Document:

CONFIDENTIAL TREATMENT REQUESTED	EXHIBIT 10.1 

CONFIDENTIAL TREATMENT REQUESTED
UNDER RULE 24(B)(2) OF THE SECURITIES AND EXCHANGE ACT OF 1934. CONFIDENTIAL TREATMENT
REQUESTED IS REQUESTED AND IS NOTED WITH “[CONFIDENTIAL TREATMENT REQUESTED].”
AN UNREDACTED VERSION OF THIS DOCUMENT HAS BEEN PREVIOUSLY FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION. 

SUPPLEMENTAL AGREEMENT 

        This
Supplemental Agreement (this “Supplemental Agreement”), dated as of March 15
2002, is made and entered into by and among Inhale Therapeutic Systems, Inc.
(“Inhale”) and Alliance Pharmaceutical Corporation (“Alliance”)
(collectively referred to as the “Parties”). 

        WHEREAS,
Inhale and Alliance have previously entered into the following agreements (collectively,
the “1999 Agreements”): (a) an Asset Purchase Agreement dated as of October 4,
1999 (the “APA”); (b) a License Agreement (License to Inhale) dated as of
November 4, 1999 (the “License to Inhale”); (c) a License Agreement (License to
Alliance) dated as of November 4, 1999 (the “License to Alliance”); (d) a
Product Development Rights Agreement dated as of November 4, 1999 (the “PDRA”);
and (e) an Escrow Agreement dated as of November 4, 1999 (the “Escrow
Agreement”); 

        WHEREAS,
disputes have arisen between the Parties as to their respective rights and obligations
under certain of the 1999 Agreements; 

        WHEREAS,
pursuant to the dispute resolution provisions of the 1999 Agreements, on or about October
30, 2001, Inhale commenced an arbitration proceeding captioned Inhale Therapeutic Systems,
Inc. v. Alliance Pharmaceutical Corp., JAMS Reference No. 1240013539 (the
“Arbitration”); 

        WHEREAS,
on or about December 18, 2001, Inhale filed and served an Amended Demand for Arbitration
(the “Amended Demand”) setting forth certain disputes between the Parties with
respect to certain of the 1999 Agreements; and 

        WHEREAS,
Inhale and Alliance agree that this Supplemental Agreement was negotiated at arms’
length by parties with reasonably equal bargaining power in an effort to avoid the costs,
distractions, and uncertainties associated with protracted litigation; 

        WHEREAS,
Inhale and Alliance agree that the payments by Inhale under this Supplemental Agreement
provide Alliance with fair value, fair consideration, and reasonably equivalent value for
the amendments and modifications of the 1999 Agreements with respect to Inhale’s
purchase and license of the PulmoSphere® Technology and the MediSpheresTM
Technology as contemplated by this Supplemental Agreement and for the additional
proprietary assets, including proprietary assets relating to the Bioavailability
Technology, that Inhale is acquiring pursuant to this Supplemental Agreement; 

CONFIDENTIAL TREATMENT
REQUESTED 

        WHEREAS,
Inhale represents that the Royalty and Milestone Payment obligations of Inhale under the
APA have not yet come due and remain contingent and speculative, and thus Alliance agrees
with Inhale that the payments by Inhale under this Supplemental Agreement provide Alliance
with fair value, fair consideration, and reasonably equivalent value for the modifications
and amendments of those Royalty and Milestone Payment obligations pursuant to this
Supplemental Agreement; 

        WHEREAS,
Inhale and Alliance have agreed that, considered as a whole, the transactions that are the
subject of this Supplemental Agreement involve an exchange of fair value, fair
consideration, and reasonably equivalent value; 

        WHEREAS,
Inhale and Alliance desire to engage in the transactions that are the subject of this
Supplemental Agreement, to settle the disputes that are the subject of the Arbitration,
and to amend and clarify the 1999 Agreements in certain respects, and are willing to enter
into a settlement of the Arbitration, on the terms set forth herein and for good and
valuable consideration; 

        NOW,
THEREFORE, for and in consideration of the premises, and the mutual promises, releases,
and agreements herein contained, the Parties agree as follows: 

	1. 	Impact
Of This Supplemental Agreement On The 1999 Agreements. 

        1.1    
1999 Agreements Remain Effective. The Parties have concluded that it is not
practical to restate in their entirety the 1999 Agreements to reflect the compromises,
agreements, and additional transactions embodied in this Supplemental Agreement. As
modified and explained by this Supplemental Agreement, and except as specifically set
forth in this Supplemental Agreement, the 1999 Agreements remain in full force and
effect.  

        1.2    
This Supplemental Agreement Controls. This Supplemental Agreement modifies and/or
explains certain aspects of the 1999 Agreements and addresses additional subjects not
covered by the 1999 Agreements. In the event of any inconsistency between the provisions
of this Supplemental Agreement and the provisions of any or all of the 1999 Agreements,
this Supplemental Agreement is controlling for all purposes.  

	2. 	Payments
By Inhale. 

        2.1    
     Payment  At  Closing.  Inhale  will pay  Alliance  [CONFIDENTIAL  TREATMENT
 REQUESTED]  in cash on the  Closing  Date of this transaction. 

        2.2    
Royalty And Milestone Payments.  

            (a)                   The
Milestone Payments provisions of Section 1.6 of the APA are amended as
               follows:  

	 	        (i)                   The
provisions apply to Products (A) then covered by a Valid Claim of the
               Assigned Patent Rights or the MediSpheresTM Assigned Patent Rights, or
(B)                which embody or incorporate PulmoSphere® Technology or MediSpheresTM               Technology
and use, incorporate, or are based on the Purchased Assets or the
               MediSpheresTM Purchased Assets.  

2 

CONFIDENTIAL TREATMENT
REQUESTED 

	 	        (ii)                   The
provisions apply to the second and fourth covered Products and not to the
               first and third such products. In no event shall the aggregate payments
from                Inhale to Alliance under Section 1.6 of the APA exceed [CONFIDENTIAL
TREATMENT                REQUESTED]  

            (b)                   The
Royalty Payments provisions of Section 1.7 of the APA are amended as
               follows:  

	 	        (i)                   The
provisions apply to Products (A) then covered by a Valid Claim of the
               Assigned Patent Rights or the MediSpheresTM Assigned Patent Rights, or
(B)                which embody or incorporate PulmoSphere® Technology or MediSpheresTM               Technology
and use, incorporate, or are based on the Purchased Assets or the
               MediSpheresTM Purchased Assets.  

        The
provisions apply to the second and fourth covered Products and not to the first and third
such products. In no event shall Inhale be obligated to make payments to Alliance under
Section 1.7 with respect to more than two products, and the [CONFIDENTIAL TREATMENT
REQUESTED] set forth in Section 1.7 of the APA is reduced to 

        [CONFIDENTIAL
TREATMENT REQUESTED] 

        2.3    
     Royalty Payments On  Bioavailability  Technology.  For purposes of this Section 2.3,
the term "Specified  Products" shall mean Products outside the Inhale Field that do not
constitute Bioavailability Products. 

            (a)                  Inhale
shall pay Alliance a royalty equal to [CONFIDENTIAL TREATMENT REQUESTED]           of Net
Sales of Specified Products sold directly or indirectly by Inhale or its
          Affiliates (other than sales by a Partner). Inhale shall make royalty payments
          to Alliance (by wire transfer) within thirty days after the end of each
calendar           quarter in which Net Sales occur.  

            (b)                  In
respect of sales of Specified Products by any Partner, Inhale shall pay
          Alliance, as and when received by Inhale or its Affiliates from such Partner, a
          royalty equal to [CONFIDENTIAL TREATMENT REQUESTED] of Net Royalties. Inhale
          shall make royalty payments to Alliance (by wire transfer) within thirty days
          after the end of each calendar quarter in which Inhale or its Affiliates
receive           such Net Royalties.  

            (c)                  Inhale’s
royalty obligations to Alliance with respect to Products that           incorporate
PulmoSphere® Technology, MediSpheresTM Technology, and/or
          Bioavailability Technology in the Inhale Field are governed exclusively by
          Section 1.7 of the APA, as amended by this Supplemental Agreement. Except as
          provided in Section 1.7 of the APA, as amended by this Supplemental Agreement,
          Inhale shall only pay Alliance a royalty with respect to the Bioavailability
          Assigned Patent Rights or the Bioavailability Technology for Specified
Products.  

3 

CONFIDENTIAL TREATMENT
REQUESTED 

            (d)                  Upon
the request of Alliance, Inhale shall permit Alliance and its           representatives,
for purposes of auditing the performance of Inhale under this           Section 2.3, to
have access (i) during normal business hours to such of the           records of Inhale
as may be reasonably necessary to verify such performance of           Inhale and (ii) to
any Partners. If any such audit reveals that any payment           required by this
Section 2.3 shall have been deficient, Inhale shall immediately           pay to Alliance
the amount of any such deficiency plus interest from the date           otherwise due at
the lesser of 18% per annum or the maximum rate permitted under           applicable law.
If any such deficiency shall be greater than five percent of the           amount
actually owed, Inhale shall immediately reimburse Alliance for the costs           of
such audit (including, without limitation, the fees of any accounting firm
          employed by Alliance for such purpose).  

	3. 	Certain
Definitions. 

        3.1    
Previously Defined Terms. Unless they are redefined in this Supplemental
Agreement, all terms defined in the 1999 Agreements shall have the same meaning for
purposes of this Supplemental Agreement as was ascribed to them in the 1999 Agreements.
The definitions set forth in this Supplemental Agreement shall control for purposes of
this Supplemental Agreement and the 1999 Agreements, and are intended by the Parties to
replace the definitions set forth in the 1999 Agreements for all purposes.  

        3.2    
Alliance Product. For purposes of this Supplemental Agreement and the 1999
Agreements, Alliance Product shall mean any product for use outside the Inhale Field
involving the use of microstructures in connection with the direct intratracheal or
direct pulmonary administration (e.g., via bronchoscope or endotracheal tube) of
fluorocarbons or other liquids (“Liquid Dose Instillation”) which if made,
used, sold, or imported absent the license granted to Alliance by Inhale would infringe
one or more Valid Claims of the Assigned Patent Rights, the MediSpheresTM Assigned
Patent Rights, or the Bioavailability Assigned Patent Rights, or which in material part
uses, incorporates, or is based on the Assigned Know-How.  

        3.3    
Assigned Know-How. For purposes of this Supplemental Agreement and the 1999
Agreements, Assigned Know-How shall mean all information and data within the Purchased
Assets, the MediSpheresTM Purchased Assets, or the Bioavailability Purchased Assets
other than the Assigned Patent Rights, the MediSpheresTM Assigned Patent Rights, and
the Bioavailability Assigned Patent Rights which is necessary or useful for Alliance to
develop, manufacture, commercialize, or use Products outside the Inhale Field.  

        3.4    
Bioavailability Product. For purposes of this Supplemental Agreement and the 1999
Agreements, Bioavailability Product shall mean a non-respiratory human pharmaceutical
(that is, a human pharmaceutical that is not within the Inhale Field), the making, using,
selling, or importation of which (i) is then covered by a Valid Claim of both (A) the
Assigned Patent Rights or the MediSpheresTM Assigned Patent Rights and (B) the
Bioavailability Assigned Patent Rights, or (ii) embodies or incorporates both (C)
PulmoSphere® Technology and/or MediSpheresTM Technology and (D) Bioavailability
Technology and in material part uses, incorporates, or is based on both (E) the Purchased
Assets and/or the MediSpheresTMPurchased Assets and (F) the Bioavailability Purchased
Assets.  

4 

CONFIDENTIAL TREATMENT
REQUESTED 

        3.5    
Bioavailability Technology. For purposes of this Supplemental Agreement and the
1999 Agreements, Bioavailability Technology shall mean (i) the method of manufacturing a
microparticle composition for controlling an immune response by downregulating a
pathogenic arm of the immune system, or upregulating the suppressor arm of the immune
system, or simultaneously downregulating the pathogenic arm and upregulating the
suppressor arm of the immune system, and (ii) the microparticle compositions manufactured
by such method, both as further described in [CONFIDENTIAL TREATMENT REQUESTED] and
[CONFIDENTIAL TREATMENT REQUESTED] and (iii) all foreign counterpart patent applications
and patents claiming priority of such patent applications and patents, and (iv) all
patents that have issued or in the future issue from any of the foregoing patent
applications, including utility, model, and design patents and certificates of invention,
and (v) all divisionals, continuations, continuations-in-part, reissues, reexaminations,
renewals, extensions or additions of any of the foregoing patent applications and patents
(the “Bioavailability Assigned Patent Rights”).  

        3.6    
Closing. The consummation of the transactions contemplated by this Supplemental
Agreement (the “Closing”) shall take place at the offices of Pillsbury Winthrop
LLP, 11682 El Camino Real, Suite 200, San Diego, California 92130 (or at such other place
as the Parties shall designate), on March 15, 2002, at 9:00 a.m. (Pacific time). For
purposes of this Supplemental Agreement, “Closing Date” shall mean the time and
date as of which the Closing actually takes place. The Parties shall each receive such
other documents as either Party may reasonably request for the purpose of evidencing or
effecting the transactions contemplated by this Supplemental Agreement, all of which
shall be in full force and effect.  

        3.7    
Improvements. For purposes of this Supplemental Agreement and the 1999 Agreements,
Improvements shall mean (a) all discoveries and inventions regarding PulmoSphere® Technology,
MediSpheresTMTechnology, or Bioavailability Technology, which are conceived and
reduced to practice by or on behalf of Alliance, whether or not such Improvements are
claimed in a pending patent application or an issued patent (“Assignable Improvements”)
and (b) all other discoveries or inventions which are conceived and reduced to practice
by or on behalf of Alliance, whether or not such Improvements are claimed in a pending
patent application or an issued patent (“Licensable Improvements”).  

        3.8    
Inhale Field. For purposes of this Supplemental Agreement and the 1999 Agreements,
Inhale Field shall mean uses of microstructures of the types described in all of the
Assigned Patent Rights and Purchased Proprietary Assets (regardless of their particular
microstructure, physical characteristics, or morphology) within the respiratory tract,
including without limitation the nasal passage; provided, however, the Inhale Field shall
not include the use of microstructures in connection with the direct intratracheal or
direct pulmonary administration (e.g., via bronchoscope or endotracheal tube) of
fluorocarbons or other liquids. For clarity, the Inhale Field includes the administration
of microstructures containing compounds by means of metered dose inhaler, dry powder
inhaler, nasal spray, or by nebulization of microstructures formulated with
fluorochemicals as suspending agents, provided that the quantities of fluorochemicals so
included in such formulation for nebulization do not exceed that which is commercially
reasonably necessary to provide effective delivery of the active agent.  

5 

CONFIDENTIAL TREATMENT
REQUESTED 

        3.9    
Licensed Know-How. For purposes of this Supplemental Agreement and the 1999
Agreements, Licensed Know-How shall mean (a) all information, inventions, technology, and
data regarding the PulmoSphere®Technology, the MediSpheresTM Technology, or the
Bioavailability Technology which is not generally known and which is necessary or useful
for Inhale to develop, manufacture, commercialize, or use Products, in which Alliance now
has an ownership or licensable interest, and (b) all information and data regarding
Licensable Improvements which is not generally known and which is necessary or useful for
Inhale to develop, manufacture, commercialize or use Products, in which Alliance acquires
an ownership or licensable interest.  

        3.10    
Licensed Patent Rights. For purposes of this Supplemental Agreement and the 1999
Agreements, Licensed Patent Rights shall mean (a) those certain patents listed on
Schedule A of the License to Inhale and all foreign counterpart patent applications and
patents claiming priority of such patent applications and patents; (b) all patents and
patent applications in any country that claim Licensable Improvements; (c) all patents
that have issued or in the future issue from any of the foregoing patent applications,
including utility, model, and design patents and certificates of invention; and (d) all
divisionals, continuations, continuations-in-part, reissues, renewals, extensions, or
additions of any of the foregoing patent applications and patents; in each case which
Alliance now has or in which Alliance hereafter acquires an ownership or licensable
interest.  

        3.11    
MediSpheresTMTechnology. For purposes of this Supplemental Agreement
and the 1999 Agreements, MediSpheresTM Technology shall mean (i) the method of
manufacturing stable, dry metal ion-lipid microparticle compositions for drug delivery
based on the formation of a lipid-metal ion complex matrix that incorporates the drug or
active agent to be delivered, and (ii) the microparticle compositions manufactured by
such method, both as further described in [CONFIDENTIAL TREATMENT REQUESTED] as well as
its related continuation-in-part [CONFIDENTIAL TREATMENT REQUESTED] , and (iii) all
foreign counterpart patent applications and patents claiming priority of such patent
applications and patents, and (iv) all patents that have issued or in the future issue
from any of the foregoing patent applications, including utility, model, and design
patents and certificates of invention, and (v) all divisionals, continuations,
continuations-in-part, reissues, reexaminations, renewals, extensions or additions of any
of the foregoing patent applications and patents (the “MediSpheresTM Assigned
Patent Rights”). The Parties have specifically agreed that all particles described
in the MediSpheresTMAssigned Patent Rights — regardless of their particular
microstructure, physical characteristics, or morphology — are covered by the phrase
MediSpheresTMTechnology.  

        3.12    
Product. For purposes of this Supplemental Agreement and the 1999 Agreements,
Product shall mean a human pharmaceutical, the making, using, selling, or importation of
which (i) is then covered by a Valid Claim of the Assigned Patent Rights, the MediSpheresTM Assigned
Patent Rights, or the Bioavailability Assigned Patent Rights, or (ii) which embodies or
incorporates PulmoSphere® Technology, MediSpheresTM Technology, or
Bioavailability Technology and in material part uses, incorporates, or is based on the
Purchased Assets, the MediSpheresTM Purchased Assets, the Bioavailability Technology,
or Licensed Know-How.  

6 

CONFIDENTIAL TREATMENT
REQUESTED 

        3.13    
PulmoSphere®Technology. For purposes of this Supplemental Agreement and the
1999 Agreements, PulmoSphere® Technology shall mean (i) the method of manufacturing
spray dried particles using a perfluorocarbon emulsion or other blowing agents described
in the Assigned Patent Rights and Purchased Proprietary Assets, and (ii) the particles
manufactured by such method, both as further described in all of the Assigned Patent
Rights and Purchased Proprietary Assets. The Parties have agreed to delete the phrase
“hollow and porous” from the definition of PulmoSphere® Technology. The
Parties have specifically agreed that all particles described in the Assigned Patent
Rights and Purchased Proprietary Assets — regardless of their particular
microstructure, physical characteristics, or morphology — are covered by the phrase
PulmoSphere® Technology, and have further agreed that “raisin-like,” or
“wrinkled,” or other non-perfectly spherical particles are covered by the
phrase PulmoSphere® Technology.  

	4. 	Purchase
And Sale of Assets. 

        4.1    
Agreement With Respect To The APA. The Parties agree that the Assigned Patent
Rights and Purchased Assets conveyed pursuant to Section 1.1 of the APA, as modified by
this Supplemental Agreement, have been conveyed by Alliance to Inhale in their entirety,
with no reservation of any ownership interest or other rights by Alliance, except as
specifically set forth in the APA or this Supplemental Agreement. The Parties have
further specifically agreed that the use of the phrase PulmoSphere® Technology in
Section 1.1 of the APA, or in any other provision of the APA, is not intended to imply or
give rise to any limitation on the scope of the Assigned Patent Rights conveyed by
Alliance to Inhale in the APA, and that the Assigned Patent Rights purchased by Inhale
are co-extensive with the disclosures and claims set forth in the Assigned Patent Rights.  

