOR Note Principal Distribution Amount, and (ii) on the Class A Auction Rate
Notes, on each Auction Rate Distribution Date in an amount equal to the Class A
Noteholders’ Principal Distribution Amount less the amount of the LIBOR Note
Principal Distribution Amount, and any amounts allocated to the payment of the
LIBOR Note Principal Distribution Amount on the next applicable Quarterly
Distribution Date.

 

(b)  Subject to subsection (d) of this Section,
principal shall be payable on the Class B Auction Rate Notes on each Auction
Rate Distribution Date in an amount equal to the Class B Noteholders’ Principal
Distribution Amount.

 

(c)  Subject to subsection (d) of this Section
and the timing and amount of payments of principal on any Additional Notes as
may be set forth in any subsequent Supplemental Indenture, in accordance with
Section 4.03, on each Quarterly Distribution Date or Monthly Allocation Date,
as applicable, principal on the Notes shall be paid or, in the case of Auction
Rate Notes, allocated (for payment on the next Auction Rate Distribution Date),
as follows:

 

(i)  While Series 2003-1 Class A-1 Notes or
Series 2004-1 Class A-1 Notes are Outstanding, to the extent of the Class A
Noteholders’ Principal Distribution Amount,

 

(A)  to the Noteholders of the Series 2003-1
Class A-1 Notes, the amount of the Targeted Principal Amount then due on the
Series 2003-1 Class A-1 Notes;

 

(B)  to the Noteholders of the Series 2004-1
Class A-1 Notes, the amount of the Targeted Principal Amount then due on the
Series 2004-1 Class A-1 Notes,

 

(C)  while other Class A Notes are Outstanding,
to the extent of the Class A Noteholders’ Principal Distribution Amount
remaining after payments on the Series 2003-1 Class A-1 Notes and the Series
2004-1 Class A-1 Notes above,

 

15

 

(1)  to the Series 2003-1 Class A-2 noteholders,
until paid in full, the Class A Noteholders’ Principal Distribution Amount;
then,

 

(2)  to the Series 2003-1 Class A-3 noteholders,
until paid in full, the Class A Noteholders’ Principal Distribution Amount;
then,

 

(3)  to the Series 2004-1 Class A-2 noteholders,
until paid in full, the Class A Noteholders’ Principal Distribution Amount;
then,

 

(4)  to the Series 2004-1 Class A-3 noteholders,
until paid in full, the Class A Noteholders’ Principal Distribution Amount; and

 

(ii)  after all Series 2003-1 Class A-1 Notes and
all Series 2004-1 Class A Notes have been paid in full, and while other Class A
notes are Outstanding,

 

(A)  subject to the limitations set forth in
Section 2.03(d), to the Series 2003-1 Class B-1 Noteholders until paid in
full, and then to the Series 2004-1 Class B-1 Noteholders until paid in full,
the Class B Noteholders’ Principal Distribution Amount; then

 

(1)  to the extent of the Class A Noteholders’
Principal Distribution Amount remaining, to Class A Auction Rate Noteholders in
the order directed by the Issuer, or in the absence of such direction,

 

a.  to the Series 2003-1 Class A-2 noteholders
until paid in full, the Class A Noteholders’ Principal Distribution Amount;
then,

 

b.  to the Series 2003-1 Class A-3 noteholders
until paid in full, the Class A Noteholders’ Principal Distribution Amount;
then,

 

c.  to the Series 2004-1 Class A-2 noteholders
until paid in full, the Class A Noteholders’ Principal Distribution Amount;
then,

 

d.  to the Series 2004-1 Class A-3 noteholders
until paid in full, the Class A Noteholders’ Principal Distribution Amount; then,

 

(B)  after all Class A Notes have been paid in
full, and while Class B notes remain Outstanding, to the extent of the Class B
Noteholders’ Principal Distribution Amount,

 

(1)  to the Series 2003-1 Class B-1 Notes until
paid in full, the Class B Noteholders’ Principal Distribution Amount; and then,

 

(2)  to the Series 2004-1 Class B-1 noteholders
until paid in full, the Class B Noteholders’ Principal Distribution Amount.

 

However, following the occurrence of an Event of
Default and the exercise by the Indenture Trustee of remedies under the
Indenture, principal payments on the Class A Notes and

 

16

 

the Class B Notes shall be made or set aside for
future distribution, pro rata, without preference or priority, as set forth in
Section of 6.02 the Indenture.

 

Any payment of principal on an Auction Rate Note shall
be made by redeeming that Auction Rate Note.

 

(d)  If, on any Auction Rate Distribution Date
occurring while Class A Auction Rate Notes remain Outstanding, (i) the Senior
Parity Percentage is greater than the Required Senior Parity Percentage and
(ii) the Parity Percentage is greater than the Required Parity Percentage,
then, before any amount will be paid or allocated as principal on the Class A
Auction Rate Notes, principal shall be paid on the Class B Notes in an amount
equal to the greatest amount that can be paid as principal on the Class B Notes
without reducing the Senior Parity Percentage below the Required Senior Parity
Percentage or reducing the Parity Percentage below the Required Parity
Percentage.

 

Notwithstanding the foregoing, if:

 

(i)  on any Distribution Date, following
distributions under Sections 4.03(d)(i) through (vii), or under
Sections 4.03(e)(i) and (ii), to be made on that Distribution Date,
without giving effect to any payments from the Acquisition Fund to the
Class B Notes, the outstanding principal balance of the Class A Notes
would be in excess of:

 

(A)  the outstanding principal balance of the
Financed Student Loans plus

 

(B)  any accrued but unpaid interest on the those
Financed Student Loans as of the last day of the related Collection Period plus

 

(C)  the balance on deposit in the Reserve Fund
on that Distribution Date following those distributions minus

 

(D)  the Reserve Fund Requirement on that
Distribution Date, or

 

(ii)  an insolvency event involving the Depositor
or an Event of Default affecting the Class A Notes has occurred and is
continuing,

 

then, until the conditions described in (i) or
(ii) above no longer exist, the amounts on deposit in the Revenue Fund and
the Reserve Fund shall be applied on that Distribution Date to the payment of
the Class A Noteholders’ Distribution Amount before any amounts shall be
applied to the payment of the Class B Noteholders’ Distribution Amount.

 

(e)  The Auction Rate Notes are subject to
redemption in minimum increments of $50,000; provided, however, while any Class
A Auction Rate Notes are Outstanding, the Issuer may redeem Class B Auction
Rate Notes only if, as of the date of selection of Notes for redemption and
after giving effect to the redemption, the Senior Parity Percentage is at least
the Required Senior Parity Percentage and the Parity Percentage is at least the
Required Parity Percentage.  If less
than all outstanding Auction Rate Notes are to be

 

17

 

redeemed, the
particular Class to be redeemed shall be determined by the Issuer.  In the absence of direction by the Issuer,
the Class of Auction Rate Notes to be redeemed shall be selected first from the
Class A Auction Rate Notes in ascending numerical order of the Series and
Class designation (beginning with the Series 2003-1 Class A-2 Notes), and
thereafter, from the Class B Auction Rate Notes in ascending numerical
order of the Class designation (beginning with the Series 2003-1 Class B-1
notes).  If less than all Outstanding
Auction Rate Notes of a given Class designation are to be redeemed, the
particular Notes to be redeemed shall be determined by lot.  To the extent any portion of Principal
Distribution Amount remains after the redemption of Auction Rate Notes in
$50,000 increments on any Distribution Date, those amounts shall be used to
redeem Auction Rate Notes on the next applicable Distribution Date on which
Auction Rate Notes may be redeemed.

 

(f)  The Indenture Trustee shall cause notice of
any redemption to be given by mailing a copy of the notice by first-class mail
to the Noteholder of any Notes designated for redemption in whole or in part at
their address as the same shall last appear upon the registration books, and
with respect to Auction Rate Notes designated for redemption, to the Auction
Agent, in each case not less than 12 days prior to the redemption date;
provided, however, that failure to give such notice, or any defect therein,
shall not affect the validity of any proceedings for the redemption of such
Notes for which no such failure or defect occurs.

 

Section 2.04  Delivery
of Series 2004-1 Notes.  Upon
the execution and delivery of this Supplemental Indenture, the Issuer shall
execute and deliver to the Indenture Trustee and the Indenture Trustee shall
authenticate the Series 2004-1 Notes and deliver the Class A Notes
and the Class B Notes to The Depository Trust Company; provided, however,
prior to the delivery by the Indenture Trustee of any of the Series 2004-1
Notes, there shall have been filed with or delivered to the Indenture Trustee
the following:

 

(a)  An Issuer Order authorizing the execution
and delivery of this Supplemental Indenture and the issuance of the Series
2004-1 Notes.

 

(b)  Duly executed copies of this Supplemental
Indenture and a copy of the Indenture.

 

(c)  A resolution duly adopted by the Issuer,
certified by an Authorized Officer thereof, authorizing the execution and
delivery of this Supplemental Indenture and the issuance of the Series 2004-1
Notes.

 

(d)  Rating letters from each Rating Agency
confirming (i) that the Class A Notes have been rated at least “Aaa” by Moody’s
and “AAA” by Fitch and S&P and (ii) that the Class B Notes have been rated
at least “A2” by Moody’s and “A” by Fitch and S&P.

 

(e)  An opinion of counsel pursuant to Section
2.08 of the Indenture.

 

Section 2.05  Form
of Series 2004-1 Notes.  The
Series 2004-1 Class A-1 Notes, the Series 2004-1 Class A-2 Notes, and the
Series 2004-1 Class A-3 Notes shall be in substantially the forms set forth in
Exhibit A-1, Exhibit A-2, Exhibit A-3 hereto, respectively, each with such
variations, omissions, and insertions as may be necessary.  The Series 2004-1

 

18

 

Class B-1 Notes
shall be in substantially the form set forth in Exhibit A-4 hereto, each
with such variations, omissions, and insertions as may be necessary.

 

Section 2.06  Trustee’s
Authentication Certificate.  The
Indenture Trustee’s authentication certificate upon the Series 2004-1
Notes shall be substantially in the form included in Exhibits A-1 through
A-4 hereto.  No Series 2004-1 Note
shall be secured hereby or entitled to the benefit hereof, or shall be valid or
obligatory for any purpose, unless a certificate of authentication,
substantially in such form, has been duly executed by the Indenture Trustee at
the written direction of the Issuer; and such certificate of the Indenture
Trustee upon any Series 2004-1 Note shall be conclusive evidence and the
only competent evidence that such Note has been authenticated and delivered
hereunder.  The Indenture Trustee’s
certificate of authentication shall be deemed to have been duly executed by it
if manually signed by an authorized officer of the Indenture Trustee, but it
shall not be necessary that the same person sign the certificate of
authentication on all of the Series 2004-1 Notes issued hereunder.

 

Section 2.07  Deposit
of Series 2004-1 Note Proceeds. 
Upon the issuance and delivery of the Series 2004-1 Notes, the
Indenture Trustee shall deposit the net proceeds thereof as follows:

 

(a)  an amount equal to $394,622,000 shall be
deposited to the Acquisition Fund; and

 

(b)  an amount equal to $4,000,000 shall be
deposited to the Reserve Fund;

 

ARTICLE III

 

GENERAL PROVISIONS

 

Section 3.01  Date of Execution.  This Supplemental Indenture for convenience
and for the purpose of reference is dated as of July 1, 2004.

 

Section 3.02  Laws Governing.  It is the intent of the parties hereto that
this Supplemental Indenture shall in all respects be governed by the laws of
the Commonwealth of Pennsylvania without regard to principles of conflicts of
law.

 

Section 3.03  Severability.  If any provision of this Supplemental
Indenture is forbidden, in whole or in part, by any pertinent law or any
pertinent law is effective to render this Supplemental Indenture invalid or
unenforceable or to impair the lien hereof, then each such provision or part
thereof is hereby declared to be wholly ineffective, and this Supplemental
Indenture shall be construed as if the same were not included herein.

 

Section 3.04  Exhibits and Appendices.  The terms of each Exhibit and Appendix
attached to this Supplemental Indenture are incorporated herein in all particulars.

 

19

 

ARTICLE IV

 

FUNDS

 

Section 4.01  Maintenance
and Creation of Funds and Accounts. 
The following Funds, have been established by the Issuer pursuant to the
Indenture, and such accounts shall be held by the Indenture Trustee in trust
for the benefit of the Holders of the Obligations:

 

(a)  The Acquisition Fund;

 

(b)  The Revenue Fund; and

 

(c)  The Reserve Fund

 

There is hereby created and established a Distribution
Account within the Revenue Fund to be administered and maintained by the
Indenture Trustee, in book form, for the benefit of the Noteholders of the
Series 2004-1 Notes and the Holders of any other Obligations.

 

The Indenture Trustee is hereby authorized for the
purpose of facilitating the administration of the Trust Estate and for the
administration of any Additional Notes issued pursuant to the Indenture or any
Supplemental Indenture to create additional Accounts or subaccounts in any of
the various Funds and Accounts established hereunder which are deemed necessary
or desirable.

 

Section 4.02  Acquisition
Fund.  With respect to the moneys
deposited into the Acquisition Fund pursuant to Section 2.07 hereof from
the proceeds of the sale of the Series 2004-1 Notes, after payment of the related
purchase price with respect to the Financed Student Loans on the Closing Date
and the related costs of issuance of the Series 2004-1 Notes, the remaining
proceeds of the sale of the Series 2004-1 Notes, less $250,000, will be held in
the Acquisition Fund and may be used to purchase Additional Financed Student
Loans on or prior to July 31, 2004 and shall be transferred to the Revenue Fund
on January 31, 2005 to the extent not used to purchase Additional Financed
Student Loans.  The remaining $250,000
may be used to purchase Add-on Consolidation Loans with respect to those
Consolidation Loans purchased with the proceeds of the Series 2004-1 Notes on
or prior to January 24, 2005.

 

Moneys on deposit in the Acquisition Fund shall be
used, upon Issuer Order, solely to pay costs of issuance of the Notes and, upon
receipt by the Indenture Trustee of a Student Loan Acquisition Certificate, to
acquire Student Loans (including Add-on Consolidation Loans) at a price that
would permit the results of the Cash Flows provided to each Rating Agency on
the Closing Date to be sustained as certified to the Indenture Trustee on each
Student Loan Acquisition Certificate; provided that such price may be increased
if Rating Confirmation is obtained, based on new Cash Flows containing such
assumptions as the Issuer shall reasonably determine.

 

No amount shall be transferred from the Acquisition
Account to acquire or originate Student Loans having characteristics that are
materially and adversely different from the characteristics of the Financed
Student Loans shown in the most recent Cash Flows provided to the Rating
Agencies, which characteristics include but are not limited to loan type,
federal

 

20

 

benefits, applicable borrower benefit programs, and
provisions and servicing of such Financed Student Loans required by the Act as
amended through the date hereof, unless the Issuer first obtains a Rating
Confirmation.  Any such Issuer Order or
Student Loan Acquisition Certificate shall state that such proposed use of
moneys in the Acquisition Fund is in compliance with the provisions of this
Indenture.

 

The Financed Student Loans shall be held by the
Eligible Lender Trustee, on behalf of the Issuer, and shall be pledged to the
Trust Estate and accounted for as a part of the Acquisition Fund. Student loan
files and documentation relating to the Financed Student Loans shall be
maintained by the Servicer as Custodian. Except as otherwise provided in the
Indenture or this Supplemental Indenture, Financed Student Loans shall not be
sold, transferred, or otherwise disposed of (other than for consolidation,
serialization or transfer to a Guarantor) by the Indenture Trustee free from
the lien of this Indenture.

 

The Indenture Trustee shall transfer all amounts
remaining in the Acquisition Fund on January 24, 2005, after giving effect to
all withdrawals from the Acquisition Fund on or prior to that date, to the
Revenue Fund; provided, however, the transfer of those amounts may be delayed
until a later date if the Issuer has provided to the Indenture Trustee a Rating
Confirmation with respect to that delay.

 

On each Quarterly Distribution Date occurring while
any LIBOR Rate Notes are Outstanding, and thereafter on each Monthly Allocation
Date which is not a Quarterly Distribution Date, to the extent amounts on
deposit in the Distribution Account and allocated to the payment of interest on
the Notes, and amounts on deposit in the Revenue Fund representing interest
receipts on the Financed Student Loans are insufficient to make the transfers
required by clauses (i) and (ii) of each of
Sections 4.03(d) and 4.03(e), or if on the Stated Maturity of any Class of
Notes, amounts on deposit in the Distribution Account and allocated to the
payment of principal on that Class of Notes and amounts on deposit in the
Revenue Fund are insufficient to make the required principal distributions to
the Noteholders of that Class of Notes, the amount of such deficiency shall be
paid from the Acquisition Fund to the extent of moneys therein before applying
to that payment any amounts on deposit in the Reserve Fund pursuant to
Section 4.06(a).

 

Amounts on deposit in the Acquisition Fund may be used
to pay principal on a Note only on its Stated Maturity.

 

No Additional Financed Student Loan shall be acquired
if, after the Date of Issuance, Congress has, in the judgment of the Issuer,
materially adversely changed any of the following characteristics of Student
Loans:  (i) the Special Allowance
Payments, (ii) the loan interest yield formula, (iii) the guaranty
obligation of the Guaranty Agency, (iv) the federal interest subsidies, or
(v) federal reinsurance of Student Loans, or makes any other economic
change in such loans, that, in each instance, would have a materially adverse effect
on the return to the holder of such loans. 
The Trustee shall be entitled to rely upon the certification of an
Authorized Officer of the Issuer as to the compliance with the provisions of
this paragraph in connection with the origination and acquisition of
Student Loans.

 

21

 

Section 4.03  Revenue
Fund.

 

(a)  The Indenture Trustee shall deposit into the
Revenue Fund all Revenues and all moneys transferred from the Acquisition Fund,
and, in accordance with Section 4.06(d), from the Reserve Fund, as provided
herein, and any other amounts to be deposited therein pursuant to and upon
receipt of an Issuer Order.

 

(b)  On or prior to the 25th day of each month,
the Indenture Trustee shall make the following allocations in the following
priority using funds on deposit in the Revenue Fund (all references to pro rata
allocation of funds described in this Section 4.03(b) shall be based upon the
amount of such fees expected to be payable with respect to each such payee to
the total amount of fees for all payees granted such priority):

 

(i)  to the Distribution Account for the
Secretary, an amount equal to the monthly rebate fee expected to be payable to
the Secretary from the 25th day of the current calendar month to the
24th day of the subsequent calendar month plus previously accrued and
unpaid or set aside amounts;

 

(ii)  to the Distribution Account for the
Servicer, an amount equal to its fees expected to be payable from the first day
of the prior calendar month to the last day of the prior calendar month plus
previously accrued and unpaid or set aside amounts;

 

(iii)  to the Distribution Account for the
Indenture Trustee, the Eligible Lender Trustee, and the Owner Trustee,
pro rata, an amount equal to their fees expected to be payable from the
25th day of the current calendar month to the 24th day of the
subsequent calendar month plus previously accrued and unpaid or set aside
amounts;

 

(iv)  to the Distribution Account, pro rata,
for the Auction Agent, the Broker-Dealers, the Calculation Agent and the Market
Agent, an amount equal to their fees expected to be payable from the
25th day of the current calendar month to the 24th day of the
subsequent calendar month plus previously accrued and unpaid or set aside amounts;

 

(v)  to the Distribution Account for the
Administrator, an amount equal to its fees expected to be payable from the
first day of the prior calendar month to the last day of the prior calendar
month plus previously accrued and unpaid or set aside amounts;

 

(vi)  to the Distribution Account, pro rata,
for each Class of Class A Notes an amount equal to the sum of (a) the
interest expected to accrue on such Class of Class A Notes from the
25th day of the current calendar month to the 24th day of the subsequent
calendar month plus previously accrued and unpaid or set aside amounts, and
(b) the amount expected to be payable as Scheduled Issuer Derivative
Payments and Specified Issuer Termination Payments under Derivative Products,
the payments of which are secured on a parity with the Class A Notes; and

 

22

 

(vii)  to the Distribution Account for the
Class B Notes an amount equal to the sum of (a) the interest expected
to accrue on the Class B Notes from the 25th day of the current
calendar month to the 24th day of the subsequent calendar month plus
previously accrued and unpaid or set aside amounts, and (b) the amount
expected to be payable as Scheduled Issuer Derivative Payments and Specified Issuer
Termination Payments under Derivative Products, the payments of which are
secured on a parity with the Class B Notes.

 

(c)  On each Monthly Expense Payment Date, the
Indenture Trustee shall pay the following fees from amounts on deposit in the
Distribution Account and allocated to the payment of those fees, and to the
extent of any insufficiency, from amounts on deposit in the Revenue Fund:  (i) the monthly rebate fee payable to the
Secretary, (ii) the fees of the Servicer, (iii) pro rata, the fees of the
Indenture Trustee, the Eligible Lender Trustee, and the Owner Trustee, and (iv)
pro rata, the fees of the Auction Agent, the Broker-Dealers, Market Agent and
the Calculation Agent, and (v) the Administration Fee; provided, however, If
(a) the default rate on the Financed Student Loans owned by the Issuer is equal
to or greater than 16% during the period from December 10, 2003 through
December 9, 2004, (b) the average daily yield to maturity (expressed as an
annual percentage) on 91-day United States Treasury Bills during any calendar
quarter during which such calendar month falls is equal to or greater than 9%,
(c) if at any time during the preceding Collection Period, (i) there was a Net
Loan Rate Restriction Period or portion thereof in effect, or (ii) any Auction Rate
Notes accrued interest at the Maximum Loan Rate, (d) on the Quarterly
Distribution Date occurring immediately prior to the last day of such calendar
month with respect to the Series 2003-1 Class A-1 Notes or the Series 2004-1
Class A-1 Notes was less than the Targeted Principal Amount then due, or (e) an
Event of Default has occurred and is continuing, then, subject to the other
provisions of the Indenture with respect to application of moneys, only
one-fifth of the Administration Fee shall be paid in the normal order of
priority, and the remaining balance of the Administration Fee shall be
subordinated and paid after the payment of any amount payable under Section
4.03(c)(xii) of the Second Supplemental Indenture.

 

(d)  On each Quarterly Distribution Date
occurring on or before the date on which no LIBOR Rate Notes remain
Outstanding, and on each Monthly Allocation Date occurring after all the LIBOR
Rate Notes are paid in full, the Indenture Trustee shall make the distributions
and transfers set forth in clauses (i) through (xiv) below, and in the case of
a Quarterly Distribution Date or Monthly Allocation Date that is not an Auction
Rate Distribution Date for all Auction Rate Notes, allocations to the
Distribution Account with respect to those Auction Rate Notes (for principal
and Carryover Amounts), in the amounts and in the order of priority shown in
clauses (i) through (xiii) below, except as otherwise provided in Section
2.03(d).  These distributions and
transfers shall be made from amounts on deposit in the following funds and
accounts in the following order: first,
from amounts on deposit in the Distribution Account and allocated to the
related payment set forth below, second,
from, and to the extent of, the Available Funds in the Revenue Fund on that
Distribution Date after payment of the fees set forth in 4.03(c); third, from amounts transferred from the
Acquisition Fund pursuant to Section 4.02 with respect to clauses (i) and (ii)
below on that Distribution Date and with respect to the payment of principal on
the Class A Notes and Class B Notes at their Stated Maturities; and fourth, from amounts transferred from the
Reserve Fund with respect to

 

23

 

clauses (i) and
(ii) below on that Distribution Date and with respect to the payment of
principal on the Class A Notes and Class B Notes at their Stated
Maturities.

 

(i)  Pro rata, based on the aggregate
principal balance of the Class A Notes entitled to distributions on such
date and on the amount payable as Scheduled Issuer Derivative Payments and
Specified Issuer Termination Payments under Derivative Products, the payments
of which are secured on a parity with those Class A Notes, if any:

 

(A)  to the Class A Noteholders, the
Class A Noteholders’ Interest Distribution Amount, pro rata, based on
the amounts payable upon each such Class of Class A Notes as Class A
Noteholders’ Interest Distribution Amount, and

 

(B)  to the Counterparties under Derivative
Products, the payments of which are secured on a parity with the Class A
Notes, the amount payable as Scheduled Issuer Derivative Payments and Specified
Issuer Termination Payments under each Derivative Product, pro rata, based
on the amounts payable by the Issuer under each Derivative Product;

 

(ii)  pro rata, based on the aggregate
principal balance of the Class B Notes entitled to distributions on this
date and the amount payable as Scheduled Issuer Derivative Payments and
Specified Issuer Termination Payments under Derivative Products, the payments of
which are secured on a parity with those Class B Notes:

 

(A)  to the Class B Noteholders, the
Class B Noteholders’ Interest Distribution Amount, pro rata, based on
the amounts payable as Class B Noteholders’ Interest Distribution Amount,
and

 

(B)  to the Counterparties under Derivative
Products, the payments of which are secured on a parity with the Class B
Notes, the amount payable as Scheduled Issuer Derivative Payments and Specified
Issuer Termination Payments under each Derivative Product, pro rata, based
on the amounts payable by the Issuer under each Derivative Product;

 

(iii)  to the holders of the Series 2003-1 Class
A-1 Notes, to the extent of the Class A Principal Distribution Amount, the
Targeted Principal Amount then due with respect to such Series 2003-1 Class A-1
Notes;

 

(iv)  to the holders of the Series 2004-1 Class
A-1 Notes, to the extent of the Class A Noteholders’ Principal Distribution
Amount remaining after payment to the holders of the Series 2003-1 Class A-1
Noteholders, the Targeted Principal Amount then due with respect to such Series
2004-1 Class A-1 Notes;

 

(A)  While Series 2003-1 Class A-1 Notes or
Series 2004-1 Class A-1 Notes are Outstanding, and while other Class A
Notes are Outstanding, to the extent of the Class A Noteholders’ Principal
Distribution Amount

 

24

 

remaining after payments to the holders of the Series
2003-1 Class A-1 Notes and the holders of the Series 2004-1 Class A-1 Notes
above,

 

(1)  to the Series 2003-1 Class A-2 noteholders,
until paid in full, the Class A Noteholders’ Principal Distribution Amount;
then,

 

(2)  to the Series 2003-1 Class A-3 noteholders,
until paid in full, the Class A Noteholders’ Principal Distribution Amount;
then,

 

(3)  to the Series 2004-1 Class A-2 noteholders,
until paid in full, the Class A Noteholders’ Principal Distribution Amount;
then,

 

(4)  to the Series 2004-1 Class A-3 noteholders,
until paid in full, the Class A Noteholders’ Principal Distribution Amount; and

 

(B)  after all Series 2003-1 Class A-1 Notes and
Series 2004-1 Class A-1 Notes have been paid in full, and other Class A Notes
are outstanding,

 

(1)  subject to the limitations set forth in
Section 2.03(d), to the Series 2003-1 Class B-1 Noteholders until paid in
full, and then to the Series 2004-1 Class B-1 Noteholders until paid in full,
the Class B Noteholders’ Principal Distribution Amount; and then

 

(2)  to the extent of the Class A Noteholders’
Principal Distribution Amount then remaining, to the holders of Class A
Auction Rate Notes in the order directed by the Issuer, or in the absence of
such direction,

 

a.  to the holders of the Series 2003-1 Class
A-2 Notes until paid in full, the Class A Noteholders’ Principal Distribution
Amount; then,

 

b.  to the holders of the Series 2003-1 Class
A-3 Notes until paid in full, the Class A Noteholders’ Principal Distribution
Amount; then,

 

c.  to the holders of the Series 2004-1 Class
A-2 Notes until paid in full, the Class A Noteholders’ Principal Distribution
Amount; then,

 

d.  to the holders of the Series 2004-1 Class
A-3 Notes until paid in full, the Class A Noteholders’ Principal Distribution
Amount; then,

 

(C)  after all Class A Notes have been paid in
full, and while Class B Notes remain outstanding, to the extent of the Class B
Noteholders’ Principal Distribution Amount, to pay principal

 

(1)  to the holders of the Series 2003-1 Class
B-1 Notes until paid in full; and then,

 

(2)  to the holders of the Series 2004-1 Class
B-1 Notes until paid in full.

 

25

 

(v)  to the Reserve Fund, the amount, if any,
necessary to reinstate the balance of the Reserve Fund to the Reserve Fund
Requirement;

 

(vi)  if the Parity Percentage is not equal to at
least the Required Parity Percentage or the Senior Parity Percentage is not
equal to at least the Required Senior Parity Percentage, to the Distribution
Account to pay principal on the Class A Notes on their next respective
Distribution Dates, in the order and priority described in Section 2.03(c),
the least amount required to increase the Parity Percentage to at least the
Required Parity Percentage and the Senior Parity Percentage to at least the
Required Senior Parity Percentage, with those percentages computed assuming
that immediately prior to the computation, the required payments of principal
were actually made on the Class A Notes;

 

(vii)  if the Parity Percentage is not equal to at
least the Required Parity Percentage, to the Distribution Account to pay
principal on the Class B Notes on their next Distribution Date, the least
amount required to increase the Parity Percentage to at least the Required
Parity Percentage, with that percentage computed assuming that immediately
prior to the computation, the required payments of principal were actually made
on the Class B Notes;

 

(viii)  to the Distribution Account to be paid on
the next respective Distribution Dates for the Class A Auction Rate Notes,
pro rata, any Class A Carryover Amounts;

 

(ix)  to the Distribution Account to be paid on
the next respective Distribution Dates for the Class B Auction Rate Notes,
any Class B Carryover Amounts;

 

(x)  pro rata, based on the amount of any
Other Issuer Termination Payments due pursuant to this clause, to the
Counterparties under each Derivative Product, the payments of which are secured
on a parity with the Class A Notes, the amount of any Other Issuer
Termination Payments due and payable;

 

(xi)  pro rata, based on the amount of any
Other Issuer Termination Payments due pursuant to this clause, to the Counterparties
under each Derivative Product, the payments of which are secured on a parity
with the Class B Notes, the amount of any Other Issuer Termination
Payments due and payable;

 

(xii)  to the Administrator, the amount of the
Administration Fee subordinated in accordance with Section 4.03(c), if any; and

 

(xiii)  to the Depositor, any remaining amounts
after application of the preceding clauses if, after giving effect to the
transfer of any amounts to the Depositor, the Parity Percentage is equal to at
least the Required Parity Percentage and the Senior Parity Percentage is equal
to at least the Required Senior Parity Percentage.

 

26

 

On each Quarterly Distribution Date that is not an
Auction Rate Distribution Date, payments of principal and Carryover Amounts to
the Auction Rate Notes shall be deposited into the Distribution Account for
future payment on such Auction Rate Notes.

 

(e)  On each Auction Rate Distribution Date that
is not a Quarterly Distribution Date or Monthly Allocation Date, the Indenture
Trustee shall make the following distributions:

 

(i)  first, from amounts deposited in the
Distribution Account that were allocated to the Class A Auction Rate Notes
with a Distribution Date on this Auction Rate Distribution Date and to
Counterparties under Derivative Products secured on a parity with those
Class A Auction Rate Notes, and then from amounts on deposit in the
Revenue Fund, pro rata, based on the aggregate principal balance of those
Class A Auction Rate Notes and the amount payable as Scheduled Issuer
Derivative Payments and Specified Issuer Termination Payments under each
Derivative Product, the payments of which are secured on a parity with those
Class A Auction Rate Notes:

 

(A)  to the Noteholders of those Class A
Auction Rate Notes, to the extent of the Class A Noteholders’ Interest
Distribution Amount, pro rata, based on the amounts then payable as interest on
each such Class of Class A Auction Rate Notes, and

 

(B)  to the Counterparties under Derivative
Products, the payments of which are secured on a parity with those Class A
Auction Rate Notes, the amount payable as Scheduled Issuer Derivative Payments
and Specified Issuer Termination Payments under each Derivative Product,
pro rata, based on the amounts payable by the Issuer under each Derivative
Product; and

 

(ii)  second, from amounts deposited in the
Distribution Account that were allocated to the Class B Auction Rate Notes
with a Distribution Date on this Auction Rate Distribution Date and to
Counterparties under Derivative Products, the payments of which are secured on
a parity with those Class B Auction Rate Notes, and then from amounts on
deposit in the Revenue Fund, pro rata, based on the aggregate principal
balance of those Class B Auction Rate Notes and the amount payable as
Scheduled Issuer Derivative Payments and Specified Issuer Termination Payments
under each Derivative Product, the payments of which are secured on a parity
with those Class B Auction Rate Notes:

 

(A)  to the Noteholders of those Class B Auction
Rate Notes, the Class B Noteholders’ Interest Distribution Amount, pro
rata, based on the amounts then payable as interest on each such Class of
Class B Auction Rate Notes, and

 

(B)  to the Counterparties under Derivative Products,
the payments of which are secured on a parity with those Class B Auction
Rate Notes, the amount payable as Scheduled Issuer Derivative Payments and
Specified Issuer

 

27

 

Termination Payments under each Derivative Product,
pro rata, based on the amounts payable by the Issuer under each Derivative
Product.

 

Amounts on deposit in the Distribution Account with
respect to principal and Carryover Amounts allocated to the Auction Rate Notes
will be paid on the Auction Rate Notes on their Auction Rate Distribution
Dates. All payments in respect of principal on the Auction Rate Notes shall be
made in the form of redemptions.

 

Notwithstanding the foregoing, at any time after the
LIBOR Rate Notes have been paid in full, the Servicer may, at its option,
purchase all of the Financed Student Loans owned by the Trust on the
Distribution Date following any date on which the total principal balance of
all the Financed Student Loans then outstanding is less than ten percent (10%)
of the highest principal balance of all student loans outstanding at the end of
any calendar month during the term of the Indenture provided that (i) such
ten percent (10%) condition is true on such Distribution Date, (ii) the
purchase price, which shall be equal to the fair market value of such Financed
Student Loans together with accrued interest, is sufficient to pay the
outstanding amount due on all the Notes then Outstanding, and (iii) no
applicable Event of Default shall have occurred and be continuing with respect
to the Servicer on such Distribution Date. 
The proceeds of the purchase of the Financed Student Loans from the
Trust will be used to redeem Notes.

 

(f)  Notwithstanding anything to the contrary in
subsections (d) and (e) above, upon the occurrence of an Event of Default
payments on any Distribution Date shall be made in accordance with the
provisions of Section 6.02 of the Indenture.

 

Section 4.04  Distribution
Account.

 

The Indenture Trustee shall deposit into the
Distribution Account all amounts required to be deposited therein pursuant to
Section 4.03(b).  The Indenture
Trustee shall use amounts on deposit in the Distribution Account to make the
distributions pursuant to Sections 4.03(c), (d) and (e).

 

Section 4.05  Transfers
to Depositor.  Transfers from the
Revenue Fund to the Depositor may be made in accordance with this Supplemental
Indenture; provided, however, that no transfer of assets to the Depositor shall
be made if there is not on deposit in the Reserve Fund an amount equal to at
least the Reserve Fund Requirement; and further provided, that no transfer
shall be made to the Depositor unless immediately after taking into account any
such transfer, .  The Parity Percentage
is at least equal to the Required Parity Percentage and the Senior Parity
Percentage is at least equal to the Required Senior Parity Percentage.

 

The amounts so transferred to the Depositor shall be
free of the lien of this Indenture and all investment earnings thereon after
the date of such transfer shall be the property of the Depositor.

 

Section 4.06  Reserve
Fund.

 

(a)  On each Quarterly Distribution Date
occurring while any LIBOR Rate Notes are Outstanding, and thereafter on each
Monthly Allocation Date, to the extent there are insufficient moneys in the
Distribution Account or Revenue Fund to make the transfers required

 

28

 

by
clauses (i) and (ii) of each of Sections 4.03(d) and
4.03(e), and after the transfer of amounts from the Acquisition Fund, the
amount of such deficiency shall be paid directly from the Reserve Fund.

 

(b)  Money in the Reserve Fund may be used to pay
principal on a Note only on its Stated Maturity.

 

(c)  If the Reserve Fund is used for the purposes
described in this Section 4.06(a) and (b), the Indenture Trustee shall restore
the Reserve Fund to the Reserve Fund Requirement by transfers from the Revenue
Fund on the next Quarterly Distribution Date or Monthly Allocation Date, as
applicable, pursuant to Section 4.03(d)(vii). 
If the full amount required to restore the Reserve Fund to the Reserve
Fund Requirement is not available in the Revenue Fund on such next succeeding
Quarterly Distribution Date or Monthly Allocation Date, as applicable, the
Indenture Trustee shall continue to transfer funds from the Revenue Fund as
they become available and in accordance with Section 4.03(d)(vii) until the
deficiency in the Reserve Fund has been eliminated.

 

(d)  On any Distribution Date that the amount in
the Reserve Account exceeds the Reserve Account Requirement, the Indenture
Trustee shall transfer the excess to the Revenue Fund.

 

(e)  On the date of redemption of all of the
Notes, at the direction of the Issuer, the Indenture Trustee shall transfer all
moneys in the Reserve Fund to the Revenue Fund.

 

If at any time the balance in the Reserve Fund,
together with other available funds of the Issuer on deposit with the Indenture
Trustee, shall be sufficient to retire all Notes Outstanding, the Issuer shall
direct the Indenture Trustee to apply that balance to retire all Notes
Outstanding in accordance with their terms.

 

ARTICLE V

 

LIMITATION
ON COUNTERPARTY RIGHTS

 

Notwithstanding any provisions of the Indenture or
this Supplemental Indenture, no Counterparty under a Derivative Product shall
have any rights to security under the Indenture or the Supplemental Indenture
other than as a beneficiary of the lien granted to the Indenture Trustee under
the Indenture for the benefit of the Noteholders and any Counterparty, except
that Scheduled Issuer Derivative Payments, Specified Issuer Termination
Payments and Other Issuer Termination Payments may be paid in the priority and
secured as provided in Section 4.03 of this Supplemental Indenture and as
provided in Section 6.02 of the Indenture.

 

ARTICLE VI

 

APPLICABILITY
OF INDENTURE

 

The provisions of the Indenture are hereby ratified,
approved and confirmed, except as otherwise expressly modified by this
Supplemental Indenture.  The
representations, warranties and covenants contained in the Indenture (except as
expressly modified herein) are

 

29

 

hereby reaffirmed with the same force and effect as if
fully set forth herein and made again as of the date hereof.

 

 

[SIGNATURE PAGE FOLLOWS]

 

30

 

IN WITNESS WHEREOF, the Issuer has caused this
Supplemental Indenture to be executed in its name and on its behalf by the
Owner Trustee and the Indenture Trustee, to evidence its acceptance of the
trusts hereby created, has caused this Supplemental Indenture to be executed in
its name and behalf, all in multiple counterparts, each of which shall be
deemed an original, and the Issuer and the Indenture Trustee have caused this
Supplemental Indenture to be dated as of the date herein above first shown,
although actually executed on the dates shown in the acknowledgments hereafter
appearing.

 

	
   

  	
  PHEAA
  STUDENT LOAN TRUST I,

  
	
   

  	
  as
  Issuer, by WACHOVIA BANK OF

  DELAWARE, National Association, not in its

  individual capacity, but solely as Owner Trustee on

  behalf of the Issuer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  MANUFACTURERS AND
  TRADERS TRUST

  COMPANY, not in its individual capacity but

  solely as Indenture Trustee and Eligible Lender

  Trustee

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  
	
  Acknowledged this
      th day of
                    ,
  2004

  	
   

  
	
   

  	
   

  
	
  PENNSYLVANIA HIGHER
  EDUCATION

  ASSISTANCE AGENCY, as Servicer

  	
   

  
	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  	
   

  
																

 

 

APPENDIX A

 

CERTAIN TERMS AND PROVISIONS OF

THE AUCTION RATE NOTES

 

ARTICLE
I

 

DEFINITIONS

 

Except as provided below
in this Section, all terms which are defined in Appendix A of the
Indenture and Article I of this Supplemental Indenture shall have the same
meanings, respectively, in this Appendix A as such terms are given
in the Indenture and Article I of this Supplemental Indenture.  In addition, the following terms shall have
the following respective meanings:

 

“All Hold Rate” shall mean the Applicable LIBOR
Rate less 0.20%; provided, that in no event shall the applicable All Hold Rate
be greater than the applicable Maximum Rate.

 

“Applicable LIBOR Rate” means, (a) for
Auction Periods of 35 days or less, One-Month LIBOR, (b) for Auction
Periods of more than 35 days but less than 91 days, Three-Month
LIBOR, (c) for Auction Periods of more than 90 days but less than
181 days, Six-Month LIBOR, and (d) for Auction Periods of more than
180 days, One-Year LIBOR.

 

“Auction” shall mean the implementation of the
Auction Procedures on an Auction Date.

 

“Auction Agent” shall mean the Initial Auction
Agent under the Initial Auction Agent Agreement unless and until a Substitute
Auction Agent Agreement becomes effective, after which “Auction Agent” shall
mean the Substitute Auction Agent.

 

“Auction Agent Agreement” shall mean the
Initial Auction Agent Agreement unless and until a Substitute Auction Agent
Agreement is entered into, after which “Auction Agent Agreement” shall mean
such Substitute Auction Agent Agreement.

 

“Auction Agent Fee” has the meaning set forth
in the Auction Agent Agreement.

 

“Auction Date” shall mean, with respect to any
Class of Auction Rate Notes, the Business Day immediately preceding the first
day of each Auction Period for each respective Class, other than:

 

(a)  with respect to the Initial Period for such
Class;

 

(b)  each Auction Period commencing after the
ownership of the applicable Auction Rate Notes is no longer maintained in
Book-entry Form by the Securities Depository;

 

(c)  each Auction Period commencing after and
during the continuance of a Payment Default; or

 

A-1

 

(d)  each Auction Period commencing less than two
Business Days after the cure or waiver of a Payment Default.

 

Notwithstanding the foregoing, the Auction Date for
one or more Auction Periods may be changed pursuant to Section 2.02(h) of
this Appendix A.

 

“Auction Note Interest Rate” shall mean each
variable rate of interest per annum borne by Auction Rate Notes for each
Auction Period and determined in accordance with the provisions of
Sections 2.01 and 2.02 of this Appendix A; provided, however,
that in the event of a Payment Default, the Auction Note Interest Rate shall
equal the applicable Non-Payment Rate; provided further, however, that such
Auction Note Interest Rate shall in no event exceed the lesser of the Maximum
Rate, and during the occurrence of a Net Loan Rate Restriction Period, the Net
Loan Rate.

 

“Auction Period” shall mean the Interest Period
applicable to each Class of the Auction Rate Notes during which time the
Auction Note Interest Rate for such Class is determined pursuant to
Section 2.02(a) of this Appendix A, which Auction Period
(after the Initial Period for such Class) shall begin on an Interest Rate
Adjustment Date and initially shall consist generally of 28 days for the
Series 2004-1 Class A-2 Notes, the Series 2004-1 Class A-3 Notes and the Series
2004-1 Class B-1 Notes, as the same may be adjusted pursuant to
Section 2.02(g) of this Appendix A.

 

“Auction Period Adjustment” shall mean an
adjustment to the Auction Period as provided in Section 2.02(g) of this Appendix A.

 

“Auction Procedures” shall mean the procedures
set forth in Section 2.02(a) of this Appendix A by which the
Auction Rate is determined.

 

“Auction Rate” shall mean the rate of interest
per annum that results from implementation of the Auction Procedures and is
determined as described in Section 2.02(a)(iii)(B) of this Appendix A.

 

“Auction Rate Notes” shall mean, collectively,
the Series 2004-1 Class A-2 Notes, the Series 2004-1 Class A-3 Notes and the
Series 2004-1 Class B-1 Notes.

 

“Authorized Denominations” shall mean $50,000
and any integral multiple thereof.

 

“Available Auction Rate Notes” has the meaning
set forth in Section 2.02(a)(iii)(A)(1) of this Appendix A.

 

“Bid” has the meaning set forth in Section 2.02(a)(i)(A)
of this Appendix A.

 

“Bid Auction Rate” has the meaning set forth in
Section 2.02(a)(iii)(A) of this Appendix A.

 

“Bidder” has the meaning set forth in
Section 2.02(a)(i)(A) of this Appendix A.

 

A-2

 

“Book-Entry Form” or “Book-Entry System”
shall mean a form or system under which (a) the beneficial right to
principal and interest may be transferred only through a book entry,
(b) physical securities in registered form are issued only to a Securities
Depository or its nominee as Noteholder, with the securities “immobilized” to
the custody of the Securities Depository, and (c) the book entry is the
record that identifies the owners of beneficial interests in that principal and
interest.

 

“Broker-Dealer” shall mean UBS Financial
Services Inc. or any other broker or dealer (each as defined in the Securities
Exchange Act of 1934, as amended), commercial bank or other entity permitted by
law to perform the functions required of a Broker-Dealer set forth in the
Auction Procedures that (a) is a Participant (or an affiliate of a
Participant), (b) has been appointed as such by the Issuer pursuant to
Section 2.02(f) of this Appendix A, and (c) has entered
into a Broker-Dealer Agreement that is in effect on the date of reference.

 

“Broker-Dealer Agreement” shall mean the
agreements between the Auction Agent and the Broker-Dealer, and approved by the
Issuer, pursuant to which the Broker-Dealer agrees to participate in Auctions
as set forth in the Auction Procedures, as from time to time amended or
supplemented.  The Broker-Dealer
Agreement shall be in substantially the form of the Broker-Dealer Agreement,
dated as of July 1, 2004, among the Issuer, the Auction Agent, and the Broker-Dealer.

 

“Broker-Dealer Fee” has the meaning set forth
in the Auction Agent Agreement.

 

“Business Day” shall mean any day other than a
Saturday, Sunday, holiday or day on which banks located in the Commonwealth of
Pennsylvania, or the New York Stock Exchange, the Indenture Trustee or the
Auction Agent, are authorized or permitted by law or executive order to close
or such other date as may be agreed to in writing by the Auction Agent, the
Broker-Dealers and the Issuer.

 

“Cap Rate” shall mean, with respect to any
Interest Period applicable to the Auction Rate Notes, the lesser of
(i) the applicable Maximum Rate and (ii) when applicable, the Net
Loan Rate in effect for such Interest Period.

 

“Carry-over Amount” shall mean, for any
Interest Period during which interest is calculated at the Net Loan Rate, if
applicable, or the Maximum Rate, the excess, if any, of (a) the amount of
interest on an Auction Rate Note that would have accrued with respect to the
related Interest Period at the least of (i) the applicable Auction Rate,
(ii) 17% and (iii) the highest rate the Issuer may legally pay, from time
to time, as interest on the Auction Rate Notes, over (b) the amount of
interest such Note actually accrued with respect to such Interest Period based
on the lesser of the Net Loan Rate, if applicable, and the Maximum Rate,
together with the unreduced portion of any such excess from prior Interest
Periods; provided that any reference to “principal” or “interest” in the
Indenture and the Auction Rate Notes shall not include within the meanings of
such words any Carry-over Amount or any interest accrued on any Carry-over
Amount.

 

 “Closing
Date” shall mean the Date of Issuance of the Auction Rate Notes.

 

“CP Rate” shall mean, for each month, the rate
as will be in effect on the second Business Day preceding the 25th
day of such month (such date, the “Reset Date”) that is the bond

 

A-3

 

equivalent yield of the rate set forth in H.15(519)
for that Reset Date opposite the 90 day maturity and under the caption “Commercial
paper-Financial.”  If, by 5:00 p.m.,
New York City time, on the Business Day immediately following the Reset
Date, such rate for the Reset Date is not yet published in H.15(519), the CP
Rate for such month will be the bond equivalent yield of the rate for the first
preceding day for which such rate is set forth in H.15(519) opposite the 90 day
maturity and under the caption “Commercial paper-Financial.”

 

“Effective Interest Rate” shall mean, with
respect to any Financed Student Loan, the interest rate per annum payable by
the borrower as of the last day of the calendar quarter borne by such Financed
Student Loan after giving effect to any reduction in such interest rate
pursuant to borrower incentives, (a) less all accrued rebate fees on such
Financed Student Loan which is a Consolidation Loan paid during such calendar
quarter expressed as a percentage per annum and (b) plus all accrued
Interest Benefit Payments and Special Allowance Payments applicable to such
Financed Student Loan during such calendar quarter expressed as a percentage
per annum.

 

“Eligible Carry-over Make-up Amount” shall
mean, with respect to each Interest Period relating to the Auction Rate Notes
as to which, as of the first day of such Interest Period, there is any unpaid
Carry-over Amount, an amount equal to the lesser of (a) interest computed
on the principal balance of the Auction Rate Notes in respect to such Interest
Period at a per annum rate equal to the excess, if any, of the lesser of the
Net Loan Rate, if applicable, and the Maximum Rate, over the Auction Rate,
together with the unreduced portion of any such excess from prior Interest
Periods and (b) the aggregate Carry-over Amount remaining unpaid as of the
first day of such Interest Period together with interest accrued and unpaid
thereon through the end of such Interest Period. The Eligible Carry-over
Make-up Amount shall be $0.00 for any Interest Period with respect to which the
Auction Rate exceeds 17% or the highest rate the Issuer may legally pay, from
time to time, as interest on the Auction Rate Notes.

 

 “Existing
Owner” shall mean (a) with respect to and for the purpose of dealing
with the Auction Agent in connection with an Auction, a Person who is a
Broker-Dealer listed in the Existing Owner Registry at the close of business on
the Business Day immediately preceding the Auction Date for such Auction and
(b) with respect to and for the purpose of dealing with the Broker-Dealers
in connection with an Auction, a Person who is a beneficial owner of Auction
Rate Notes.

 

“Existing Owner Registry” shall mean the
registry of Persons who are owners of the Auction Rate Notes, maintained by the
Auction Agent as provided in the Auction Agent Agreement.

 

“Hold Order” has the meaning set forth in
Section 2.02(a)(i)(A) of this Appendix A.

 

“Initial Auction Agent” shall mean The Bank of
New York and its successors and assigns.

 

“Initial Auction Agent Agreement” shall mean,
collectively, the Auction Agency Agreement dated as of July 1, 2004, by and
among the Issuer, the Indenture Trustee and the Initial Auction Agent,
including any amendment thereof or supplement thereto.

 

A-4

 

“Initial Payment Dates” means, with respect to
the Series 2004-1 Class A-2 Notes, August 5, 2004; with respect to the Series
2004-1 Class A-3 Notes, August 19, 2004; and with respect to the Series
2004-1 Class B-1 Notes, August 5, 2004.

 

“Initial Period” shall mean, as to Auction Rate
Notes, the period commencing on the Closing Date and continuing through the day
immediately preceding the Initial Rate Adjustment Date for such Auction Rate
Notes.

 

“Initial Rate” shall mean 1.57% for the Series
2004-1 Class A-2 Notes, 1.57% for the Series 2004-1 Class A-3 Notes, and 1.70%
for the Series 2004-1 Class B-1 Notes.

 

“Initial Rate Adjustment Date” shall mean, with
respect to the Series 2004-1 Class A-2 Notes, August 5, 2004; with respect to
the Series 2004-1 Class A-3 Notes, August 19, 2004, 2004; and with respect to
the Series 2004-1 Class B-1 Notes, August 5, 2004.

 

“Interest Period” shall mean, with respect to
the Auction Rate Notes, the Initial Period and each period commencing on an
Interest Rate Adjustment Date for such Class and ending on and including the
day before (a) the next Interest Rate Adjustment Date for such Class or
(b) the Stated Maturity of such Class, as applicable.

 

“Interest Rate Adjustment Date” shall mean the
date on which an Auction Note Interest Rate is effective, and shall mean, with
respect to the Auction Rate Notes, the date of commencement of each Auction
Period.

 

“Interest Rate Determination Date” shall mean,
with respect to the Auction Rate Notes, the Auction Date, or if no Auction Date
is applicable to such Class, the Business Day immediately preceding the date of
commencement of an Auction Period.

 

“LIBOR Determination Date” means, for each
Accrual Period, the second business day before the beginning of that Accrual
Period.

 

“Market Agent” shall mean UBS Financial
Services Inc., and its successors and assigns.

 

“Maximum Rate” shall mean, with respect to any
class of Auction Rate Notes, the least of (a) a per annum interest rate on such
Auction Rate Notes which, when taken together with the interest rate on those
Auction Rate Notes for the one-year period ending on the final day of the proposed
Auction Period, would result in the average interest rate on those Notes for
such period either (i) not being in excess (on a per annum basis) of the
average of the 91-day United States Treasury Bill rate plus 1.20% for such
one-year period (if any one of the ratings assigned by the rating agencies to
those Auction Rate Notes are “Aa3” or “AA-” or better), (ii) not being in
excess (on a per annum basis) of the 91-day United States Treasury Bill rate
plus 1.50% for such one-year period (if any one of the ratings assigned by the
Rating Agencies to the Series 2004-1 Notes is less than “Aa3” or “AA-,”
but both are at least any category of “A”), or (iii) not being in excess
(on a per annum basis) of the average of 91-day United States Treasury Bill rate
plus 1.75% for such one-year period (if any one of the ratings assigned by the
rating agencies to the Auction Rate Notes is less than the lowest category of
“A”); provided, however, that if such Auction Rate Notes have not been
outstanding for at least such one-year period, then

 

A-5

 

for any portion of
such period during which such Auction Rate Notes were not outstanding, the
interest rates on such Auction Rate Notes for purposes of this definition shall
be deemed to be equal to such rates as the Market Agent shall determine were
the rates of interest on equivalently rated auction securities with comparable
lengths of auction periods during such period; provided further, however, that
for any Auction with respect to any of the Auction Rate Notes rated any
category of “A” or better (or its equivalent) by each of the rating agencies,
the Maximum Rate shall not exceed the Applicable LIBOR-Based Rate plus 1.50%;
and, provided further, however, that this definition may be modified at the
direction of the Issuer upon receipt by the Indenture Trustee of
(A) written consent of the Market Agent and (B) written consent from
each rating agency then rating such Auction Rate Notes that such change will
not in and of itself result in a reduction of the rating on any Auction Rate
Notes; (b) 17.0%; and (c) the highest rate the Issuer may legally pay, from
time to time, as interest on the Auction Rate Notes. For purposes of the
Auction Agent and the Auction Procedures, the ratings referred to in this
definition shall be the last ratings of which the Auction Agent has been given
written notice pursuant to the Auction Agent Agreement. For purposes of the
Auction Agent Agreement and the Auction Procedures, the ratings referred to in
this definition shall be the last ratings of which the Auction Agent has been
given notice pursuant to the Auction Agent Agreement.  The percentage amount to be added to the
91-day United States Treasury Bill rate in any one or more of clauses (a)(i),
(ii) or (iii) above may be increased by delivery to the Auction Agent and the
Indenture Trustee of a certificate signed by an authorized officer of the
Issuer directing such increase, together with a confirmation from each Rating
Agency then rating such Auction Rate Notes that it will not reduce or withdraw
its then current rating as a result of such increase.