        4.2    
Purchase And Sale Of MediSpheresTM Assets.  

            (a)                  Upon
the terms and subject to the conditions of this Supplemental Agreement, on           the
Closing Date, Alliance shall sell, transfer, convey, assign, grant, and           deliver
to Inhale, and Inhale shall purchase, acquire, and receive (a) the           MediSpheresTM Assigned
Patent Rights; (b) the trademark MediSpheresTM;           and (c) all Know-How of
Alliance related to the development or use of the           MediSpheresTM Technology
(collectively, the “MediSpheresTM          Purchased Assets”). Within 30
days after the Closing Date, Alliance shall           place in escrow pursuant to the
Escrow Agreement the originals of all laboratory           files, batch records, and
other records listed in Exhibit A, and copies of           portions of laboratory
notebooks listed in Exhibit B, in each case relating to           the MediSpheresTM Technology.  

            (b)                  Alliance
shall not itself retain copies (unless otherwise required by applicable
          governmental laws, rules, and regulations) of such files and records other than
          for portions of the laboratory notebooks, but if Alliance requires access
          thereto to comply with regulatory requirements for its products, it shall so
          notify Inhale and Inhale shall provide Alliance access on a reasonable basis
          during normal business hours as the Parties shall mutually agree.  

        4.3    
Purchase And Sale Of Bioavailability Assets.  

            (a)                  Upon
the terms and subject to the conditions of this Supplemental Agreement, on           the
Closing Date, Alliance shall sell, transfer, convey, assign, grant, and           deliver
to Inhale, and Inhale shall purchase, acquire, and receive (a) the
          Bioavailability Assigned Patent Rights; and (b) all Know-How of Alliance
related           to the development or use of the Bioavailability Technology
(collectively, the           “Bioavailability Purchased Assets”). Within 30
days after the Closing           Date, Alliance shall place in escrow pursuant to the
Escrow Agreement the           originals of all laboratory files, batch records, and
other records listed in           Exhibit C, and copies of portions of laboratory
notebooks listed in Exhibit D,           in each case relating to the Bioavailability
Technology.  

7 

CONFIDENTIAL TREATMENT
REQUESTED 

            (b)                  Alliance
shall not itself retain copies (unless otherwise required by applicable
          governmental laws, rules, and regulations) of such files and records other than
          for portions of the laboratory notebooks, but if Alliance requires access
          thereto to comply with regulatory requirements for its products, it shall so
          notify Inhale and Inhale shall provide Alliance access on a reasonable basis
          during normal business hours as the Parties shall mutually agree.  

        4.4    
Intent Of The Parties. The Parties intend that the MediSpheresTM Purchased
Assets and the Bioavailability Purchased Assets constitute all of Alliance’s
Proprietary Assets with respect to the MediSpheresTM Technology and Bioavailability
Technology.  

        4.5    
     Representations  And Warranties Of Alliance.  Except as set forth in this
 Supplemental  Agreement,  the 1999  Agreements,  or that certain letter to Inhale's
counsel dated as of the date hereof: 

            (a)                  To
Alliance’s Knowledge, Alliance has the right to grant to Inhale rights           to
all MediSpheresTM Purchased Assets and all Bioavailability Purchased           Assets
that Alliance purports to grant under this Supplemental Agreement, free           and
clear of any Encumbrances. To the Knowledge of Alliance, there are no           defects
in the filing or prosecution of the MediSpheresTM Assigned Patent           Rights or
the Bioavailability Assigned Patent Rights that could reasonably be           expected to
cause either the invalidity of any patent that may issue from the           MediSpheresTM Assigned
Patent Rights or the Bioavailability Assigned Patent           Rights or cause a patent
not to issue from the MediSpheresTM Assigned Patent           Rights or the
Bioavailability Assigned Patent Rights. Alliance is not obligated           to make any
payment to any Person for the use or other exploitation of any of           the
MediSpheresTM Purchased Assets or any of the Bioavailability Purchased
          Assets.  

            (b)                  Alliance
has taken commercially reasonable measures and precautions, consistent           with its
customary practices, appropriate to protect and maintain the           confidentiality
and secrecy of all of the MediSpheresTM Purchased Assets and           all of the
Bioavailability Purchased Assets (except to the extent that public           disclosure
was necessary as part of the process of filing patent applications           for the
MediSpheresTM Assigned Patent Rights or the Bioavailability Assigned           Patent
Rights whose value would be unimpaired by public disclosure).  

            (c)                  All
issued patents and trademarks that are registered with any Governmental Body
          and held by Alliance and included within the MediSpheresTM Purchased Assets
          or the Bioavailability Purchased Assets are subsisting and to the Knowledge of
          Alliance are valid. To the Knowledge of Alliance (without performing any
special           inquiry and recognizing that Alliance’s primary area of expertise
is           outside Inhale’s intended use of the MediSpheresTM Purchased Assets
and           the Bioavailability Purchased Assets), the use of the MediSpheresTM          Purchased
Assets or the Bioavailability Purchased Assets does not infringe or           constitute
a misappropriation of any Proprietary Asset owned or used by any           other Person.
Alliance has not received any written notice or other           communication from any
Person of any actual, alleged, possible, or potential           infringement,
misappropriation, or unlawful use of, any Proprietary Asset owned           or used by
such Person. To the Knowledge of Alliance, no other Person is           infringing,
misappropriating, or making any unlawful use of any           MediSpheresTM Purchased
Asset or any Bioavailability Purchased Asset.  

8 

CONFIDENTIAL TREATMENT
REQUESTED 

            (d)                  The
MediSpheresTM Purchased Assets and the Bioavailability Purchased Assets
          constitute all the Proprietary Assets of Alliance that are necessary to enable
          Alliance to utilize the MediSpheresTM Technology and the Bioavailability
          Technology in the manner in which the MediSpheresTM Technology and the
          Bioavailability Technology are being utilized by Alliance outside of Liquid
Dose           Instillation. Alliance has not licensed any of the MediSpheresTM Purchased
          Assets or any of the Bioavailability Purchased Assets to any Person and has not
          granted any right to any Third Party in or to the MediSpheresTM Purchased
          Assets or the Bioavailability Purchased Assets which would conflict with the
          rights transferred to Inhale pursuant to this Supplemental Agreement. Alliance
          has not entered into any covenant not to compete or Contract restricting its
          right to use or practice any of the MediSpheresTM Purchased Assets or any
of           the Bioavailability Purchased Assets or to transact business regarding the
          MediSpheresTM Purchased Assets or the Bioavailability Purchased Assets in
          any market or geographic area or with any Person. To the Knowledge of Alliance,
          Alliance has, and Inhale will acquire on the Closing Date, the exclusive right
          to use the trademark MediSpheresTM, subject to the nonexclusive license
          granted to Alliance in the License to Alliance to use such mark for Designated
          Products. As a specific remedy for breach of this warranty, in addition to all
          other remedies available at law, Alliance agrees that any Proprietary Asset of
          Alliance in existence as of the Closing Date that is necessary to enable
          Alliance to utilize the MediSpheresTM Technology and the Bioavailability
          Technology in the manner in which the MediSpheresTM Technology and the
          Bioavailability Technology are being utilized by Alliance outside of Liquid
Dose           Instillation as of the Closing Date will be treated, with no further
action by           Inhale or Alliance, as a MediSpheresTM Purchased Asset or a
Bioavailability           Purchased Asset for all purposes under this Supplemental
Agreement.  

            (e)                  Alliance
has provided Inhale with full and complete access to all of           Alliance’s
material records, documents, and data with respect to the           MediSpheresTM Purchased
Assets and the Bioavailability Purchased Assets.  

            (f)                  To
Alliance’s Knowledge, there is no fact or condition relating to the
          MediSpheresTM Purchased Assets or the Bioavailability Purchased Assets
          (including without limitation the practice of the MediSpheresTM Purchased
          Assets or the Bioavailability Purchased Assets) that may interfere materially
          with Inhale’s ability to exploit the MediSpheresTM Purchased Assets or
          the Bioavailability Purchased Assets outside of Liquid Dose Instillation in a
          commercially reasonable manner, and no condition or circumstance exists that
          would be expected to give rise to any such fact or condition.  

9 

CONFIDENTIAL TREATMENT
REQUESTED 

            (g)                  Alliance
is not now insolvent, and will not be rendered insolvent by any of the
          transactions contemplated by this Supplemental Agreement. In addition,
          immediately after giving effect to the consummation of the transactions
          contemplated by this Supplemental Agreement, (a) Alliance will be able to pay
          its debts as they become due; (b) Alliance will not have unreasonably small
          assets with which to conduct its present or proposed business; and (c) taking
          into account all contingent pending and threatened litigation, final judgments
          against Alliance in actions for money damages are not reasonably anticipated to
          be rendered at a time when, or in amounts such that, Alliance will be unable to
          satisfy any such judgments promptly in accordance with their terms (taking into
          account the maximum probable amount of such judgments in any such actions might
          be rendered) as well as all other obligations of Alliance. The cash available
to           Alliance, taking into account all other anticipated uses of the cash, will
be           sufficient to pay all such judgments promptly in accordance with their
terms. As           used in this Section, (i) “insolvent” means that the sum of
the           present fair saleable value of Alliance’s assets does not and will not
          exceed its debts and other probable liabilities; and (ii) “debts”          includes
any legal liability, whether matured or unmatured, liquidated or           unliquidated,
absolute, fixed or contingent, disputed or undisputed, or secured           or unsecured.  

            (h)                  To
the Knowledge of Alliance, no representation or warranty of Alliance in this
          Supplemental Agreement and no information provided by Alliance to Inhale with
          respect to the Purchased Assets, the MediSpheresTM Purchased Assets, or the
          Bioavailability Purchased Assets fails to state any material fact necessary in
          order to make the representations, warranties, and information of or with
          respect to Alliance, the Purchased Assets, the MediSpheresTM Purchased
          Assets, or the Bioavailability Purchased Assets contained herein and therein
(in           the light of circumstances under which such representations, warranties,
and           information were or will be made or provided) not false or misleading.  

            (i)                  EXCEPT
AS OTHERWISE EXPRESSLY SET FORTH IN THIS SECTION 4.5, NOTHING IN THIS
          SUPPLEMENTAL AGREEMENT SHALL BE CONSTRUED AS A REPRESENTATION MADE, OR WARRANTY
          GIVEN, BY ALLIANCE THAT ANY PATENT WILL ISSUE BASED UPON ANY PENDING PATENT
          APPLICATION WITHIN THE MEDISPHERESTM ASSIGNED PATENT RIGHTS OR THE
          BIOAVAILABILITY ASSIGNED PATENT RIGHTS, THAT ANY PATENT WITHIN THE
          MEDISPHERESTM ASSIGNED PATENT RIGHTS OR THE BIOAVAILABILITY ASSIGNED PATENT
          RIGHTS WHICH ISSUES WILL BE VALID, OR THAT THE USE OF ANY LICENSE GRANTED
          HEREUNDER OR THE USE OF ANY RIGHTS WITH RESPECT THERETO WILL NOT INFRINGE THE
          PATENT OR OTHER PROPRIETARY RIGHTS OF ANY OTHER PERSON. FURTHERMORE, EXCEPT AS
          OTHERWISE EXPRESSLY SET FORTH IN THIS SECTION 4.5, ALLIANCE MAKES NO
          REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO THE
          MEDISPHERESTM PURCHASED ASSETS, THE BIOAVAILABILITY PURCHASED ASSETS OR ANY
          OTHER RIGHTS GRANTED OR LICENSED HEREUNDER, INCLUDING WITHOUT LIMITATION, ANY
          WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.  

        4.6    
Technology Transfer. Following the Closing Date, Alliance and Inhale shall take
all steps reasonable to effect the transfer of all MediSpheresTM Purchased Assets and
all Bioavailability Purchased Assets to Inhale in such a manner as to enable Inhale to
practice the MediSpheresTMTechnology and the Bioavailability Technology with the same
proficiency as such technology is practiced by Alliance as of the Closing Date. Such
transfer shall occur no later than June 30, 2002.  

10 

CONFIDENTIAL TREATMENT
REQUESTED 

	5. 	License
To Inhale. 

        5.1    
Effect Of This Supplemental Agreement. Following the Closing Date, the definitions
set forth in this Supplemental Agreement will apply with full force and effect to the
License to Inhale for all purposes. The effect of this Supplemental Agreement is to
clarify and broaden the scope of the license granted by Alliance to Inhale under the
License to Inhale. As amended by this Supplemental Agreement, the License to Inhale
remains in full force and effect.  

        5.2    
Amendments To The License To Inhale.  

            (a)                  The
first “Whereas” clause of the License to Inhale is hereby deleted           in
its entirety and replaced with the following: “WHEREAS, Alliance and
          Inhale have entered into an Asset Purchase Agreement dated as of October 4,
1999           (as amended or restated from time to time) (the “Asset Purchase
          Agreement”) and a Supplemental Agreement dated as of March 15, 2002 (the
          “Supplemental Agreement”), pursuant to which Alliance assigned and
          sold to Inhale certain patent rights and know-how relating to the
          PulmoSphere® Technology, the MediSpheresTM Technology, and the
          Bioavailability Technology.” 

            (b)                  Section
3.1 of the License to Inhale is hereby deleted in its entirety and           replaced
with the following: “Alliance hereby grants to Inhale an           irrevocable,
nonexclusive, worldwide, royalty-free (except as provided in the           Asset Purchase
Agreement, as amended by the Supplemental Agreement) license           (including the
nonexclusive right to grant sublicenses) under the Licensed           Patent Rights (as
defined in the Supplemental Agreement) solely to make, use,           offer for sale,
sell, and import Products (as defined in the Supplemental           Agreement) other than
Products involving Liquid Dose Instillation (as defined in           the Supplemental
Agreement).” 

            (c)                  Section
3.2 of the License to Inhale is hereby deleted in its entirety and           replaced
with the following: “Alliance hereby grants to Inhale an           irrevocable,
nonexclusive, worldwide, royalty-free (except as provided in the           Asset Purchase
Agreement, as amended by the Supplemental Agreement) license           (including the
nonexclusive right to grant sublicenses) under the Licensed           Know-How (as
defined in the Supplemental Agreement) solely to make, use, offer           for sale,
sell, and import Products (as defined in the Supplemental Agreement)           other than
Products involving Liquid Dose Instillation (as defined in the           Supplemental
Agreement).” 

            (d)                  Section
3.3 of the License to Inhale is hereby deleted in its entirety and           replaced
with the following: “Alliance shall, and hereby does, grant to           Inhale all
right, title, and interest in and to all Assignable Improvements (as           defined in
the Supplemental Agreement), together with all intellectual property           rights
relating thereto (including without limitation all patent applications or
          patents claiming such Assignable Improvements). Alliance agrees promptly to
          disclose to Inhale any such Assignable Improvements and to execute such
          documents and perform such other acts as Inhale may reasonably request to
          obtain, perfect, and enforce such rights to the Assignable Improvements and the
          assignment thereof.” 

            (e)                  Section
3.4 of the License to Inhale is hereby deleted in its entirety and           replaced
with the following: “Inhale shall not knowingly use or sell           products or
compounds involving Liquid Dose Instillation (as defined in the           Supplemental
Agreement) where such products or compounds are claimed in the           Licensed Patent
Rights or incorporate or are made using the Licensed           Know-How.” 

11 

CONFIDENTIAL TREATMENT
REQUESTED 

            (f)                  Section
5.3 of the License to Inhale is hereby deleted in its entirety and           replaced
with the following: “Alliance hereby represents and warrants to           Inhale
that, except as set forth on Schedule A to this Agreement, as of the           Closing of
the Supplemental Agreement, Alliance does not own or control any           patents or
patent applications that would be infringed by the use of the           PulmoSphere® Technology,
the MediSpheresTM Technology, or the           Bioavailability Technology, as
described in the Assigned Patent Rights, the           MediSpheresTM Assigned Patent
Rights, or the Bioavailability Assigned Patent           Rights, respectively, as of the
Closing of the Supplemental Agreement. As a           specific remedy for breach of this
warranty, in addition to all other remedies           available at law, Alliance agrees
that any Proprietary Asset of Alliance in           existence as of the Closing Date that
is necessary to enable Alliance to utilize           the MediSpheresTM Technology and
the Bioavailability Technology in the           manner in which the MediSpheresTM Technology
and the Bioavailability           Technology are being utilized by Alliance outside of
Liquid Dose Instillation as           of the Closing Date will be treated, with no
further action by Inhale or           Alliance, as a MediSpheresTM Purchased Asset or
a Bioavailability Purchased           Asset for all purposes under this Agreement.” 

	6. 	License
To Alliance. 

        6.1    
Effect Of This Supplemental Agreement. Following the Closing Date, the definitions
set forth in this Supplemental Agreement will apply with full force and effect to the
License to Alliance for all purposes. The effect of this Supplemental Agreement is to
amend and clarify the scope of the license granted by Inhale to Alliance under the
License to Alliance. As amended by this Supplemental Agreement, the License to Alliance
remains in full force and effect.  

        6.2    
Amendments To The License To Alliance.  

            (a)                  The
second “Whereas” clause of the License to Alliance is hereby           deleted
in its entirety and replaced with the following: “WHEREAS, pursuant           to the
Supplemental Agreement dated as of March 15, 2002 (the “Supplemental
          Agreement”), Inhale has agreed to grant Alliance a license under the
          assigned patent rights and know-how, together with other intellectual property
          rights, relating to the PulmoSphere® Technology, the MediSpheresTM          Technology,
and the Bioavailability Technology for all applications involving           Liquid Dose
Instillation, and for certain products within the Inhale Field as to           which
Alliance exercises its rights under the Product Development Rights           Agreement,
as amended by the Supplemental Agreement (the “Product           Development Rights
Agreement”). The definitions for certain terms used in           this Agreement with
initial letters capitalized (as this Agreement is amended           pursuant to the
Supplemental Agreement) are set forth in the Supplemental           Agreement.” 

            (b)                  Section
3.1 of the License to Alliance is hereby deleted in its entirety and           replaced
with the following:  

	 	        “(a)                      Inhale
hereby grants to Alliance an irrevocable, exclusive, worldwide,
               royalty-free license (including the right to grant sublicenses) under the
               Assigned Patent Rights, the MediSpheresTM Assigned Patent Rights, the
               Bioavailability Assigned Patent Rights, the Assignable Improvements, and
the                Assigned Know-How for use in applications involving Liquid Dose
Instillation,                including without limitation the right to make, use, offer
for sale, sell, and                import Alliance Products for use in applications
involving Liquid Dose                Instillation.  

12 

CONFIDENTIAL TREATMENT
REQUESTED 

	 	        (b)                      Inhale
hereby grants to Alliance an irrevocable, exclusive, worldwide,
               royalty-free license (including the right to grant sublicenses) under the
               Bioavailability Purchased Assets and any Assignable Improvements regarding
               Bioavailability Technology for uses outside the Inhale Field to make, use,
offer                for sale, sell, and import Products that do not constitute
Bioavailability                Products.” 

            (c)                  Section
3.2 of the License to Alliance is hereby deleted in its entirety and           replaced
with the following: “Inhale hereby grants to Alliance a           non-exclusive,
worldwide, royalty-free license (without the right to grant           sublicenses, other
than to its Affiliates and parties to whom the rights of           Alliance under the
Product Development Rights Agreement may be assigned as           permitted thereby)
under the Assigned Patent Rights, the MediSpheresTM          Assigned Patent Rights,
the Bioavailability Assigned Patent Rights, the           Assignable Improvements, and
the Assigned Know-How to perform research and           development activities to
identify products with respect to which Alliance may           desire to exercise a
Product Development Right (as defined in the Product           Development Rights
Agreement) therefor under the Product Development Rights           Agreement. Such
license shall be effective for so long as Alliance has any           unused Product
Development Right(s) available to it under the Product           Development Rights
Agreement.” 

            (d)                  Section
3.3 of the License to Alliance is hereby deleted in its entirety and           replaced
with the following: “Inhale hereby grants to Alliance an           irrevocable,
exclusive, worldwide (subject to Section 3.9 of the Product           Development Rights
Agreement), royalty-free (except as provided in Section 3.8           of the Product
Development Rights Agreement) license (including the exclusive           right to grant
sublicenses to Third Parties that are not Competitors of Inhale,           subject to
Section 3.7 of the Product Development Rights Agreement) under the           Designated
Product Patent Rights and Designated Product Know-How to use, offer           for sale,
sell, import, manufacture and have manufactured Designated Products           for all
purposes; provided, however, that the right to manufacture or have           manufactured
a Powder Formulation of the Active Substance of such Designated           Product shall
be suspended to the extent that Inhale or its Partner (as the           foregoing terms
are defined for purposes of the Product Development Rights           Agreement) is
manufacturing such Powder Formulation pursuant to a manufacturing           agreement
entered into as contemplated by Section 3.5 of the Product Development           Rights
Agreement.” 

            (e)                  The
trademark MediSpheresTM is added to Section 3.4 of the License to           Alliance
for all purposes.  

            (f)                  Section
3.5 of the License to Alliance is hereby deleted in its entirety and           replaced
with the following: “Except in the case of Designated Products or           products
or compounds involving Liquid Dose Instillation (as defined in the           Supplemental
Agreement), or, as to the Bioavailability Purchased Assets and any           Assignable
Improvements regarding Bioavailability Technology, for applications           outside the
Inhale Field, Alliance shall not knowingly use or sell products or           compounds
that are made using or that incorporate PulmoSphere® Technology,           MediSpheresTM Technology,
or Bioavailability Technology.” 

13 

CONFIDENTIAL TREATMENT
REQUESTED 

            (g)              Sections
5.1 and 5.2 of the License to Alliance are hereby deleted in their           entirety and
replaced with the following:  

	 	        “5.1    
Prosecution and Maintenance. 

	 	        5.1.1    
Subject to the provisions of this Section 5.1, Inhale shall be responsible for and shall
control, at its sole cost, the preparation, filing, prosecution (including oppositions)
and maintenance of the Assigned Patent Rights, Designated Product Patent Rights,
MediSpheresTM Assigned Patent Rights and Bioavailability Assigned Patent Rights.
Inhale shall consider in good faith the interests of Alliance in so doing. Inhale (a)
shall supply Alliance with a copy of each patent application within the Assigned Patent
Rights, Designated Product Patent Rights, MediSpheresTM Assigned Patent Rights and
Bioavailability Assigned Patent Rights as filed, together with notice of its filing date
and serial number; (b) shall consult with Alliance regarding the prosecution and
maintenance of the Assigned Patent Rights, Designated Product Patent Rights, MediSpheresTM Assigned
Patent Rights and Bioavailability Assigned Patent Rights, and shall implement all
reasonable requests of Alliance regarding claims with application (i) for Liquid Dose
Instillation, (ii) as to the Bioavailability Assigned Patent Rights, for uses outside the
Inhale Field, and (iii) as to the Designated Products or their use; and (c) shall inform
Alliance promptly of the allowance and issuance of each patent within the Assigned Patent
Rights, Designated Product Patent Rights, MediSpheresTM Assigned Patent Rights or
Bioavailability Assigned Patent Rights, together with the date and patent number thereof,
and shall provide Alliance with a copy of such patent as issued.  

	 	        5.1.2    
Inhale shall use its commercially reasonable efforts to obtain the strongest commercially
reasonable patent protection (under the circumstances) for applications of the Assigned
Patent Rights, MediSpheresTM Assigned Patent Rights and Bioavailability Assigned
Patent Rights for Liquid Dose Instillation and, as to the Bioavailability Assigned Patent
Rights, for applications outside the Inhale Field (collectively, “Applications”).
Inhale (a) shall inform Alliance promptly of any substantive action or proposed action
with respect to any Applications and shall provide Alliance with advance copies of all
proposed responses thereto reasonably in advance of any proposed action and shall
implement all reasonable requests of Alliance relating to the Applications; (b) shall not
abandon or materially narrow the substantive claims of the Assigned Patent Rights,
MediSpheresTM Assigned Patent Rights or Bioavailability Assigned Patent Rights with
respect to any Applications without the prior express written consent of Alliance (which
shall not be unreasonably withheld or delayed) unless Inhale first files a continuation
of such application claiming the subject matter of the application to be abandoned or
materially narrowed; (c) shall provide Alliance with copies of all filings and
submissions, together with all correspondence with the applicable patent authorities,
regarding the Assigned Patent Rights, MediSpheresTM Assigned Patent Rights and
Bioavailability Assigned Patent Rights; and (d) shall prosecute all reexaminations and
reissues of the Assigned Patent Rights, MediSpheresTM Assigned Patent Rights and
Bioavailability Assigned Patent Rights relating to any Applications as reasonably
requested by Alliance.  

14 

CONFIDENTIAL TREATMENT
REQUESTED 

	 	        5.1.3   
If requested by Alliance and to the extent commercially practicable, Inhale shall seek
separate divisionals and continuations for claims under the Assigned Patent Rights,
MediSpheresTM Assigned Patent Rights and Bioavailability Assigned Patent Rights for
Liquid Dose Instillation and, as to the Bioavailability Assigned Patent Rights, for
applications outside the Inhale Field. With respect to each such patent application and
patent issuing therefrom within the Assigned Patent Rights, MediSpheresTM Assigned
Patent Rights or Bioavailability Assigned Patent Rights that solely claims an application
or use for Liquid Dose Instillation (or, as to the Bioavailability Assigned Patent
Rights, for applications outside the Inhale Field), Alliance shall, at its sole cost and
in its sole discretion, assume control of the preparation, filing, prosecution and
maintenance of such patent application or patent. For any patent application or patent
for which Alliance assumes such responsibility under this Section 5.1.3, Alliance (a)
shall consult with Inhale regarding the prosecution and maintenance of such Assigned
Patent Rights, MediSpheresTM Assigned Patent Rights or Bioavailability Assigned
Patent Rights, and (b) shall inform Inhale promptly of any substantive action or proposed
action with respect to such Assigned Patent Rights, MediSpheresTM Assigned Patent
Rights or Bioavailability Assigned Patent Rights and shall provide Inhale with advance
copies of all proposed responses thereto at least ten (10) business day in advance of any
proposed action. Notwithstanding the foregoing, if Alliance proposes to make any
statement or take any action that is reasonably likely to have a material adverse effect
on Inhale’s ability to obtain issued claims within the Assigned Patent Rights,
MediSpheresTMAssigned Patent Rights or Bioavailability Assigned Patent Rights with
application in the Inhale Field, and during such ten (10) business day period, Inhale
gives reasonably specific written notice thereof stating reasonably acceptable grounds
therefor, Alliance shall not make such statement or take such action.  

	 	        5.1.4    
If Inhale elects to abandon any patent application (for which it does not file a
continuation application), or not to pursue the filing of any foreign patent application
or maintain any patent within the Assigned Patent Rights, Designated Product Patent
Rights, MediSpheresTM Assigned Patent Rights or Bioavailability Assigned Patent
Rights that relates solely to uses for Liquid Dose Instillation or any Designated Product
(or, as to the Bioavailability Assigned Patent Rights, for applications outside the
Inhale Field), Inhale shall give Alliance written notice thereof not less than sixty (60)
days prior to the last day permitted to timely continue such patent application or to
maintain such patent and protect its rights under this Section 5.1.4. Alliance shall have
the right, at its sole cost and in its sole discretion, to assume control of the
preparation, filing, prosecution (including oppositions) and maintenance of such patent
application or patent. With respect to each patent application or patent for which
Alliance assumes control pursuant to this Section 5.1.4, Inhale promptly shall assign to
Alliance all right, title and interest therein, and thereafter each such patent
application or patent no longer shall be included within the Assigned Patent Rights,
Designated Product Patent Rights, MediSpheresTM Assigned Patent Rights or
Bioavailability Assigned Patent Rights.  

15 

CONFIDENTIAL TREATMENT
REQUESTED 

	 	        5.1.5    
Each party shall cooperate with the other, execute all lawful papers and instruments and
make all rightful oaths and declarations as may be necessary in the preparation, filing,
prosecution and maintenance of the Assigned Patent Rights, Designated Product Patent
Rights, MediSpheresTM Assigned Patent Rights and Bioavailability Assigned Patent
Rights.  

        5.2    
Enforcement of Patent Rights. Each party shall notify the other party of any
infringement known to such party of any [CONFIDENTIAL TREATMENT REQUESTED] and shall
provide the other party with the available evidence, if any, of such infringement.  

	 	        5.2.1    
Subject to the provisions of Sections 5.2.2 and 5.2.3 below, Inhale shall have the right,
at its sole cost and in its sole discretion, to determine the appropriate course of
action to enforce the [CONFIDENTIAL TREATMENT REQUESTED] or otherwise abate the
infringement thereof, to take (or refrain from taking) appropriate action to enforce the
[CONFIDENTIAL TREATMENT REQUESTED], to control any litigation or other enforcement action
and to enter into, or permit, the settlement of any such litigation or other enforcement
action with respect to the [CONFIDENTIAL TREATMENT REQUESTED], and shall consider, in
good faith, the interests of Alliance in so doing.  

	 	        5.2.2    
Except as provided in the last sentence of this Section 5.2.2, Alliance shall have the
right, at its sole cost and in its sole discretion, to determine the appropriate course
of action to enforce one or more patents within the [CONFIDENTIAL TREATMENT REQUESTED] or
otherwise abate the infringement thereof, to take (or refrain from taking) appropriate
action to enforce the [CONFIDENTIAL TREATMENT REQUESTED] to control any litigation or
other enforcement action with respect to one or more patents within the [CONFIDENTIAL
TREATMENT REQUESTED], and shall consider, in good faith, the interests of Inhale in so
doing. Inhale shall have the right in its sole discretion and at its cost, to jointly
defend any challenge to the validity, enforceability or scope of the [CONFIDENTIAL
TREATMENT REQUESTED] under this section 5.2.2. Alliance may exercise its rights under
this Section 5.2.2 only on a [CONFIDENTIAL TREATMENT REQUESTED] basis; Alliance shall not
settle any action or otherwise consent to an adverse judgment in any such action that
diminishes the rights of Inhale in the [CONFIDENTIAL TREATMENT REQUESTED] without the
prior written consent of Inhale. All monies recovered upon final judgment or settlement
of any such suit to enforce the [CONFIDENTIAL TREATMENT REQUESTED] as permitted under
this Section 5.2.2 shall first be allocated to reimburse each party’s expenses
incurred in conducting such action and then allocated between the parties in proportion
to their respective damages incurred by reason of such infringement, as determined in
such suit, or as agreed upon in such settlement.  

16 

CONFIDENTIAL TREATMENT
REQUESTED 

	 	        5.2.3    
If Alliance learns that a Third Party is infringing the [CONFIDENTIAL TREATMENT
REQUESTED] by making and selling a product competitive with a Designated Product, it may
request that Inhale enforce the [CONFIDENTIAL TREATMENT REQUESTED] against such Third
Party. If the parties agree that such Third Party’s actions infringe a [CONFIDENTIAL
TREATMENT REQUESTED] and that such infringement is material [CONFIDENTIAL TREATMENT
REQUESTED], then Inhale shall have the first right, but not the obligation, to enforce
the [CONFIDENTIAL TREATMENT REQUESTED] or otherwise abate the infringement thereof, and
to enter into, or permit, the settlement of any such litigation or other enforcement
action with respect to the [CONFIDENTIAL TREATMENT REQUESTED] against such Third Party,
at Inhale’s cost. If Inhale does not bring such action within one hundred eighty
(180) days after the parties agree that such infringement exists and is material, then
Alliance may enforce the [CONFIDENTIAL TREATMENT REQUESTED] or otherwise abate the
infringement thereof by such Third Party, at Alliance’s cost, and Inhale may
participate in such suit at its cost. Neither party shall settle any such suit or
otherwise take any action in such suit that would affect the scope or validity of the
[CONFIDENTIAL TREATMENT REQUESTED] or otherwise adversely affect the other party without
the other party’s prior written consent. All monies recovered upon final judgment or
settlement of any such suit to enforce the [CONFIDENTIAL TREATMENT REQUESTED] as
permitted under this Section 5.2.3 shall first be allocated to reimburse each party’s
expenses incurred in conducting such action and then allocated between the parties in
proportion to their respective damages incurred by reason of such infringement, as
determined in such suit, or as agreed upon in such settlement.  

	 	        5.2.4    
Notwithstanding the foregoing, the non-controlling party shall reasonably cooperate with
the controlling party, at the expense of the controlling party, in the planning and
prosecution of any action to enforce the [CONFIDENTIAL TREATMENT REQUESTED] as set forth
above. Each party shall keep the other party and its counsel reasonably informed as to
the status of any such action.” 

	7. 	Alliance’s
Product Development Eights. 

        7.1    
Effect Of This Supplemental Agreement. Following the Closing Date, the definitions
set forth in this Supplemental Agreement will apply with full force and effect to the
PDRA for all purposes. The effect of this Supplemental Agreement is to amend, clarify,
and limit the scope of the product development rights granted by Inhale to Alliance under
the PDRA. As amended by this Supplemental Agreement, the PDRA remains in full force and
effect.  

        7.2    
Amendments To The PDRA.  

17 

CONFIDENTIAL TREATMENT
REQUESTED 

            (a)              The
“Whereas” clauses of the PDRA are hereby deleted in their entirety
          and replaced with the following: “WHEREAS, Alliance and Inhale have
entered           into a Supplemental Agreement dated as of March 15, 2002 (the “Supplemental
          Agreement”), pursuant to which the product development rights granted to
          Alliance in connection with the Asset Purchase Agreement and this Agreement
have           been substantially altered and amended.” 

            (b)              Section
3.1 of the PDRA is hereby deleted in its entirety and replaced with the
          following:  

	 	        “3.1
Product Development Rights. 

	 	        (a)                      Subject
to the last sentence of this Section 3.1(a), in the [CONFIDENTIAL
               TREATMENT REQUESTED] following the Closing of the Supplemental Agreement,
               Alliance shall have the right (a “Product Development Right”) to
(i)                select, on a [CONFIDENTIAL TREATMENT REQUESTED] for development and
               commercialization of products in the Inhale Field which are manufactured
by                means of or incorporate PulmoSphere® Technology, MediSpheresTM               Technology,
and/or Bioavailability Technology, or (ii) initiate Phase II trials                on up
to four products in the Inhale Field which are manufactured by means of or
               incorporate PulmoSphere® Technology, MediSpheresTM Technology,
and/or                Bioavailability Technology, whichever comes first. Alliance may not
exercise                Product Development Rights under this Section without first
obtaining from                Inhale a Product Development Rights License under the
procedures set forth in                Section 3.2 of this Agreement. Alliance shall not
have the right to exercise any                additional Product Development Rights
granted to Alliance under this Agreement                following the earliest of (i) the
date on which Alliance has initiated                development on [CONFIDENTIAL
TREATMENT REQUESTED]; (ii) the date on which                Alliance has initiated Phase
II trials on four products; or (iii) [CONFIDENTIAL                TREATMENT REQUESTED]
from the Closing Date of the Supplemental Agreement                (although none of
these events shall disrupt the continuing exercise of Product                Development
Rights that have been initially exercised prior thereto).                Alliance’s
Product Development Rights granted under this Agreement are                subject to
termination as provided in Section 9.7 of the Asset Purchase                Agreement.  

	 	        (b)                      The
Product Development Rights granted to Alliance under Section 3.1(a) apply
               only to [CONFIDENTIAL TREATMENT REQUESTED] together with any Immune
Modulator                that can be included in such Designated Product (a “Combination”)
               without requiring the entity or entities commercializing such product to
obtain                regulatory approval of such [CONFIDENTIAL TREATMENT REQUESTED] as a
single drug                prior to obtaining regulatory approval of a Designated Product
containing such                [CONFIDENTIAL TREATMENT REQUESTED]. Alliance may exercise
Product Development                Rights only with respect to [CONFIDENTIAL TREATMENT
REQUESTED] that are                proprietary compounds protected by a claim in a
pending patent application or an                unexpired, enforceable claim in an issued
patent. In the event Alliance                exercises a Product Development Right for a
Combination, Inhale shall be free to                develop and commercialize, either
itself or with a third party, products                containing as an active agent, only
either such [CONFIDENTIAL TREATMENT                REQUESTED] or such [CONFIDENTIAL
TREATMENT REQUESTED]; provided, however, that                nothing in this sentence
shall be deemed to grant Inhale any implied license                under Alliance’s
proprietary technologies. Furthermore, Alliance may                exercise a Product
Development Right for a product only if it owns or controls                rights
necessary to make, use and sell such product in the United States or in
               four (4) of the remaining six (6) Major Countries at the time of such
exercise.  

18 

CONFIDENTIAL TREATMENT
REQUESTED 

	 	        (c)                      As
of March 15, 2002, Alliance has [CONFIDENTIAL TREATMENT REQUESTED] under
               development for which Alliance must seek Product Development Rights from
Inhale                under this Agreement. Alliance can continue these programs only if
(i) Alliance                discloses the identity of the [CONFIDENTIAL TREATMENT
REQUESTED] under                development to Inhale prior to the grant by Inhale to
Alliance of any Product                Development Rights License with respect to those
molecules, and (ii) the                molecules under development qualify under Section
3.1(b) of the PDRA as                originally executed by the Parties. Alliance waives
any Call Rights that it may                have had with respect to these molecules under
the PDRA as originally drafted                and waives the right to require Inhale to
perform development work for Alliance,                but Alliance retains the right to
develop and commercialize the molecules                without product development work
by Inhale if Inhale grants a Product                Development Rights License with
respect to the molecules under Section 3.2 of                this Agreement. The
[CONFIDENTIAL TREATMENT REQUESTED] that are the subject of                this Section
will count against the total of [CONFIDENTIAL TREATMENT REQUESTED]                set
forth in Section 3.1(a) if Alliance requests, and Inhale grants to Alliance,
               a Product Development Rights License under Section 3.2 of this Agreement
with                respect to such molecules.” 