 

“Net Loan Rate” shall mean, with respect to any
Interest Period applicable to the Auction Rate Notes, the rate of interest per
annum (rounded to the next highest one-hundredth of one percent) equal to
(a) the weighted average Effective Interest Rate of the Financed Student
Loans for the calendar quarter immediately preceding such Interest Period, as
determined by the Administrator on the last day of such calendar quarter, less
(b) (1) the Program Expense Percentage, as determined by the Administrator
on the last day of each calendar quarter and (2) net losses realized on the
Financed Student Loans during the calendar quarter immediately preceding such
Interest Period, as determined by the Administrator on the last day of such
calendar quarter, expressed as a percentage of the principal balance of the
Financed Student Loans outstanding on the last day of such calendar quarter. In
making the determinations in (a) and (b) of this definition of “Net
Loan Rate,” the Administrator shall take into account as an increase to such
Net Loan Rate the receipt of any Counterparty Derivative Payment and as a
decrease to such Net Loan Rate any Issuer Derivative Payment. The determinations
made by the Administrator in (a) and (b) of this definition of “Net
Loan Rate” shall be given in writing to the Auction Agent, the Indenture
Trustee and the Broker-Dealers immediately upon their respective calculation
dates.

 

“Net Loan Rate Restriction Period” means, with
respect to any Class of Auction Rate Notes, the period of time from and
including a Net Loan Rate Trigger Date to but excluding a Net Loan Rate
Termination Date.

 

“Net Loan Rate Termination Date” means, for a
class of Auction Rate Notes for which the Net Loan Rate Trigger Date has
occurred, the 25th day of a month which immediately follows two consecutive
months for which both (a) the daily weighted average of the Auction

 

A-6

 

Rates for the
Auction Rate Notes was equal to or less than a per annum rate equal to the sum
of (i) the bond equivalent yield of 91-day United States Treasury Bills
sold at the last auction prior to the 25th day of the month for which such
calculation is being made plus (ii) 1.0%; and (b) the most recently
available Three-Month LIBOR as of the Reset Date for the CP Rate in the month
for which such calculation is being made is less than the sum of (i) the
CP Rate for the month for which such calculation is being made plus
(ii) 0.25%.

 

“Net Loan Rate Trigger Date” means, for a class
of Auction Rate Notes, the 25th day of a month which immediately follows three
consecutive months for which either (a) the daily weighted average of the
Auction Rates for the class of Auction Rate Notes exceeded a per annum rate
equal to the sum of (i) the bond equivalent yield of the 91-day United
States Treasury Bills sold at the last auction prior to the 25th day of the
month for which such calculation is being made plus (ii) 1.0%; or
(b) the most recently available Three-Month LIBOR as of the Reset Date for
the CP Rate in the month for which such calculation is being made is equal to
or greater than the sum of (i) the CP Rate for the applicable month plus
(ii) 0.25%.

 

“Non-Payment Rate” shall mean One-Month LIBOR
plus 1.50%.

 

“One-Month LIBOR,” “Two-Month LIBOR,” “Three-Month
LIBOR,” “Four-Month LIBOR,” “Six-Month LIBOR” or “One-Year
LIBOR” shall mean, for any accrual period, the London Interbank Offered
Rate for deposits in U.S. Dollars having a maturity of one month, two months,
three months, four months, six months or one year as applicable, commencing on
the first day of the accrual period, which appears on Telerate Page 3750
as of 11:00 a.m., London Time on the related LIBOR Determination Date, as
determined by the Calculation Agent. If such a day is not a business day in
London, the most recently fixed London Interbank Offered Rates on U.S. dollar
deposits for the Applicable LIBOR Rate shall be used. If an applicable rate
does not appear on Telerate Page 3750, the rate for that day will be
determined on the basis of the rates at which deposits in U.S. Dollars, having
the applicable maturity and in a principal amount of not less than U.S.
$1,000,000, are offered at approximately 11:00 a.m., London time, on that
LIBOR Determination Date, to prime banks in the London interbank market by four
major banks selected by the Calculation Agent (each, a “Reference Bank”).  The Calculation Agent will request the
principal London office of each Reference Bank to provide a quotation of its
rate.  If the Reference Banks provide at
least two quotations, the rate for that day will be the arithmetic mean of the
quotations.  If the banks provide fewer
than two quotations, the rate for that day will be the arithmetic mean of the
rates quoted by major banks in New York City, selected by the Calculation
Agent, at approximately 11:00 a.m., New York time, on that LIBOR
Determination Date, for loans in U.S. Dollars to leading European banks having
the applicable maturity and in a principal amount of not less than U.S.
$1,000,000.  If the banks selected as
described above are not providing quotations, the Applicable LIBOR Rate in
effect for the applicable Accrual Period will be the Applicable LIBOR Rate in
effect for the previous Accrual Period. 
All percentages resulting from such calculations shall be rounded
upwards, if necessary, to the nearest one-hundredth of one percent. For
purposes of calculating One-Month LIBOR, Two-Month LIBOR, Three-Month LIBOR,
Four-Month, Six-Month LIBOR or One-Year LIBOR, a business day is any day on
which banks in New York City and in the City of London are open for the
transaction of international business.

 

“Order” has the meaning set forth in
Section 2.02(a)(i)(A) of this Appendix A.

 

A-7

 

“Payment Date” shall mean, initially with
respect to each Class of Series 2004-1 Auction Rate Notes, the applicable
Initial Payment Dates and, thereafter (a) so long as such Auction Rate
Notes bear interest at an Auction Note Interest Rate for an Interest Period of
not greater than 90 days, the Business Day immediately following the
expiration of each related Auction Period thereafter and (b) if and for so
long as the Auction Rate Notes bear interest at an Auction Note Interest Rate
for an Interest Period of greater than 90 days, the 25th day of each
January, April, July and October (unless any January 25th,
April 25th, July 25th or October 25th is not a Business Day,
then the Payment Date will be the next Business Day) immediately following the
expiration of the Auction period for that Class of Auction Rate Notes.

 

“Payment Default” shall mean, with respect
to the Auction Rate Notes, (a) a default in the due and punctual payment
of any installment of interest on such Auction Rate Notes, or (b) a
default in the due and punctual payment of any interest on and principal of
such Auction Rate Notes at their maturity.

 

“Potential Owner” shall mean any Person
(including an Existing Owner that is (a) a Broker-Dealer when dealing with
the Auction Agent and (b) a potential beneficial owner when dealing with a
Broker-Dealer) who may be interested in acquiring Auction Rate Notes (or, in
the case of an Existing Owner thereof, an additional principal amount of Auction
Rate Notes).

 

“Program Expense Percentage” shall mean, the
percentage that all Program Expenses (other than Consolidation Loan rebate
fees) estimated for the next 12 months represent of the outstanding
principal balance of the Financed Student Loans, which as of the Closing Date
is 0.93%, and which the Administrator shall calculate on the last day of each
calendar quarter.  Any adjustment in the
Program Expense Percentage shall be effective beginning on the first Interest
Rate Determination Date following each such calculation.

 

“Regular Record Date” shall mean,
with respect to each Payment Date, the Business Day immediately preceding such
Payment Date.

 

“Sell Order” has the meaning set forth in
Section 2.02(a)(i)(A) of this Appendix A.

 

“Submission Deadline” shall mean
1:00 p.m., eastern time, on any Auction Date or such other time on any
Auction Date by which the Broker-Dealers are required to submit Orders to the
Auction Agent as specified by the Auction Agent from time to time.

 

“Submitted Bid” has the meaning set forth in
Section 2.02(a)(iii)(A) of this Appendix A.

 

“Submitted Hold Order” has the meaning set
forth in Section 2.02(a)(iii)(A) of this Appendix A.

 

“Submitted Order” has the meaning set forth in
Section 2.02(a)(iii)(A) of this Appendix A.

 

“Submitted Sell Order” has the meaning set
forth in Section 2.02(a)(iii)(A) of this Appendix A.

 

A-8

 

“Substitute Auction Agent” shall mean the
Person with whom the Issuer and the Indenture Trustee enter into a Substitute
Auction Agent Agreement.

 

“Substitute Auction Agent Agreement” shall mean
an auction agent agreement containing terms substantially similar to the terms
of the Initial Auction Agent Agreement, whereby a Person having the
qualifications required by Section 2.02(e) of this Appendix A
agrees with the Indenture Trustee and the Issuer to perform the duties of the
Auction Agent under this Appendix A.

 

“Sufficient Bids” has the meaning set forth in
Section 2.02(a)(iii)(A) of this Appendix A.

 

ARTICLE
II

 

TERMS
AND ISSUANCE

 

Section 2.01  Auction
Rate and Carryover Amounts.  During
the Initial Period, each Class of the Auction Rate Notes shall bear interest at
the Initial Rate for such Class. 
Thereafter, and except with respect to an Auction Period Adjustment, the
Auction Rate Notes shall bear interest at an Auction Note Interest Rate based
on a 28-day Auction Period for the Auction Rate Notes, as determined pursuant
to this Section 2.01 and Section 2.02 of this Appendix A.

 

For the Auction Rate Notes during the Initial Period
and each Auction Period thereafter, interest at the applicable Auction Note
Interest Rate shall accrue daily and shall be computed for the actual number of
days elapsed on the basis of a year consisting of 365 or 366 days, as applicable.

 

The Auction Note Interest Rate to be borne by the
Auction Rate Notes after such Initial Period for each Auction Period until an
Auction Period Adjustment, if any, shall be determined as described below.  Each such Auction Period after the Initial
Period shall commence on and include the day following the expiration of the
immediately preceding Auction Period and terminate on and include the day
preceding the first Business Day of the following fourth week in the case of
the Auction Rate Notes; provided, however, that in the case of the Auction
Period that immediately follows the Initial Period for the Auction Rate Notes,
such Auction Period shall commence on the Initial Rate Adjustment Date.  The Auction Note Interest Rate of the Auction
Rate Notes for each Auction Period shall be the Auction Rate in effect for such
Auction Period as determined in accordance with Section 2.02(a) of this Appendix A;
provided that if, on any Interest Rate Determination Date, an Auction is not
held for any reason, the following Business Day shall be considered the
Interest Rate Determination Date and an Auction is to be held on such
date.  If an Auction is not held for any
reason on such date, then the Auction Note Interest Rate on such Auction Rate
Notes for the next succeeding Auction Period shall be the applicable Cap Rate.

 

Notwithstanding the foregoing:

 

(a)  if the
ownership of an Auction Rate Note is no longer maintained in Book-Entry Form,
the Auction Note Interest Rate on the Auction Rate Notes for any Interest

 

A-9

 

Period commencing after
the delivery of certificates representing Auction Rate Notes pursuant to this
Supplemental Indenture shall equal the Cap Rate; or

 

(b)  if a
Payment Default shall have occurred, the Auction Note Interest Rate on the
Auction Rate Notes for the Interest Period commencing on or immediately after
such Payment Default, and for each Interest Period thereafter, to and including
the Interest Period, if any, during which, or commencing less than two Business
Days after, such Payment Default is cured, shall equal the applicable
Non-Payment Rate on the first day of each such Interest Period.

 

In accordance with Section 2.02(a)(iii)(B) and
(C) of this Appendix A, the Auction Agent shall promptly give
written notice to the Indenture Trustee and the Issuer of each Auction Note
Interest Rate (unless the Auction Note Interest Rate is the applicable
Non-Payment Rate) and the Maximum Rate when such rate is not the Auction Note
Interest Rate, applicable to the Auction Rate Notes.  The Indenture Trustee shall, upon request,
notify the Noteholders and the Issuer of Auction Rate Notes of the applicable
Auction Note Interest Rate applicable to such Auction Rate Notes for each
Auction Period not later than the third Business Day of such Auction
Period.  Notwithstanding any other
provision of the Auction Rate Notes or this Supplemental Indenture and except
for the occurrence of a Payment Default, interest payable on the Auction Rate
Notes for an Auction Period shall never exceed for such Auction Period the
amount of interest payable at the applicable Maximum Rate in effect for such
Auction Period.

 

During the occurrence of a Net Loan Rate Restriction
Period, if the Auction Rate for the Auction Rate Notes is greater than the Net
Loan Rate, then the Auction Note Interest Rate applicable to such Auction Rate
Notes for that Interest Period will be the lesser of the Net Loan Rate and the
Maximum Rate, and the Issuer shall determine the Carryover Amount, if any, with
respect to such Auction Rate Notes for such Interest Period.

 

Such Carryover Amount shall bear interest calculated
at a rate equal to One-Month LIBOR (as determined by the Indenture Trustee)
from the Payment Date for the Interest Period with respect to which such
Carryover Amount was calculated, until paid. 
Any payment in respect of Carryover Amount shall be applied, first, to
any accrued interest payable thereon and, second, in reduction of such
Carryover Amount.  For purposes of this
Supplemental Indenture and this Appendix A, any reference to
“principal” or “interest” herein shall not include within the meaning of such
words Carryover Amount or any interest accrued on any such Carryover
Amount.  Such Carryover Amount shall be
separately calculated for each Auction Rate Note by the Issuer during such
Interest Period in sufficient time for the Indenture Trustee to give notice to
each Noteholder of such Carryover Amount as required in the next succeeding
sentence.  Not less than four days before
the Payment Date for an Interest Period with respect to which such Carryover
Amount has been calculated by the Issuer, the Indenture Trustee shall give
written notice to each Noteholder, the Auction Agent and the Issuer, in the
form provided by the Issuer, of the Carryover Amount applicable to each Auction
Rate Note, which written notice may accompany the payment of interest made to
the Noteholder on such Payment Date. 
Such notice shall state, in addition to such Carryover Amount, that,
unless and until an Auction Rate Note has been redeemed (other than by optional
redemption), after which all accrued Carryover Amounts (and all accrued
interest thereon) that remains unpaid shall be canceled and no Carryover Amount
(and interest accrued thereon) shall be paid with respect to such Auction Rate
Note, (a) the Carryover Amount (and interest accrued thereon calculated at
a rate equal to One-

 

A-10

 

Month LIBOR) shall
be paid by the Indenture Trustee pursuant to an Issuer Order on an Auction Rate
Note on the earliest of (i) the date of defeasance of any of the Auction
Rate Notes or (ii) the first occurring Payment Date with respect to the
Auction Rate Note (or on the date of any such optional redemption) if and to
the extent that (A) the Eligible Carryover Make-up Amount with respect to
such subsequent Interest Period is greater than zero, and (B) moneys are
available pursuant to the terms of the Indenture in an amount sufficient to pay
all or a portion of such Carryover Amount (and interest accrued thereon), and
(b) interest shall accrue on the Carryover Amount at a rate equal to
One-Month LIBOR until such Carryover Amount is paid in full or is cancelled.

 

The Carryover Amount (and interest accrued thereon)
for Auction Rate Notes shall be paid by the Indenture Trustee pursuant to an
Issuer Order on Outstanding Auction Rate Notes on the earliest of (a) the
date of defeasance of any of the Auction Rate Notes or (b) the first
occurring Payment Date if and to the extent that (i) the Eligible
Carryover Make-up Amount with respect to such Interest Period is greater than
zero, and (ii) on such Payment Date there are sufficient moneys in the
Revenue Fund to pay all interest due on the Auction Rate Notes on such Payment
Date, to redeem any Auction Rate Notes required to be redeemed on such Payment
Date in accordance with the Indenture and to fund amounts required to be added
to the Reserve Fund on such Payment Date. 
Any Carryover Amount (and any interest accrued thereon) on any Auction Rate
Note which is due and payable on a Payment Date, which Auction Rate Note is to
be redeemed (other than by optional redemption) on said Payment Date, shall be
paid to the Noteholder thereof on said Payment Date to the extent that moneys
are available therefor in accordance with the provisions of this Appendix A;
provided, however, that any Carryover Amount (and any interest accrued thereon)
which is not yet due and payable on said Payment Date shall be cancelled with
respect to such Auction Rate Note that is to be redeemed (other than by
optional redemption) on such Payment Date and shall not be paid on any
succeeding Payment Date.  To the extent
that any portion of the Carryover Amount (and any interest accrued thereon)
remains unpaid after payment of a portion thereof, such unpaid portion shall be
paid in whole or in part as required hereunder until fully paid by the
Indenture Trustee on the earliest of (a) the date of defeasance of any of
the Auction Rate Notes or (b) the next occurring Payment Date or Dates, as
necessary, if and to the extent that the conditions in the second preceding
sentence are satisfied.  On any Payment
Date on which the Indenture Trustee pays only a portion of the Carryover Amount
(and any interest accrued thereon) on Auction Rate Notes, the Indenture Trustee
shall give written notice in the manner set forth in the immediately preceding
paragraph to the Noteholder of such Auction Rate Note receiving such
partial payment of the Carryover Amount remaining unpaid on such Auction Rate
Note.

 

The Payment Date or other date on which such Carryover
Amount (or any interest accrued thereon) for Auction Rate Notes shall be paid
shall be determined by the Indenture Trustee in accordance with the provisions
of the immediately preceding paragraph and the Indenture, and the
Indenture Trustee shall make payment of the Carryover Amount (and any interest
accrued thereon) in the same manner as, and from the same Fund from which, it
pays interest on the Auction Rate Notes on a Payment Date.  Any payment of Carryover Amounts (and
interest accrued thereon) shall reduce the amount of Eligible Carryover Make-up
Amount.

 

In the event that the Auction Agent no longer
determines, or fails to determine, when required, the Auction Note Interest
Rate with respect to Auction Rate Notes, or, if for any

 

A-11

 

reason such manner
of determination shall be held to be invalid or unenforceable, the Auction Note
Interest Rate for the next succeeding Interest Period, which Interest Period
shall be an Auction Period, for Auction Rate Notes shall be the applicable Cap
Rate as determined by the Auction Agent for such next succeeding Auction
Period, and if the Auction Agent shall fail or refuse to determine the Cap
Rate, the Cap Rate shall be determined by the securities dealer appointed by
the Issuer capable of making such a determination in accordance with the
provisions of this Appendix A and written notice of such
determination shall be given by such securities dealer to the Indenture
Trustee.

 

Section 2.02  Auction
Rate.

 

(a)  Determining the Auction Rate.  By purchasing Auction Rate Notes, whether in
an Auction or otherwise, each purchaser of the Auction Rate Notes, or its
Broker-Dealer, must agree and shall be deemed by such purchase to have agreed
(x) to participate in Auctions on the terms described herein, (y) to have its
beneficial ownership of the Auction Rate Notes maintained at all times in
Book-entry Form for the account of its Participant, which in turn will maintain
records of such beneficial ownership and (z) to authorize such Participant to
disclose to the Auction Agent such information with respect to such beneficial
ownership as the Auction Agent may request.

 

So long as the ownership of Auction Rate Notes is maintained
in Book-entry Form by the Securities Depository, an Existing Owner may sell,
transfer or otherwise dispose of Auction Rate Notes only pursuant to a Bid or
Sell Order placed in an Auction or otherwise sell, transfer or dispose of
Auction Rate Notes through a Broker-Dealer, provided that, in the case of all
transfers other than pursuant to Auctions, such Existing Owner, its
Broker-Dealer or its Participant advises the Auction Agent of such transfer.

 

Auctions shall be conducted on each Auction Date, if
there is an Auction Agent on such Auction Date, in the following manner:

 

(i)  (A)    Prior
to the Submission Deadline on each Auction Date;

 

(1)  each Existing Owner of Auction Rate Notes may
submit to a Broker-Dealer by telephone or otherwise any information as to:

 

a.  the principal amount of Outstanding Auction
Rate Notes, if any, owned by such Existing Owner which such Existing Owner
desires to continue to own without regard to the Auction Note Interest Rate for
the next succeeding Auction Period;

 

b.  the principal amount of Outstanding Auction
Rate Notes, if any, which such Existing Owner offers to sell if the Auction
Note Interest Rate for the next succeeding Auction Period shall be less than
the rate per annum specified by such Existing Owner; and/or

 

c.  the principal amount of Outstanding Auction
Rate Notes, if any, owned by such Existing Owner which such Existing Owner
offers

 

A-12

 

to sell without regard to
the Auction Note Interest Rate for the next succeeding Auction Period;

 

and

 

(2)  one or more Broker-Dealers may contact
Potential Owners to determine the principal amount of Auction Rate Notes which
each Potential Owner offers to purchase, if the Auction Note Interest Rate for
the next succeeding Auction Period shall not be less than the rate per annum
specified by such Potential Owner.

 

The statement of an Existing Owner or a Potential
Owner referred to in (1) or (2) of this paragraph (A) is herein referred
to as an “Order,” and each Existing Owner and each Potential Owner placing an
Order is herein referred to as a “Bidder.” 
An Order described in clause (1)a. is herein referred to as a “Hold
Order,” an Order described in clauses (1)b. and (2) is herein referred to
as a “Bid,” and an Order described in clause (1)c. is herein referred to
as a “Sell Order.”

 

(B)  (1) 
Subject to the provisions of Section 2.02(a)(ii) of this Appendix A,
a Bid by an Existing Owner shall constitute an irrevocable offer to sell:

 

a.  the principal amount of Outstanding Auction
Rate Notes specified in such Bid if the Auction Note Interest Rate determined
as provided in this Section 2.02(a) shall be less than the rate specified
therein; or

 

b.  such principal amount, or a lesser principal
amount of Outstanding Auction Rate Notes to be determined as set forth in
Section 2.02(a)(iv)(A)(4) of this Appendix A, if the Auction
Note Interest Rate determined as provided in this Section 2.02(a) shall be
equal to the rate specified therein; or

 

c.  such principal amount, or a lesser principal
amount of Outstanding Auction Rate Notes to be determined as set forth in
Section 2.02(a)(iv)(B)(3) of this Appendix A, if the rate
specified therein shall be higher than the applicable Maximum Rate and
Sufficient Bids have not been made.

 

(2)  Subject to the provisions of
Section 2.02(a)(ii) of this Appendix A, a Sell Order by
an Existing Owner shall constitute an irrevocable offer to sell:

 

a.  the principal amount of Outstanding Auction
Rate Notes specified in such Sell Order; or

 

b.  such principal amount, or a lesser principal
amount of Outstanding Auction Rate Notes set forth in
Section 2.02(a)(iv)(B)(3) of this Appendix A, if Sufficient
Bids have not been made.

 

A-13

 

(3)  Subject to the provisions of
Section 2.02(a)(ii) of this Appendix A, a Bid by a
Potential Owner shall constitute an irrevocable offer to purchase:

 

a.  the principal amount of Outstanding Auction
Rate Notes specified in such Bid if the Auction Note Interest Rate determined as
provided in this Section 2.02(a) shall be higher than the rate specified
in such Bid; or

 

b.  such principal amount, or a lesser principal
amount of Outstanding Auction Rate Notes set forth in
Section 2.02(a)(iv)(A)(5) of this Appendix A, if the Auction Note
Interest Rate determined as provided in this Section 2.02(a) shall be
equal to the rate specified in such Bid.

 

(ii)  (A)             Each
Broker-Dealer shall submit in writing to the Auction Agent prior to the
Submission Deadline on each Auction Date all Orders obtained by such
Broker-Dealer and shall specify with respect to each such Order:

 

(1)  the name of the Bidder placing such Order;

 

(2)  the aggregate principal amount of Auction
Rate Notes that are the subject of such Order;

 

(3)  to the extent that such Bidder is an Existing
Owner:

 

a.  the principal amount of Auction Rate Notes,
if any, subject to any Hold Order placed by such Existing Owner;

 

b.  the principal amount of Auction Rate Notes,
if any, subject to any Bid placed by such Existing Owner and the rate specified
in such Bid; and

 

c.  the principal amount of Auction Rate Notes,
if any, subject to any Sell Order placed by such Existing Owner;

 

and

 

(4)  to the extent such Bidder is a Potential
Owner, the rate specified in such Potential Owner’s Bid.

 

(B)  If any rate specified in any Bid contains
more than three figures to the right of the decimal point, the Auction Agent
shall round such rate up to the next higher one thousandth of 1%.

 

(C)  If an Order or Orders covering all
Outstanding Auction Rate Notes owned by an Existing Owner is not submitted to
the Auction Agent prior to the Submission Deadline, the Auction Agent shall
deem a Hold Order to have been submitted on behalf of such Existing Owner
covering the principal amount

 

A-14

 

of Outstanding Auction Rate Notes owned by such
Existing Owner and not subject to an Order submitted to the Auction Agent.

 

(D)  Neither the Issuer, the Indenture Trustee nor
the Auction Agent shall be responsible for any failure of a Broker-Dealer to
submit an Order to the Auction Agent on behalf of any Existing Owner or
Potential Owner.

 

(E)  If any Existing Owner submits through a
Broker-Dealer to the Auction Agent one or more Orders covering in the aggregate
more than the principal amount of Outstanding Auction Rate Notes owned by such
Existing Owner, such Orders shall be considered valid as follows and in the
following order of priority:

 

(1)  All Hold Orders shall be considered valid,
but only up to the aggregate principal amount of Outstanding Auction Rate Notes
owned by such Existing Owner, and if the aggregate principal amount of Auction
Rate Notes subject to such Hold Orders exceeds the aggregate principal amount
of Auction Rate Notes owned by such Existing Owner, the aggregate principal
amount of Auction Rate Notes subject to each such Hold Order shall be reduced
pro rata so that the aggregate principal amount of Auction Rate Notes
subject to such Hold Order equals the aggregate principal amount of Outstanding
Auction Rate Notes owned by such Existing Owner.

 

(2)  a.      Any
Bid shall be considered valid up to an amount equal to the excess of the
principal amount of Outstanding Auction Rate Notes owned by such Existing Owner
over the aggregate principal amount of Auction Rate Notes subject to any Hold
Order referred to in clause (A) of this paragraph (ii);

 

b.  Subject to subclause (2)(a) of this
clause (E), if more than one Bid with the same rate is submitted on behalf
of such Existing Owner and the aggregate principal amount of Outstanding
Auction Rate Notes subject to such Bids is greater than such excess, such Bids
shall be considered valid up to an amount equal to such excess;

 

c.  Subject to subclauses (2)(a) and (2)(b)
of this clause (E), if more than one Bid with different rates are
submitted on behalf of such Existing Owner, such Bids shall be considered valid
first in the ascending order of their respective rates until the highest rate
is reached at which such excess exists and then at such rate up to the amount of
such excess; and

 

d.  In any such event, the amount of Outstanding
Auction Rate Notes, if any, subject to Bids not valid under this
clause (E) shall be treated as the subject of a Bid by a Potential Owner
at the rate therein specified; and

 

(3)  All Sell Orders shall be considered valid up
to an amount equal to the excess of the principal amount of Outstanding Auction
Rate Notes

 

A-15

 

owned by such Existing
Owner over the aggregate principal amount of Auction Rate Notes subject to Hold
Orders referred to in clause (1) of this paragraph (v) and valid
Bids referred to in clause (2) of this paragraph (E).

 

(F)  If more than one Bid for Auction Rate Notes
is submitted on behalf of any Potential Owner, each Bid submitted shall be a
separate Bid with the rate and principal amount therein specified.

 

(G)  An Existing Owner that offers to purchase
additional Auction Rate Notes is, for purposes of such offer, treated as a
Potential Owner.

 

(H)  Any Bid or Sell Order submitted by an
Existing Owner covering an aggregate principal amount of Auction Rate Notes not
equal to an Authorized Denomination shall be rejected and shall be deemed a
Hold Order.  Any Bid submitted by a
Potential Owner covering an aggregate principal amount of Auction Rate Notes
not equal to an Authorized Denomination shall be rejected.

 

(I)  Any Bid specifying a rate higher than the
applicable Maximum Rate will (1) be treated as a Sell Order if submitted
by an Existing Owner and (2) not be accepted if submitted by a Potential
Owner.

 

(J)  Any Order submitted in an Auction by a
Broker-Dealer to the Auction Agent prior to the Submission Deadline on any
Auction Date shall be irrevocable.

 

(iii) 
(A)       Not earlier than the
Submission Deadline on each Auction Date, the Auction Agent shall assemble all
valid Orders submitted or deemed submitted to it by the Broker-Dealers (each
such Order as submitted or deemed submitted by a Broker-Dealer being herein
referred to individually as a “Submitted Hold Order,” a “Submitted Bid” or a
“Submitted Sell Order,” as the case may be, or as a “Submitted Order,” and
collectively as “Submitted Hold Orders,” “Submitted Bids” or “Submitted Sell
Orders,” as the case may be, or as “Submitted Orders”) and shall determine:

 

(1)  the excess of the total principal amount of
Outstanding Auction Rate Notes over the sum of the aggregate principal amount
of Outstanding Auction Rate Notes subject to Submitted Hold Orders (such excess
being herein referred to as the “Available Auction Rate Notes”), and

 

(2)  from the Submitted Orders whether:

 

a.  the aggregate principal amount of Outstanding
Auction Rate Notes subject to Submitted Bids by Potential Owners specifying one
or more rates equal to or lower than the applicable Maximum Rate;

 

exceeds or is equal to the sum of:

 

A-16

 

b.  the aggregate principal amount of Outstanding
Auction Rate Notes subject to Submitted Bids by Existing Owners specifying one
or more rates higher than the applicable Maximum Rate; and

 

c.  the aggregate principal amount of Outstanding
Auction Rate Notes subject to Submitted Sell Orders;

 

(in the event such excess or such equality exists,
other than because all of the Outstanding Auction Rate Notes are subject to Submitted
Hold Orders, such Submitted Bids described in subclause a. above shall be
referred to collectively as “Sufficient Bids”); and

 

(3)  if Sufficient Bids exist, the Bid Auction
Rate, which shall be the lowest rate specified in such Submitted Bids such that
if:

 

a.   (x) each Submitted Bid from Existing
Owners specifying such lowest rate and (y) all other Submitted Bids from
Existing Owners specifying lower rates were rejected, thus entitling such
Existing Owners to continue to own the principal amount of Auction Rate Notes
subject to such Submitted Bids; and

 

b.   (x) each such Submitted Bid from
Potential Owners specifying such lowest rate and (y) all other Submitted
Bids from Potential Owners specifying lower rates were accepted;

 

the result would be that such Existing Owners
described in subclause a. above would continue to own an aggregate
principal amount of Outstanding Auction Rate Notes that, when added to the
aggregate principal amount of Outstanding Auction Rate Notes to be purchased by
such Potential Owners described in subclause b. above, would equal not
less than the Available Auction Rate Notes.

 

(B)  Promptly after the Auction Agent has made the
determinations pursuant to Section 2.02(a)(iii)(A) of this Appendix A,
the Auction Agent shall advise the Indenture Trustee, the Broker-Dealers and
the Issuer of the Net Loan Rate, Maximum Rate and the All Hold Rate and the
components thereof on the Auction Date. 
Based on such determinations, the Auction Rate for the next succeeding
Interest Period will be established as follows:

 

(1)  if Sufficient Bids exist, that the Auction
Rate for the next succeeding Interest Period shall be equal to the Bid Auction
Rate so determined;

 

(2)  if Sufficient Bids do not exist (other than
because all of the Outstanding Auction Rate Notes are subject to Submitted Hold
Orders), that the Auction Rate for the next succeeding Interest Period shall be
equal to the applicable Maximum Rate; or

 

(3)  if all Outstanding Auction Rate Notes are
subject to Submitted Hold Orders, that the Auction Rate for the next succeeding
Interest Period shall be equal to the applicable All Hold Rate.

 

A-17

 

(C)  Promptly after the Auction Agent has
determined the Auction Rate, the Auction Agent shall determine and advise the
Indenture Trustee of the Auction Note Interest Rate, which rate shall be the
lesser of (x) the Auction Rate 
(y) the applicable Maximum Rate, and (z) during the occurrence if a
Net Loan Rate Restriction Period, the Net Loan Rate.

 

(iv)  Existing Owners shall continue to own the
principal amount of Auction Rate Notes that are subject to Submitted Hold
Orders.  If the Net Loan Rate is equal to
or greater than the Bid Auction Rate and if Sufficient Bids have been received
by the Auction Agent, the Bid Auction Rate will be the Auction Note Interest
Rate, and Submitted Bids and Submitted Sell Orders will be accepted or rejected
and the Auction Agent will take such other action as described below in
subparagraph (A).

 

If the Maximum Rate is less than the Auction Rate, the
Maximum Rate will be the Auction Note Interest Rate.  If the Auction Agent has not received
Sufficient Bids (other than because all of the Outstanding Auction Rate Notes
are subject to Submitted Hold Orders), the Auction Note Interest Rate will be
the applicable Maximum Rate.  In any of
the cases described above, Submitted Orders will be accepted or rejected and
the Auction Agent will take such other action as described below in
subparagraph (B).

 

(A)  If Sufficient Bids have been made and the
Maximum Rate is equal to or greater than the Bid Auction Rate (in which case
the Auction Note Interest Rate shall be the Bid Auction Rate), all Submitted
Sell Orders shall be accepted and, subject to the provisions of clauses (4)
and (5) of this Section 2.02(a)(iv), Submitted Bids shall be accepted or
rejected as follows in the following order of priority, and all other Submitted
Bids shall be rejected:

 

(1)  Existing Owners’ Submitted Bids specifying
any rate that is higher than the Auction Note Interest Rate shall be accepted,
thus requiring each such Existing Owner to sell the aggregate principal amount
of Auction Rate Notes subject to such Submitted Bids;

 

(2)  Existing Owners’ Submitted Bids specifying
any rate that is lower than the Auction Note Interest Rate shall be rejected,
thus entitling each such Existing Owner to continue to own the aggregate
principal amount of Auction Rate Notes subject to such Submitted Bids;

 

(3)  Potential Owners’ Submitted Bids specifying
any rate that is lower than the Auction Note Interest Rate shall be accepted;

 

(4)  Each Existing Owners’ Submitted Bid
specifying a rate that is equal to the Auction Note Interest Rate shall be
rejected, thus entitling such Existing Owner to continue to own the aggregate
principal amount of Auction Rate Notes subject to such Submitted Bid, unless
the aggregate principal amount of Outstanding Auction Rate Notes subject to all
such Submitted Bids shall be greater than the principal amount of Auction Rate
Notes (the “remaining principal

 

A-18

 

amount”) equal to the
excess of the Available Auction Rate Notes over the aggregate principal amount
of Auction Rate Notes subject to Submitted Bids described in clauses (2)
and (3) of this Section 2.02(a)(iv)(A), in which event such Submitted Bid
of such Existing Owner shall be rejected in part, and such Existing Owner shall
be entitled to continue to own the principal amount of Auction Rate Notes
subject to such Submitted Bid, but only in an amount equal to the aggregate
principal amount of Auction Rate Notes obtained by multiplying the remaining
principal amount by a fraction, the numerator of which shall be the principal
amount of Outstanding Auction Rate Notes owned by such Existing Owner subject
to such Submitted Bid and the denominator of which shall be the sum of the
principal amount of Outstanding Auction Rate Notes subject to such Submitted
Bids made by all such Existing Owners that specified a rate equal to the
Auction Note Interest Rate, subject to the provisions of
Section 2.02(a)(iv)(D) of this Appendix A; and

 

(5)  Each Potential Owner’s Submitted Bid
specifying a rate that is equal to the Auction Note Interest Rate shall be
accepted, but only in an amount equal to the principal amount of Auction Rate
Notes obtained by multiplying the excess of the aggregate principal amount of
Available Auction Rate Notes over the aggregate principal amount of Auction
Rate Notes subject to Submitted Bids described in clauses (2), (3) and (4)
of this Section 2.02(a)(iv)(A) by a fraction the numerator of which shall
be the aggregate principal amount of Outstanding Auction Rate Notes subject to
such Submitted Bid and the denominator of which shall be the sum of the
principal amount of Outstanding Auction Rate Notes subject to Submitted Bids
made by all such Potential Owners that specified a rate equal to the Auction
Note Interest Rate, subject to the provisions of Section 2.02(a)(iv)(D) of
this Appendix A.

 

(B)  If Sufficient Bids have not been made (other
than because all of the Outstanding Auction Rate Notes are subject to submitted
Hold Orders), or if the Maximum Rate is less than the Bid Auction Rate (in
which case the Auction Note Interest Rate shall be the Maximum Rate), subject
to the provisions of Section 2.02(a)(iv)(D) of this Appendix A,
Submitted Orders shall be accepted or rejected as follows in the following
order of priority and all other Submitted Bids shall be rejected:

 

(1)  Existing Owners’ Submitted Bids specifying
any rate that is equal to or lower than the Auction Note Interest Rate shall be
rejected, thus entitling such Existing Owners to continue to own the aggregate
principal amount of Auction Rate Notes subject to such Submitted Bids;

 

(2)  Potential Owners’ Submitted Bids specifying
(x) any rate that is equal to or lower than the Auction Note Interest Rate
shall be accepted and (y) any rate that is higher than the Auction Note
Interest Rate shall be rejected; and

 

A-19

 

(3)  each Existing Owner’s Submitted Bid
specifying any rate that is higher than the Auction Note Interest Rate and the
Submitted Sell Order of each Existing Owner shall be accepted, thus entitling
each Existing Owner that submitted any such Submitted Bid or Submitted Sell
Order to sell the Auction Rate Notes subject to such Submitted Bid or Submitted
Sell Order, but in both cases only in an amount equal to the aggregate
principal amount of Auction Rate Notes obtained by multiplying the aggregate
principal amount of Auction Rate Notes subject to Submitted Bids described in
clause (2)(x) of this Section 2.02(a)(iv)(B) by a fraction the
numerator of which shall be the aggregate principal amount of Outstanding
Auction Rate Notes owned by such Existing Owner subject to such submitted Bid
or Submitted Sell Order and the denominator of which shall be the aggregate
principal amount of Outstanding Auction Rate Notes subject to all such
Submitted Bids and Submitted Sell Orders.

 

(C)  If all Auction Rate Notes are subject to
Submitted Hold Orders, all Submitted Bids shall be rejected.

 

(D)  If, as a result of the procedures described
in paragraph (A) or (B) of this Section 2.02(a)(iv), any Existing
Owner would be entitled or required to sell, or any Potential Owner would be
entitled or required to purchase, a principal amount of Auction Rate Notes that
is not equal to an Authorized Denomination, the Auction Agent shall, in such
manner as in its sole discretion it shall determine, round up or down the
principal amount of Auction Rate Notes to be purchased or sold by any Existing
Owner or Potential Owner so that the principal amount of Auction Rate Notes
purchased or sold by each Existing Owner or Potential Owner shall be equal to
an Authorized Denomination.

 

(E)  If, as a result of the procedures described
in paragraph (B) of this Section 2.02(a)(iv), any Potential Owner
would be entitled or required to purchase less than an Authorized Denomination
of Auction Rate Notes, the Auction Agent shall, in such manner as in its sole
discretion it shall determine, allocate Auction Rate Notes for purchase among
Potential Owners so that only Auction Rate Notes in Authorized Denominations
are purchased by any Potential Owner, even if such allocation results in one or
more of such Potential Owners not purchasing any Auction Rate Notes.

 

(v)  Based on the result of each Auction, the
Auction Agent shall determine the aggregate principal amount of Auction Rate
Notes to be purchased and the aggregate principal amount of Auction Rate Notes
to be sold by Potential Owners and Existing Owners on whose behalf each
Broker-Dealer submitted Bids or Sell Orders and, with respect to each
Broker-Dealer, to the extent that such aggregate principal amount of Auction
Rate Notes to be sold differs from such aggregate principal amount of Auction
Rate Notes to be purchased, determine to which other Broker-Dealer or
Broker-Dealers acting for one or more purchasers such Broker-Dealer shall
deliver, or from which other Broker-Dealer or Broker-Dealers acting for one or
more sellers such Broker-Dealer shall receive, as the case may be, Auction Rate
Notes.

 

A-20

 

(vi)  Any calculation by the Auction Agent or the
Indenture Trustee, as applicable, of the Auction Note Interest Rate, the
Maximum Rate, the All Hold Rate, the Net Loan Rate and the Non-Payment Rate
shall, in the absence of manifest error, be binding on all other parties.

 

(vii)  Notwithstanding anything in this Appendix A
to the contrary, (A) no Auction for the Auction Rate Notes for an Auction
Period of less than 180 days will be held on any Auction Date hereunder on
which there are insufficient moneys in the Revenue Fund to pay, or otherwise
held by the Indenture Trustee under the Indenture and available to pay, the
principal of and interest due on the Auction Rate Notes on the Payment Date
immediately following such Auction Date, and (B) no Auction will be held
on any Auction Date hereunder during the continuance of a Payment Default.  The Indenture Trustee shall promptly notify
the Auction Agent of any such occurrence.

 

(b)  Application
of Interest Payments for the Auction Rate Notes.

 

(i)  The Indenture Trustee shall determine not
later than 2:00 p.m., Eastern Time, on the Business Day next succeeding an
Payment Date, whether a Payment Default has occurred.  If a Payment Default has occurred, the
Indenture Trustee shall, not later than 2:15 p.m., Eastern Time, on such
Business Day, send a notice thereof in substantially the form of Exhibit C
attached hereto to the Auction Agent by telecopy or similar means and, if such
Payment Default is cured, the Indenture Trustee shall immediately send a notice
in substantially the form of Exhibit D attached hereto to the Auction
Agent by telecopy or similar means.

 

(ii)  Not later than 2:00 p.m., Eastern Time,
on each anniversary of the Closing Date, the Indenture Trustee shall pay to the
Auction Agent, in immediately available funds out of amounts in the Revenue
Fund, an amount equal to the Auction Agent Fee as set forth in the Auction
Agent Agreement as set forth in the Servicer’s Report.  Not later than 2:00 p.m., Eastern Time,
on each Auction Date, the Indenture Trustee shall pay to the Auction Agent, in
immediately available funds out of amounts in the Revenue Fund, an amount equal
to the Broker-Dealer Fee as calculated in the Auction Agent Agreement.  The Indenture Trustee shall, from time to
time at the request of the Auction Agent and at the direction of an Authorized
Officer, reimburse the Auction Agent for its reasonable expenses as provided in
the Auction Agent Agreement, such expenses to be paid out of amounts in the
Revenue Fund.

 

(c)  Calculation of Maximum Rate, All Hold Rate, Net Loan
Rate, Applicable LIBOR Rate, and Non-Payment Rate.  The Auction Agent shall calculate the
applicable Maximum Rate, Applicable LIBOR Rate, and All Hold Rate, as the case
may be, on each Auction Date and shall notify the Indenture Trustee and the
Broker-Dealers of the applicable Maximum Rate, Applicable LIBOR Rate, and All
Hold Rate, as the case may be, as provided in the Auction Agent Agreement;
provided, that if the ownership of the Auction Rate Notes is no longer
maintained in Book-entry Form, or if a Payment Default has occurred, then the
Indenture Trustee shall determine the applicable Maximum Rate, Net Loan Rate,
Applicable LIBOR Rate,

 

A-21

 

All Hold Rate and
Non-Payment Rate for each such Interest Period. 
If the ownership of the Auction Rate Notes is no longer maintained in
Book-entry Form by the Securities Depository, the Indenture Trustee shall
calculate the applicable Maximum Rate and the Net Loan Rate on the Business Day
immediately preceding the first day of each Interest Period after the delivery
of certificates representing the Auction Rate Notes pursuant to the
Indenture.  If a Payment Default shall
have occurred, the Indenture Trustee shall calculate the Non-Payment Rate on
the Interest Rate Determination Date for (i) each Interest Period
commencing after the occurrence and during the continuance of such Payment
Default and (ii) any Interest Period commencing less than two Business
Days after the cure of any Payment Default. 
The determination by the Indenture Trustee or the Auction Agent, as the
case may be, of the applicable Maximum Rate, Net Loan Rate, Applicable LIBOR
Rate, All Hold Rate and Non-Payment Rate shall (in the absence of manifest
error) be final and binding upon all parties. 
If calculated or determined by the Auction Agent, the Auction Agent
shall promptly advise the Indenture Trustee of the applicable Maximum Rate, Net
Loan Rate, Applicable LIBOR Rate, and All Hold Rate.

 

(d) 
Notification of Rates, Amounts and Payment Dates.

 

(i)  By 12:00 noon, Eastern Time, on the
Business Day following each Regular Record Date, the Indenture Trustee shall
determine the aggregate amounts of interest distributable on the next
succeeding Payment Date to the beneficial owners of Auction Rate Notes.

 

(ii)  At least four days prior to any Payment Date,
the Indenture Trustee shall:

 

(A)  confirm with the Auction Agent, so long as no
Payment Default has occurred and is continuing and the ownership of the Auction
Rate Notes is maintained in Book-entry Form by the Securities Depository,
(1) the date of such next Payment Date and (2) the amount payable to
the Auction Agent on the Auction Date pursuant to
Section 2.02(b)(ii) of this Appendix A; and

 

(B)  advise the Securities Depository, so long as
the ownership of the Auction Rate Notes is maintained in Book-entry Form by the
Securities Depository, upon request, of the aggregate amount of interest
distributable on such next Payment Date to the beneficial owners of each
Class of the Auction Rate Notes.

 

If any day scheduled to be a Payment Date shall be
changed after the Indenture Trustee shall have given the notice or confirmation
referred to in clause (i) of the preceding sentence, the Indenture Trustee
shall, not later than 11:15 a.m., Eastern Time, on the Business Day next
preceding the earlier of the new Payment Date or the old Payment Date, by such
means as the Indenture Trustee deems practicable, give notice of such change to
the Auction Agent, so long as no Payment Default has occurred and is continuing
and the ownership of the Auction Rate Notes is maintained in Book-entry Form by
the Securities Depository.

 

A-22

 

(e)  Auction
Agent.

 

(i)  The Bank of New York is hereby appointed as
Initial Auction Agent to serve as agent for the Issuer in connection with
Auctions.  The Indenture Trustee and the
Issuer will, and the Indenture Trustee is hereby directed to, enter into the
Initial Auction Agent Agreement with The Bank of New York, as the Initial
Auction Agent.  Any Substitute Auction
Agent shall be (A) a bank, national banking association or trust company
duly organized under the laws of the United States of America or any state or
territory thereof having its principal place of business in the Borough of
Manhattan, New York, or such other location as approved by the Indenture
Trustee in writing and having a combined capital stock or surplus of at least
$50,000,000, or (B) a member of the National Association of Securities
Dealers, Inc., having a capitalization of at least $50,000,000, and, in either
case, authorized by law to perform all the duties imposed upon it hereunder and
under the Auction Agent Agreement.  The
Auction Agent may at any time resign and be discharged of the duties and
obligations created by this Appendix A by giving at least
90 days’ notice to the Indenture Trustee, each Broker-Dealer and the
Issuer.  The Auction Agent may be removed
at any time by the Indenture Trustee upon the written direction of an
Authorized Officer or by the holders of a majority of the aggregate principal
amount of the Auction Rate Notes then Outstanding, and if by such Noteholders,
by an instrument signed by such Noteholders or their attorneys and filed with
the Auction Agent, the Issuer and the Indenture Trustee upon at least
90 days’ written notice.  Neither
resignation nor removal of the Auction Agent pursuant to the preceding two
sentences shall be effective until and unless a Substitute Auction Agent has
been appointed and has accepted such appointment.  If required by the Issuer, a Substitute
Auction Agent Agreement shall be entered into with a Substitute Auction
Agent.  Notwithstanding the foregoing,
the Auction Agent may terminate the Auction Agent Agreement if, within
25 days after notifying the Indenture Trustee, each Broker-Dealer and the
Issuer in writing that it has not received payment of any Auction Agent Fee due
it in accordance with the terms of the Auction Agent Agreement, the Auction
Agent does not receive such payment.

 

(ii)  If the Auction Agent shall resign or be
removed or be dissolved, or if the property or affairs of the Auction Agent
shall be taken under the control of any state or federal court or
administrative body because of bankruptcy or insolvency, or for any other
reason, the Indenture Trustee at the direction of an Authorized Officer, shall
use its best efforts to appoint a Substitute Auction Agent.

 

(iii)  The Auction Agent is acting as agent for the
Issuer in connection with Auctions.  In
the absence of bad faith, negligent failure to act or negligence on its part,
the Auction Agent shall not be liable for any action taken, suffered or omitted
or any error of judgment made by it in the performance of its duties under the
Auction Agent Agreement and shall not be liable for any error of judgment made
in good faith unless the Auction Agent shall have been negligent in
ascertaining (or failing to ascertain) the pertinent facts.

 

A-23

 

(f) 
Broker-Dealer.

 

(i)  The Auction Agent will enter into a
Broker-Dealer Agreement with UBS Financial Services Inc. as the initial Broker-Dealer.
An Authorized Officer may, from time to time, approve one or more additional
Persons to serve as a Broker-Dealer under the Broker-Dealer Agreements and
shall be responsible for providing such Broker-Dealer Agreements to the
Indenture Trustee and the Auction Agent.

 

(ii)  Any Broker-Dealer may be removed at any time,
at the request of an Authorized Officer, but there shall, at all times, be at
least one Broker-Dealer appointed and acting as such.

 

(g)  Changes in
Auction Period or Periods and Certain Percentages.

 

(i)  While any of the Auction Rate Notes are
Outstanding, the Issuer may, from time to time, change the length of one or
more Auction Periods (an “Auction Period Adjustment”), in order to conform with
then current market practice with respect to similar securities or to
accommodate economic and financial factors that may affect or be relevant to
the length of the Auction Period and the interest rate borne by the Auction
Rate Notes.  The Issuer shall not
initiate an Auction Period Adjustment unless it shall have received the written
consent of the Market Agent, which consent shall not be unreasonably withheld,
not later than nine days prior to the Auction Date for such Auction Period. The
Issuer shall initiate the Auction Period Adjustment by giving written notice by
Issuer Order to the Indenture Trustee, the Auction Agent, the Market Agent, the
applicable Broker-Dealer, each Rating Agency and the Securities Depository in
substantially the form of, or containing substantially the information contained
in, Exhibit E attached hereto at least 10 days prior to the Auction
Date for such Auction Period.

 

(ii)  Any such adjusted Auction Period shall not be
less than 7 days nor more than 366 days.

 

(iii)  An Auction Period Adjustment shall take
effect only if (A) the Indenture Trustee and the Auction Agent receive, by
11:00 a.m., Eastern Time, on the Business Day before the Auction Date for
the first such Auction Period, an Issuer Certificate in substantially the form
attached as, or containing substantially the same information contained in,
Exhibit F attached hereto, authorizing the Auction Period Adjustment
specified in such certificate along with a copy of the written consent of the
Market Agent and, (B) Sufficient Bids exist as of the Auction on the
Auction Date for such first Auction Period. 
If the condition referred to in (A) above is not met, the
applicable Auction Note Interest Rate for the next Auction Period shall be
determined pursuant to the above provisions of this Section 2.02 and the
Auction Period shall be the Auction Period determined without reference to the
proposed change.  If the condition
referred to in (A) is met but the condition referred in (B) above is not met,
the applicable Auction Note Interest Rate for the next Auction Period shall be
the applicable Maximum Rate and the Auction Period shall be the Auction Period
determined without reference to the proposed change.

 

A-24

 

In connection with any Auction Period Adjustment, the
Auction Agent shall provide such further notice to such parties as is specified
in Section 2.5 of the Auction Agent Agreement.

 

(h)  Changes in the Auction Date.  The Market Agent, with the written consent of
the Administrator on behalf of the Issuer, may specify a different Auction Date
(but in no event more than five Business Days earlier) than the Auction Date
that would otherwise be determined in accordance with the definition of
“Auction Date” in Section 1.01 of this Appendix A with respect to one or
more specified Auction Periods in order to conform with then current market
practice with respect to similar securities or to accommodate economic and
financial factors that may affect or be relevant to the day of the week
constituting an Auction Date and the interest rate borne on the Auction Rate
Notes.  The Market Agent shall deliver a
written request for consent to such change in the Auction Date to the
Administrator at least 14 days prior to the effective date of such change.  If the Administrator shall have delivered
such written consent to the Market Agent, such Market Agent shall provide
notice of its determination to specify an earlier Auction Date for one or more
Auction Periods by means of a written notice delivered at least 10 days prior
to the proposed changed Auction Date to the Indenture Trustee, the Auction
Agent, the Issuer, the Administrator, each Rating Agency and the Securities
Depository.  Such notice shall be
substantially in the form of, or contain substantially the information
contained in, Exhibit G attached hereto.

 

In connection with any change described in this
Section 2.02(h), the Auction Agent shall provide such further notice to
such parties as is specified in Section 2.5 of the Auction Agent
Agreement.

 

Section 2.03  Additional
Provisions Regarding the Interest Rates on the Auction Rate Notes.  The determination of an Auction Note Interest
Rate by the Auction Agent or any other Person pursuant to the provisions of the
applicable Section of this Article II shall be conclusive and binding on the
Noteholders of the Auction Rate Notes to which such Auction Note Interest Rate
applies, and the Issuer and the Indenture Trustee may rely thereon for all
purposes.