            (c)                  Section
3.2 of the PDRA is hereby deleted in its entirety and replaced with the
          following:  

	 	        “3.2
Notice Mechanism; Excluded Products. 

	 	        (a)                      In
order to exercise a Product Development Right with respect to a product,
               Alliance must receive a product-specific Product Development Rights
License from                Inhale. Alliance shall give written notice to Inhale of such
exercise with a                description of such product and other information in
Alliance’s possession                and control that is reasonably sufficient for
Inhale to decide whether to grant                Product Development Rights to Alliance
under this Section 3.2(a). Alliance must                give such notice before the
initiation of Phase I in order to receive a Product                Development Rights
License. Within forty-five days after Inhale’s receipt                of such notice
and information, Inhale shall either confirm its grant of a                Product
Development Rights License or notify Alliance that it is not granting a
               Product Development Rights License with respect to the proposed product.
Inhale                may reject the proposed product if Inhale reasonably and in good
faith makes one                of the following determinations: (i) Inhale has already
begun development of the                product prior to the date of receipt of the
Alliance notice, either through an                internal development program or with a
partner; (ii) granting a Product                Development Rights License with respect
to the proposed product would constitute                a breach by Inhale of a then
existing agreement to which Inhale is bound; or                (iii) Inhale began
negotiating prior to the date of receipt of the Alliance                notice an
agreement with a prospective customer and believes that the principal
               terms of such an agreement will be agreed upon within ninety days of the
               Alliance notice and granting a Product Development Rights License to
Alliance                would constitute a breach of such agreement if consummated. If
Inhale rejects a                Product Development Rights License for a specific
Alliance product based on a                determination covered by clause (iii), Inhale
shall diligently pursue the                conclusion of such negotiations with the
prospective customer and Inhale shall                notify Alliance promptly if Inhale
concludes that it is not going to execute a                definitive agreement for such
product with such prospective customer.  

19 

CONFIDENTIAL TREATMENT
REQUESTED 

	 	        (b)                      Inhale
will grant Product Development Rights Licenses to Alliance under this
               Agreement on a [CONFIDENTIAL TREATMENT REQUESTED] basis. Products as to
which a                Product Development Rights License has been granted by Inhale
shall constitute                Designated Products. Except in the case of Designated
Products for which Inhale                has granted a specific Product Development
Rights License under this Agreement                or products or compounds involving
Liquid Dose Instillation (as defined in the                Supplemental Agreement) or, as
to the Bioavailability Purchased Assets (as                defined in the Supplemental
Agreement) and any Assignable Improvements regarding                Bioavailability
Technology (as defined in the Supplemental Agreement), for                applications
outside the Inhale Field, Alliance shall not use or sell knowingly
               products or compounds that are made using or that incorporate PulmoSphere®               Technology,
MediSpheresTM Technology, or Bioavailability Technology.  

	 	        (c)                      Alliance
may obtain up to [CONFIDENTIAL TREATMENT REQUESTED] Product Development
               Rights Licenses, but may obtain no additional Product Development Rights
               Licenses after Phase II trials have been initiated with respect to four
               Designated Products or after [CONFIDENTIAL TREATMENT REQUESTED] years have
               elapsed from the Closing Date, whichever is earlier.  

	 	        (d)                      If
Alliance terminates development on a Designated Product, rights with respect
               to the [CONFIDENTIAL TREATMENT REQUESTED] under development revert to
Inhale.                Alliance is not entitled to seek additional Product Development
Rights to                replace rights that have reverted to Inhale as a result of
Alliance’s                termination of development on a Designated Product.” 

            (d)                  Sections
3.3 and 3.4 of the PDRA are hereby deleted in their entirety. Alliance           may seek
to develop Designated Products on its own and is not required to           contract with
Inhale to do so. Except in the case of Liquid Dose Instillation,           Alliance is
not permitted to partner or contract with Competitors of Inhale for           the
development or commercialization of Designated Products in the Inhale Field.
          Alliance may seek to contract with Inhale for the development of Designated
          Products pursuant to a Collaboration Agreement negotiated in good faith by the
          Parties, but Inhale is not required to enter into any Collaboration Agreement.  

20 

CONFIDENTIAL TREATMENT
REQUESTED 

            (e)                  Section
3.5 of the PDRA is hereby deleted in its entirety and replaced with the
          following:  

	 	        “(a)                      Inhale
shall have a right of first offer, either by itself or through a Partner,
               for the manufacture and supply of a Powder Formulation of any Designated
Product                that is [CONFIDENTIAL TREATMENT REQUESTED]. With respect to
Designated Products                that are not [CONFIDENTIAL TREATMENT REQUESTED]
products for which Alliance and                Inhale do not enter into a commercial
supply agreement as provided in this                Section 3.5, Alliance may manufacture
a Powder Formulation of the Active                Substance of the Designated Product
itself or enter into a manufacturing                agreement therefor with a Third Party
that is not a Competitor of Inhale.  

	 	        (b)                      Before
entering into a manufacturing agreement with any Third Party with respect
               to a Powder Formulation of any Designated Product that is [CONFIDENTIAL
               TREATMENT REQUESTED], Alliance will give Inhale notice containing the
terms of                its offer to Inhale to enter into a manufacturing agreement. Such
notice will                include the financial and other material terms which Alliance
is prepared to                accept and, if requested by Inhale, (i) sufficient
information to define the                manufacturing process and (ii) reasonable data
regarding anticipated volume                requirements for the Designated Product. For
the 60-day period following                delivery of such notice, the parties will
negotiate in good faith in an effort                to achieve (and, if applicable,
execute) a definitive manufacturing agreement.                If such an agreement is not
executed prior to the end of such 60-day period,                Alliance may (x) do its
own manufacturing or (y) negotiate and execute a                definitive manufacturing
agreement with one or more Third Parties that are not                Competitors of
Inhale on terms no more favorable, in the aggregate, than the                last terms
offered by Inhale to Alliance. In such an event, Alliance may request                that
Inhale provide reasonable advice regarding whether Alliance’s proposed
               formulation for the relevant Designated Product is compatible with Inhale’s
               proprietary technology for manufacturing a Powder Formulation of such
Designated                Product, and other reasonable technical assistance as may be
relevant to the                manufacture of such product. Any technology transfer to
Alliance or                Alliance’s Third Party manufacturer(s) in connection with
such advice or                assistance shall be governed by a written agreement between
Inhale, Alliance,                and any such Third Party manufacturer(s) in customary
form imposing upon                Alliance and such Third Party manufacturer(s)
obligations of confidentiality and                limitations on use of Inhale’s
proprietary technology for the relevant                Designated Product, which
agreement shall be negotiated and entered into prior                to the transfer of
such technology pursuant to this Section 3.5.” 

            (f)                  Section
3.7 of the PDRA is hereby deleted in its entirety and replaced with the
          following: “The Product Development Rights and other rights described
          herein shall not be transferable by Alliance to any other person, except (i) as
          provided in Section 7.7 and (ii) that Alliance, as to each Designated Product,
          shall have the right at any time after commencement of Phase IIa clinical
trials           for such Designated Product to grant sublicenses under the license
granted to           Alliance for such Designated Product to Third Parties other than
Competitors of           Inhale. Any such right to sublicense includes the right to grant
a sublicense to           use, sell, offer for sale, import, manufacture, or have
manufactured the           relevant Designated Product; provided, however, that the right
to manufacture or           have manufactured a Powder Formulation of the Active
Substance of such           Designated Product shall be suspended to the extent that
Inhale or any Partner           of Inhale is manufacturing such Powder Formulation
pursuant to a manufacturing           agreement entered into as contemplated by Section
3.5. Any sublicensee of           Alliance that manufactures such a Powder Formulation of
the Active Substance           shall be subject to confidentiality obligations and use
limitations with respect           to the Inhale Technology substantially similar to
those provided in the last           sentence of Section 3.5(b).” 

21 

CONFIDENTIAL TREATMENT
REQUESTED 

            (g)                  Section
3.8 of the PDRA is hereby deleted in its entirety and replaced with the
          following: “Further Payments. Other than the payments agreed to by the
          Parties (if any) in any manufacturing agreement contemplated by Section 3.5 or
          any other agreement contemplated by Section 3.6, Alliance shall have no
          obligation to pay Inhale any amounts, by way of royalties or otherwise, in
          connection with the development, manufacture, sale, or use of the [CONFIDENTIAL
          TREATMENT REQUESTED] Designated Products commercialized pursuant to the
exercise           of Product Development Rights. However, if the Parties enter into an
agreement           pursuant to this Article 3 under which Inhale agrees to perform final
container           filling or packaging of a Powder Formulation of a Designated Product,
or to           supply devices to Alliance as provided in Section 3.6, then such
agreement shall           provide for additional payments to Inhale as the parties may
mutually agree that           will provide Inhale reasonable and customary compensation
for a license under           Inhale’s proprietary technology covering or including
such Other Inhale           Technology. In addition to the payments referred to above,
Alliance shall pay           Inhale a royalty equal to [CONFIDENTIAL TREATMENT REQUESTED]
of Net Sales of any           Designated Products after the [CONFIDENTIAL TREATMENT
REQUESTED] Designated           Products sold by Alliance or its Affiliates or Partners.
Alliance shall make           royalty payments to Inhale (by wire transfer) within thirty
days after the end           of each calendar quarter in which Net Sales occur.  

Upon the request of Inhale, Alliance
shall permit Inhale and its representatives, for purposes of auditing the performance of
Alliance under this Section 3.8, to have access (i) during normal business hours to such
of the records of Alliance as may be reasonably necessary to verify such performance of
Alliance and (ii) to any Partners. If any such audit reveals that any payment required by
this Section 3.8 shall have been deficient, Alliance shall immediately pay to Inhale the
amount of any such deficiency plus interest from the date otherwise due at the lesser of
18% per annum or the maximum rate permitted under applicable law. If any such deficiency
shall be greater than five percent of the amount actually owed, Alliance shall immediately
reimburse Inhale for the costs of such audit (including, without limitation, the fees of
any accounting firm employed by Inhale for such purpose).” 

            (h)                  Section
3.9 of the PDRA is hereby deleted in its entirety and replaced with the
          following: “Each Product Development Rights License shall become effective
          with respect to the related Designated Product on a worldwide basis.
          Notwithstanding the foregoing, if, as of the second anniversary of the grant
          date for any Product Development Rights License, Alliance (or a sublicensee)
          does not own or acquire rights to any patent applications or patents covering
          the related Designated Product and the use thereof outside of Liquid Dose
          Instillation in the United States and four (4) of the remaining Major Countries
          (other than pursuant to the License to Alliance), then effective as of such
          date, such license granted to Alliance for such Designated Product shall revert
          to Inhale with respect to those Major Countries in which Inhale has Designated
          Product Patent Rights covering such Designated Products and the use thereof
          outside of Liquid Dose Instillation and in which Alliance does not own or
          possess rights under patent applications or patents covering such Designated
          Product in such countries (other than pursuant to the License to Alliance),
          without otherwise affecting such license granted to Alliance (or a sublicensee)
          for such Designated Product with respect to all other countries.” 

22 

            (i)                  The
trademark MediSpheresTM is added to Section 3.11 of the PDRA for all
          purposes.  

            (j)                  Section
7.7 of the PDRA is hereby deleted in its entirety and replaced with the
          following: “Except as otherwise expressly provided under this Agreement,
          neither this Agreement nor any right or obligation hereunder may be assigned or
          otherwise transferred (whether voluntarily, by operation of law, or otherwise),
          without the prior express written consent of the other party; provided,
however,           that either party may, without such consent, assign this Agreement and
its           rights and obligations hereunder in connection with the transfer or sale of
all           or substantially all of its business to which this Agreement relates, or in
the           event of a merger, consolidation, change in control, or similar
transaction; and           further provided, that in the event of a transfer or sale of
all or           substantially all of Alliance’s business to which this Agreement
relates,           or in the event of a merger or consolidation in which Alliance is not
the           acquiring or surviving entity and in which the stockholders of Alliance
          immediately prior to such event do not own at least a majority of the voting
          power of the acquiring or surviving entity, Alliance will forfeit any unused
          Product Development Rights (i.e., its right to seek any further Product
          Development Rights Licenses with respect to additional [CONFIDENTIAL TREATMENT
          REQUESTED]) regardless of whether Alliance’s rights thereto have otherwise
          expired under the terms of this Agreement; and further provided, that in no
          event shall Alliance assign this Agreement or its rights and obligations
          hereunder to a Competitor of Inhale or shall Inhale assign its rights under
this           Agreement to an entity that has fewer than two hundred employees without
          Alliance’s prior written consent, not to be unreasonably withheld.
          Notwithstanding the foregoing, Alliance may only assign its rights and
          obligations under this Agreement to a party that provides adequate assurance of
          future performance in form and substance satisfactory in Inhale, and Inhale may
          only assign its obligations under this Agreement to a third party in
conjunction           with an assignment of sufficient rights under the PulmoSphere® Technology,
          the MediSpheresTM Technology, and the Bioavailability Technology necessary
          for the performance of its obligations hereunder. Any permitted assignee shall
          assume all obligations of its assignor under this Agreement. Any purported
          assignment or transfer in violation of this Section 7.7 shall be void.” 

	8. 	Alliance’s
Escrow Obligations. 

        8.1    
Effect Of This Supplemental Agreement. Following the Closing Date, the definitions
set forth in this Supplemental Agreement will apply with full force and effect to the
Escrow Agreement for all purposes. The effect of this Supplemental Agreement is to
clarify and broaden the scope of Alliance’s obligations under the Escrow Agreement.
As amended by this Supplemental Agreement, the Escrow Agreement remains in full force and
effect.  

23 

CONFIDENTIAL TREATMENT
REQUESTED 

        8.2    
Previously Requested Information. On the Closing Date, Alliance will place into
escrow with DSI Technology Escrow Services, Inc. pursuant to the terms of the APA and the
Escrow Agreement the following: (a) the original laboratory notebooks of Alliance
employees relating to the [CONFIDENTIAL TREATMENT REQUESTED] and included in the
Purchased Assets; and (b) a copy of Alliance’s preclinical toxicology and safety
studies and human safety studies directly related to or necessary for the use or
development of the [CONFIDENTIAL TREATMENT REQUESTED], and in particular the use of
[CONFIDENTIAL TREATMENT REQUESTED], and additional data owned or controlled by Alliance
directly relating to the use or development of the [CONFIDENTIAL TREATMENT REQUESTED],
including but not limited to (i) [CONFIDENTIAL TREATMENT REQUESTED] invention
disclosures; (ii) LiquiVent toxicology studies; (iii) clinical safety data in support of
long-term stability of [CONFIDENTIAL TREATMENT REQUESTED]; (iv) overview of material
compatibility for [CONFIDENTIAL TREATMENT REQUESTED]; (v) [CONFIDENTIAL TREATMENT
REQUESTED] -related safety studies; (v) AFO 160 clinical raw data, including data on
aerosol testing (reports from Magellan), chemical stability, cleaning verification, etc.;
(vi) analytical methods for [CONFIDENTIAL TREATMENT REQUESTED] and [CONFIDENTIAL
TREATMENT REQUESTED] analysis in blood/tissues; (vii) reports on nitrogen blowing agent
process; (viii) schematics for high pressure nozzle; (ix) certain historical batch
production records for OxygentTM production (as reasonably determined by both
Parties); and (x) history files/logbook for the Propellant capping and filling station.  

        8.3    
Information On MediSpheresTM and Bioavailability Technology. Within twelve
months of the Closing Date of this Supplemental Agreement, Inhale may request that
Alliance place into escrow a copy of Alliance’s [CONFIDENTIAL TREATMENT REQUESTED]
related to the development of the MediSpheresTM Technology and the Bioavailability
Technology. From time to time, Inhale may request that Alliance place into escrow copies
of such additional data owned or controlled by Alliance directly related to the
development of the MediSpheresTMTechnology and the Bioavailability Technology.
Alliance will honor such requests within thirty days.  

	9. 	Supply
of Perflubron. 

        9.1    
Initial Purchase. On the Closing Date, Alliance will supply Inhale with
[CONFIDENTIAL TREATMENT REQUESTED] metric tons of Perflubron.  

        9.2    
Inhale’s Option. Inhale shall have an option, exercisable within one year of
the Closing Date, to purchase from Alliance up to an additional [CONFIDENTIAL TREATMENT
REQUESTED] metric tons of Perflubron, in units of not less than [CONFIDENTIAL TREATMENT
REQUESTED] metric tons, at a price of [CONFIDENTIAL TREATMENT REQUESTED] per metric ton.
In the event Inhale exercises the option but does not purchase all twelve metric tons of
Perflubron in a single purchase, Inhale may purchase any portion of the remaining balance
of the [CONFIDENTIAL TREATMENT REQUESTED] metric tons, in units of approximately
[CONFIDENTIAL TREATMENT REQUESTED] metric tons, at any time prior to the expiration of
the twelve-month period following the Closing Date. Inhale’s option can be extended,
at Inhale’s request at any time during the initial twelve-month period, for an
additional six months, in which case the price per metric ton for Perflubron purchased
during the extended option period will be [CONFIDENTIAL TREATMENT REQUESTED].  

24 

        9.3    
Application Of The APA. All purchases of Perflubron under this Supplemental
Agreement will be subject to the provisions of Sections 1.3, 10.6(b), 10.6(e), and 11.2
of the APA and to the title, risk of loss, and warranty provisions of Section 10.6(c) of
the APA.  

	10. 	Dismissal
Of The Arbitration. 

        Promptly
following the Closing Date, Inhale will cause its counsel in the Arbitration to dismiss
the Arbitration. 

	11. 	Releases. 

        11.1    
Inhale Releases. In consideration of Alliance’s agreement to resolve the
Arbitration on the terms set forth in this Supplemental Agreement, the execution of this
Supplemental Agreement by Alliance, the satisfaction of the obligations of Alliance under
this Supplemental Agreement, and the consummation of the transactions set forth in this
Supplemental Agreement, and in consideration of the Alliance Release set forth in Section
11.2, the receipt, performance and sufficiency of which are hereby acknowledged, Inhale,
for itself and its divisions, subsidiaries, and affiliates and their successors and
assigns, hereby releases, and forever discharges Alliance; its successors, assigns,
divisions, subsidiaries, and affiliates; their present and former officers, directors,
shareholders, employees, attorneys and agents; and each of them (hereinafter collectively
termed the “Alliance Releasees”) from any and all manner of claims, demands,
damages, actions, causes of action, contracts, agreements, charges, sums of money, claims
for attorneys’ fees, and lawsuits of every kind and description, whether known or
unknown, now existing or which may hereafter arise against the Alliance Releasees, or any
of them, under the laws of the United States, any State thereof, or any other
jurisdiction based upon, arising out of or having connection in any way whatsoever with
[CONFIDENTIAL TREATMENT REQUESTED].  

        11.2    
Alliance Release. In consideration of Inhale’s agreement to resolve the
Arbitration on the terms set forth in this Supplemental Agreement, the execution of this
Supplemental Agreement by Inhale, the satisfaction of the obligations of Inhale under
this Supplemental Agreement and the consummation of the transactions set forth in this
Supplemental Agreement, and in consideration of the Inhale Release set forth in Section
11.1, the receipt, performance, and sufficiency of which are hereby acknowledged,
Alliance, for itself and its divisions, subsidiaries, and affiliates and their successors
and assigns, hereby releases, and forever discharges Inhale; its successors, assigns,
divisions, subsidiaries, and affiliates; their present and former officers, directors,
shareholders, employees, attorneys and agents; and each of them (hereinafter collectively
termed the “Inhale Releasees”) from any and all manner of claims, demands,
damages, actions, causes of action, contracts, agreements, charges, sums of money, claims
for attorneys’ fees, and lawsuits of every kind and description, whether known or
unknown, now existing or which may hereafter arise against the Inhale Releases, or any of
them, under the laws of the United States, any State thereof, or any other jurisdiction
based upon, arising out of or having connection in any way whatsoever with [CONFIDENTIAL
TREATMENT REQUESTED].  

25 

     12.        
          Enforcement. The Parties agree that all disputes arising out of or
          relating to this Supplemental Agreement will be subject to the dispute
          resolution provisions of the 1999 Agreements. 

	13.  	Miscellaneous. 

        13.1    
Notices. All notices, requests, waivers, releases, consents, and other
communications required or permitted by this Supplemental Agreement (collectively, “Notices”)
must be given in writing. Notices will be deemed sufficiently given for all purposes when
delivered in person or when dispatched by electronic facsimile transmission or upon
confirmation of receipt when dispatched by a nationally recognized overnight courier
service to the appropriate party as follows: (a) If to Inhale, at 150 Industrial Road,
San Carlos, CA 94070, to the attention of the General Counsel, with a copy to Richard I.
Werder, Jr., Jones, Day, Reavis & Pogue, North Point, 901 Lakeside Avenue, Cleveland,
Ohio 44114, and (b) if to Alliance, at 3040 Science Park Road, San Diego, CA 92121, to
the attention of the President and Chief Operating Officer, with a copy to Mike Hird,
Pillsbury Winthrop LLP, 11682 El Camino Real, Suite 200, San Diego, California 92130.  

        13.2    
Amendment And Waiver. This Supplemental Agreement may be amended, modified,
waived, discharged, or terminated only by an instrument in writing signed by all Parties.  

        13.3    
Survival Of Representations And Warranties. All representations and warranties
contained herein will survive the execution and delivery of this Supplemental Agreement
and the Closing Date; provided, however, that the representations and warranties made by
Alliance in this Supplemental Agreement (including, without limitation, the
representations and warranties set forth in Section 4.5) shall survive the Closing solely
for, and shall expire, two years after the Closing Date and any liability of Alliance
with respect to such representations and warranties shall thereupon cease; provided,
further, that if, at any time prior to such second anniversary of the Closing Date,
Inhale (acting in good faith) shall deliver a written notice to Alliance alleging the
breach by Alliance of any such representation or warranty, then the representations and
warranties of Alliance in this Supplemental Agreement, but solely as they relate to the
claim asserted, shall survive until such time as such claim is resolved.  

        13.4    
Successors And Assigns. This Supplemental Agreement will be binding upon and inure
to the benefit of the Parties and their respective successors and permitted assigns, but
will not be assignable or delegable by any Party without the prior written consent of
each other Party. In the absence of such prior written consent, any purported assignment
or delegation of any right or obligation hereunder will be null and void.  

        13.5    
Rights Of The Parties. Nothing expressed or implied in this Supplemental Agreement
is intended or will be construed to confer upon or give any person or entity other than
the Parties any rights or remedies under or by reason of this Supplemental Agreement or
any transaction contemplated hereby.  

26 

CONFIDENTIAL TREATMENT
REQUESTED 

        13.6    
Expenses. Each of the Parties to this Supplemental Agreement will bear its own
expenses incurred in connection with this Supplemental Agreement and the transactions
contemplated hereby.  

        13.7    
Titles And Headings. Titles and headings to Sections herein are inserted for
convenience of reference only, and are not intended to be part of or to affect the
meaning or interpretation of this Supplemental Agreement.  

        13.8    
Entire Agreement. This Supplemental Agreement, together with its Exhibits,
constitutes the entire agreement between the Parties hereto with respect to the subject
matter hereof, and there are no agreements among the Parties hereto with respect thereto
except as expressly set forth herein.  

        13.9    
Severability. In case any provision contained in this Supplemental Agreement is
invalid or unenforceable, the validity and enforceability of the remaining provisions
will not in any way be affected or impaired thereby.  

        13.10    
Governing Law. This Supplemental Agreement will be governed by and construed in
accordance with the laws of the State of California.  

        13.11    
Counterparts. This Supplemental Agreement may be executed in any number of
counterparts, each of which so executed will be deemed to be an original; such
counterparts will together constitute but one agreement.  

        IN
WITNESS WHEREOF, the Parties hereto have duly executed this Supplemental Agreement as of
this 15 day of March, 2002. 

		ALLIANCE PHARMACEUTICAL CORPORATION
	

 	By: ______________________________________
	 	Its:______________________________________
	

 	INHALE THERAPEUTIC SYSTEMS, INC.
	
 	By: ______________________________________
		Its:______________________________________

27 

CONFIDENTIAL TREATMENT
REQUESTED 

EXHIBIT A 

Report Title: 

During 2000 all reports and data were
incorporated into the following quarterly reports: 

	|_|  	Quarterly
Report 1 and 2 for Alliance Pharmaceutical Corp. Dept. For Biological Research: January 1
-          March 31, 2000;

	|_|  	Quarterly
Report 1 and 2  For Biological Research: April 1 - June 30 , 2000;

	|_|  	Quarterly
Report 1 For Biological Research: July 1 - September 30, 2000.

For periods after September 30, 2000, draft
reports will be placed into escrow and supplemented by final reports when completed. 

Invention Disclosures: 

	 	1) 	[CONFIDENTIAL
TREATMENT REQUESTED] 

CONFIDENTIAL TREATMENT
REQUESTED 

EXHIBIT B 

Laboratory Notebooks: 

	Assignee	Notebook Number
	
[CONFIDENTIAL TREATMENT REQUESTED]  	# 1196
	
 	# 1216

CONFIDENTIAL TREATMENT
REQUESTED 

EXHIBIT C 

Report Title: 

During 2000 all reports and data were
incorporated into the following quarterly reports: 

	|_|  	Quarterly
Report  1 and 2 for Alliance Pharmaceutical Corp. Dept. For Biological        Research:
January 1 - March 31, 2000;

	|_|  	Quarterly
Report 1 and 2  For Biological Research: April 1 - June 30 , 2000;

	|_|  	Quarterly
Report 1 For Biological Research: July 1 - September 30, 2000.

For periods after September 30, 2000, draft
reports will be placed into escrow and supplemented by final reports when completed. 

Invention Disclosures: 

	 	1)	[CONFIDENTIAL
TREATMENT REQUESTED]

CONFIDENTIAL TREATMENT
REQUESTED 

EXHIBIT D 

Laboratory Notebooks: 

	Assignee	Notebook Number
	
[CONFIDENTIAL TREATMENT REQUESTED]	# 1196
	
 	# 1216
	
[CONFIDENTIAL TREATMENT REQUESTED]	# 1183
	
[CONFIDENTIAL TREATMENT REQUESTED]	# 1127
	
 	# 1211
	
[CONFIDENTIAL TREATMENT REQUESTED]	# 1162
	
 	# 1172
	
 	# 1186
	
 	# 1218FIRST HORIZON ASSET SECURITIES INC.

                            Depositor

               FIRST HORIZON HOME LOAN CORPORATION

                         Master Servicer

                               and

                      THE BANK OF NEW YORK,

                             Trustee

      _____________________________________________________

                 POOLING AND SERVICING AGREEMENT

                    Dated as of June 1, 2004

      _____________________________________________________

        FIRST HORIZON MORTGAGE PASS-THROUGH TRUST 2004-5

        MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 2004-5

<PAGE>

                        TABLE OF CONTENTS

                                                             Page
                                                             ----

ARTICLE I DEFINITIONS.....................................     6

ARTICLE II CONVEYANCE OF MORTGAGE LOANS; REPRESENTATIONS
AND WARRANTIES............................................    43
 SECTION 2.1 Conveyance of Mortgage Loans.................    43
 SECTION 2.2 Acceptance by Trustee of the Mortgage
     Loans................................................    47
 SECTION 2.3 Representations and Warranties of the
     Master Servicer;  Covenants of the Seller............    50
 SECTION 2.4 Representations and Warranties of the
     Depositor as to the Mortgage Loans...................    53
 SECTION 2.5 Delivery of Opinion of Counsel in
     Connection with Substitutions........................    53
 SECTION 2.6 Execution and Delivery of Certificates.......    54
 SECTION 2.7 REMIC Matters................................    54
 SECTION 2.8 Covenants of the Master Servicer.............    59

ARTICLE III ADMINISTRATION AND SERVICING OF MORTGAGE
LOANS.....................................................    60
 SECTION 3.1 Master Servicer to Service Mortgage
     Loans................................................    60
 SECTION 3.2 Subservicing; Enforcement of the
     Obligations of Servicers.............................    61
 SECTION 3.3 Rights of the Depositor and the Trustee
     in Respect of the Master Servicer....................    62
 SECTION 3.4 Trustee to Act as Master Servicer............    62
 SECTION 3.5 Collection of Mortgage Loan Payments;
     Certificate Account; Distribution Account............    63
 SECTION 3.6 Collection of Taxes, Assessments
     and Similar Items; Escrow Accounts...................    67
 SECTION 3.7 Access to Certain Documentation
     and Information Regarding the Mortgage Loans.........    68
 SECTION 3.8 Permitted Withdrawals from the
     Certificate Account and Distribution Account.........    68
 SECTION 3.9 Maintenance of Hazard Insurance;
     Maintenance of Primary Insurance Policies............    70
 SECTION 3.10 Enforcement of Due-on-Sale Clauses;
     Assumption Agreements................................    72
 SECTION 3.11 Realization Upon Defaulted Mortgage Loans;
     Repurchase of Certain Mortgage Loans.................    74
 SECTION 3.12 Trustee to Cooperate; Release of
     Mortgage Files.......................................    77
 SECTION 3.13 Documents Records and Funds in Possession
     of Master Servicer to be Held for the Trustee........    78
 SECTION 3.14 Master Servicing Compensation...............    79
 SECTION 3.15 Access to Certain Documentation.............    80
 SECTION 3.16 Annual Statement as to Compliance...........    80
 SECTION 3.17 Annual Independent Public Accountants'
     Servicing Statement; Financial Statements............    80
 SECTION 3.18 Errors and Omissions Insurance;
     Fidelity Bonds.......................................    81

ARTICLE IV DISTRIBUTIONS AND ADVANCES BY THE
MASTER SERVICER...........................................    81
 SECTION 4.1 Advances.....................................    81
 SECTION 4.2 Priorities of Distribution...................    82

                               -i-

<PAGE>

 SECTION 4.3 Method of Distribution.......................    89
 SECTION 4.4 Allocation of Losses.........................    90
 SECTION 4.5 Reserved.....................................    93
 SECTION 4.6 Monthly Statements to Certificateholders.....    93
 SECTION 4.7 [RESERVED]...................................    95
 SECTION 4.8 [RESERVED]...................................    95
 SECTION 4.9 Determination of Pass-Through Rates for
     LIBOR Certificates...................................    95

ARTICLE V THE CERTIFICATES................................    98
 SECTION 5.1 The Certificates.............................    98
 SECTION 5.2 Certificate Register; Registration of
     Transfer and Exchange of Certificates................    99
 SECTION 5.3 Mutilated, Destroyed, Lost or
     Stolen Certificates..................................    105
 SECTION 5.4 Persons Deemed Owners........................    106
 SECTION 5.5 Access to List of Certificateholders'
     Names and Addresses..................................    106
 SECTION 5.6 Maintenance of Office or Agency..............    106

ARTICLE VI THE DEPOSITOR AND THE MASTER SERVICER..........    107
 SECTION 6.1 Respective Liabilities of the Depositor
     and the Master Servicer..............................    107
 SECTION 6.2 Merger or Consolidation of the Depositor
     or the Master Servicer...............................    107
 SECTION 6.3 Limitation on Liability of the Depositor,
     the Master Servicer and Others.......................    107
 SECTION 6.4 Limitation on Resignation of Master
     Servicer.............................................    108

ARTICLE VII DEFAULT.......................................    109
 SECTION 7.1 Events of Default............................    109
 SECTION 7.2 Trustee to Act; Appointment of Successor.....    111
 SECTION 7.3 Notification to Certificateholders...........    112

ARTICLE VIII CONCERNING THE TRUSTEE.......................    113
 SECTION 8.1 Duties of Trustee............................    113
 SECTION 8.2 Certain Matters Affecting the Trustee........    115
 SECTION 8.3 Trustee Not Liable for Certificates or
     Mortgage Loans.......................................    117
 SECTION 8.4 Trustee May Own Certificates.................    117
 SECTION 8.5 Trustee's Fees and Expenses..................    117
 SECTION 8.6 Eligibility Requirements for Trustee.........    118
 SECTION 8.7 Resignation and Removal of Trustee...........    118
 SECTION 8.8 Successor Trustee............................    119
 SECTION 8.9 Merger or Consolidation of Trustee...........    120
 SECTION 8.10 Appointment of Co-Trustee or Separate
     Trustee..............................................    120
 SECTION 8.11 Tax Matters.................................    122
 SECTION 8.12 Periodic Filings............................    124

ARTICLE IX TERMINATION....................................    125
 SECTION 9.1 Termination upon Liquidation or Purchase
     of all Mortgage Loans................................    125
 SECTION 9.2 Final Distribution on the Certificates.......    125
 SECTION 9.3 Additional Termination Requirements..........    127

ARTICLE X [RESERVED]......................................    128

ARTICLE XI MISCELLANEOUS PROVISIONS.......................    128
 SECTION 11.1 Amendment...................................    128

                              -ii-

<PAGE>

 SECTION 11.2 Recordation of Agreement; Counterparts......    130
 SECTION 11.3 Governing Law...............................    130
 SECTION 11.4 Intention of Parties........................    130
 SECTION 11.5 Notices.....................................    131
 SECTION 11.6 Severability of Provisions..................    132
 SECTION 11.7 Assignment..................................    132
 SECTION 11.8 Limitation on Rights of
     Certificateholders...................................    133
 SECTION 11.9 Inspection and Audit Rights.................    134
 SECTION 11.10 Certificates Nonassessable and
     Fully Paid...........................................    134
 SECTION 11.11 Limitations on Actions; No Proceedings.....    134
 SECTION 11.12 Acknowledgment of Seller...................    135

                            SCHEDULES

Schedule I:      Mortgage Loan Schedule                    S-I-1
Schedule II:     Representations and Warranties of
                   the Master Servicer                    S-II-1
Schedule III:    Form of Monthly Master Servicer
                   Report                                S-III-1

                            EXHIBITS

Exhibit A-1: Form of Senior Certificate                    A-1-1
Exhibit A-2: Form of Senior Certificate/
              Class I-A-PO/Class II-A-PO Certificate       A-2-1
Exhibit B:   Form of Subordinated Certificate                B-1
Exhibit C:   Form of Residual Certificate                    C-1
Exhibit D:   Form of Reverse of Certificates                 D-1
Exhibit E:   Form of Initial Certification                   E-1
Exhibit F:   Form of Delay Delivery Certification            F-1
Exhibit G:   Form of Final Certification of Custodian        G-1
Exhibit H:   Transfer Affidavit                              H-1
Exhibit I:   Form of Transferor Certificate                  I-1
Exhibit J:   Form of Investment Letter [Non-Rule 144A]       J-1
Exhibit K:   Form of Rule 144A Letter                        K-1
Exhibit L:   Request for Release (for Trustee)               L-1
Exhibit M:   Request for Release (Mortgage Loan)             M-1

                              -iii-

<PAGE>

     THIS POOLING AND SERVICING AGREEMENT, dated as of June 1,
2004, among FIRST HORIZON ASSET SECURITIES INC., a Delaware
corporation, as depositor (the "Depositor"), FIRST HORIZON HOME
LOAN CORPORATION, a Kansas corporation, as master servicer (the
"Master Servicer"), and THE BANK OF NEW YORK, a banking
corporation organized under the laws of the State of New York, as
trustee (the "Trustee").

                         WITNESSETH THAT

     In consideration of the mutual agreements herein contained,
the parties hereto agree as follows:

                      PRELIMINARY STATEMENT

     The Depositor is the owner of the Trust Fund that is hereby
conveyed to the Trustee in return for the Certificates. The Trust
Fund for federal income tax purposes will consist of three
separate REMICs.  The Certificates will represent the entire
beneficial ownership interest in the Trust Fund. The Regular
Certificates will represent "regular interests" in the Upper
REMIC.  The Class I-A-R Certificates will represent the residual
interests in the Lower REMIC, Middle REMIC and Upper REMIC, as
described in Section 2.7.  The "latest possible maturity date"
for federal income tax purposes of all REMIC regular interests
created hereby will be the Latest Possible Maturity Date.

The following table sets forth characteristics of the
Certificates, together with the minimum denominations and
integral multiples in excess thereof in which such Classes shall
be issuable (except that one Certificate of each Class of
Certificates may be issued in a different amount and, in
addition, one Residual Certificate representing the Tax Matters
Person Certificate may be issued in a different amount):

          [Remainder of Page Intentionally Left Blank]

                               -1-

<PAGE>

                                                             Integral
                Initial Class      Pass-                   Multiples in
    Class        Certificate      Through      Minimum        Excess
 Designation       Balance         Rate     Denominations     Minimum
-------------- ---------------   ---------  -------------    ------------

 Class I-A-1   $   122,325,000    6.000%     $    25,000      $1,000

 Class I-A-2   $ 40,775,000.00  variable(1)  $    25,000      $1,000

 Class I-A-3         (2)        variable(3)  $   500,000      $1,000

 Class I-A-4   $  2,818,100.00    6.500%     $     1,000      $1,000

 Class I-A-PO  $  1,005,909.76      (4)      $    25,000      $1,000

 Class I-A-R   $        100.00    6.500%     $       100        N/A

 Class II-A-1  $ 33,229,000.00    6.250%     $    25,000      $1,000

Class II-A-PO  $    486,965.22      (4)      $    25,000      $1,000

  Class B-1    $  3,501,000.00  variable(5)  $   100,000      $1,000

  Class B-2    $    824,000.00  variable(5)  $   100,000      $1,000

  Class B-3    $    412,000.00  variable(5)  $   100,000      $1,000

  Class B-4    $    309,000.00  variable(5)  $   100,000      $1,000

  Class B-5    $    103,000.00  variable(5)  $   100,000      $1,000

  Class B-6    $    205,961.18  variable(5)  $   100,000      $1,000

(1)  The Pass-Through Rate with respect to any Distribution Date
for the Class I-A-2 Certificates is the per annum rate equal to
(a) 1.75% with respect to the first Distribution Date, and (b)
thereafter, the lesser of (i) LIBOR plus 0.45% and (ii) 8.00%,
subject to a minimum rate of 0.45%.

(2)  The Notional Amount of the Class I-A-3 Certificates with
respect to any Distribution Date will equal  the Class
Certificate Balance of the Class I-A-2 Certificates for such
Distribution Date.