 

In no event shall the cumulative amount of interest
paid or payable on the Auction Rate Notes (including interest calculated as
provided herein, plus any other amounts that constitute interest on the Auction
Rate Notes under applicable law, which are contracted for, charged, reserved,
taken or received pursuant to the Auction Rate Notes or related documents)
calculated from the Closing Date of the Auction Rate Notes through any
subsequent day during the term of the Auction Rate Notes or otherwise prior to
payment in full of the Auction Rate Notes exceed the amount permitted by applicable
law.  If the applicable law is ever
judicially interpreted so as to render usurious any amount called for under the
Auction Rate Notes or related documents or otherwise contracted for, charged,
reserved, taken or received in connection with the Auction Rate Notes, or if
the redemption or acceleration of the maturity of the Auction Rate Notes
results in payment to or receipt by the Noteholder or any former Noteholder of
the Auction Rate Notes of any interest in excess of that permitted by
applicable law, then, notwithstanding any provision of the Auction Rate Notes
or related documents to the contrary, all excess amounts theretofore paid or
received with respect to the Auction Rate Notes shall be credited on the
principal balance of the Auction Rate Notes (or, if the Auction Rate Notes have

 

A-25

 

been paid or would
thereby be paid in full, refunded by the recipient thereof), and the provisions
of the Auction Rate Notes and related documents shall automatically and
immediately be deemed reformed and the amounts thereafter collectible hereunder
and thereunder reduced, without the necessity of the execution of any new
document, so as to comply with the applicable law, but so as to permit the
recovery of the fullest amount otherwise called for under the Auction Rate
Notes and under the related documents.

 

A-26

 

EXHIBIT A-1

 

FORM OF SERIES 2004-1 CLASS A-1
NOTES

 

UNLESS THIS NOTE IS PRESENTED BY AN
AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK
CORPORATION (“DTC”), TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER,
EXCHANGE, OR PAYMENT, AND ANY NOTE ISSUED IS REGISTERED IN THE NAME OF CEDE
& CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE
OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY
AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE,
OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL
INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST
HEREIN.

 

EXCEPT AS OTHERWISE PROVIDED IN THE INDENTURE, THIS GLOBAL NOTE MAY BE
TRANSFERRED, IN WHOLE BUT NOT IN PART, ONLY TO ANOTHER NOMINEE OF THE
SECURITIES DEPOSITORY (AS DEFINED IN THE INDENTURE) OR TO A SUCCESSOR
SECURITIES DEPOSITORY OR TO A NOMINEE OF A SUCCESSOR SECURITIES DEPOSITORY.

 

PHEAA STUDENT LOAN TRUST
I

STUDENT LOAN ASSET-BACKED NOTE

SERIES 2004-1 CLASS A-1

LIBOR RATE NOTE

 

	
  REGISTERED NO. A-1- 1

  	
   

  	
  REGISTERED $200,000,000

  

 

	
  Maturity Date

  	
   

  	
  Interest Rate

  	
   

  	
  Original Issue Date

  	
   

  	
  Cusip No.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  April 25, 2016

  	
   

  	
  As Herein Provided

  	
   

  	
  July 14, 2004

  	
   

  	
  71722T AE4

  

 

PRINCIPAL SUM: TWO-HUNDRED-MILLION AND 00/100 DOLLARS

 

NOTEHOLDER: CEDE & CO.

 

PHEAA STUDENT LOAN TRUST I, a Delaware statutory trust
organized under the laws of the State of Delaware (the “Issuer,” which term
includes any successor entity under the Indenture of Trust, dated as of
December 1, 2003 (the “Original Indenture”), as amended by that certain
First Amendment to Indenture of Trust and First Supplemental Indenture of Trust
dated as of July 1, 2004, and the Second Supplemental Indenture of Trust dated
as of July 1, 2004 (as the same may be amended from time to time, the “Second
Supplemental Indenture”, and together with the Original Indenture, as amended,
the “Indenture”), each between the Issuer and Manufacturers and Traders Trust
Company, as Indenture Trustee (the “Indenture Trustee,” which term includes any
successor indenture trustee under the Indenture)) for value received,

 

A-1-1

 

hereby promises to
pay to CEDE & CO. (the “Noteholder”) or registered assigns
TWO-HUNDRED-MILLION DOLLARS ($200,000,000) (the “Principal Sum”), but solely
from the revenues and receipts hereinafter specified and not otherwise, on the
Maturity Date specified above (subject to the right of prior redemption
hereinafter described), upon presentation and surrender of this note at the
Corporate Trust Office of the Indenture Trustee, as paying agent for the Notes,
or a duly appointed successor paying agent, and to pay interest in arrears on
said Principal Sum, but solely from the revenues and receipts hereinafter
specified and not otherwise, to the Noteholder from the most recent Quarterly
Distribution Date to which interest has been paid hereon, or from the Original
Issue Date if no Quarterly Distribution Date has occurred, until the payment in
full of the Principal Sum.

 

Any capitalized words and terms used as defined words
and terms in this note and not otherwise defined herein shall have the meanings
given them in the Indenture.

 

This note shall bear interest at a rate equal to the
Three- Month LIBOR, as determined in accordance with Section 2.02 of the
Second Supplemental Indenture, plus twelve- hundredths percent (0.12%);
provided, however, LIBOR for the first Accrual Period shall be determined by
the Calculation Agent by reference to straight line interpolation between
three-month LIBOR and four-month LIBOR based on the actual number of days in the
first Accrual Period.

 

The principal of and interest on this note are payable
in lawful money of the United States of America.  If the specified date for any payment of
principal or interest accrued to such specified date shall be a day other than
a Business Day then such payment may be made on the next succeeding Business
Day, with the same force and effect as if made on the specified date for such
payment, without additional interest.

 

Interest payable on this note shall be computed on the
assumption that each year contains 360 days and actual days elapsed.

 

This note is one of a Series of notes of the Issuer
designated Student Loan Asset-Backed Notes, Series 2004-1 Class A-1 LIBOR Rate
Notes, dated the Original Issue Date, in the aggregate original principal
amount of $200,000,000 (the “Series 2004-1 Class A-1 Notes”) which have been
authorized by the Issuer, and issued by the Issuer pursuant to the
Indenture.  The Issuer is, simultaneously
with the Class A-1 Notes, issuing $180,000,000 of its Student Loan Asset-Backed
Notes, Series 2004-1 Class A Notes in two other classes (together with the
Series 2004-1 Class A-1 Notes, the Series 2003-1 Class A Notes and any
Additional Notes designated as Senior Notes, the “Class A Notes”) and
$20,000,000 of its Student Loan Asset-Backed Notes, Series 2004-1 Class B-1
Notes (together with the Series 2003-1 Class B Notes, and any Additional
Notes designated as Subordinate Notes, the “Class B Notes”).  The proceeds of such notes have been used by
the Issuer, together with other moneys of the Issuer, for the purpose of
providing funds to finance the acquisition of student loans, fund a reserve
fund and to pay certain costs and expenses in connection with the issuance of
such notes. The Indenture provides for the
issuance of additional notes (the “Additional Notes”) which may be secured on a
parity with, or subordinate to, any Class of Class A Notes then outstanding,
and secured on a parity with, senior to, or subordinate to, any Class of Class
B Notes then outstanding. In addition, subject to certain

 

A-1-2

 

restrictions set forth in the Indenture, any Class of Additional Notes
may be entitled to receive payments of principal or interest at a time which is
prior to, concurrent with, or after, any Class of Notes then Outstanding, in
accordance with the terms set forth in the Indenture and any related
Supplemental Indenture. The Class A Notes, the Class B Notes and any Additional
Notes are collectively referred to herein as the “Notes.”

 

The Indenture provides that the Issuer may enter into
a Derivative Product between the Issuer and a Counterparty.  Payments due to a Counterparty from the
Issuer pursuant to the applicable Derivative Product may be secured on a parity
with any series of Notes.

 

The principal of and interest on the Class A
Notes and any Additional Notes issued on a parity with the Class A Notes
and any Scheduled Issuer Derivative Payments and Specified Issuer Termination
Payments secured on a parity with the Class A Notes are payable on a basis
superior to such payments on the Class B Notes and any Additional Notes
issued on a parity or subordinate to the Class B Notes; provided, however,
that current principal and interest may be paid on the Class B Notes and
any Additional Notes issued on a parity with the Class B Notes (and any
Scheduled Issuer Derivative Payments and Specified Issuer Termination Payments
secured on a parity with the Class B Notes) if all principal and interest
payments due and owing at such time on the Class A Notes and any
Additional Notes issued on a parity with the Class A Notes and any
Scheduled Issuer Derivative Payments and Specified Issuer Termination Payments
secured on a parity with the Class A Notes have been previously made or
provided for as provided in the Indenture.

 

Reference is hereby made to the Indenture, copies of
which are on file in the Corporate Trust Office of the Indenture Trustee, and
to all of the provisions of which any Noteholder of this note by his acceptance
hereof hereby assents, for definitions of terms; the description of and the
nature and extent of the security for the Notes; the Issuer’s student loan
acquisition program; the revenues and other money pledged to the payment of the
principal of and interest on the Notes; the nature and extent and manner of
enforcement of the pledge; the conditions upon which the Indenture may be
amended or supplemented with or without the consent of the Noteholders and any
Counterparty; the rights and remedies of the Noteholder hereof with respect
hereto and thereto, including the limitations upon the right of a Noteholder
hereof to institute any suit, action, or proceeding in equity or at law with
respect hereto and thereto; the rights, duties, and obligations of the Issuer
and the Indenture Trustee thereunder; the terms and provisions upon which the
liens, pledges, charges, trusts, and covenants made therein may be discharged
at or prior to the Stated Maturity or earlier redemption of this note, and this
note thereafter shall no longer be secured by the Indenture or be deemed to be
Outstanding, thereunder; and for the other terms and provisions thereof.

 

THE NOTES ARE LIMITED OBLIGATIONS OF THE ISSUER,
PAYABLE SOLELY FROM, AND FURTHER SECURED BY, THE TRUST ESTATE, AS DEFINED IN
THE INDENTURE.

 

No recourse, either directly or indirectly, shall be
had for the payment of the principal of and interest on this note or any claim
based hereon or in respect hereof or of the Indenture, against the Indenture
Trustee, or any officer, director, owner, employee, or agent of

 

A-1-3

 

the Issuer, nor
against the State of Delaware, or any official thereof, but the obligation to
pay all amounts required by the Indenture securing this note and the obligation
to do and perform the covenants and acts required of the Issuer therein and
herein shall be and remain the responsibility and obligation of said Issuer,
limited as herein set forth.

 

Subject to the restrictions specified in the
Indenture, this note is transferable on the Note Register kept for that purpose
by the Indenture Trustee, as registrar, upon surrender of this note for
transfer at the Corporate Trust Office of the Indenture Trustee, duly endorsed
by, or accompanied by a written instrument of transfer in form satisfactory to
the Indenture Trustee duly executed by, the Noteholder hereof or his attorney
duly authorized in writing, and thereupon one or more new Notes of the same
class, Stated Maturity, of Authorized Denominations, bearing interest at the same
rate, and for the same aggregate principal amount will be issued to the
designated transferee or transferees.  At
the option of the Noteholder, any Note may be exchanged for other Notes in
Authorized Denominations upon surrender of the Note to be exchanged at the
Corporate Trust Office of the Indenture Trustee.  Upon any such presentation for exchange, one
or more new Notes of the same class, Stated Maturity, in Authorized
Denominations, bearing interest at the same rate, and for the same aggregate
principal amount as the Note or Notes so surrendered will be issued to the
Noteholder of the Note or Notes so surrendered; and the Note or Notes so
surrendered shall thereupon be cancelled by the Indenture Trustee.

 

Notwithstanding the foregoing, so long as the
ownership of the Notes is maintained in book-entry form by The Depository Trust
Company (the “Securities Depository”) or a nominee thereof, this note may be
transferred in whole, but not in part, only to the Securities Depository or a
nominee thereof or to a successor Securities Depository or its nominee.

 

The Issuer, the Indenture Trustee, and any agent of
either of them shall treat the Person in whose name this note is registered as
the Noteholder hereof (a) on the Record Date for purposes of receiving
timely payment of interest hereon, and (b) on the date of surrender of
this note for purposes of receiving payment of principal hereof at its Stated
Maturity and (c) for all other purposes, whether or not this note is
overdue, and neither the Issuer, the Indenture Trustee, nor any such agent
shall be affected by notice to the contrary.

 

To the extent permitted by the Indenture,
modifications or alterations of the Indenture and any supplemental indenture
may be made with the consent of less than all of the holders of the Notes then
Outstanding or without the consent of any of such Noteholders (by reason of a
change in the Act or the Regulations or to cure ambiguities or conflicts, or
for any other reasons stated in Section 8.01 of the Indenture), but such
modification or alteration is not permitted to affect the Maturity, Stated
Maturity, amount, Quarterly Distribution Date, or rate of interest on any
Outstanding Notes or affect the rights of the Noteholders of less than all of
the Notes Outstanding.

 

It is hereby certified and recited that all acts and
things required by the laws of the State of Delaware to happen, exist, and be
performed precedent to and in the issuance of this note, and the execution of
said Indenture, have happened, exist and have been performed as so required.

 

A-1-4

 

[SIGNATURE TO FOLLOW]

 

A-1-5

 

IN WITNESS WHEREOF, the Issuer has caused this note to
be executed in its name and on its behalf by its Owner Trustee, all as of the
Original Issue Date.

 

	
   

  	
  PHEAA STUDENT LOAN
  TRUST I

  
	
   

  	
   

  
	
   

  	
  By:  Wachovia Bank of Delaware, National

  Association, not in its individual capacity, but

  solely as Owner Trustee

  
	
   

  	
   

  
	
   

  	
  By

  	
   

  	
   

  
	
   

  	
  Name:

  
	
   

  	
  Title:

  

 

 

CERTIFICATE OF AUTHENTICATION

 

This note is one of the Series 2004-1 Class A-1 Notes
designated therein and described in the within-mentioned Indenture.

 

	
   

  	
  Manufacturers and
  Traders Trust Company, as

  Indenture Trustee

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Authorized Signatory

  
	
   

  	
   

  
	
  Authentication Date:

  	
   

  
	
   

  	
   

  
	
                             
        , 2004

  	
   

  

 

 

ASSIGNMENT

 

FOR VALUE RECEIVED, the undersigned hereby sells,
assigns, and transfers unto
                 
(Social Security or other identifying number                  )
the within note and all rights thereunder and hereby irrevocably appoints
                    
attorney to transfer the within note on the books kept for registration
thereof, with full power of substitution in the premises.

 

	
  Dated:

  	
  Signed:

  
	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  NOTICE: The signature on this Assignment must
  correspond with the name of the Noteholder as it appears on the face of the
  within note in every particular.

  
	
   

  	
   

  
	
   

  	
   

  
	
  Signature Guaranteed by:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  A Member of The
  New York Stock

  	
   

  
	
  Exchange or a
  State or National Bank

  	
   

  
					

 

 

EXHIBIT A-2

 

FORM OF SERIES 2004-1 CLASS A-2
NOTES

 

UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION (“DTC”),
TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT,
AND ANY NOTE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH
OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY
PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED
BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE
HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE
REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.

 

EXCEPT AS OTHERWISE PROVIDED IN THE INDENTURE, THIS
GLOBAL NOTE MAY BE TRANSFERRED, IN WHOLE BUT NOT IN PART, ONLY TO ANOTHER
NOMINEE OF THE SECURITIES DEPOSITORY (AS DEFINED IN THE INDENTURE) OR TO A
SUCCESSOR SECURITIES DEPOSITORY OR TO A NOMINEE OF A SUCCESSOR SECURITIES
DEPOSITORY.

 

PHEAA STUDENT LOAN TRUST
I

STUDENT LOAN ASSET-BACKED NOTE

SERIES 2004-1 CLASS A-2

AUCTION RATE NOTES

 

	
  REGISTERED NO. A-2-1

  	
   

  	
  REGISTERED $90,000,000

  

 

	
  Maturity Date

  	
   

  	
  Interest Rate

  	
   

  	
  Original Issue Date

  	
   

  	
  Cusip No.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  April 25, 2044

  	
   

  	
  As Herein Provided

  	
   

  	
  July 14, 2004

  	
   

  	
  71722T AF1

  

 

PRINCIPAL SUM:  NINETY-MILLION
AND 00/100 DOLLARS

 

NOTEHOLDER:  CEDE & CO.

 

PHEAA STUDENT LOAN TRUST I, a Delaware statutory trust
organized under the laws of the State of Delaware (the “Issuer,” which term
includes any successor entity under the Indenture of Trust, dated as of
December 1, 2003 (the “Original Indenture”), as amended by that certain
First Amendment to Indenture of Trust and First Supplemental Indenture of Trust
dated as of July 1, 2004, and the Second Supplemental Indenture of Trust dated
as of July 1, 2004 (as the same may be amended from time to time, the “Second
Supplemental Indenture”,

 

A-2-1

 

and together with the Original Indenture, as amended, the “Indenture”),
each between the Issuer and Manufacturers and Traders Trust Company, as
Indenture Trustee (the “Indenture Trustee,” which term includes any successor
indenture trustee under the Indenture)) for value received, hereby promises to
pay to CEDE & CO. (the “Noteholder”) or registered assigns, NINETY- MILLION
DOLLARS ($90,000,000) (the “Principal Sum”), but solely from the revenues and
receipts hereinafter specified and not otherwise, on the Maturity Date
specified above (subject to the right of prior redemption hereinafter
described), upon presentation and surrender of this note at the Corporate Trust
Office of the Indenture Trustee, as paying agent for the Notes, or a duly
appointed successor paying agent, and to pay interest in arrears on said
Principal Sum, but solely from the revenues and receipts hereinafter specified
and not otherwise, to the Noteholder from the most recent Payment Date to which
interest has been paid hereon, or from the Original Issue Date if no Payment
Date has occurred, until the payment in full of the Principal Sum.

 

Any capitalized words and terms used as defined words
and terms in this note and not otherwise defined herein shall have the meanings
given them in the Indenture.

 

This Note shall bear interest at an Auction Rate, all
as determined in Appendix A of the Second Supplemental Indenture.

 

The principal of and interest on this note are payable
in lawful money of the United States of America.  If the specified date for any payment of
principal or interest accrued to such specified date shall be a day other than
a Business Day then such payment may be made on the next succeeding Business
Day, with the same force and effect as if made on the specified date for such
payment, without additional interest.

 

Interest payable on this note shall be computed on
actual days elapsed and the assumption that each year contains 365 or
366 days, as applicable.

 

This note is one of a series of notes of the Issuer
designated Student Loan Asset-Backed Notes, Series 2004-1 Class A-2 Auction
Rate Notes, dated the Original Issue Date, in the aggregate original principal
amount of $90,000,000 (the “Series 2004-1 Class A-2 Notes”) which have been
authorized by the Issuer, and issued by the Issuer pursuant to the
Indenture.  The Issuer is, simultaneously
with the Series 2004-1 Class A-2 Notes, issuing $290,000,000 of its Student
Loan Asset-Backed Notes, Series 2004-1 Class A Notes in two other classes
(together with the Series 2004-1 Class A-2 Notes, the Series 2003-1 Class A
Notes and any Additional Notes designated as Senior Notes, the “Class A Notes”),
and $20,000,000 of its Student Loan Asset-Backed Notes, Series 2004-1 Class B-1
Notes (together with the Series 2003-1 Class B Notes and any Additional Notes
designated as Subordinate Notes, the “Class B Notes”).  The proceeds of such notes have been used by
the Issuer, together with other moneys of the Issuer, for the purpose of
providing funds to finance the acquisition of student loans, fund a reserve
fund and to pay certain costs and expenses in connection with the issuance of
such notes. The Indenture provides for the
issuance of additional notes (the “Additional Notes”) which may be secured on a
parity with, or subordinate to, any Class of Class A Notes then outstanding,
and secured on a parity with, senior to, or subordinate to, any Class of Class
B Notes then outstanding. In addition, subject to certain restrictions set
forth in the Indenture, any Class of Additional Notes may be entitled to
receive payments of principal or interest at a time which is prior to,
concurrent with, or after, any Class of Notes then Outstanding, in accordance
with the

 

A-2-2

 

terms set forth in the Indenture and any related Supplemental
Indenture. The Class A Notes, the Class B Notes and any Additional Notes are
collectively referred to herein as the “Notes.”

 

Optional Redemption.  This note is subject to optional redemption
as described in the Indenture at a redemption price equal to the outstanding
principal balance of this note, plus accrued interest hereon through the day
preceding the Payment Date on which the redemption occurs.

 

Notice of Redemption.  Notice of the call for redemption shall be
given by the Indenture Trustee by mailing a copy of the notice at least
12 days prior to the redemption date to the Noteholders to be redeemed in
whole or in part at the address of such Noteholder last showing on the
registration books.  Failure to give such
notice or any defect therein shall not affect the validity of any proceedings for
the redemption of such Notes for which no such failure or defect occurs.  All Notes called for redemption will cease to
bear interest after the specified redemption date, provided funds for their
payment are on deposit at the place of payment at the time.  If less than all Notes are to be redeemed,
Notes shall be selected for redemption as provided in the Indenture.

 

The Indenture provides that the Issuer may enter into
a Derivative Product between the Issuer and a Counterparty.  Payments due to a Counterparty from the
Issuer pursuant to the applicable Derivative Product may be secured on a parity
with any series of Notes.

 

The principal of and interest on the Class A
Notes and any Additional Notes issued on a parity with the Class A Notes
and any Scheduled Issuer Derivative Payments and Specified Issuer Termination
Payments secured on a parity with the Class A Notes are payable on a basis
superior to such payments on the Class B Notes and any Additional Notes
issued on a parity or subordinate to the Class B Notes; provided, however,
that current principal and interest may be paid on the Class B Notes and
any Additional Notes issued on a parity with the Class B Notes (and any
Scheduled Issuer Derivative Payments and Specified Issuer Termination Payments
secured on a parity with the Class B Notes) if all principal and interest
payments due and owing at such time on the Class A Notes and any
Additional Notes issued on a parity with the Class A Notes and any
Scheduled Issuer Derivative Payments and Specified Issuer Termination Payments
secured on a parity with the Class A Notes have been previously made or
provided for as provided in the Indenture; provided, further, however, that
under certain circumstances described in Sections 2.03 and 4.03 of the
Second Supplemental Indenture, principal may be paid on the Class B
Auction Rate Notes before principal is paid on the Class A Auction Rate
Notes.

 

Reference is hereby made to the Indenture, copies of
which are on file in the Corporate Trust Office of the Indenture Trustee, and
to all of the provisions of which any Noteholder of this note by his acceptance
hereof hereby assents, for definitions of terms; the description of and the
nature and extent of the security for the Notes; the Issuer’s student loan
acquisition program; the revenues and other money pledged to the payment of the
principal of and interest on the Notes; the nature and extent and manner of
enforcement of the pledge; the conditions upon which the Indenture may be
amended or supplemented with or without the consent of the Noteholders and any Counterparty;
the rights and remedies of the Noteholder hereof with respect hereto and
thereto, including the limitations upon the right of a Noteholder

 

A-2-3

 

hereof to institute any suit, action, or proceeding in equity or at law
with respect hereto and thereto; the rights, duties, and obligations of the
Issuer and the Indenture Trustee thereunder; the terms and provisions upon
which the liens, pledges, charges, trusts, and covenants made therein may be discharged
at or prior to the Stated Maturity or earlier redemption of this note, and this
note thereafter shall no longer be secured by the Indenture or be deemed to be
Outstanding, thereunder; and for the other terms and provisions thereof.

 

THE NOTES ARE LIMITED OBLIGATIONS OF THE ISSUER,
PAYABLE SOLELY FROM, AND FURTHER SECURED BY, THE TRUST ESTATE, AS DEFINED IN
THE INDENTURE.

 

No recourse, either directly or indirectly, shall be
had for the payment of the principal of and interest on this note or any claim
based hereon or in respect hereof or of the Indenture, against the Indenture
Trustee, or any officer, director, owner, employee, or agent of the Issuer, nor
against the State of Delaware, or any official thereof, but the obligation to
pay all amounts required by the Indenture securing this note and the obligation
to do and perform the covenants and acts required of the Issuer therein and
herein shall be and remain the responsibility and obligation of said Issuer,
limited as herein set forth.

 

Subject to the restrictions specified in the
Indenture, this note is transferable on the Note Register kept for that purpose
by the Indenture Trustee, as registrar, upon surrender of this note for
transfer at the Corporate Trust Office of the Indenture Trustee, duly endorsed
by, or accompanied by a written instrument of transfer in form satisfactory to
the Indenture Trustee duly executed by, the Noteholder hereof or his attorney
duly authorized in writing, and thereupon one or more new Notes of the same
class, Stated Maturity, of Authorized Denominations, bearing interest at the
same rate, and for the same aggregate principal amount will be issued to the
designated transferee or transferees.  At
the option of the Noteholder, any Note may be exchanged for other Notes in
Authorized Denominations upon surrender of the Note to be exchanged at the
Corporate Trust Office of the Indenture Trustee.  Upon any such presentation for exchange, one
or more new Notes of the same class, Stated Maturity, in Authorized
Denominations, bearing interest at the same rate, and for the same aggregate
principal amount as the Note or Notes so surrendered will be issued to the
Noteholder of the Note or Notes so surrendered; and the Note or Notes so
surrendered shall thereupon be cancelled by the Indenture Trustee.

 

Notwithstanding the foregoing, so long as the
ownership of the Notes is maintained in book-entry form by The Depository Trust
Company (the “Securities Depository”) or a nominee thereof, this note may be
transferred in whole, but not in part, only to the Securities Depository or a
nominee thereof or to a successor Securities Depository or its nominee.

 

The Issuer, the Indenture Trustee, and any agent of
either of them shall treat the Person in whose name this note is registered as
the Noteholder hereof (a) on the Record Date for purposes of receiving
timely payment of interest hereon, and (b) on the date of surrender of
this note for purposes of receiving payment of principal hereof at its Stated
Maturity and (c) for all other purposes, whether or not this note is
overdue, and neither the Issuer, the Indenture Trustee, nor any such agent
shall be affected by notice to the contrary.

 

A-2-4

 

To the extent permitted by the Indenture, modifications
or alterations of the Indenture and any supplemental indenture may be made with
the consent of less than all of the holders of the Notes then Outstanding or
without the consent of any of such Noteholders (by reason of a change in the
Act or the Regulations or to cure ambiguities or conflicts, or for any other
reasons stated in Section 8.01 of the Indenture), but such modification or
alteration is not permitted to affect the Maturity, Stated Maturity, amount,
Payment Date, or rate of interest on any Outstanding Notes or affect the rights
of the Noteholders of less than all of the Notes Outstanding.

 

It is hereby certified and recited that all acts and
things required by the laws of the State of Delaware to happen, exist, and be
performed precedent to and in the issuance of this note, and the execution of
said Indenture, have happened, exist and have been performed as so required.

 

[SIGNATURE PAGE FOLLOWS]

 

A-2-5

 

IN WITNESS WHEREOF, the Issuer has caused this note to
be executed in its name and on its behalf by its Owner Trustee, all as of the
Original Issue Date.

 

	
   

  	
  PHEAA STUDENT LOAN
  TRUST I

  
	
   

  	
   

  
	
   

  	
  By:  Wachovia Bank of Delaware, National

  Association, not in its individual capacity, but

  solely as Owner Trustee

  
	
   

  	
   

  
	
   

  	
  By

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

CERTIFICATE OF AUTHENTICATION

 

This note is one of the Series 2004-1 Class A-2 Notes
designated therein and described in the within-mentioned Indenture.

 

	
   

  	
  Manufacturers and
  Traders Trust Company, as

  Indenture Trustee

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Authorized Signatory

  
	
   

  	
   

  
	
  Authentication Date:

  	
   

  
	
   

  	
   

  
	
  [                          
        ], 2004

  	
   

  

 

 

ASSIGNMENT

 

FOR VALUE RECEIVED, the undersigned hereby sells,
assigns, and transfers unto
              
(Social Security or other identifying number
                    )
the within note and all rights thereunder and hereby irrevocably appoints
                 
attorney to transfer the within note on the books kept for registration
thereof, with full power of substitution in the premises.

 

	
  Dated:

  	
  Signed:

  
	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  NOTICE: The signature on this Assignment must
  correspond with the name of the Noteholder as it appears on the face of the
  within note in every particular.

  
	
   

  	
   

  
	
  Signature Guaranteed by:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  A Member of The New York Stock

  	
   

  
	
  Exchange or a State or National Bank

  	
   

  
					

 

 

EXHIBIT A-3

 

FORM OF SERIES 2004-1 CLASS A-3
NOTES

 

UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION (“DTC”),
TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT,
AND ANY NOTE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH
OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY
PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED
BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE
HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE
REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.

 

EXCEPT AS OTHERWISE PROVIDED IN THE INDENTURE, THIS
GLOBAL NOTE MAY BE TRANSFERRED, IN WHOLE BUT NOT IN PART, ONLY TO ANOTHER
NOMINEE OF THE SECURITIES DEPOSITORY (AS DEFINED IN THE INDENTURE) OR TO A
SUCCESSOR SECURITIES DEPOSITORY OR TO A NOMINEE OF A SUCCESSOR SECURITIES
DEPOSITORY.

 

PHEAA STUDENT LOAN TRUST
I

STUDENT LOAN ASSET-BACKED NOTE

SERIES 2004-1 CLASS A-3

AUCTION RATE NOTES

 

	
  REGISTERED NO. A-3-1

  	
   

  	
  REGISTERED $90,000,000

  

 

	
  Maturity Date

  	
   

  	
  Interest Rate

  	
   

  	
  Original Issue Date

  	
   

  	
  Cusip No.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  April 25, 2044

  	
   

  	
  As Herein Provided

  	
   

  	
  July 14, 2004

  	
   

  	
  71722T AG9

  

 

PRINCIPAL SUM: NINETY-MILLION AND 00/100 DOLLARS

 

NOTEHOLDER: 
CEDE & CO.

 

PHEAA STUDENT LOAN TRUST I, a Delaware statutory trust
organized under the laws of the State of Delaware (the “Issuer,” which term
includes any successor entity under the Indenture of Trust, dated as of
December 1, 2003 (the “Original Indenture”), as amended by that certain
First Amendment to Indenture of Trust and First Supplemental Indenture of Trust
dated as of July 1, 2004, and the Second Supplemental Indenture of Trust dated
as of July 1, 2004 (as the same may be amended from time to time, the “Second
Supplemental Indenture”, and together with the Original Indenture, as amended,
the “Indenture”), each between the Issuer and Manufacturers and Traders Trust
Company, as Indenture Trustee (the “Indenture Trustee,” which term includes any
successor indenture trustee under the Indenture)) for value received, hereby
promises to pay to CEDE & CO. (the “Noteholder”) or registered assigns,
NINETY-

 

A-3-1

 

MILLION DOLLARS ($90,000,000) (the “Principal Sum”), but solely from
the revenues and receipts hereinafter specified and not otherwise, on the
Maturity Date specified above (subject to the right of prior redemption
hereinafter described), upon presentation and surrender of this note at the
Corporate Trust Office of the Indenture Trustee, as paying agent for the Notes,
or a duly appointed successor paying agent, and to pay interest in arrears on
said Principal Sum, but solely from the revenues and receipts hereinafter
specified and not otherwise, to the Noteholder from the most recent Payment
Date to which interest has been paid hereon, or from the Original Issue Date if
no Payment Date has occurred, until the payment in full of the Principal Sum.

 

Any capitalized words and terms used as defined words
and terms in this note and not otherwise defined herein shall have the meanings
given them in the Indenture.

 

This Note shall bear interest at an Auction Rate, all
as determined in Appendix A of the Second Supplemental Indenture.

 

The principal of and interest on this note are payable
in lawful money of the United States of America.  If the specified date for any payment of
principal or interest accrued to such specified date shall be a day other than
a Business Day then such payment may be made on the next succeeding Business
Day, with the same force and effect as if made on the specified date for such
payment, without additional interest.

 

Interest payable on this note shall be computed on
actual days elapsed and the assumption that each year contains 365 or
366 days, as applicable.

 

This note is one of a series of notes of the Issuer
designated Student Loan Asset-Backed Notes, Series 2004-1 Class A-3 Auction
Rate Notes, dated the Original Issue Date, in the aggregate original principal
amount of $90,000,000 (the “Series 2004-1 Class A-3 Notes”) which have been
authorized by the Issuer, and issued by the Issuer pursuant to the
Indenture.  The Issuer is, simultaneously
with the Series 2004-1 Class A-3 Notes, issuing $290,000,000 of its Student
Loan Asset-Backed Notes, Series 2004-1 Class A Notes in two other classes
(together with the Series 2004-1 Class A-3 Notes, the Series 2003-1 Class A
Notes and any Additional Notes designated as Senior Notes, the “Class A
Notes”), and $20,000,000 of its Student Loan Asset-Backed Notes, Series 2004-1
Class B-1 Notes (together with the Series 2003-1 Class B Notes and any
Additional Notes designated as Subordinate Notes, the “Class B Notes”).  The proceeds of such notes have been used by
the Issuer, together with other moneys of the Issuer, for the purpose of
providing funds to finance the acquisition of student loans, fund a reserve
fund and to pay certain costs and expenses in connection with the issuance of
such notes. The Indenture provides for the
issuance of additional notes (the “Additional Notes”) which may be secured on a
parity with, or subordinate to, any Class of Class A Notes then outstanding,
and secured on a parity with, senior to, or subordinate to, any Class of Class
B Notes then outstanding. In addition, subject to certain restrictions set
forth in the Indenture, any Class of Additional Notes may be entitled to
receive payments of principal or interest at a time which is prior to, concurrent
with, or after, any Class of Notes then Outstanding, in accordance with the
terms set forth in the Indenture and any related Supplemental Indenture. The
Class A Notes, the Class B Notes and any Additional Notes are
collectively referred to herein as the “Notes.”

 

A-3-2

 

Optional Redemption.  This note is subject to optional redemption
as described in the Indenture at a redemption price equal to the outstanding
principal balance of this note, plus accrued interest hereon through the day
preceding the Payment Date on which the redemption occurs.

 

Notice of Redemption.  Notice of the call for redemption shall be
given by the Indenture Trustee by mailing a copy of the notice at least
12 days prior to the redemption date to the Noteholders to be redeemed in
whole or in part at the address of such Noteholder last showing on the
registration books.  Failure to give such
notice or any defect therein shall not affect the validity of any proceedings
for the redemption of such Notes for which no such failure or defect
occurs.  All Notes called for redemption
will cease to bear interest after the specified redemption date, provided funds
for their payment are on deposit at the place of payment at the time.  If less than all Notes are to be redeemed,
Notes shall be selected for redemption as provided in the Indenture.

 

The Indenture provides that the Issuer may enter into
a Derivative Product between the Issuer and a Counterparty.  Payments due to a Counterparty from the
Issuer pursuant to the applicable Derivative Product may be secured on a parity
with any series of Notes.

 

The principal of and interest on the Class A
Notes and any Additional Notes issued on a parity with the Class A Notes
and any Scheduled Issuer Derivative Payments and Specified Issuer Termination
Payments secured on a parity with the Class A Notes are payable on a basis
superior to such payments on the Class B Notes and any Additional Notes
issued on a parity or subordinate to the Class B Notes; provided, however,
that current principal and interest may be paid on the Class B Notes and
any Additional Notes issued on a parity with the Class B Notes (and any
Scheduled Issuer Derivative Payments and Specified Issuer Termination Payments
secured on a parity with the Class B Notes) if all principal and interest
payments due and owing at such time on the Class A Notes and any
Additional Notes issued on a parity with the Class A Notes and any
Scheduled Issuer Derivative Payments and Specified Issuer Termination Payments
secured on a parity with the Class A Notes have been previously made or
provided for as provided in the Indenture; provided, further, however, that
under certain circumstances described in Sections 2.03 and 4.03 of the
Second Supplemental Indenture, principal may be paid on the Class B
Auction Rate Notes before principal is paid on the Class A Auction Rate
Notes.

 

Reference is hereby made to the Indenture, copies of
which are on file in the Corporate Trust Office of the Indenture Trustee, and to
all of the provisions of which any Noteholder of this note by his acceptance
hereof hereby assents, for definitions of terms; the description of and the
nature and extent of the security for the Notes; the Issuer’s student loan
acquisition program; the revenues and other money pledged to the payment of the
principal of and interest on the Notes; the nature and extent and manner of
enforcement of the pledge; the conditions upon which the Indenture may be
amended or supplemented with or without the consent of the Noteholders and any
Counterparty; the rights and remedies of the Noteholder hereof with respect
hereto and thereto, including the limitations upon the right of a Noteholder
hereof to institute any suit, action, or proceeding in equity or at law with
respect hereto and thereto; the rights, duties, and obligations of the Issuer
and the Indenture Trustee thereunder; the terms and provisions upon which the
liens, pledges, charges, trusts, and covenants made therein

 

A-3-3

 

may be discharged at or prior to the Stated Maturity or earlier
redemption of this note, and this note thereafter shall no longer be secured by
the Indenture or be deemed to be Outstanding, thereunder; and for the other
terms and provisions thereof.

 

THE NOTES ARE LIMITED OBLIGATIONS OF THE ISSUER,
PAYABLE SOLELY FROM, AND FURTHER SECURED BY, THE TRUST ESTATE, AS DEFINED IN
THE INDENTURE.

 

No recourse, either directly or indirectly, shall be
had for the payment of the principal of and interest on this note or any claim
based hereon or in respect hereof or of the Indenture, against the Indenture
Trustee, or any officer, director, owner, employee, or agent of the Issuer, nor
against the State of Delaware, or any official thereof, but the obligation to
pay all amounts required by the Indenture securing this note and the obligation
to do and perform the covenants and acts required of the Issuer therein and
herein shall be and remain the responsibility and obligation of said Issuer,
limited as herein set forth.

 

Subject to the restrictions specified in the
Indenture, this note is transferable on the Note Register kept for that purpose
by the Indenture Trustee, as registrar, upon surrender of this note for
transfer at the Corporate Trust Office of the Indenture Trustee, duly endorsed
by, or accompanied by a written instrument of transfer in form satisfactory to
the Indenture Trustee duly executed by, the Noteholder hereof or his attorney
duly authorized in writing, and thereupon one or more new Notes of the same
class, Stated Maturity, of Authorized Denominations, bearing interest at the
same rate, and for the same aggregate principal amount will be issued to the
designated transferee or transferees.  At
the option of the Noteholder, any Note may be exchanged for other Notes in
Authorized Denominations upon surrender of the Note to be exchanged at the
Corporate Trust Office of the Indenture Trustee.  Upon any such presentation for exchange, one
or more new Notes of the same class, Stated Maturity, in Authorized
Denominations, bearing interest at the same rate, and for the same aggregate
principal amount as the Note or Notes so surrendered will be issued to the
Noteholder of the Note or Notes so surrendered; and the Note or Notes so
surrendered shall thereupon be cancelled by the Indenture Trustee.

 

Notwithstanding the foregoing, so long as the
ownership of the Notes is maintained in book-entry form by The Depository Trust
Company (the “Securities Depository”) or a nominee thereof, this note may be
transferred in whole, but not in part, only to the Securities Depository or a
nominee thereof or to a successor Securities Depository or its nominee.

 

The Issuer, the Indenture Trustee, and any agent of
either of them shall treat the Person in whose name this note is registered as
the Noteholder hereof (a) on the Record Date for purposes of receiving
timely payment of interest hereon, and (b) on the date of surrender of
this note for purposes of receiving payment of principal hereof at its Stated
Maturity and (c) for all other purposes, whether or not this note is
overdue, and neither the Issuer, the Indenture Trustee, nor any such agent
shall be affected by notice to the contrary.

 

To the extent permitted by the Indenture,
modifications or alterations of the Indenture and any supplemental indenture
may be made with the consent of less than all of the holders of the Notes then
Outstanding or without the consent of any of such Noteholders (by

 

A-3-4

 

reason of a change in the Act or the Regulations or to cure ambiguities
or conflicts, or for any other reasons stated in Section 8.01 of the
Indenture), but such modification or alteration is not permitted to affect the
Maturity, Stated Maturity, amount, Payment Date, or rate of interest on any
Outstanding Notes or affect the rights of the Noteholders of less than all of
the Notes Outstanding.

 

It is hereby certified and recited that all acts and
things required by the laws of the State of Delaware to happen, exist, and be
performed precedent to and in the issuance of this note, and the execution of
said Indenture, have happened, exist and have been performed as so required.

 

[SIGNATURE PAGE FOLLOWS]

 

A-3-5

 

IN WITNESS WHEREOF, the Issuer has caused this note to
be executed in its name and on its behalf by its Owner Trustee, all as of the
Original Issue Date.

 

	
   

  	
  PHEAA STUDENT LOAN
  TRUST I

  
	
   

  	
   

  
	
   

  	
  By:  Wachovia Bank of Delaware, National

  Association, not in its individual capacity, but

  solely as Owner Trustee

  
	
   

  	
   

  
	
   

  	
  By

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

CERTIFICATE OF AUTHENTICATION

 

This note is one of the Series 2004-1 Class A-3 Notes
designated therein and described in the within-mentioned Indenture.

 

	
   

  	
  Manufacturers and
  Traders Trust Company, as

  Indenture Trustee

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Authorized Signatory

  
	
   

  	
   

  
	
  Authentication Date:

  	
   

  
	
   

  	
   

  
	
  [                          
        ], 2004

  	
   

  

 

 

ASSIGNMENT

 

FOR VALUE RECEIVED, the undersigned hereby sells,
assigns, and transfers unto
                   
(Social Security or other identifying number
                     )
the within note and all rights thereunder and hereby irrevocably appoints
                    
attorney to transfer the within note on the books kept for registration
thereof, with full power of substitution in the premises.

 

	
  Dated:

  	
  Signed:

  
	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  NOTICE: The signature on this Assignment must
  correspond with the name of the Noteholder as it appears on the face of the
  within note in every particular.

  
	
   

  	
   

  
	
  Signature Guaranteed by:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  A Member of The New York Stock

  	
   

  
	
  Exchange or a State or National Bank

  	
   

  
					

 

 

EXHIBIT A-4

 

FORM OF SERIES 2004-1 CLASS B-1
NOTES

 

UNLESS THIS NOTE IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION (“DTC”),
TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT,
AND ANY NOTE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH
OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY
PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF
FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE
REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.

 

EXCEPT AS OTHERWISE PROVIDED IN THE INDENTURE, THIS
GLOBAL NOTE MAY BE TRANSFERRED, IN WHOLE BUT NOT IN PART, ONLY TO ANOTHER
NOMINEE OF THE SECURITIES DEPOSITORY (AS DEFINED IN THE INDENTURE) OR TO A
SUCCESSOR SECURITIES DEPOSITORY OR TO A NOMINEE OF A SUCCESSOR SECURITIES
DEPOSITORY.

 

PHEAA STUDENT LOAN TRUST
I

STUDENT LOAN ASSET-BACKED NOTE

SERIES 2004-1 CLASS B-1

AUCTION RATE NOTE

 

	
  REGISTERED NO. B-1-1

  	
   

  	
  REGISTERED $20,000,000

  

 

	
  Maturity Date

  	
   

  	
  Interest Rate

  	
   

  	
  Original Issue Date

  	
   

  	
  Cusip No.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  April 25, 2044

  	
   

  	
  As Herein Provided

  	
   

  	
  [       ]

  	
   

  	
  [       ]

  

 

PRINCIPAL SUM: TWENTY-MILLION AND 00/100 DOLLARS

 

NOTEHOLDER: CEDE & CO.

 

PHEAA STUDENT LOAN TRUST I, a Delaware statutory trust
organized under the laws of the State of Delaware (the “Issuer,” which term
includes any successor entity under the Indenture of Trust, dated as of
December 1, 2003 (the “Original Indenture”), [the First Supplemental
Indenture of Trust dated as of December 1, 2003 (as amended, the “First
Supplemental Indenture”)], and the Second Supplemental Indenture of Trust dated
as of
[                 ]
1, 2004 (as amended, the “Second Supplemental Indenture”, and together with the
Original Indenture, and the First Supplemental Indenture, the “Indenture”),
each between the Issuer and Manufacturers and Traders Trust Company, as
Indenture Trustee (the “Indenture Trustee,” which term includes any successor
indenture trustee under the Indenture)) for value received, hereby promises to
pay to CEDE & CO. (the “Noteholder”) or registered assigns,

 

A-4-1

 

TWENTY-MILLION Dollars ($20,000,000) (the “Principal Sum”), but solely
from the revenues and receipts hereinafter specified and not otherwise, on the
Maturity Date specified above (subject to the right of prior redemption
hereinafter described), upon presentation and surrender of this note at the
Corporate Trust Office of the Indenture Trustee, as paying agent, or a duly
appointed successor paying agent, and to pay interest in arrears on said
Principal Sum, but solely from the revenues and receipts hereinafter specified
and not otherwise, to the Noteholder hereof from the most recent Payment Date
to which interest has been paid hereon, or from the Original Issue Date if no
Payment Date has occurred, until the payment of said principal sum in full.

 

Any capitalized words and terms used as defined words
and terms in this note and not otherwise defined herein shall have the meanings
given them in the Indenture.

 

This note shall bear interest at an Auction Rate, all
as determined in Appendix A of the Second Supplemental Indenture.

 

The principal of and interest on this note are payable
in lawful money of the United States of America.  If the specified date for any payment of
principal or interest accrued to such specified date shall be a day other than
a Business Day then such payment may be made on the next succeeding Business
Day, with the same force and effect as if made on the specified date for such
payments, without additional interest.

 

Interest payable on this note shall be computed on
actual days elapsed and the assumption that each year contains 365 or 366 days,
as applicable.

 

This note is one of a Series of Notes of the
Issuer designated Student Loan Asset-Backed Notes, Series 2004-1 Class B-1
Notes, dated the Original Issue Date, in the aggregate original principal
amount of $20,000,000 (the “Series 2004-1 Class B-1 Notes”) which have been
authorized by the Issuer, and issued by the Issuer pursuant to the
Indenture.  The Issuer is, simultaneously
with the Series 2004-1 Class B-1 Notes (together with the Series 2003-1 Class B
Notes and any Additional Notes designated as Subordinate Notes, collectively,
the “Class B Notes”), issuing $380,000,000 of its Student Loan
Asset-Backed Notes, Series 2004-1 Class A Notes in three classes (such
Series 2004-1 Class A Notes, together with the Series 2003-1 Class A Notes and
any Additional Notes designated as Senior Notes, the “Class A
Notes”).  The proceeds of such notes have
been used by the Issuer, together with other moneys of the Issuer, for the
purpose of providing funds to finance the acquisition of student loans, fund a
reserve fund and to pay certain costs and expenses in connection with the
issuance of such notes. The Indenture
provides for the issuance of additional notes (the “Additional Notes”) which
may be secured on a parity with, or subordinate to, any Class of Class A Notes
then outstanding, and secured on a parity with, senior to, or subordinate to,
any Class of Class B Notes then outstanding. In addition, subject to certain
restrictions set forth in the Indenture, any Class of Additional Notes may be
entitled to receive payments of principal or interest at a time which is prior
to, concurrent with, or after, any Class of Notes then Outstanding, in accordance
with the terms set forth in the Indenture and any related Supplemental
Indenture. The Class A Notes, the Class B Notes and any
Additional Notes are collectively referred to herein as the “Notes.”

 

Optional Redemption.  This note is subject to optional redemption
as described in the Indenture at a redemption price equal to the outstanding
principal balance of this note, plus

 

A-4-2

 

accrued interest hereon through the day preceding the Payment Date on
which the redemption occurs.

 

Notice of Redemption.  Notice of the call for redemption shall be
given by the Indenture Trustee by mailing a copy of the notice at least
12 days prior to the redemption date to the Noteholders to be redeemed in
whole or in part at the address of such Noteholder last showing on the
registration books.  Failure to give such
notice or any defect therein shall not affect the validity of any proceedings
for the redemption of such Notes for which no such failure or defect
occurs.  All Notes called for redemption
will cease to bear interest after the specified redemption date, provided funds
for their payment are on deposit at the place of payment at the date of
redemption.  If less than all Notes are
to be redeemed, Notes shall be selected for redemption as provided in the
Indenture.

 

The Indenture provides that the Issuer may enter into
a Derivative Product between the Issuer and a Counterparty.  Payments due to a Counterparty from the
Issuer may be secured on a parity with any series of Notes.

 

The principal of and interest on the Class A
Notes and any Additional Notes issued on a parity with the Class A Notes
and any Scheduled Issuer Derivative Payments and Specified Issuer Termination
Payments secured on a parity with the Class A Notes are payable on a basis
superior to such payments on the Class B Notes and any Additional Notes
issued on a parity or subordinate to the Class B Notes; provided, however,
that current principal and interest may be paid on the Class B Notes and
any Additional Notes issued on a parity with the Class B Notes (and any
Scheduled Issuer Derivative Payments and Specified Issuer Termination Payments
secured on a parity with the Class B Notes) if all principal and interest
payments due and owing at such time on the Class A Notes and any
Additional Notes issued on a parity with the Class A Notes and any
Scheduled Issuer Derivative Payments and Specified Issuer Termination Payments
secured on a parity with the Class A Notes have been previously made or
provided for as provided in the Indenture; provided, further, however, that
under certain circumstances described in Sections 2.03 and 4.03 of the
Second Supplemental Indenture, principal may be paid on the Class B
Auction Rate Notes before principal is paid on the Class A Auction Rate
Notes.

 

Reference is hereby made to the Indenture, copies of
which are on file in the principal office of the Indenture Trustee, and to all
of the provisions of which any Noteholder of this note by his acceptance hereof
hereby assents, for definitions of terms; the description of and the nature and
extent of the security for the Notes; the Issuer’s student loan acquisition
program; the revenues and other money pledged to the payment of the principal
of and interest on the Notes; the nature and extent and manner of enforcement
of the pledge; the conditions upon which the Indenture may be amended or
supplemented with or without the consent of the Noteholders and any
Counterparty; the rights and remedies of the Noteholder hereof with respect hereto
and thereto, including the limitations upon the right of a Noteholder hereof to
institute any suit, action, or proceeding in equity or at law with respect
hereto and thereto; the rights, duties, and obligations of the Issuer and the
Indenture Trustee thereunder; the terms and provisions upon which the liens,
pledges, charges, trusts, and covenants made therein may be discharged at or
prior to the Stated Maturity or earlier redemption of this note, and this note
thereafter shall no

 

A-4-3

 

longer be secured by the Indenture or be deemed to be Outstanding,
thereunder; and for the other terms and provisions thereof.

 

THE NOTES ARE LIMITED OBLIGATIONS OF THE ISSUER,
PAYABLE SOLELY FROM, AND FURTHER SECURED BY, THE TRUST ESTATE, AS DEFINED IN
THE INDENTURE.

 

No recourse, either directly or indirectly, shall be
had for the payment of the principal of and interest on this note or any claim
based hereon or in respect hereof or of the Indenture, against the Indenture
Trustee, or any owner, director, officer, employee, or agent of the Issuer, nor
against the State of Delaware, or any official thereof, but the obligation to
pay all amounts required by the Indenture securing this note and the obligation
to do and perform the covenants and acts required of the Issuer therein and
herein shall be and remain the responsibility and obligation of said Issuer,
limited as herein set forth.

 

Subject to the restrictions specified in the
Indenture, this note is transferable on the Note Register kept for that purpose
by the Indenture Trustee, as registrar, upon surrender of this note for
transfer at the principal office of the Indenture Trustee, duly endorsed by, or
accompanied by a written instrument of transfer in form satisfactory to the
Indenture Trustee duly executed by, the Noteholder hereof or his attorney duly
authorized in writing, and thereupon one or more new Notes of the same class,
Stated Maturity, of Authorized Denominations, bearing interest at the same
rate, and for the same aggregate principal amount will be issued to the
designated transferee or transferees.  At
the option of the Noteholder, any Note may be exchanged for other Notes in
Authorized Denominations upon surrender of the Note to be exchanged at the
principal office of the Indenture Trustee. 
Upon any such presentation for exchange, one or more new Notes of the
same class, Stated Maturity, in Authorized Denominations, bearing interest at
the same rate, and for the same aggregate principal amount as the Note or Notes
so surrendered will be issued to the Noteholder of the Note or Notes so
surrendered; and the Note or Notes so surrendered shall thereupon be cancelled
by the Indenture Trustee.

 

Notwithstanding the foregoing, so long as the
ownership of the Notes is maintained in book-entry form by The Depository Trust
Company (the “Securities Depository”) or a nominee thereof, this note may be
transferred in whole, but not in part, only to the Securities Depository or a
nominee thereof or to a successor Securities Depository or its nominee.

 

The Issuer, the Indenture Trustee, and any agent of
either of them shall treat the Person in whose name this note is registered as
the Noteholder hereof (a) on the Record Date for purposes of receiving
timely payment of interest hereon, and (b) on the date of surrender of
this note for purposes of receiving payment of principal hereof at its Stated
Maturity and (c) for all other purposes, whether or not this note is
overdue, and neither the Issuer, the Indenture Trustee, nor any such agent
shall be affected by notice to the contrary.

 

To the extent permitted by the Indenture,
modifications or alterations of the Indenture and any supplemental indenture
may be made with the consent of less than all of the holders of the Notes then
Outstanding or without the consent of any of such Noteholders (by reason of a
change in the Act or the Regulations or to cure ambiguities or conflicts, or
for any

 

A-4-4

 

other reason stated in Section 8.01 of the Indenture), but such
modification or alteration is not permitted to affect the Maturity, Stated
Maturity, amount, Payment Date, or rate of interest on any outstanding Notes or
affect the rights of the Noteholders of less than all of the Notes outstanding.

 

It is hereby certified and recited that all acts and
things required by the laws of the State of Delaware to happen, exist, and be
performed precedent to and in the issuance of this note, and the execution of
said Indenture, have happened, exist and have been performed as so required.

 

[SIGNATURE PAGE FOLLOWS]

 

A-4-5

 

IN WITNESS WHEREOF, the Issuer has caused this note to
be executed in its name and on its behalf by its Owner Trustee, all as of the
Original Issue Date.

 

	
   

  	
  PHEAA STUDENT LOAN
  TRUST I

  
	
   

  	
   

  
	
   

  	
  By:  Wachovia Bank of Delaware, National

  Association, not in its individual capacity, but

  solely as Owner Trustee

  
	
   

  	
   

  
	
   

  	
  By

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

CERTIFICATE OF AUTHENTICATION

 

This note is one of the Series 2004-1 Class B-1 Notes
designated therein and described in the within-mentioned Indenture.