(3)  The Pass-Through Rate with respect to any Distribution Date
for the Class I-A-3 Certificates is the per annum rate equal to
(a) 6.25% with respect to the first Distribution Date, and (b)
thereafter, 7.55% minus LIBOR, subject to a minimum rate of
0.00%.

(4)  The Class I-A-PO and Class II-A-PO Certificates will be
Principal Only Certificates and will not accrue interest..

(5)  The Pass-Through Rate on each Class of Subordinated
Certificates is variable and will be equal to the weighted
average of the Designated Mortgage Pool Rates, weighted on the
basis of the Group Subordinate Amount for each Mortgage Pool.

                               -2-

<PAGE>

Accrual Certificates                The Class I-A-4 Certificates.

Accrual Components                  None.

Book-Entry Certificates             All Classes of Certificates other
                                    than the Physical Certificates.

Certificate Group                   With respect to Pool I, the Group
                                    I Senior Certificates, and with
                                    respect to Pool II, the Group II
                                    Senior Certificates.  The
                                    Subordinated Certificates
                                    correspond to both Mortgage
                                    Pools.

COFI Certificates                   None.

Component Certificates              None.

Components                          None.

Delay Certificates                  All interest-bearing Classes of
                                    Certificates other than the Non-
                                    Delay Certificates, if any.

ERISA-Restricted Certificates       The Residual Certificates,
                                    Private Certificates and
                                    Certificates of any Class that no
                                    longer satisfy the applicable
                                    rating requirement of the
                                    Underwriters' Exemption.

Floating Rate Certificates          The Class I-A-2 Certificates.

Group I Senior Certificates         The Class I-A-1, Class I-A-2,
                                    Class I-A-3, Class I-A-4, Class I-
                                    A-PO, and Class I-A-R
                                    Certificates.

Group II Senior Certificates        The Class II-A-1 and Class II-A-
                                    PO Certificates.

Inverse Floating Rate
  Certificates                      The Class I-A-3 Certificates.
LIBOR Certificates                  The Floating Rate Certificates
                                    and the Inverse Floating Rate
                                    Certificates.

NAS Certificates                    None.

Non-Delay Certificates              The Class I-A-2 and Class I-A-3
                                    Certificates.

Notional Certificates               The Class I-A-3 Certificates.

Offered Certificates                All Classes of Certificates other
                                    than the Private Certificates.

Physical Certificates               The Principal Only Certificates,
                                    the Residual Certificates and the
                                    Private Certificates.

Planned Principal Classes           None.

Principal Only Certificates         The Class I-A-PO and Class II-A-
                                    PO Certificates.

Private Certificates                The Class B-4, Class B-5 and
                                    Class B-6 Certificates.

Rating Agencies                     S&P and Moody's; except that, for
                                    purposes of the Class B-1, B-2,
                                    Class B-3, Class B-4 and Class B-
                                    5 Certificates, S&P shall be the
                                    sole Rating Agency.

Regular Certificates                All Classes of Certificates,
                                    other than the Residual
                                    Certificates.

Retail/Lottery Certificates         None.

Scheduled Certificates              None.

                               -3-

<PAGE>

Senior Certificates                 The Group I Senior Certificates
                                    and the Group II Senior
                                    Certificates, collectively.

Senior Support Certificates         None.

Subordinated Certificates           The Class B-1, Class B-2, Class B-
                                    3, Class B-4, Class B-5 and Class
                                    B-6 Certificates.

Super Senior Certificates           None.

Support Classes                     None.

Targeted Principal Classes          None.

Underwriters                        Deutsche Bank Securities Inc. and
                                    FTN Financial Capital Markets, a
                                    division of First Tennessee Bank
                                    National Association.

     With respect to any of the foregoing designations as to
which the corresponding reference is "None," all defined terms
and provisions herein relating solely to such designations shall
be of no force or effect, and any calculations herein
incorporating references to such designations shall be
interpreted without reference to such designations and amounts.
Defined terms and provisions herein relating to statistical
rating agencies not designated above as Rating Agencies shall be
of no force or effect.

                               -4-

<PAGE>

                            ARTICLE I
                           DEFINITIONS

     Whenever used in this Agreement, the following words and
phrases, unless the context otherwise requires, shall have the
following meanings:

     Accretion Termination Date:  For the Class of Accrual
Certificates, the earlier of: (x) the Cross-over Date and (y) the
Distribution Date on which the Class Certificate Balances of the
Class I-A-1 and Class I-A-2 Certificates have each been reduced
to zero.

     Accrual Amount:  For the Class of Accrual Certificates and
each Distribution Date through the Accretion Termination Date, an
amount equal to the sum of (a) any amounts allocable to Accrued
Certificate Interest in respect of such class of Accrual
Certificates in accordance with Section 4.2(a)(i), and (b) any
available amounts allocable to such Class of Accrual Certificates
in accordance with Section 4.2(a)(ii).

     Accrual Certificates:  Not applicable.

     Accrual Components:  Not applicable.

     Accrued Certificate Interest:  For any Class of Certificates
entitled to distributions of interest for any Distribution Date,
the interest accrued during the related Interest Accrual Period
at the applicable Pass-Through Rate on the Class Certificate
Balance of such Class of Certificates (or Notional Amount, in the
case of the Notional Certificates) immediately prior to such
Distribution Date, less such Class' share of any Net Interest
Shortfall, allocable among the outstanding Classes of Senior
Certificates of the related Certificate Group based on the
Accrued Certificate Interest otherwise distributable thereto, and
allocable to the Subordinated Certificates based on interest
accrued on their related Apportioned Principal Balances.

     Additional Amounts:  To the extent any Mortgage Loan which
is 91 days or more delinquent is repurchased by the Seller
pursuant to Sections 2.3(b) or 2.5(b) and the Master Servicer
pursuant to Section 3.11 at a price that exceeds the Purchase
Price, the amount of such excess.

     Adjusted Mortgage Rate:  As to each Mortgage Loan, and at
any time, the per annum rate equal to the Mortgage Rate less the
Master Servicing Fee Rate.

     Adjusted Net Mortgage Rate:  As to each Mortgage Loan, and
at any time, the per annum rate equal to the Mortgage Rate less
the related Expense Fee Rate.

     Advance:  The payment required to be made by the Master
Servicer with respect to any Distribution Date pursuant to
Section 4.1, the amount of any such payment being equal to the
aggregate of payments of principal and interest (net of the
Master Servicing Fee and net of any net income in the case of any
REO Property) on the Mortgage Loans that were due on the related
Due Date and not received as of the close of business on the
related Determination Date, less the aggregate amount of any such
delinquent payments that the Master Servicer has determined would
constitute a Nonrecoverable Advance if advanced.

                               -5-

<PAGE>

     Agreement:  This Pooling and Servicing Agreement and all
amendments or supplements hereto.

     Allocable Share:  With respect to any Class of Subordinated
Certificates on any Distribution Date, such Class' pro rata share
(based on the Class Certificate Balance of each Class entitled
thereto) of each of the components of the Subordinated Optimal
Principal Amount for both Mortgage Pools; provided that, solely
for purposes of this definition, the applicable Subordinated
Optimal Principal Amount for Pool I or Pool II will be reduced by
the amounts required to be distributed to the Class I-A-PO or
Class II-A-PO Certificates, respectively, in respect of the
applicable Class PO Deferred Amount on such Distribution Date,
and any such reduction in the applicable Subordinate Optimal
Principal Amount for Pool I or Pool II shall reduce the amounts
calculated pursuant to clauses (1), (4), (2), (3) and (5) of the
definition thereof, in that order, and the Class Certificate
Balances of each Class of Subordinated Certificates will be
reduced by such amounts in reverse order of priority until the
respective Class Certificate Balances of each Class of
Subordinated Certificates has been reduced to zero; provided
further, that, except as provided in this Agreement, no
Subordinated Certificates (other than the Class of Subordinated
Certificates with the highest priority of distribution) shall be
entitled on any Distribution Date to receive distributions
pursuant to clauses (2), (3) and (5) of the definition of
Subordinated Optimal Principal Amount unless the Class Prepayment
Distribution Trigger for such Class is satisfied for such
Distribution Date.

     Amount Held for Future Distribution:  As to any Distribution
Date, the aggregate amount held in the applicable subaccount of
the Certificate Account at the close of business on the related
Determination Date on account of (i) Principal Prepayments on the
related Mortgage Pool received after the related Prepayment
Period and Liquidation Proceeds in the related Mortgage Pool
received in the month of such Distribution Date and (ii) all
Scheduled Payments in the related Mortgage Pool due after the
related Due Date.

     Apportioned Principal Balance:  For any Class of
Subordinated Certificates and any Distribution Date, an amount
equal to the Class Certificate Balance of such Class immediately
prior to that  Distribution Date multiplied by a fraction, the
numerator of which is the applicable Group Subordinate Amount for
such Distribution Date and the denominator of which is the sum of
the Group Subordinate Amounts for such Distribution Date.

     Appraised Value:  With respect to any Mortgage Loan, the
Appraised Value of the related Mortgaged Property shall be: (i)
with respect to a Mortgage Loan other than a Refinancing Mortgage
Loan, the lesser of (a) the value of the Mortgaged Property based
upon the appraisal made at the time of the origination of such
Mortgage Loan and (b) the sales price of the Mortgaged Property
at the time of the origination of such Mortgage Loan; (ii) with
respect to a Refinancing Mortgage Loan other than a Streamlined
Documentation Mortgage Loan, the value of the Mortgaged Property
based upon the appraisal made at the time of the origination of
such Refinancing Mortgage Loan; and (iii) with respect to a
Streamlined Documentation Mortgage Loan, (a) if the loan-to-value
ratio with respect to the Original Mortgage Loan at the time of
the origination thereof was 90% or less, the value of the
Mortgaged Property based upon the appraisal made at the time of
the origination of the Original Mortgage Loan and (b) if the loan-
to-value ratio with respect to the Original Mortgage Loan at the
time of the origination thereof was greater than 90%, the value
of the Mortgaged Property based upon the appraisal

                               -6-

<PAGE>

(which may be a drive-by appraisal) made at the time of the
origination of such Streamlined Documentation Mortgage Loan.

     Available Funds:  For each Mortgage Pool, with respect to
any Distribution Date, an amount equal to the sum of:

        * all scheduled installments of interest, net of the
          Master Servicing Fee, the Trustee Fee and any amounts
          due to First Horizon in respect of the Retained Yield
          on such Distribution Date, and all scheduled
          installments of principal due in respect of the
          Mortgage Loans in such Mortgage Pool on the Due Date in
          the month in which the Distribution Date occurs and
          received before the related Determination Date,
          together with any Advances in respect thereof;

        * all Insurance Proceeds and all Liquidation Proceeds
          received in respect of the Mortgage Loans in such
          Mortgage Pool during the calendar month before the
          Distribution Date, which in each case is net of
          unreimbursed expenses incurred in connection with a
          liquidation or foreclosure and unreimbursed Advances,
          if any;

        * all Principal Prepayments received in respect of the
          Mortgage Loans in such Mortgage Pool during the related
          Prepayment Period, plus interest received thereon, net
          of any Prepayment Interest Excess;

        * any Compensating Interest in respect of Principal
          Prepayments in Full received in respect of the Mortgage
          Loans in such Mortgage Pool during the related
          Prepayment Period; and

        * any Substitution Adjustment Amount or the Purchase
          Price for any Deleted Mortgage Loan in the related
          Mortgage Pool or a Mortgage Loan in the related
          Mortgage Pool repurchased by the Seller or the Master
          Servicer as of such Distribution Date, reduced by
          amounts  in reimbursement for Advances previously made
          and other amounts that the Master Servicer is entitled
          to be reimbursed for out of the Certificate Account
          pursuant to this Agreement.

     Bankruptcy Code:  The United States Bankruptcy Reform Act of
1978, as amended.

     Bankruptcy Coverage Termination Date:  The date on which the
Bankruptcy Loss Coverage Amount is reduced to zero.

     Bankruptcy Loss:  With respect to any Mortgage Loan, a
Deficient Valuation or Debt Service Reduction; provided, however,
that a Bankruptcy Loss shall not be deemed a Bankruptcy Loss
hereunder so long as the Master Servicer has notified the Trustee
in writing that the Master Servicer is diligently pursuing any
remedies that may exist in connection with the related Mortgage
Loan and either (A) the related Mortgage Loan is not in default
with regard to payments due thereunder or (B) delinquent payments
of principal and interest under the related Mortgage Loan and any
related escrow payments in respect of such Mortgage Loan are
being advanced on a current basis by the Master Servicer, in
either case without giving effect to any Debt Service Reduction
or Deficient Valuation.

                               -7-

<PAGE>

     Bankruptcy Loss Coverage Amount:  As of any Determination
Date, the Bankruptcy Loss Coverage Amount shall equal the Initial
Bankruptcy Coverage Amount as reduced by (i) the aggregate amount
of Bankruptcy Losses allocated to the Certificates since the Cut-
off Date and (ii) any permissible reductions in the Bankruptcy
Loss Coverage Amount as evidenced by a letter of each Rating
Agency to the Trustee to the effect that any such reduction will
not result in a downgrading of the then current ratings assigned
to the Classes of Certificates rated by it.  As of any
Distribution Date on or after the Cross-over Date, the Bankruptcy
Loss Coverage Amount will be zero.

     Blanket Mortgage:  The mortgage or mortgages encumbering the
Cooperative Property.

     Book-Entry Certificates:  As specified in the Preliminary
Statement.

     Business Day:  Any day other than (i) a Saturday or a
Sunday, or (ii) a day on which banking institutions in the City
of Dallas, or the State of Texas or the city in which the
Corporate Trust Office of the Trustee is located are authorized
or obligated by law or executive order to be closed.

     Certificate:  Any one of the Certificates executed by the
Trustee in substantially the forms attached hereto as exhibits.

     Certificate Account:  The separate Eligible Account or
Accounts created and maintained by the Master Servicer pursuant
to Section 3.5 with a depository institution in the name of the
Master Servicer for the benefit of the Trustee on behalf of
Certificateholders and designated "First Horizon Home Loan
Corporation in trust for the registered holders of First Horizon
Asset Securities Inc. Mortgage Pass-Through Certificates, Series
2004-5."

     Certificate Owner:  With respect to a Book-Entry
Certificate, the Person who is the beneficial owner of such Book-
Entry Certificate.

     Certificate Principal Balance:  With respect to any
Certificate (other than the Notional Certificates) and as of any
Distribution Date, the Certificate Principal Balance on the date
of the initial issuance of such Certificate,

     (1)  as reduced by:

          (a)  all amounts distributed on previous Distribution
               Dates on such Certificate on account of principal,

          (b)  the principal portion of all Realized Losses
               previously allocated to such Certificate, and

          (c)  in the case of a Subordinated Certificate, such
               Certificate's pro rata share, if any, of the
               Subordinated Certificate Writedown Amount for
               previous Distribution Dates.

     (2)  in the case of the Accrual Certificates, as increased
          by any Accrual Amount therefor on such previous
          Distribution Dates.
                               -8-

<PAGE>

     Certificate Register:  The register maintained pursuant to
Section 5.2 hereof.

     Certificateholder or Holder:  The person in whose name a
Certificate is registered in the Certificate Register, except
that, solely for the purpose of giving any consent pursuant to
this Agreement, any Certificate registered in the name of the
Depositor or the Seller or any affiliate or agent of the
Depositor or the Seller shall be deemed not to be Outstanding and
the Percentage Interest evidenced thereby shall not be taken into
account in determining whether the requisite amount of Percentage
Interests necessary to effect such consent has been obtained;
provided, however, that if any such Person (including the
Depositor) owns 100% of the Percentage Interests evidenced by a
Class of Certificates, such Certificates shall be deemed to be
Outstanding for purposes of any provision hereof that requires
the consent of the Holders of Certificates of a particular Class
as a condition to the taking of any action hereunder. The Trustee
is entitled to rely conclusively on a certification of the
Depositor or any affiliate of the Depositor in determining which
Certificates are registered in the name of an affiliate of the
Depositor.

     Class:  All Certificates bearing the same class designation
as set forth in the Preliminary Statement.

     Class I-A-PO Percentage:  (a) With respect to any Discount
Mortgage Loan in Pool I, the fraction, expressed as a percentage,
equal to (6.50% - Adjusted Net Mortgage Rate) divided by 6.50%,
and (b) with respect to any Non-Discount Mortgage Loan in Pool I,
0%.

     Class II-A-PO Percentage:  (a) With respect to any Discount
Mortgage Loan in Pool II, the fraction, expressed as a
percentage, equal to (6.25% - Net Mortgage Rate) divided by
6.25%, and (b) with respect to any Non-Discount Mortgage Loan in
Pool II, 0%.

     Class Certificate Balance:  With respect to any Class of
Certificates (other than the Notional Certificates) and as of any
Distribution Date the aggregate of the Certificate Principal
Balances of all Certificates of such Class as of such date.

     Class PO Deferred Amount:  With respect to any Class of
Class PO Certificates and any Distribution Date through the Cross-
over Date, the sum of (1) the Class I-A-PO Percentage or Class II-
A-PO Percentage, as applicable, of the principal portion of Non-
Excess Losses on a Discount Mortgage Loan in Pool I or Pool II
allocated to the Class I-A-PO or Class II-A-PO Certificates,
respectively, on such date, and (2) all amounts previously
allocated to the Class I-A-PO or Class II-A-PO Certificates in
respect of such losses and not distributed to the Class I-A-PO or
Class II-A-PO Certificates, respectively,  on prior Distribution
Dates.

     Class PO Deferred Payment Writedown Amount:  For any
Distribution Date and any Class of Class PO Certificates, the
amount, if any, distributed on such date in respect of the
related Class PO Deferred Amount pursuant to Section 4.2(a)(iv)
herein.  The Subordinated Certificate Writedown Amount and the
Class PO Deferred Payment Writedown Amount will be allocated to
the Classes of Subordinated Certificates in inverse order of
priority, until the Class Certificate Balance of each such Class
has been reduced to zero.

     Class PO Principal Distribution Amount:  With respect to
each Distribution Date and any Class of Class PO Certificates, an
amount equal to the sum of:

                               -9-

<PAGE>

          (1)  the Class I-A-PO Percentage or Class II-A-PO
     Percentage, as applicable, of all Scheduled Payments of
     principal due on each Mortgage Loan on the first day of the
     month in which the Distribution Date occurs, as specified in
     the amortization schedule at the time applicable thereto,
     after adjustment for previous principal prepayments and the
     principal portion of Debt Service Reductions after the
     Bankruptcy Loss Coverage Amount has been reduced to zero,
     but before any adjustment to such amortization schedule by
     reason of any other bankruptcy or similar proceeding or any
     moratorium or similar waiver or grace period;

          (2)  the Class I-A-PO Percentage or Class II-A-PO
     Percentage, as applicable, of the Stated Principal Balance
     of each Mortgage Loan which was the subject of a Principal
     Prepayment in Full received by the Master Servicer during
     the related Prepayment Period;

          (3)  the Class I-A-PO Percentage or Class II-A-PO
     Percentage, as applicable, of all partial prepayments of
     principal for each Mortgage Loan received by the Master
     Servicer during the related Prepayment Period;

          (4)  the Class I-A-PO Percentage or Class II-A-PO
     Percentage, as applicable, of the sum of (a) the Net
     Liquidation Proceeds allocable to principal on each
     Mortgage Loan which became a Liquidated Mortgage Loan during
     the related Prepayment Period, other than Mortgage Loans
     described in clause (b), and (b) the principal balance of
     each Mortgage Loan that was purchased by a private mortgage
     insurer during the related Prepayment Period as an
     alternative to paying a claim under the related mortgage
     insurance policy; and

          (5)  the Class I-A-PO Percentage or Class II-A-PO
     Percentage, as applicable, of the sum of (a) the Stated
     Principal Balance of each Mortgage Loan which was
     repurchased by the Seller in connection with such
     Distribution Date, and (b) the difference, if any, between
     the Stated Principal Balance of a Mortgage Loan that has
     been replaced by the Seller with a Substitute Mortgage Loan
     pursuant to this Agreement in connection with such
     Distribution Date and the Stated Principal Balance of such
     Substitute Mortgage Loan.