 

	
   

  	
  MANUFACTURERS AND
  TRADERS TRUST COMPANY, as Indenture Trustee

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Authorized Signatory

  
	
   

  	
   

  
	
  Authentication Date:

  	
   

  
	
   

  	
   

  
	
  [                          
        ], 2004

  	
   

  

 

 

ASSIGNMENT

 

FOR VALUE RECEIVED, the undersigned hereby sells,
assigns, and transfers unto
                 
(Social Security or other identifying number                   )
the within note and all rights thereunder and hereby irrevocably appoints
                
attorney to transfer the within note on the books kept for registration
thereof, with full power of substitution in the premises.

 

	
  Dated:

  	
  Signed:

  
	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  NOTICE: The signature on this Assignment must
  correspond with the name of the Noteholder as it appears on the face of the
  within note in every particular.

  
	
   

  	
   

  
	
  Signature Guaranteed by:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  A Member of The
  New York Stock

  	
   

  
	
  Exchange or a
  State or National Bank

  	
   

  
					

 

 

EXHIBIT B

 

SERIES 2004-1 CLOSING CASH
FLOW PROJECTIONS

 

 

Exhibit begins on next
page.

 

B-1

 

EXHIBIT C

 

NOTICE OF PAYMENT DEFAULT

 

PHEAA STUDENT LOAN TRUST
I

STUDENT LOAN ASSET-BACKED NOTES

CLASS   

AUCTION RATE NOTES

 

NOTICE IS HEREBY GIVEN that a Payment Default has
occurred and is continuing with respect to the
                
Notes identified above.  The next Auction
for the Auction Rate Notes will not be held. 
The Auction Rate for the Auction Rate Notes for the next succeeding
Interest Period shall be the Non-Payment Rate.

 

	
   

  	
  MANUFACTURERS AND
  TRADERS TRUST

  COMPANY, as Indenture Trustee

  
	
   

  	
   

  
	
   

  	
   

  
	
  Dated: 

  	
   

  	
   

  	
  By:

  
				

 

C-1

 

EXHIBIT D

 

NOTICE OF
CURE OF PAYMENT DEFAULT

 

PHEAA STUDENT LOAN
TRUST I

STUDENT LOAN ASSET-BACKED NOTES

CLASS      

AUCTION RATE CERTIFICATE NOTES

 

NOTICE IS HEREBY GIVEN that a Payment Default with
respect to the Auction Rate Notes identified above has been waived or
cured.  The next Payment Date is
                                                     
and the Auction Date is
                                                      .

 

	
   

  	
  MANUFACTURERS AND
  TRADERS TRUST

  
	
   

  	
  COMPANY, as Indenture
  Trustee

  
	
   

  	
   

  
	
   

  	
   

  
	
  Dated:

  	
   

  	
   

  	
  By:

  
				

 

D-1

 

EXHIBIT E

 

NOTICE OF
PROPOSED CHANGE IN LENGTH

OF ONE OR MORE AUCTION PERIODS

 

PHEAA STUDENT LOAN
TRUST I

STUDENT LOAN ASSET-BACKED NOTES

CLASS      

AUCTION RATE NOTES

 

Notice is hereby given that the Issuer proposes to
change the length of one or more Auction Periods pursuant to the Indenture of
Trust, as amended (the “Indenture”) as follows:

 

1.  The change shall take effect on
                                ,
the Interest Rate Adjustment Date for the next Auction Period (the “Effective
Date”).

 

2.  The Auction Period Adjustment in
Paragraph 1 shall take place only if (a) the Indenture Trustee and
the Auction Agent receive, by 11:00 a.m., eastern time, on the Business
Day before the Auction Date for the Auction Period commencing on the Effective
Date, a certificate from the Issuer, as required by the Indenture authorizing
the change in length of one or more Auction Periods and (b) Sufficient
Bids exist on the Auction Date for the Auction Period commencing on the
Effective Date.

 

3.  If the condition referred to in (a) above is
not met, the Auction Rate for the Auction Period commencing on the Effective
Date will be determined pursuant to the Auction Procedures and the Auction
Period shall be the Auction Period determined without reference to the proposed
change.  If the condition referred to in
(a) is met but the condition referred to in (b) above is not met, the Auction
Rate for the Auction Period commencing on the Effective Date shall be the
Maximum Rate and the Auction Period shall be the Auction Period determined
without reference to the proposed change.

 

4.  It is hereby represented, upon advice of the
Auction Agent for the Class       Notes described
herein, that there were Sufficient Bids for such Class
      Notes at the Auction immediately preceding the
date of this Notice.

 

5.  Terms not defined in this Notice shall have
the meanings set forth in the Indenture entered into in connection with the
Class       Notes.

 

	
   

  	
  PHEAA STUDENT LOAN
  TRUST I

  
	
   

  	
   

  
	
   

  	
   

  
	
  Dated:

  	
   

  	
   

  	
  By:

  
				

 

E-1

 

EXHIBIT F

 

NOTICE OF
ESTABLISHING CHANGE IN LENGTH

OF ONE OR MORE AUCTION PERIODS

 

PHEAA STUDENT LOAN
TRUST I

STUDENT LOAN ASSET-BACKED NOTES

CLASS      

AUCTION RATE NOTES

 

Notice is hereby given that the Issuer hereby
establishes new lengths for one or more Auction Periods pursuant to the
Indenture of Trust, as amended:

 

1.  The change shall take effect on
                           ,
the Interest Rate Adjustment Date for the next Auction Period (the “Effective
Date”).

 

2.  For the Auction Period commencing on the
Effective Date, the Interest Rate Adjustment Date shall be
                            ,
or the next succeeding Business Day if such date is not a Business Day.

 

3.  For Auction Periods occurring after the
Auction Period commencing on the Effective Date, the Interest Rate Adjustment
Date shall be
[                           (date)
and every                            (number)
                           (day
of week) thereafter] [every
                           (number)
                           (day
of week) after the date set forth in paragraph 2 above], or the next
Business Day if any such day is not a Business Day; provided, however, that the
length of subsequent Auction Periods shall be subject to further change
hereafter as provided in the Indenture of Trust.

 

4.  The changes described in paragraphs 2
and 3 above shall take place only upon delivery of this Notice and the
satisfaction of other conditions set forth in the Indenture of Trust and our
prior notice dated                            
regarding the proposed change.

 

5.  Terms not defined in this Notice shall have
the meanings set forth in the Indenture of Trust relating to the Class
      Notes.

 

	
   

  	
  PHEAA STUDENT LOAN
  TRUST I

  
	
   

  	
   

  
	
   

  	
   

  
	
  Dated:

  	
   

  	
   

  	
  By:

  
				

 

F-1

 

EXHIBIT G

 

NOTICE OF
CHANGE IN AUCTION DATE

 

PHEAA STUDENT LOAN
TRUST I

STUDENT LOAN ASSET-BACKED NOTES

CLASS      

AUCTION RATE NOTES

 

Notice is hereby given by [  ], as
Broker-Dealer for the Auction Rate Notes, that with respect to the Auction Rate
Notes, the Auction Date is hereby changed as follows:

 

1.  With respect to Class
      Notes, the definition of “Auction Date” shall be
deemed amended by substituting
“                           (number)
Business Day” in the second line thereof and by substituting
“                           (number)
Business Days” for “two Business Days” in Subsection  (d) thereof.

 

2.  This change shall take effect on
                           
which shall be the Auction Date for the Auction Period commencing on
                           .

 

3.  The Auction Date for the Class
      Notes shall be subject to further change
hereafter as provided in the Indenture of Trust.

 

4.  Terms not defined in this Notice shall have
the meaning set forth in the Indenture of Trust, as amended, relating to the
Class       Notes.

 

	
   

  	
  [BROKER-DEALER], as
  Broker-Dealer

  
	
   

  	
   

  
	
   

  	
   

  
	
  Dated:

  	
   

  	
   

  	
  By:

  
				

 

G-1

 

EXHIBIT H

 

 

(Intentionally Omitted)

 

H-1

 

EXHIBIT I

 

	
  Student Loan Backed
  Securities Monitoring Report Form

  
	
  FFELP Worksheet

  	
   

  	
   

  
	
  Issuer :

  	
   

  	
   

  
	
  Indenture Name

  	
   

  	
   

  
	
  Reporting Period :

  	
   

  	
   

  
	
  Contact :

  	
   

  	
  Phone:

  
	
  Certificate/Note/Bond Status

  	
   

  	
   

  

 

	
   

  	
   

  	
  Series / Tranche

  	
   

  	
  Series / Tranche

  	
   

  	
  Series / Tranche

  	
   

  	
  Series / Tranche

  	
   

  	
  Series / Tranche

  	
   

  	
  Total Balance

  	
   

  
	
  Beginning
  Principal Balance ($)

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Interest
  Paid ($)

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Principal
  Paid ($)

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Ending
  Principal Balance($)

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Maturity
  Date

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

	
  Actual
  Days in Period

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Actual
  Coupon Rate

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Coupon
  Type(ie., ARC, Fixed, VRDO)

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

Student Loan Pool Data-FFELP

I.
Pool Size ($)

 

	
   

  	
   

  	
  Principal Only

  	
   

  	
  Principal Plus

  Capitalized Interest

  	
   

  	
   

  	
   

  	
  Weighted Average Interest

  Rate (%)

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Beginning
  Balance

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Loans
  Added

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Loans
  Repaid

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Ending
  Balance

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

	
  Parity Levels

  	
   

  	
  Beginning of Period

  	
   

  	
  End of Period

  	
   

  
	
  Total
  Assets/Senior Liabilities

  	
   

  	
   

  	
  %

  	
   

  	
  %

  
	
  Total
  Assets/Total Liabilities

  	
   

  	
   

  	
  %

  	
   

  	
  %

  

 

II. Loans by Program Type

 

	
   

  	
   

  	
  Beginning of the period

  	
   

  	
   

  	
   

  	
  Additions during Period

  	
   

  	
  Loans Repaid during the Period

  	
   

  	
  End of Period Balance

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
   

  	
  %

  	
   

  	
  $

  	
   

  	
  $

  	
   

  	
  $

  	
   

  	
  # of Borrowers

  	
   

  	
  Average Coupon

  	
   

  
	
  Subsidized Stafford

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Unsubsidized Stafford

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  SLS

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  PLUS

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  HEAL

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Consolidation Subsidized

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Consolidation Unsubsidized

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Consolidation HEAL

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Alternative Loans

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Total

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

III. Loans by School
Type-FFELP

 

	
   

  	
   

  	
  Beginning of the period

  	
   

  	
   

  	
   

  	
  Additions during Period

  	
   

  	
  Loans Repaid during the Period

  	
   

  	
  End of Period Balance

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
   

  	
  %

  	
   

  	
  $

  	
   

  	
  $

  	
   

  	
  $

  	
   

  	
  # of Borrowers

  	
   

  
	
  4-Year

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  2-Year

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Proprietary

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Graduate (Law)

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Graduate (Medical)

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Other

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Total

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

 

IV. Loan Status-FFELP

 

	
   

  	
   

  	
  Beginning of the period

  	
   

  	
   

  	
   

  	
  Additions during Period

  	
   

  	
  Loans Repaid during the Period

  	
   

  	
  End of Period Balance

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
   

  	
  %

  	
   

  	
  $

  	
   

  	
  $

  	
   

  	
  $

  	
   

  	
  # of Borrowers

  	
   

  
	
  In School

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Grace

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Deferment

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Forbearance

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Repayment

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Total

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

V. Loans By Guarantor-FFELP

 

	
   

  	
   

  	
  $

  	
   

  	
  % of loans

  	
   

  	
  Weighted Avg. Guarantee%

  	
   

  
	
  FFELP Guarantor 1

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  FFELP Guarantor 2

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  FFELP Guarantor 3

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  FFELP Guarantor 4

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Private Guarantor

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Total

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

VI. Payment Status-FFELP

 

	
  Delinquency Bucket (days)

  	
   

  	
  31-60

  	
   

  	
  61-90

  	
   

  	
  91-120

  	
   

  	
  121-180

  	
   

  	
  180-270

  	
   

  	
  270+

  	
   

  	
  Totals

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  By
  ending balance, $

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  By
  ending balance, %

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  #
  of Loans

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

VII. Credit Support-FFELP

 

	
   

  	
   

  	
  Beginning Balance

  	
   

  	
  Withdrawals

  	
   

  	
   

  	
   

  	
  Ending Balance

  	
   

  
	
   

  	
   

  	
  $

  	
   

  	
  %

  	
   

  	
  $

  	
   

  	
   

  	
   

  	
  $

  	
   

  
	
  Type 1

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Type 2

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Type 3

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

 

VIII. Servicer
Information-FFELP

 

Servicer # 1.

 

	
   

  	
   

  	
  # of Loans Serviced

  	
   

  	
  $ amount of loans

  Serviced

  	
   

  	
  % of Portfolio Serviced

  	
   

  	
  $ Amt. of claims filed during

  reporting period

  	
   

  	
  Claims Paid during

  reporting period

  	
   

  	
  Claims rejected

  status at end of

  period (1)

  	
   

  	
  Claims

  outstanding at end

  of period (2)

  	
   

  
	
  FFELP Loans

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  HEAL Loans

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Other Loans

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Total

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

Servicer # 2.

 

	
   

  	
   

  	
  # of Loans Serviced

  	
   

  	
  $ amount of loans

  Serviced

  	
   

  	
  % of Portfolio Serviced

  	
   

  	
  $ Amt. of claims filed during

  reporting period

  	
   

  	
  Claims Paid during

  reporting period

  	
   

  	
  Claims rejected

  status at end of

  period (1 )

  	
   

  	
  Claims

  outstanding at end

  of period (2)

  	
   

  
	
  FFELP Loans

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  HEAL Loans

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Other Loans

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Total

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

Servicer #3

 

	
   

  	
   

  	
  # of Loans Serviced

  	
   

  	
  $ amount of loans

  Serviced

  	
   

  	
  % of Portfolio Serviced

  	
   

  	
  $ Amt. of claims filed during

  reporting period

  	
   

  	
  Claims Paid during

  reporting period

  	
   

  	
  Claims rejected

  status at end of

  period (1 )

  	
   

  	
  Claims

  outstanding at end

  of period (2)

  	
   

  
	
  FFELP Loans

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  HEAL Loans

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Other Loans

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Total

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  

 

(1)  Rejected subject to cure,
aged six months or more

 

(2)  Outstanding, including
rejected aged less than six months

 

 

Schedule I

 

	
  Date

  	
   

  	
  Principal

  	
   

  
	
  January 
  25, 2004

  	
   

  	
  $

  	
  198,000,000

  	
   

  
	
  April  25,
  2004

  	
   

  	
  181,322,000

  	
   

  
	
  July  25,
  2004

  	
   

  	
  163,348,000

  	
   

  
	
  October 
  25, 2004

  	
   

  	
  145,036,000

  	
   

  
	
  January 
  25, 2005

  	
   

  	
  127,219,000

  	
   

  
	
  April  25,
  2005

  	
   

  	
  110,877,000

  	
   

  
	
  July  25,
  2005

  	
   

  	
  94,762,000

  	
   

  
	
  October 
  25, 2005

  	
   

  	
  80,101,000

  	
   

  
	
  January 
  25, 2006

  	
   

  	
  66,058,000

  	
   

  
	
  April  25,
  2006

  	
   

  	
  52,625,000

  	
   

  
	
  July  25,
  2006

  	
   

  	
  39,747,000

  	
   

  
	
  October 
  25, 2006

  	
   

  	
  27,253,000

  	
   

  
	
  January 
  25, 2007

  	
   

  	
  15,231,000

  	
   

  
	
  April  25,
  2007

  	
   

  	
  3,778,000

  	
   

  
	
  July 25,
  2007

  	
   

  	
  0

  	
   

  
					

 

 

Schedule II

 

	
  Date

  	
   

  	
  Principal

  	
   

  
	
  July 25, 2007

  	
   

  	
  194,900,000

  	
   

  
	
  October 25, 2007

  	
   

  	
  181,500,000

  	
   

  
	
  January 25, 2008

  	
   

  	
  164,600,000

  	
   

  
	
  April 25, 2008

  	
   

  	
  148,000,000

  	
   

  
	
  July 25, 2008

  	
   

  	
  132,100,000

  	
   

  
	
  October 25, 2008

  	
   

  	
  116,400,000

  	
   

  
	
  January 25, 2009

  	
   

  	
  101,000,000

  	
   

  
	
  April 25, 2009

  	
   

  	
  85,800,000

  	
   

  
	
  July 25, 2009

  	
   

  	
  70,900,000

  	
   

  
	
  October 25, 2009

  	
   

  	
  56,400,000

  	
   

  
	
  January 25, 2010

  	
   

  	
  42,000,000

  	
   

  
	
  April 25, 2010

  	
   

  	
  28,200,000

  	
   

  
	
  July 25, 2010

  	
   

  	
  15,100,000

  	
   

  
	
  October 25, 2010

  	
   

  	
  2,000,000

  	
   

  
	
  January 25, 2011

  	
   

  	
  —Exhibit 10.1

 

SEVERANCE AGREEMENT

 

THIS AGREEMENT, dated as
of July 19, 2004, is made by and between Stewart & Stevenson Services,
Inc., a Texas corporation (the “Company”),
and                    (the
“Executive”).

 

WHEREAS, the Company
considers it essential to the best interests of its stockholders to foster the
continued employment of key management personnel; and

 

WHEREAS, the Board
recognizes that, as is the case with many publicly held corporations, the
possibility of a Change in Control exists and that such possibility, and the
uncertainty and questions which it may raise among management, may result in
the departure or distraction of management personnel to the detriment of the
Company and its stockholders; and

 

WHEREAS, the Board has
determined that appropriate steps should be taken to reinforce and encourage
the continued attention and dedication of members of the Company’s management,
including the Executive, to their assigned duties without distraction in the
face of potentially disturbing circumstances arising from the possibility of a
Change in Control;

 

NOW, THEREFORE, in
consideration of the premises and the mutual covenants herein contained, the
Company and the Executive hereby agree as follows:

 

1.                                       Defined
Terms.  The definitions of capitalized
terms used in this Agreement are provided in the last Section hereof.

 

2.                                       Term
of Agreement.  The Term of this
Agreement shall commence on the date hereof and shall continue in effect
through December 31, 2006; provided, however, that commencing on January 1,
2005 and each January 1 thereafter (an “Extension Date”), the Term shall
automatically be extended for one additional year (i.e., resulting in a
two-year Term on the Extension Date) unless, not later than September 30
of the year preceding the Extension Date, the Company or the Executive shall
have given notice not to extend the Term; and further provided, however, that
if a Change in Control shall have occurred during the Term, the Term shall
expire no earlier than twenty-four (24) months beyond the month in which such
Change in Control occurred.

 

3.                                       Company’s
Covenants Summarized.  In order to
induce the Executive to remain in the employ of the Company and in
consideration of the Executive’s covenants set forth in Section 3 hereof,
the Company agrees, under the conditions described herein, to pay the Executive
the Severance Payments and the other payments and benefits described
herein.  Except as provided in
Section 8.1 hereof, no Severance Payments shall be payable under this
Agreement unless there shall have been (or, under the terms of the second
sentence of Section 5.1 hereof, there shall be deemed to have been) a
termination of the Executive’s employment with the Company following a Change
in Control and during the Term.  This
Agreement shall not be construed as creating an express or implied contract of
employment and, except as otherwise agreed in writing between the Executive and
the Company, the Executive shall not have any rights to be retained in the
employ of the Company.

 

 

4.                                       Compensation
Other Than Severance Payments.

 

4.1                                 Following
a Change in Control and during the Term, during any period that the Executive
fails to perform the Executive’s duties with the Company as a result of
incapacity due to physical or mental illness, the Company shall pay the
Executive’s full salary to the Executive at the rate in effect at the
commencement of any such period, together with all compensation and benefits
payable to the Executive under the terms of any compensation or benefit plan,
program or arrangement maintained by the Company during such period, until the
Executive’s employment is terminated by the Company for Disability.

 

4.2                                 If
the Executive’s employment shall be terminated for any reason following a
Change in Control and during the Term, the Company shall pay the Executive’s
full salary to the Executive through the Date of Termination at the rate in
effect immediately prior to the Date of Termination or, if higher, the rate in
effect immediately prior to the first occurrence of an event or circumstance
constituting Good Reason, together with all compensation and benefits payable
to the Executive through the Date of Termination under the terms of the
Company’s compensation and benefit plans, programs or arrangements as in effect
immediately prior to the Date of Termination or, if more favorable to the
Executive, as in effect immediately prior to the first occurrence of an event
or circumstance constituting Good Reason.

 

4.3                                 If
the Executive’s employment shall be terminated for any reason following a
Change in Control and during the Term, the Company shall pay to the Executive
the Executive’s normal post-termination compensation and benefits as such
payments become due in accordance with written plans.  Such post-termination compensation and benefits shall be
determined under, and paid in accordance with, the Company’s retirement,
insurance and other compensation or benefit plans, programs and arrangements as
in effect immediately prior to the Date of Termination or, if more favorable to
the Executive, as in effect immediately prior to the occurrence of the first
event or circumstance constituting Good Reason.

 

4.4                                 Upon
the occurrence of a Change in Control all options to acquire shares of Company
stock, all shares of restricted Company stock and all other equity or phantom
equity incentives held by the Executive under any plan of the Company
(including, but not limited to, the Company’s various stock option plans) shall
become immediately vested, exercisable and nonforfeitable and all conditions thereof
(including, but not limited to, any required holding periods) shall be deemed
to have been satisfied.

 

5.                                       Severance
Payments.

 

5.1                                 If
the Executive’s employment is terminated following a Change in Control and
during the Term, other than (A) by the Company for Cause, (B) by reason of
death or Disability, or (C) by the Executive without Good Reason, then, the
Company shall pay the Executive the amounts, and provide the Executive the
benefits, described in this Section 5.1 (“Severance Payments”) and Section 5.2,
in addition to any payments and benefits to which the Executive is entitled
under Section 4 hereof.  Solely for
purposes of determining whether termination occurred following a Change in
Control pursuant to this Agreement (and without any implication that a Change
in Control has in fact occurred), the Executive’s employment shall be deemed to
have been terminated following a Change in Control by the Company without Cause

 

2

 

or by the Executive with Good Reason, if (i) the
Executive’s employment is terminated by the Company without Cause prior to a
Change in Control and such termination was at the request, direction or
suggestion, directly or indirectly, of a Person who has entered into an agreement
or with whom the Company contemplates will enter into an agreement with the
Company the consummation of which would constitute a Change in Control or, (ii)
the Executive terminates his employment for Good Reason prior to a Change in
Control and the circumstance or event which constitutes Good Reason occurs at
the request, direction or suggestion of such Person described in clause
(i).  For purposes of any determination
regarding the applicability of the immediately preceding sentence, any position
taken by the Executive shall be presumed to be correct unless the Company
establishes to the Committee by clear and convincing evidence that such
position is not correct.

 

(A)                              In
lieu of any further salary payments to the Executive for periods subsequent to
the Date of Termination and in lieu of any severance benefit otherwise payable
to the Executive, the Company shall pay to the Executive a lump sum severance
payment, in cash, equal to two times the sum of (i) the Executive’s base salary
as in effect immediately prior to the Date of Termination or, if higher, in
effect immediately prior to the first occurrence of an event or circumstance
constituting Good Reason, and (ii) the average cash value of annual bonus
(whether paid in cash or stock) earned by the Executive pursuant to any annual
bonus or incentive plan maintained by the Company in respect of the three
fiscal years ending immediately prior to the fiscal year in which occurs the
Date of Termination or, if higher, immediately prior to the fiscal year in which
occurs the first event or circumstance constituting Good Reason; provided, that
if the Executive has not participated in an annual bonus or incentive plan
maintained by the Company for the entirety of such three-year period, the
amount referred to in this clause (ii) shall be calculated using such lesser
number of bonuses as have been actually earned by the Executive in respect of
such lesser period.

 

(B)                                For
the twenty-four (24) month period immediately following the Date of
Termination, the Company shall arrange to provide the Executive and his
dependents life, disability, accident and health insurance benefits and
perquisites (including, but not limited to, executive life insurance, club
memberships, financial planning and tax preparation, annual physical
examination and charitable contributions), in each case, substantially similar
to those provided to the Executive and his dependents immediately prior to the
Date of Termination or, if more favorable to the Executive, those provided to
the Executive and his dependents immediately prior to the first occurrence of
an event or circumstance constituting Good Reason, at no greater cost to the
Executive than the cost to the Executive immediately prior to such date or
occurrence; provided, however, that, unless the Executive consents to a
different method (after taking into account the effect of such method on the
calculation of “parachute payments” pursuant to Section 5.2 hereof), such
health insurance benefits shall be provided through a third-party insurer.  Benefits otherwise receivable by the
Executive pursuant to this Section 5.1(B) shall be reduced to the extent
benefits of the same type are received by the Executive under any individual or
group policy or program, or made available to the Executive under a group plan
whether by reason of the employment of the Executive or the employment of the
spouse of the Executive, during the thirty-six (36) month period following the
Executive’s termination of employment (and any such benefits received by

 

3

 

or made available to the
Executive shall be reported to the Company by the Executive); provided,
however, that the Company shall reimburse the Executive for the excess, if any,
of the cost of such benefits to the Executive over such cost immediately prior
to the Date of Termination or, if more favorable to the Executive, the first
occurrence of an event or circumstance constituting Good Reason.

 

(C)                                Notwithstanding
any provision of the Company’s management incentive compensation plan (the
“Annual Incentive Plan”), the Company shall pay to the Executive a lump sum
amount, in cash, equal to the sum of (i) any unpaid incentive compensation
which has been allocated or awarded to the Executive for a completed fiscal
year or other measuring period preceding the Date of Termination under the
Annual Incentive Plan and which, as of the Date of Termination, is contingent
only upon the continued employment of the Executive to a subsequent date, and
(ii) a pro rata portion to the Date of Termination of the aggregate value of
all contingent incentive compensation awards to the Executive for all then
uncompleted periods under the Annual Incentive Plan, calculated as to each such
award by multiplying the award that the Executive would have earned as of the
last day of the performance award period, assuming the achievement, at the
expected value target level, of the individual and corporate performance goals
established with respect to such award, by the fraction obtained by dividing the
number of full months and any fractional portion of a month during such
performance award period through the Date of Termination by the total number of
months contained in such performance award period; provided, however, that if
such termination of employment occurs during the same year in which the Change
in Control occurs, the pro-rata bonus payment referred to in clause (ii) above
shall be offset by any payments received under the Annual Incentive Plan in
connection with such Change in Control.

 

(D)                               The
Company shall provide the Executive with outplacement services suitable to the
Executive’s position for a period of one year or, if earlier, until the first
acceptance by the Executive of an offer of employment.

 

(E)                                 The
Executive shall have a fully nonforfeitable interest in the Executive’s
benefits accrued, if any, under the Stewart & Stevenson Supplemental
Retirement Plan and the Stewart & Stevenson Supplemental Executive
Retirement Plan.

 

5.2                                 (A)                              Whether
or not the Executive becomes entitled to the Severance Payments, if any of the
payments or benefits received or to be received by the Executive in connection
with a Change in Control or the Executive’s termination of employment (whether
pursuant to the terms of this Agreement or any other plan, arrangement or
agreement with the Company, any Person whose actions result in a Change in
Control or any Person affiliated with the Company or such Person) (such
payments or benefits, excluding the Gross-Up Payment, being hereinafter
referred to as the “Total Payments”) will be subject to the Excise Tax, the
Company shall pay to the Executive an additional amount (the “Gross-Up
Payment”) such that the net amount retained by the Executive, after deduction
of any Excise Tax on the Total Payments and any federal, state and local income
and employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal
to the Total Payments.

 

4

 

(B)                                For
purposes of determining whether any of the Total Payments will be subject to
the Excise Tax and the amount of such Excise Tax, (i) all of the Total Payments
shall be treated as “parachute payments” (within the meaning of
section 280G(b)(2) of the Code) unless, in the opinion of tax counsel
(“Tax Counsel”) reasonably acceptable to the Executive and selected by the
accounting firm which was, immediately prior to the Change in Control, the
Company’s independent auditor (the “Auditor”), such payments or benefits (in
whole or in part) do not constitute parachute payments, including by reason of
section 280G(b)(4)(A) of the Code, (ii) all “excess parachute payments”
within the meaning of section 280G(b)(1) of the Code shall be treated as
subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess
parachute payments (in whole or in part) represent reasonable compensation for
services actually rendered (within the meaning of section 280G(b)(4)(B) of
the Code) in excess of the Base Amount allocable to such reasonable
compensation, or are otherwise not subject to the Excise Tax, and (iii) the
value of any noncash benefits or any deferred payment or benefit shall be
determined by the Auditor in accordance with the principles of
section 280G(d)(3) and (4) of the Code. 
For purposes of determining the amount of the Gross-Up Payment, the
Executive shall be deemed to pay federal income tax at the highest marginal
rate of federal income taxation in the calendar year in which the Gross-Up
Payment is to be made and state and local income taxes at the highest marginal
rate of taxation in the state and locality of the Executive’s residence on the
Date of Termination (or if there is no Date of Termination, then the date on
which the Gross-Up Payment is calculated for purposes of this
Section 5.2), net of the maximum reduction in federal income taxes which
could be obtained from deduction of such state and local taxes.

 

(C)                                In
the event that the Excise Tax is finally determined to be less than the amount
taken into account hereunder in calculating the Gross-Up Payment, the Executive
shall repay to the Company, within five (5) business days following the time
that the amount of such reduction in the Excise Tax is fully determined, the
portion of the Gross-Up Payment”) attributable to such reduction (plus that
portion of the Gross-Up Payment attributable to the Excise Tax and federal,
state and local income and employment taxes imposed on the Gross-Up Payment
being repaid by the Executive, to the extent that such repayment results in a
reduction in the Excise Tax and a dollar-for-dollar reduction in the
Executive’s taxable income and wages for purposes of federal, state and local
income and employment taxes, plus interest on the amount of such repayment at
120% of the rate provided in section 1274(b)(2)(B) of the Code.  In the event that the Excise Tax is
determined to exceed the amount taken into account hereunder in calculating the
Gross-Up Payment (including by reason of any payment the existence or amount of
which cannot be determined at the time of the Gross-Up Payment), the Company
shall make an additional Gross-Up Payment in respect of such excess (plus any
interest, penalties or additions payable by the Executive with respect to such
excess) within five (5) business days following the time that the amount of
such excess is finally determined.  The
Executive and the Company shall each reasonably cooperate with the other in
connection with any administrative or judicial proceedings concerning the
existence or amount of liability for Excise Tax with respect to the Total
Payments.

 

5

 

5.3                                 The
payments provided in subsection (A) and (C) of Section 5.1 hereof and
in Section 5.2 hereof shall be made not later than the fifth day following
the Date of Termination; provided, however, that if the amounts of such
payments cannot be finally determined on or before such day, the Company shall
pay to the Executive on such day an estimate, as determined in good faith by
the Executive or, in the case of payments under Section 5.2 hereof, in
accordance with Section 5.2 hereof, of the minimum amount of such payments
to which the Executive is clearly entitled and shall pay the remainder of such
payments (together with interest on the unpaid remainder (or on all such
payments to the extent the Company fails to make such payments when due) at
120% of the rate provided in section 1274(b)(2)(B) of the Code) as soon as
the amount thereof can be determined but in no event later than the thirtieth
(30th) day after the Date of Termination. 
In the event that the amount of the estimated payments exceeds the
amount subsequently determined to have been due, such excess shall constitute a
loan by the Company to the Executive, payable on the fifth (5th) business day
after demand by the Company (together with interest at 120% of the rate
provided in section 1274(b)(2)(B) of the Code), but only to the extent
such amount has not been paid by the Executive pursuant to Section 5.2(C)
above.  At the time that payments are
made under this Agreement, the Company shall provide the Executive with a
written statement setting forth the manner in which such payments were
calculated and the basis for such calculations including, without limitation,
any opinions or other advice the Company has received from Tax Counsel, the
Auditor or other advisors or consultants (and any such opinions or advice which
are in writing shall be attached to the statement).

 

5.4                                 If
the Executive’s employment with the Company is terminated following a Change in
Control and during the Term, the Company shall pay to the Executive all legal
fees and expenses incurred by the Executive in disputing in good faith any
issue hereunder relating to the termination of the Executive’s employment, in
seeking in good faith to obtain or enforce any benefit or right provided by
this Agreement or in connection with any tax audit or proceeding to the extent
attributable to the application of section 4999 of the Code to any payment
or benefit provided hereunder.  Such
payments shall be made within five (5) business days after delivery of the
Executive’s written requests for payment accompanied with such evidence of fees
and expenses incurred as the Company reasonably may require.

 

6.                                       Termination
Procedures and Compensation During Dispute.

 

6.1                                 Notice
of Termination.  After a Change in
Control and during the Term, any purported termination of the Executive’s
employment (other than by reason of death) shall be communicated by written
Notice of Termination from one party hereto to the other party hereto in
accordance with Section 9 hereof. 
For purposes of this Agreement, a “Notice of Termination” shall mean a
notice which shall indicate the specific termination provision in this
Agreement relied upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive’s
employment under the provision so indicated. 
Further, a Notice of Termination for Cause is required to include a copy
of a resolution duly adopted by the affirmative vote of not less than
three-quarters (3/4) of the Committee at a meeting of the Committee which was
called and held for the purpose of considering such termination (after
reasonable notice to the Executive and an opportunity for the Executive,
together with the Executive’s counsel, to be heard before the Committee)
finding on

 

6

 

clear and convincing evidence and the good faith
opinion of the Committee, the Executive’s employment was terminated for Cause
and specifying the particulars thereof in detail.

 

6.2                                 Date
of Termination.  “Date of
Termination,” with respect to any purported termination of the Executive’s
employment after a Change in Control and during the Term, shall mean (i) if the
Executive’s employment is terminated for Disability, thirty (30) days after
Notice of Termination is given (provided that the Executive shall not have
returned to the full-time performance of the Executive’s duties during such
thirty (30) day period), and (ii) if the Executive’s employment is terminated
for any other reason, the date specified in the Notice of Termination (which,
in the case of a termination for Cause) and, in the case of a termination by
the Executive, shall not be less than fifteen (15) days nor more than sixty
(60) days, respectively, from the date such Notice of Termination is given).

 

6.3                                 Dispute
Concerning Termination.  If within
fifteen (15) days after any Notice of Termination is given following a Change
in Control, or, if later, prior to the Date of Termination (as determined
without regard to this Section 6.3), the party receiving such Notice of
Termination notifies the other party that a dispute exists concerning the
termination, the Date of Termination shall be extended until the earlier of (i)
the date on which the Term ends or (ii) the date on which the dispute is
finally resolved, either by mutual written agreement of the parties or by a
final judgment, order or decree of an arbitrator or a court of competent
jurisdiction (which is not appealable or with respect to which the time for
appeal therefrom has expired and no appeal has been perfected); provided,
however, that the Date of Termination shall be extended by a notice of dispute
only if such notice is given in good faith and the party giving notice pursues
the resolution of such dispute with reasonable diligence.

 

6.4                                 Compensation
During Dispute.  If a purported
termination occurs following a Change in Control and during the Term and the
Date of Termination is extended in accordance with Section 6.3 hereof, the
Company shall continue to pay the Executive the full compensation in effect
when the notice giving rise to the dispute was given (including, but not
limited to, salary) and continue the Executive as a participant in all
compensation, benefit and insurance plans in which the Executive was participating
when the notice giving rise to the dispute was given or those plans in which
the Executive was participating immediately prior to the first occurrence of an
event or circumstance giving rise to the Notice of Termination, if more
favorable to the Executive, until the Date of Termination, as determined in
accordance with Section 6.3 hereof. 
Amounts paid under this Section 6.4 are in addition to all other
amounts due under this Agreement (other than those due under Section 4.2
hereof) and shall not be offset against or reduce any other amounts due under
this Agreement.

 

7.                                       No
Mitigation.  The Company agrees
that, if the Executive’s employment with the Company terminates during the
Term, the Executive is not required to seek other employment or to attempt in
any way to reduce any amounts payable to the Executive by the Company pursuant
to Sections 4, 5 or 6.4 hereof. 
Further, the amount of any payment or benefit provided for in this
Agreement (other than Section 5.1(B) hereof but including (but not limited
to) Section 6.4 hereof) shall not be reduced by any compensation earned by
the Executive as the result of employment by another employer, by retirement
benefits, by offset against any amount claimed to be owed by the Executive to
the Company, or otherwise.

 

7

 

8.                                       Successors;
Binding Agreement.

 

8.1                                 In
addition to any obligations imposed by law upon any successor to the Company,
the Company will require any successor (whether direct or indirect, by purchase,
merger, consolidation or otherwise) to all or substantially all of the business
and/or assets of the Company to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession had taken place.  Failure of the Company to obtain such
assumption and agreement prior to the effectiveness of any such succession
shall be a breach of this Agreement and shall entitle the Executive to
compensation from the Company in the same amount and on the same terms as the
Executive would be entitled to hereunder if the Executive were to terminate the
Executive’s employment for Good Reason after a Change in Control, except that,
for purposes of implementing the foregoing, the date on which any such
succession becomes effective shall be deemed the Date of Termination.

 

8.2                                 This
Agreement shall inure to the benefit of and be enforceable by the Executive’s
personal or legal representatives, executors, administrators, successors,
heirs, distributees, devisees and legatees. 
If the Executive shall die while any amount would still be payable to
the Executive hereunder (other than amounts which, by their terms, terminate
upon the death of the Executive) if the Executive had continued to live, all
such amounts, unless otherwise provided herein, shall be paid in accordance
with the terms of this Agreement to the executors, personal representatives or
administrators of the Executive’s estate.

 

9.                                       Notices.  For the purpose of this Agreement, notices
and all other communications provided for in the Agreement shall be in writing
and shall be deemed to have been duly given when delivered or mailed by United
States registered mail, return receipt requested, postage prepaid, addressed,
if to the Executive, to the address inserted below the Executive’s signature on
the final page hereof and, if to the Company, to the address set forth below,
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notice of change of address shall
be effective only upon actual receipt:

 

	
  To the Company:

  
	
   

  
	
   

  	
  Stewart & Stevenson
  Services, Inc.

  
	
   

  	
  2707 North Loop West

  
	
   

  	
  Houston, Texas  77008-1088

  
	
   

  	
   

  
	
   

  	
  Attention:  Secretary

  

 

10.                                 Miscellaneous.  No provision of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing and signed by the Executive and such officer as may be
specifically designated by the Committee. 
No waiver by either party hereto at any time of any breach by the other
party hereto of, or of any lack of compliance with, any condition or provision
of this Agreement to be performed by such other party shall be deemed a waiver
of similar or dissimilar provisions or conditions at the same or at any prior
or subsequent time.  This Agreement
supersedes any other agreements or representations, oral or otherwise, express
or implied, with respect to the subject matter hereof

 

8

 

which have been made by either party, provided,
however, that this Agreement shall supersede any agreement setting forth the
terms and conditions of the Executive’s employment with the Company only in the
event that the Executive’s employment with the Company is terminated on or
following a Change in Control, by the Company other than for Cause or by the
Executive other than for Good Reason; and provided further that all agreements
otherwise superseded by this Agreement shall be automatically reinstated with
full force and effect to the extent this Agreement is terminated.  The validity, interpretation, construction
and performance of this Agreement shall be governed by the laws of the State of
Texas.  All references to sections of
the Exchange Act or the Code shall be deemed also to refer to any successor
provisions to such sections.  Any
payments provided for hereunder shall be paid net of any applicable withholding
required under federal, state or local law and any additional withholding to
which the Executive has agreed.  The
obligations of the Company and the Executive under this Agreement which by
their nature may require either partial or total performance after the
expiration of the Term (including, without limitation, those under Sections 5
and 6 hereof) shall survive such expiration.

 

11.                                 Validity.  The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect.

 

12.                                 Counterparts.  This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.

 

13.                                 Settlement
of Disputes; Arbitration.

 

13.1                           All
claims by the Executive for benefits under this Agreement shall be directed to
and determined by the Committee and shall be in writing.  Any denial by the Committee of a claim for
benefits under this Agreement shall be delivered to the Executive in writing
within thirty (30) days after written notice of the claim is provided to the
Company in accordance with Section 10 and shall set forth the specific
reasons for the denial and the specific provisions of this Agreement relied
upon.  The Committee shall afford a
reasonable opportunity to the Executive for a review of the decision denying a
claim and shall further allow the Executive to appeal to the Committee a
decision of the Committee within sixty (60) days after notification by the
Committee that the Executive’s claim has been denied.

 

13.2                           Any
further dispute or controversy arising out of or relating to this Agreement,
including without limitation, any and all disputes, claims (whether in tort,
contract, statutory or otherwise), breaches or disagreements concerning the
interpretation or application of the provisions of this Agreement shall be
resolved by arbitration before a panel of three arbitrators and administered by
the American Arbitration Association (the “AAA”) under its Commercial
Arbitration Rules then in effect.  No arbitration
proceeding relating to this Agreement may be initiated by either the Company or
the Executive unless the claims review and appeals procedures specified in
Section 13.1 have been exhausted. 
Within ten (10) business days of the initiation of an arbitration
hereunder, the Company and the Executive will each separately designate an
arbitrator, and within twenty (20) business days of selection, the appointed
arbitrators will appoint a neutral arbitrator. 
All arbitrators shall be members of the National Panel of Commercial
Arbitrators maintained by the AAA.  The
arbitrators shall issue

 

9

 

their written decision (including a statement of
finding of facts) within thirty (30) days from the date of the close of the
arbitration hearing.  The decision of
the arbitrators selected hereunder will be final and binding on both
parties.  This arbitration provision is
expressly made pursuant to and shall be governed by the Federal Arbitration
Act, 9 U.S.C. Sections 1-16 (or replacement or successor statute).  Pursuant to Section 9 of the Federal
Arbitration Act, the Company and the Executive agree that a judgment of the
United States District Court for the Southern District of Texas may be entered
upon the award made pursuant to the arbitration.

 

14.                                 Definitions.  For purposes of this Agreement, the
following terms shall have the meanings indicated below:

 

(A)                              “Affiliate”
shall have the meaning set forth in Rule 12b-2 promulgated under
Section 12 of the Exchange Act.

 

(B)                                “Auditor”
shall have the meaning set forth in Section 5.2 hereof.

 

(C)                                “Base
Amount” shall have the meaning set forth in section 280G(b)(3) of the
Code.

 

(D)                               “Beneficial
Owner” shall have the meaning set forth in Rule 13d-3 under the Exchange Act.

 

(E)                                 “Board”
shall mean the Board of Directors of the Company.

 

(F)                                 “Cause”
for termination by the Company of the Executive’s employment shall mean (i) the
willful and continued failure by the Executive to substantially perform the
Executive’s duties with the Company (other than any such failure resulting from
the Executive’s incapacity due to physical or mental illness or any such actual
or anticipated failure after the issuance of a Notice of Termination for Good
Reason by the Executive pursuant to Section 6.1 hereof) after a written
demand for substantial performance is delivered to the Executive by the Board,
which demand specifically identifies the manner in which the Board believes
that the Executive has not substantially performed the Executive’s duties, or
(ii) the willful engaging by the Executive in conduct which is demonstrably and
materially injurious to the Company or its subsidiaries, monetarily or
otherwise.  For purposes of clauses (i)
and (ii) of this definition, (x) no act, or failure to act, on the Executive’s
part shall be deemed “willful” unless done, or omitted to be done, by the
Executive not in good faith and without reasonable belief that the Executive’s
act, or failure to act, was in the best interest of the Company and (y) the
Executive has received written notice from the Company of the specific conduct
asserted as Cause for termination and has thirty (30) business days to remedy
any such occurrence otherwise constituting Cause.

 

(G)                                A
“Change in Control” shall be deemed to have occurred if the event set forth in
any one of the following paragraphs shall have occurred:

 

(I)                                    any
Person is or becomes the Beneficial Owner, directly or indirectly, of
securities of the Company (not including in the securities beneficially owned
by such Person any securities acquired directly from the

 

10

 

Company or its
affiliates) representing 35% or more of the combined voting power of the
Company’s then outstanding securities, excluding any Person who becomes such a
Beneficial Owner in connection with a transaction described in clause (i) of
paragraph (III) below; or

 

(II)                                the
following individuals cease for any reason to constitute a majority of the
number of directors then serving: individuals who, on the date hereof,
constitute the Board and any new director (other than a director whose initial
assumption of office is in connection with an actual or threatened election
contest relating to the election of directors of the Company) whose appointment
or election by the Board or nomination for election by the Company’s
stockholders was approved or recommended by a vote of at least two-thirds (2/3)
of the directors then still in office who either were directors on the date
hereof or whose appointment, election or nomination for election was previously
so approved or recommended; or

 

(III)                            there
is consummated a merger or consolidation of the Company or any direct or
indirect subsidiary of the Company with any other corporation, other than
(i) a merger or consolidation that would result in the voting securities
of the Company outstanding immediately prior to such merger or consolidation
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity or any parent thereof), in
combination with the ownership of any trustee or other fiduciary holding
securities under an employee benefit plan of the Company or any subsidiary of
the Company, at least 51% of the combined voting power of the securities of the
Company or its parent outstanding immediately after such merger or
consolidation, or (ii) a merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in which no Person is
or becomes the Beneficial Owner, directly or indirectly, of securities of the
Company (not including in the securities Beneficially Owned by such Person any
securities acquired directly from the Company or its Affiliates other than in
connection with the acquisition by the Company or its Affiliates of a business)
representing at least 51% or more of the combined voting power of the Company’s
then outstanding securities; or

 

(IV)                            the
stockholders of the Company approve a plan of complete liquidation or
dissolution of the Company or there is consummated an agreement for the sale or
disposition by the Company of all or substantially all of the Company’s assets,
other than a sale or disposition by the Company of all or substantially all of
the Company’s assets to an entity, at least 51% of the combined voting power of
the voting securities of which are owned by stockholders of the Company in
substantially the same proportions as their ownership of the Company
immediately prior to such sale.  For
purposes of this Agreement, it is contemplated that a sale of substantially all
of the assets of the Company shall not be deemed to occur unless at least 75%
of the book value (as stated in the Company’s most recent audited financial
statements) of the Company’s total assets is disposed of in a single transaction.

 

11

 

Notwithstanding the
foregoing, a “Change in Control” shall not be deemed to have occurred by virtue
of the consummation of any transaction or series of integrated transactions
immediately following which the record holders of the common stock of the
Company immediately prior to such transaction or series of transactions
continue to have substantially the same proportionate ownership in an entity
which owns all or substantially all of the assets of the Company immediately
following such transaction or series of transactions.

 

(H)                               “Code”
shall mean the Internal Revenue Code of 1986, as amended from time to time.

 

(I)                                    “Committee”
shall mean (i) the individuals (not fewer than three in number) who, on
the date six months before a Change in Control, constitute the Compensation
Committee of the Board, plus (ii) in the event that fewer than three
individuals are available from the group specified in clause (i) above for any
reason, such individuals as may be appointed by the individual or individuals
so available (including for this purpose any individual or individuals
previously so appointed under this clause (ii)); provided, however, that the
maximum number of individuals constituting the Committee shall not exceed six
(6).

 

(J)                                   “Company”
shall mean Stewart & Stevenson Services, Inc. and, except in determining
under Section 15(G) hereof whether or not any Change in Control of the
Company has occurred, shall include any successor to its business and/or assets
which assumes and agrees to perform this Agreement by operation of law, or
otherwise.

 

(K)                               “Date
of Termination” shall have the meaning set forth in Section 6.2 hereof.

 

(L)                                 “Disability”
shall be deemed the reason for the termination by the Company of the Executive’s
employment, if, as a result of the Executive’s incapacity due to physical or
mental illness, the Executive shall have been absent from the full-time
performance of the Executive’s duties with the Company for a period of six (6)
consecutive months, the Company shall have given the Executive a Notice of
Termination for Disability, and, within thirty (30) days after such Notice of
Termination is given, the Executive shall not have returned to the full-time
performance of the Executive’s duties.

 

(M)                            “Exchange
Act” shall mean the Securities Exchange Act of 1934, as amended from time to
time.

 

(N)                               “Excise
Tax” shall mean any excise tax imposed under section 4999 of the Code.

 

(O)                               “Executive”
shall mean the individual named in the first paragraph of this Agreement.

 

(P)                                 “Extension
Date” shall have the meaning set forth in Section 2 hereof.

 

12

 

(Q)                               “Good
Reason” for termination by the Executive of the Executive’s employment shall
mean the occurrence (without the Executive’s express written consent) after any
Change in Control, or prior to a Change in Control under the circumstances
described in clause (ii) of the second sentence of Section 5.1 hereof of
any one of the following acts by the Company, or failures by the Company to
act, unless, in the case of any act or failure to act described in paragraph
(I), (V), (VI) or (VII) below, such act or failure to act is corrected prior to
the Date of Termination specified in the Notice of Termination given in respect
thereof:

 

(I)                                    the
assignment to the Executive of any duties inconsistent with the Executive’s
status as a senior executive officer of the Company or a substantial adverse
alteration in the nature or status of the Executive’s responsibilities from
those in effect immediately prior to the Change in Control;

 

(II)                                a
reduction by the Company in the Executive’s annual base salary as in effect on
the date hereof or as the same may be increased from time to time except for
across-the-board salary reductions similarly affecting all senior executives of
the Company and all senior executives of any Person in control of the Company;

 

(III)                            the
relocation of the Executive’s principal place of employment to a location more
than 50 miles from the Executive’s principal place of employment immediately
prior to the Change in Control or the Company’s requiring the Executive to be
based anywhere other than such principal place of employment (or permitted
relocation thereof) except for required travel on the Company’s business to an
extent substantially consistent with the Executive’s present business travel
obligations;

 

(IV)                            the
failure by the Company to pay to the Executive any portion of the Executive’s
current compensation except pursuant to an across-the-board compensation
deferral similarly affecting all senior executives of the Company and all
senior executives of any Person in control of the Company, or to pay to the
Executive any portion of an installment of deferred compensation under any
deferred compensation program of the Company, within seven (7) days of the date
such compensation is due;

 

(V)                                the
failure by the Company to continue in effect any compensation plan in which the
Executive participates immediately prior to the Change in Control which is
material to the Executive’s total compensation, including but not limited to
the Company’s stock option plans or any substitute plans adopted prior to the
Change in Control, unless an equitable arrangement (embodied in an ongoing
substitute or alternative plan) has been made with respect to such plan, or the
failure by the Company to continue the Executive’s participation therein (or in
such substitute or alternative plan) on a basis not materially less favorable,
both in terms of the amount or timing of payment of benefits provided and the
level of the Executive’s participation relative to other participants, as
existed immediately prior to the Change in Control;

 

13

 

(VI)                            the
failure by the Company to continue to provide the Executive with benefits
substantially similar to those enjoyed by the Executive under any of the
Company’s pension, savings, life insurance, medical, health and accident, or
disability plans in which the Executive was participating immediately prior to
the Change in Control (except for across the board changes similarly affecting
all senior executives of the Company and all senior executives of any Person in
control of the Company), the taking of any other action by the Company which
would directly or indirectly materially reduce any of such benefits or deprive
the Executive of any material fringe benefit or perquisite enjoyed by the
Executive at the time of the Change in Control, or the failure by the Company
to provide the Executive with the number of paid vacation days to which the
Executive is entitled on the basis of years of service with the Company in
accordance with the Company’s normal vacation policy in effect at the time of
the Change in Control; or

 

(VII)                        any
purported termination of the Executive’s employment which is not effected
pursuant to a Notice of Termination satisfying the requirements of
Section 6.1 hereof; for purposes of this Agreement, no such purported
termination shall be effective.

 

The Executive’s
right to terminate the Executive’s employment for Good Reason shall not be
affected by the Executive’s incapacity due to physical or mental illness.  The Executive’s continued employment shall
not constitute consent to, or a waiver of rights with respect to, any act or
failure to act constituting Good Reason hereunder.

 

For purposes of
any determination regarding the existence of Good Reason, any claim by the
Executive that Good Reason exists shall be presumed to be correct unless the
Company establishes to the Committee by clear and convincing evidence that Good
Reason does not exist.

 

(R)                                “Gross-Up
Payment” shall have the meaning set forth in Section 5.2 hereof.

 

(S)                                 “Notice
of Termination” shall have the meaning set forth in Section 6.1 hereof.

 

(T)                                “Person”
shall have the meaning given in Section 3(a)(9) of the Exchange Act, as
modified and used in Sections 13(d) and 14(d) thereof, except that such term
shall not include (i) the Company or any of its subsidiaries, (ii) a
trustee or other fiduciary holding securities under an employee benefit plan of
the Company or any of its Affiliates, (iii) an underwriter temporarily
holding securities pursuant to an offering of such securities, or (iv)a
corporation owned, directly or indirectly, by the stockholders of the Company
in substantially the same proportions as their ownership of stock of the
Company.

 

(U)                               “Plan”
shall have the meaning set forth in Section 5.1 hereof.

 

14

 

(V)                                “Severance
Payments” shall have the meaning set forth in Section 5.1 hereof.

 

(W)                           “Tax
Counsel” shall have the meaning set forth in Section 5.2 hereof.

 

(X)                               “Term”
shall mean the period of time described in Section 2 hereof (including any
extension, continuation or termination described therein).

 

(Y)                                “Total
Payments” shall mean those payments so described in Section 5.2 hereof.

 

15

 

IN WITNESS WHEREOF, the
parties hereto have executed this Agreement as of the date above first written.

 

	
   

  	
  STEWART & STEVENSON SERVICES,
  INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Carl B. King

  
	
   

  	
  Senior Vice President, Secretary and

  
	
   

  	
  General Counsel

  
	
   

  	
   

  
	
   

  	
  EXECUTIVE:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  
	
   

  	
  Address:

  	
   

  
					

 

16

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