     For purposes of clauses (2) and (5) above, the Stated
Principal Balance of a Mortgage Loan will be reduced by the
amount of any Deficient Valuation that occurred prior to the
reduction of the Bankruptcy Loss Coverage Amount to zero.

     Class Prepayment Distribution Trigger:  For a Class of
Subordinated Certificates (other than the Class of Subordinated
Certificates with the highest priority of distribution), a
trigger that is satisfied on any Distribution Date on which a
fraction (expressed as a percentage), the numerator of which is
the aggregate Class Certificate Balance of such Class and each
Class subordinate thereto, if any, and the denominator of which
is the aggregate Pool Principal Balance for both Mortgage Pools
with respect to such Distribution Date, equals or exceeds such
percentage calculated as of the Closing Date.

     Closing Date:  June 30, 2004.

                              -10-

<PAGE>

     Code:  The Internal Revenue Code of 1986, including any
successor or amendatory provisions.

     COFI:  Not applicable.

     COFI Certificates:  Not applicable.

     Compensating Interest:  As to any Distribution Date and any
Principal Prepayment in respect of a Mortgage Loan that is
received during the period from the sixteenth day of the month
(or, in the case of the first Distribution Date, from the Cut-off
Date) prior to the month of such Distribution Date through the
last day of such month, an additional payment to the related
Mortgage Pool made by the Master Servicer, to the extent funds
are available from the Master Servicing Fee, equal to the amount
of interest at the Adjusted Net Mortgage Rate for that Mortgage
Loan from the date of the prepayment to the related Due Date;
provided that the aggregate of all such payments as to the
Mortgage Loans in a Mortgage Pool shall not exceed 0.0083% of the
Pool Principal Balance of such Mortgage Pool as of the related
Determination Date, and provided further that if a partial
Principal Prepayment is applied on or after the first day of the
month following the month of receipt, no additional payment is
required for such Principal Prepayment.

     Component:  Not applicable.

     Component Balance:  Not applicable.

     Component Certificates:  Not applicable.

     Cooperative Corporation:  The entity that holds title (fee
or an acceptable leasehold estate) to the real property and
improvements constituting the Cooperative Property and which
governs the Cooperative Property, which Cooperative Corporation
must qualify as a Cooperative Housing Corporation under Section
216 of the Code.

     Coop Shares:  Shares issued by a Cooperative Corporation.

     Cooperative Loan:  Any Mortgage Loan secured by Coop Shares
and a Proprietary Lease.

     Cooperative Property:  The real property and improvements
owned by the Cooperative Corporation, including the allocation of
individual dwelling units to the holders of the Coop Shares of
the Cooperative Corporation.

     Cooperative Unit:  A single family dwelling located in a
Cooperative Property.

     Corporate Trust Office:  The designated office of the
Trustee in the State of New York at which at any particular time
its corporate trust business with respect to this Agreement shall
be administered, which office at the date of the execution of
this Agreement is located at The Bank of New York, 101 Barclay
Street, 8W, New York, New York 10286 (Attn: Corporate Trust
Mortgage-Backed Securities Group, First Horizon Asset Securities
Inc. Series 2004-5), facsimile no. (212) 815-3986, and which is
the address to which notices to and correspondence with the
Trustee should be directed.

                              -11-

<PAGE>

     Corresponding Class of Certificates:  As to any Middle REMIC
Interest identified in Section 2.7, the Class or Classes that are
identified in Section 2.7 as corresponding to such Middle REMIC
Interest.

     Corresponding Classes of Middle REMIC Interests:  As to any
Lower REMIC Interest identified in Section 2.7, the Middle REMIC
Interest or Middle REMIC Interests that are identified in
Section 2.7 as corresponding to such Lower REMIC Interest.

     Cross-over Date:  The Distribution Date on which the
respective Class Certificate Balances of each Class of
Subordinated Certificates have been reduced to zero.

     Custodial Agreement:  The Custodial Agreement dated as of
June 30, 2004 by and among the Trustee, the Master Servicer and
the Custodian.

     Custodian:  LaSalle Bank National Association, a national
banking association, and its successors and assigns, as custodian
under the Custodial Agreement.

     Cut-off Date:  June 1, 2004.

     Cut-off Date Pool Principal Balance:  With respect to Pool
I, $171,380,050.79 and with respect to Pool II, $34,615,985.37.

     Cut-off Date Principal Balance:  As to any Mortgage Loan,
the Stated Principal Balance thereof as of the close of business
on the Cut-off Date.

     Debt Service Reduction:  With respect to any Mortgage Loan,
a reduction by a court of competent jurisdiction in a proceeding
under the Bankruptcy Code in the Scheduled Payment for such
Mortgage Loan which became final and non-appealable, except such
a reduction resulting from a Deficient Valuation or any reduction
that results in a permanent forgiveness of principal.

     Defective Mortgage Loan:  Any Mortgage Loan which is
required to be repurchased pursuant to Section 2.2 or 2.3.

     Deficient Valuation:  With respect to any Mortgage Loan, a
valuation by a court of competent jurisdiction of the Mortgaged
Property in an amount less than the then-outstanding indebtedness
under the Mortgage Loan, or any reduction in the amount of
principal to be paid in connection with any Scheduled Payment
that results in a permanent forgiveness of principal, which
valuation or reduction results from an order of such court which
is final and non-appealable in a proceeding under the Bankruptcy
Code.

     Definitive Certificates:  Any Certificate evidenced by a
Physical Certificate and any Certificate issued in lieu of a Book-
Entry Certificate pursuant to Section 5.2(e).

     Delay Certificates:  As specified in the Preliminary
Statement.

     Delay Delivery Mortgage Loans:  The Mortgage Loans for which
all or a portion of a related Mortgage File is not delivered to
Trustee on the Closing Date. The number of Delay

                              -12-

<PAGE>

Delivery Mortgage Loans shall not exceed 25% of the aggregate
number of Mortgage Loans as of the Closing Date.

     Deleted Mortgage Loan:  As defined in Section 2.3(b) hereof.

     Denomination:  With respect to each Certificate, the amount
set forth on the face thereof as the "Initial Certificate Balance
of this Certificate" or the Percentage Interest appearing on the
face thereof.

     Depositor:  First Horizon Asset Securities Inc., a Delaware
corporation, or its successor in interest.

     Depository:  The initial Depository shall be The Depository
Trust Company, the nominee of which is CEDE & Co., as the
registered Holder of the Book-Entry Certificates. The Depository
shall at all times be a "clearing corporation" as defined in
Section 8-102(a)(5) of the Uniform Commercial Code of the State
of New York.

     Depository Participant:  A broker, dealer, bank or other
financial institution or other Person for whom from time to time
a Depository effects book-entry transfers and pledges of
securities deposited with the Depository.

     Designated Mortgage Pool Rates:  With respect to Pool I,
6.50%, and with respect to Pool II, 6.25%.

     Determination Date:  As to any Distribution Date, the
earlier of (i) the third Business Day after the 15th day of each
month, and (ii) the second Business Day prior to the related
Distribution Date.

     Discount Mortgage Loan:  Any Mortgage Loan in Pool I or Pool
II with a Net Mortgage Rate of less than 6.50% or 6.25% per
annum, respectively.

     Distribution Account:  The separate Eligible Account created
and maintained by the Trustee pursuant to Section 3.5 in the name
of the Trustee for the benefit of the Certificateholders and
designated "The Bank of New York, in trust for registered Holders
of First Horizon Asset Securities Inc. Mortgage Pass-Through
Certificates, Series 2004-5." Funds in the Distribution Account
shall be held in trust for the Certificateholders for the uses
and purposes set forth in this Agreement.

     Distribution Account Deposit Date:  As to any Distribution
Date, 1:30 p.m. Central time on the Business Day immediately
preceding such Distribution Date.

     Distribution Date:  The 25th day of each calendar month
after the initial issuance of the Certificates, or if such 25th
day is not a Business Day, the next succeeding Business Day,
commencing in July  2004.

     Due Date:  With respect to any Distribution Date, the first
day of the month in which the related Distribution Date occurs.

                              -13-

<PAGE>

     Eligible Account:  Any of (i) an account or accounts
maintained with a federal or state chartered depository
institution or trust company the short-term unsecured debt
obligations of which (or, in the case of a depository institution
or trust company that is the principal subsidiary of a holding
company, the debt obligations of such holding company) have the
highest short-term ratings of each Rating Agency at the time any
amounts are held on deposit therein, or (ii) an account or
accounts in a depository institution or trust company in which
such accounts are insured by the FDIC or the SAIF (to the limits
established by the FDIC or the SAIF, as applicable) and the
uninsured deposits in which accounts are otherwise secured such
that, as evidenced by an Opinion of Counsel delivered to the
Trustee and to each Rating Agency, the Certificateholders have a
claim with respect to the funds in such account or a perfected
first priority security interest against any collateral (which
shall be limited to Permitted Investments) securing such funds
that is superior to claims of any other depositors or creditors
of the depository institution or trust company in which such
account is maintained, or (iii) a trust account or accounts
maintained with (a) the trust department of a federal or state
chartered depository institution or (b) a trust company, acting
in its fiduciary capacity or (iv) any other account acceptable to
each Rating Agency.  Eligible Accounts may bear interest, and may
include, if otherwise qualified under this definition, accounts
maintained with the Trustee.

     ERISA:  The Employee Retirement Income Security Act of 1974,
as amended.

     ERISA-Qualifying Underwriting:  With respect to any ERISA-
Restricted Certificate, a best efforts or firm commitment
underwriting or private placement that meets the requirements of
the Underwriters' Exemption.

     ERISA-Restricted Certificate:  As specified in the
Preliminary Statement.

     Escrow Account:  The Eligible Account or Accounts
established and maintained pursuant to Section 3.6(a) hereof.

     Event of Default:  As defined in Section 7.1 hereof.

     Excess Loss:  With respect to a Mortgage Pool, the amount of
any (i) Fraud Loss realized after the Fraud Loss Coverage
Termination Date, (ii) Special Hazard Loss realized after the
Special Hazard Coverage Termination Date or (iii) Deficient
Valuation realized after the Bankruptcy Coverage Termination
Date.

     Excess Proceeds:  With respect to any Liquidated Mortgage
Loan, the amount, if any, by which the sum of any Liquidation
Proceeds of such Mortgage Loan received in the calendar month in
which such Mortgage Loan became a Liquidated Mortgage Loan, net
of any amounts previously reimbursed to the Master Servicer as
Nonrecoverable Advance(s) with respect to such Mortgage Loan
pursuant to Section 3.8(a)(iii), exceeds (i) the unpaid principal
balance of such Liquidated Mortgage Loan as of the Due Date in
the month in which such Mortgage Loan became a Liquidated
Mortgage Loan plus (ii) accrued interest at the Mortgage Rate
from the Due Date as to which interest was last paid or advanced
(and not reimbursed) to Certificateholders up to the Due Date
applicable to the Distribution Date immediately following the
calendar month during which such liquidation occurred.

                              -14-

<PAGE>

     Expense Fee Rate:  As to each Mortgage Loan, the sum of the
related Master Servicing Fee Rate and the Trustee Fee Rate.

     FDIC:  The Federal Deposit Insurance Corporation, or any
successor thereto.

     FHLMC:  The Federal Home Loan Mortgage Corporation, a
corporate instrumentality of the United States created and
existing under Title III of the Emergency Home Finance Act of
1970, as amended, or any successor thereto.

     FIRREA:  The Financial Institutions Reform, Recovery, and
Enforcement Act of 1989.

     First Horizon:  First Horizon Home Loan Corporation, a
Kansas corporation and an indirect wholly owned subsidiary of
First Horizon National Corporation, a Tennessee corporation.

     Fitch:  Fitch Ratings or any successor thereto. If Fitch is
designated as a Rating Agency in the Preliminary Statement, for
purposes of Section 11.5(b) the address for notices to Fitch
shall be Fitch, Inc., One State Street Plaza, New York, New York
10004, Attention: Residential Mortgage Surveillance Group, or
such other address as Fitch may hereafter furnish to the
Depositor and the Master Servicer.

     FNMA:  The Federal National Mortgage Association, a
federally chartered and privately owned corporation organized and
existing under the Federal National Mortgage Association Charter
Act, or any successor thereto.

     Fraud Loan:  A Liquidated Mortgage Loan as to which a Fraud
Loss has occurred.

     Fraud Losses:  Realized Losses on Mortgage Loans as to which
a loss is sustained by reason of a default arising from fraud,
dishonesty or misrepresentation in connection with the related
Mortgage Loan, including a loss by reason of the denial of
coverage under any related Primary Insurance Policy because of
such fraud, dishonesty or misrepresentation.

     Fraud Loss Coverage Amount:  As of the Closing Date,
$4,119,921.  As of any Distribution Date from the first
anniversary of the Cut-off Date and prior to the third
anniversary of the Cut-off Date, the Fraud Loss Coverage Amount
will equal $4,119,921 minus the aggregate amount of Fraud Losses
that would have been allocated to the Subordinated Certificates
in the absence of the Loss Allocation Limitation since the Cut-
off Date.  As of any Distribution Date from the third to the
fifth anniversary of the Cut-off Date, the Fraud Loss Coverage
Amount will equal (1) the lesser of (a) the Fraud Loss Coverage
Amount as of the most recent anniversary of the Cut-off Date and
(b) 1.00% of the aggregate outstanding principal balance of all
of the Mortgage Loans as of the most recent anniversary of the
Cut-off Date minus (2) the Fraud Losses that would have been
allocated to the Subordinated Certificates in the absence of the
Loss Allocation Limitations since the most recent anniversary of
the Cut-off Date.  As of any Distribution Date on or after the
earlier of the Cross-over Date or the fifth anniversary of the
Cut-off Date, the Fraud Loss Coverage Amount shall be zero.

     Fraud Loss Coverage Termination Date:  The date on which the
Fraud Loss Coverage Amount is reduced to zero.

                              -15-

<PAGE>

     Group I Senior Certificates:  As specified in the
Preliminary Statement.

     Group II Senior Certificates:  As specified in the
Preliminary Statement.

     Group Subordinate Amount:  For a Mortgage Pool and any
Distribution Date; the excess of (a) the Pool Principal Balance
of such Mortgage Pool for the immediately preceding Distribution
Date, over (b) the aggregate Class Certificate Balance of the
Senior Certificates of the related Certificate Group immediately
prior to that Distribution Date.

     Index:  LIBOR.

     Indirect Participant:  A broker, dealer, bank or other
financial institution or other Person that clears through or
maintains a custodial relationship with a Depository Participant.

     Initial Bankruptcy Coverage Amount:  $150,000.

     Initial Component Balance:  Not applicable.

     Insurance Policy:  With respect to any Mortgage Loan
included in the Trust Fund, any insurance policy, including all
riders and endorsements thereto in effect, including any
replacement policy or policies for any Insurance Policies.

     Insurance Proceeds:  Proceeds paid by an insurer pursuant to
any Insurance Policy, in each case other than any amount included
in such Insurance Proceeds in respect of Insured Expenses.

     Insured Expenses:  Expenses covered by an Insurance Policy
or any other insurance policy with respect to the Mortgage Loans.

     Interest Accrual Period:  With respect to each Class of
Delay Certificates and any Distribution Date, the calendar month
prior to the month of such Distribution Date. With respect to any
Non-Delay Certificates and any Distribution Date, the one month
period commencing on the 25th day of the month preceding the
month in which such Distribution Date occurs and ending on the
24th day of the month in which such Distribution Date occurs.

     Interest Determination Date:  With respect to any Interest
Accrual Period for any LIBOR Certificates, the second Business
Day prior to the first day of such Interest Accrual Period.

     Latest Possible Maturity Date:  As to each Class of
Subordinated Certificates and each Class of Senior Certificates
in the Certificate Group corresponding to Pool I, each Lower
REMIC Interest, and each Middle REMIC Interest, the Distribution
Date following the third anniversary of the scheduled maturity
date of the Mortgage Loan in Pool I having the latest scheduled
maturity date as of the Cut-off Date; as to each Class of Senior
Certificates in the Certificate Group corresponding to Pool II,
the Distribution Date following the third anniversary of the
scheduled maturity date of the Mortgage Loan in Pool II having
the latest scheduled maturity date as of the Cut-off Date.

     Lender PMI Mortgage Loan:  Not applicable.

                              -16-

<PAGE>

     LIBOR:  The London interbank offered rate for one month
United States dollar deposits calculated in the manner described
in Section 4.9.

     LIBOR Certificates:  As specified in the Preliminary
Statement.

     Liquidated Mortgage Loan:  With respect to any Distribution
Date, a defaulted Mortgage Loan (including any REO Property)
which was liquidated in the calendar month preceding the month of
such Distribution Date and as to which the Master Servicer has
determined (in accordance with this Agreement) that it has
received all amounts it expects to receive in connection with the
liquidation of such Mortgage Loan, including the final
disposition of an REO Property.

     Liquidation Proceeds:  Amounts, including Insurance Proceeds
and any Unanticipated Recoveries, received in connection with the
partial or complete liquidation of defaulted Mortgage Loans,
whether through trustee's sale, foreclosure sale or otherwise or
amounts received in connection with any condemnation or partial
release of a Mortgaged Property and any other proceeds received
in connection with an REO Property, less the sum of related
unreimbursed Master Servicing Fees, Servicing Advances and
Advances.

     Loan-to-Value Ratio:  With respect to any Mortgage Loan and
as to any date of determination, the fraction (expressed as a
percentage) the numerator of which is the principal balance of
the related Mortgage Loan at such date of determination and the
denominator of which is the Appraised Value of the related
Mortgaged Property.

     Loss Allocation Limitation:  As defined in Section 4.4(e).

     Lost Mortgage Note:  Any Mortgage Note, the original of
which was permanently lost or destroyed and has not been
replaced.

     Lower REMIC:  The segregated pool of assets consisting of
the Trust Fund but excluding the Retained Yield, any Additional
Amounts, the Middle REMIC Interests, the Lower REMIC Interests,
the RL Interest, the RM Interest, and the RU Interest.

     Lower REMIC Interests:  The REMIC regular interests, within
the meaning of the REMIC Provisions, issued by the Lower REMIC as
set forth in Section 2.7.

     Maintenance:  With respect to any Cooperative Unit, the rent
paid by the Mortgagor to the Cooperative Corporation pursuant to
the Proprietary Lease.

     Majority in Interest:  As to any Class of Regular
Certificates, the Holders of Certificates of such Class
evidencing, in the aggregate, at least 51% of the Percentage
Interests evidenced by all Certificates of such Class.

     Master Servicer:  First Horizon Home Loan Corporation, a
Kansas corporation, and its successors and assigns, in its
capacity as master servicer hereunder.

     Master Servicer Advance Date:  As to any Distribution Date,
1:30 p.m. Central time on the Business Day immediately preceding
such Distribution Date.

                              -17-

<PAGE>

     Master Servicing Fee:  As to each Mortgage Loan and any
Distribution Date, an amount payable out of each full payment of
interest received on such Mortgage Loan and equal to one-twelfth
of the Master Servicing Fee Rate multiplied by the Stated
Principal Balance of such Mortgage Loan as of the Due Date in the
month of such Distribution Date (prior to giving effect to any
Scheduled Payments due on such Mortgage Loan on such Due Date),
subject to reduction as provided in Section 3.14.

     Master Servicing Fee Rate: For each Mortgage Loan, other
than a Discount Mortgage Loan, a per annum rate equal to 0.244%.
For each Discount Mortgage Loan in Pool I, a per annum rate equal
to the  excess, if any, of the Mortgage Rate thereof over 6.256%.
For each Discount Mortgage Loan in Pool II, a per annum rate
equal to the  excess, if any, of the Mortgage Rate thereof over
6.006%.

     Middle REMIC:  The segregated pool of assets consisting of
the Lower REMIC Interests.

     Middle REMIC Interests:  The REMIC regular interests, within
the meaning of the REMIC Provisions, issued by the Middle REMIC
as set forth in Section 2.7.

     MLPA I:  The Mortgage Loan Purchase Agreement, dated as of
June 30, 2004, by and between First Horizon Home Loan
Corporation, as seller, and First Tennessee Bank National
Association, as purchaser, as related to the transfer, sale and
conveyance of the Mortgage Loans.

     MLPA II: The Mortgage Loan Purchase Agreement, dated as of
June 30, 2004, by and between First Tennessee Bank National
Association, as seller, and First Horizon Asset Securities Inc.,
as purchaser, as related to the transfer, sale and conveyance of
the Mortgage Loans.

     Monthly Statement:  The statement delivered to the
Certificateholders pursuant to Section 4.6.

     Moody's:  Moody's Investors Service, Inc., or any successor
thereto. If Moody's is designated as a Rating Agency in the
Preliminary Statement, for purposes of Section 11.5(b) the
address for notices to Moody's shall be Moody's Investors
Service, Inc., 99 Church Street, New York, New York 10007,
Attention: Residential Pass-Through Monitoring, or such other
address as Moody's may hereafter furnish to the Depositor or the
Master Servicer.

     Mortgage:  The mortgage, deed of trust or other instrument
creating a first lien on an estate in fee simple or leasehold
interest in real property securing a Mortgage Note.

     Mortgage File:  The mortgage documents listed in Section 2.1
hereof pertaining to a particular Mortgage Loan and any
additional documents delivered to the Trustee to be added to the
Mortgage File pursuant to this Agreement.

     Mortgage Loan Schedule:  The list of Mortgage Loans (as from
time to time amended by the Master Servicer to reflect the
addition of Substitute Mortgage Loans and the deletion of Deleted
Mortgage Loans pursuant to the provisions of this Agreement)
transferred to the Trustee as part of the Trust Fund and from
time to time subject to this Agreement, attached hereto as
Schedule I, setting forth the following information with respect
to each Mortgage Loan:

                              -18-

<PAGE>

               (1)  the loan number;

               (2)  the Mortgagor's name and the street address
                    of the Mortgaged  Property, including the zip
                    code;

               (3)  the maturity date;

               (4)  the original principal balance;

               (5)  the Cut-off Date Principal Balance;

               (6)  the first payment date of the Mortgage Loan;

               (7)  the Scheduled Payment in effect as of the Cut-
                    off Date;

               (8)  the Loan-to-Value Ratio at origination;

               (9)  a code indicating whether the residential
                    dwelling at the time of origination was
                    represented to be owner-occupied;

               (10) a code indicating whether the residential
                    dwelling is either (a) a detached single
                    family dwelling (b) a dwelling in a de
                    minimis PUD, (c) a condominium unit or PUD
                    (other than a de minimis PUD), (d) a two-to-
                    four unit residential property or (e) a
                    Cooperative Unit;

               (11) the Mortgage Rate;

               (12) the purpose for the Mortgage Loan;

               (13) the type of documentation program pursuant to
                    which the Mortgage Loan was originated; and

               (14) the Master Servicing Fee for the Mortgage
                    Loan.

     Such schedule shall also set forth the total of the amounts
described under (4) and (5) above for all of the Mortgage Loans.

     Mortgage Loans:  Such of the mortgage loans transferred and
assigned to the Trustee pursuant to the provisions hereof as from
time to time are held as a part of the Trust Fund (including any
REO Property), the mortgage loans so held being identified in the
Mortgage Loan Schedule, notwithstanding foreclosure or other
acquisition of title of the related Mortgaged Property.

     Mortgage Note:  The original executed note or other evidence
of indebtedness evidencing the indebtedness of a Mortgagor under
a Mortgage Loan.

     Mortgage Pool:  Either Pool I or Pool II.

                              -19-

<PAGE>

     Mortgage Rate:  The annual rate of interest borne by a
Mortgage Note from time to time, net of any insurance premium
charged by the mortgagee to obtain or maintain any Primary
Insurance Policy.

     Mortgaged Property:  The underlying property securing a
Mortgage Loan, which, with respect to a Cooperative Loan, is the
related Coop Shares and Proprietary Lease.

     Mortgagor:  The obligor(s) on a Mortgage Note.

     National Cost of Funds Index:  The National Monthly Median
Cost of Funds Ratio to SAIF-Insured Institutions published by the
Office of Thrift Supervision.

     Net Interest Shortfall:  For any Distribution Date and each
Mortgage Pool, the sum of (a) the amount of interest which would
otherwise have been received for any Mortgage Loan in such
Mortgage Pool that was the subject of (x) a Relief Act Reduction
or (y) a Special Hazard Loss, Fraud Loss, or Deficient Valuation,
after the exhaustion of the respective amounts of coverage for
those types of losses provided by the Subordinated Certificates;
and (b) any Net Prepayment Interest Shortfalls in respect of such
Mortgage Pool.

     Net Prepayment Interest Shortfalls:  As to any Distribution
Date and each Mortgage Pool, the amount by which the aggregate of
Prepayment Interest Shortfalls in respect of the Mortgage Loans
or such Mortgage Pool during the related Prepayment Period
exceeds an amount equal to the Compensating Interest paid in
respect of such Mortgage Loans, if any, for such Distribution
Date.

     Non-Delay Certificates:  As specified in the Preliminary
Statement.

     Non-Discount Mortgage Loan:  Any Mortgage Loan in Pool I
with a Net Mortgage Rate that is equal to or greater than 6.50%
per annum and any mortgage loan in Pool II with a Net Mortgage
Rate that is equal to or greater than 6.25% per annum.

     Non-Class I-A-PO Percentage:  (a) With respect to a Discount
Mortgage Loan in Pool I, the fraction, expressed as a percentage,
equal to the Net Mortgage Rate divided by 6.50%, and (b) with
respect to each Non-Discount Mortgage Loan in Pool I, 100%.

     Non-Class II-A-PO Percentage:  (a) With respect to a
Discount Mortgage Loan in Pool II, the fraction, expressed as a
percentage, equal to the Net Mortgage Rate divided by 6.25%, and
(b) with respect to each Non-Discount Mortgage Loan in Pool II,
100%.

     Non-Excess Loss:  Any Realized Loss other than an Excess
Loss.

     Nonrecoverable Advance:  Any portion of an Advance
previously made or proposed to be made by the Master Servicer
that, in the good faith judgment of the Master Servicer, will not
be ultimately recoverable by the Master Servicer from the related
Mortgagor, related Liquidation Proceeds or otherwise.

                              -20-

<PAGE>

     Notice of Final Distribution:  The notice to be provided
pursuant to Section 9.2 to the effect that final distribution on
any of the Certificates shall be made only upon presentation and
surrender thereof.

     Notional Amount:  As specified in the Preliminary Statement.

     Notional Amount Component: Not applicable.

     Notional Certificates:  As specified in the Preliminary
Statement.

     Offered Certificates:  As specified in the Preliminary
Statement.

     Officer's Certificate:  A Certificate (i) signed by the
Chairman of the Board, the Vice Chairman of the Board, the
President, a Managing Director, a Vice President (however
denominated), an Assistant Vice President, the Treasurer, the
Secretary, or one of the Assistant Treasurers or Assistant
Secretaries of the Depositor or the Master Servicer, or (ii), if
provided for in this Agreement, signed by a Servicing Officer, as
the case may be, and delivered to the Depositor and the Trustee,
as the case may be, as required by this Agreement.

     Opinion of Counsel:  A written opinion of counsel, who may
be counsel for the Depositor or the Master Servicer, including,
in-house counsel, reasonably acceptable to the Trustee; provided,
however, that with respect to the interpretation or application
of the REMIC Provisions, such counsel must (i) in fact be
independent of the Depositor and the Master Servicer, (ii) not
have any direct financial interest in the Depositor or the Master
Servicer or in any affiliate of either, and (iii) not be
connected with the Depositor or the Master Servicer as an
officer, employee, promoter, underwriter, trustee, partner,
director or person performing similar functions.

     Optional Termination:  The termination of the trust created
hereunder in connection with the purchase of the Mortgage Loans
pursuant to Section 9.1(a) hereof.

     Original Group Subordinate Amount:  With respect to a
Mortgage Pool, the related Group Subordinate Amount as of the Cut-
off Date.

     Original Mortgage Loan:  The Mortgage Loan refinanced in
connection with the origination of a Refinancing Mortgage Loan.

     Original Subordinated Principal Balance:  The aggregate of
the Class Certificate Balances of the Subordinated Certificates
as of the Closing Date.

     OTS:  The Office of Thrift Supervision.

     Outside Reference Date:  Not applicable.

     Outstanding:  With respect to the Certificates as of any
date of determination, all Certificates theretofore executed and
authenticated under this Agreement except:

                              -21-

<PAGE>

          (i)  Certificates theretofore canceled by the Trustee
               or delivered to the Trustee for cancellation; and

          (ii) Certificates in exchange for which or in lieu of
               which other Certificates have been executed and
               delivered by the Trustee pursuant to this
               Agreement.

     Outstanding Mortgage Loan:  As of any Due Date, a Mortgage
Loan with a Stated Principal Balance greater than zero which was
not the subject of a Principal Prepayment in Full prior to such
Due Date and which did not become a Liquidated Mortgage Loan
prior to such Due Date.

     Ownership Interest:  As to any Residual Certificate, any
ownership interest in such Certificate including any interest in
such Certificate as the Holder thereof and any other interest
therein, whether direct or indirect, legal or beneficial.

     Pass-Through Rate:  For any interest bearing Class of
Certificates, the per annum rate set forth or calculated in the
manner described in the Preliminary Statement.

     Percentage Interest:  As to any Certificate, the percentage
interest evidenced thereby in distributions required to be made
on the related Class, such percentage interest being set forth on
the face thereof or equal to the percentage obtained by dividing
the Denomination of such Certificate by the aggregate of the
Denominations of all Certificates of the same Class.

     Permitted Investments:  At any time, any one or more of the
following obligations and securities:

          (i)  obligations of the United States or any agency
               thereof, provided such obligations are backed by
               the full faith and credit of the United States;

          (ii) general obligations of or obligations guaranteed
               by any state of the United States or the District
               of Columbia receiving the highest long-term debt
               rating of each Rating Agency;

         (iii) commercial or finance company paper which is then
               receiving the highest commercial or finance
               company paper rating of each Rating Agency;

          (iv) certificates of deposit, demand or time deposits,
               or bankers' acceptances issued by any depository
               institution or trust company incorporated under
               the laws of the United States or of any state
               thereof and subject to supervision and examination
               by federal and/or state banking authorities,
               provided that the commercial paper and/or long
               term unsecured debt obligations of such depository
               institution or trust company (or in the case of
               the principal depository institution in a holding
               company system, the commercial paper or long-term
               unsecured debt obligations of such holding
               company, but only if Moody's is not a Rating
               Agency) are then rated one of the two highest long-
               term and/or the highest short-term ratings of each
               Rating Agency for such securities;

                              -22-

<PAGE>

          (v)  demand or time deposits or certificates of deposit
               issued by any bank or trust company or savings
               institution to the extent that such deposits are
               fully insured by the FDIC and receiving the
               highest short-term debt rating of each Rating
               Agency;

          (vi) guaranteed reinvestment agreements issued by any
               bank, insurance company or other corporation and
               receiving the highest short-term debt rating of
               each Rating Agency and containing, at the time of
               the issuance of such agreements, such terms and
               conditions as will not result in the downgrading
               or withdrawal of the rating then assigned to the
               Certificates by either Rating Agency;

         (vii) repurchase obligations with respect to any
               security described in clauses (i) and (ii) above,
               in either case entered into with a depository
               institution or trust company (acting as principal)
               described in clause (iv) above;

        (viii) securities (other than stripped bonds, stripped
               coupons or instruments sold at a purchase price in
               excess of 115% of the face amount thereof) bearing
               interest or sold at a discount issued by any
               corporation incorporated under the laws of the
               United States or any state thereof which, at the
               time of such investment, have one of the two
               highest ratings of each Rating Agency (except if
               the Rating Agency is Moody's or S&P, such rating
               shall be the highest commercial paper rating of
               Moody's or S&P, as applicable, for any such
               securities);

          (ix) units of a taxable money-market portfolio having
               the highest rating assigned by each Rating Agency
               (except if Fitch is a Rating Agency and has not
               rated the portfolio, the highest rating assigned
               by Moody's) and restricted to obligations issued
               or guaranteed by the United States of America or
               entities whose obligations are backed by the full
               faith and credit of the United States of America
               and repurchase agreements collateralized by such
               obligations; and

          (x)  such other investments bearing interest or sold at
               a discount acceptable to each Rating Agency as
               will not result in the downgrading or withdrawal
               of the rating then assigned to the Certificates by
               either Rating Agency, as evidenced by a signed
               writing delivered by each Rating Agency;

provided that no such instrument shall be a Permitted Investment
if such instrument evidences the right to receive interest only
payments with respect to the obligations underlying such
instrument.

     Permitted Transferee:  Any person other than (i) the United
States, any State or political subdivision thereof, or any agency
or instrumentality of any of the foregoing, (ii) a foreign
government, International Organization or any agency or
instrumentality of either of the foregoing, (iii) an organization
(except certain farmers' cooperatives described in section 521 of
the Code) which is exempt from tax imposed by Chapter 1 of the
Code (including the tax

                              -23-

<PAGE>

imposed by section 511 of the Code on unrelated business taxable
income) on any excess inclusions (as defined in section
860E(c)(l) of the Code) with respect to any Residual Certificate,
(iv) rural electric and telephone cooperatives described in
section 1381(a)(2)(C) of the Code, (v) an "electing large
partnership" as defined in section 775 of the Code, (vi) a Person
that is not (a) a citizen or resident of the United States, (b) a
corporation, partnership, or other entity created or organized in
or under the laws of the United States, any state thereof or the
District of Columbia, (c) an estate whose income from sources
without the United States is includible in gross income for
United States federal income tax purposes regardless of its
connection with the conduct of a trade or business within the
United States or (d) a trust if a court within the United States
is able to exercise primary supervision over the administration
of the trust and one or more United States persons have the
authority to control all substantial decisions of the trust,
unless such Person has furnished the transferor and the Trustee
with a duly completed Internal Revenue Service Form W-8ECI or any
applicable successor form, and (vii) any other Person so
designated by the Depositor based upon an Opinion of Counsel that
the Transfer of an Ownership Interest in a Residual Certificate
to such Person may cause any REMIC created hereunder to fail to
qualify as a REMIC at any time that the Certificates are
outstanding; provided, however, that if a person is classified as
a partnership under the Code, such person shall only be a
Permitted Transferee if all of its beneficial owners are
described in subclauses (a), (b), (c) or (d) of clause (vi) and
the governing documents of such person prohibits a transfer of
any interest in such person to any person described in clause
(vi). The terms "United States," "State" and "International
Organization" shall have the meanings set forth in section 7701
of the Code or successor provisions. A corporation will not be
treated as an instrumentality of the United States or of any
State or political subdivision thereof for these purposes if all
of its activities are subject to tax and, with the exception of
the Federal Home Loan Mortgage Corporation, a majority of its
board of directors is not selected by such government unit.

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

     Physical Certificate:  As specified in the Preliminary
Statement.

     Planned Balance:  Not applicable.

     Planned Principal Classes:  Not applicable.

     Pool I:  The aggregate of the Mortgage Loans identified on
the Mortgage Loan Schedule as being included in Pool I.

     Pool II:  The aggregate of the Mortgage Loans identified on
the Mortgage Loan Schedule as being included in Pool II.

     Pool Principal Balance:  For each Mortgage Pool, with
respect to any Distribution Date, the aggregate of the Stated
Principal Balances of the Mortgage Loans which were Outstanding
Mortgage Loans on the Due Date in the month preceding the month
of such Distribution Date, and for the first Distribution Date,
as of the Closing Date, less any Principal Prepayments

                              -24-

<PAGE>

received on or after such Due Date and distributed to
Certificateholders on the prior Distribution Date.

     Prepayment Interest Excess:  As to any Principal Prepayment
received by the Master Servicer from the first day through the
fifteenth day of any calendar month (other than the calendar
month in which the Cut-off Date occurs), all amounts paid by the
related Mortgagor in respect of interest on such Principal
Prepayment.  All Prepayment Interest Excess shall be paid to the
Master Servicer as additional master servicing compensation.

     Prepayment Interest Shortfall:  As to any Distribution Date,
Mortgage Loan and Principal Prepayment received (a) during the
period from the sixteenth day of the month preceding the month of
such Distribution Date (or, in the case of the first Distribution
Date, from the Cut-off Date) through the last day of such month,
in the case of a Principal Prepayment in Full, or (b) during the
month preceding the month of such Distribution Date, in the case
of a partial Principal Prepayment, the amount, if any, by which
one month's interest at the related Adjusted Mortgage Rate on
such Principal Prepayment exceeds the amount of interest actually
paid by the Mortgagor in connection with such Principal
Prepayment.

     Prepayment Period:  (a) With respect to any Principal
Prepayments in Full and any Distribution Date, the period from
the sixteenth day of the month preceding the month of such
Distribution Date (or, in the case of the first Distribution
Date, from the Cut-off Date) through the fifteenth day of the
month of such Distribution Date, and (b) with respect to any
other Principal Prepayments and any Distribution Date, the month
preceding the month of such Distribution Date.

     Primary Insurance Policy:  Each policy of primary mortgage
guaranty insurance or any replacement policy therefor with
respect to any Mortgage Loan.

     Principal Balance Schedules:  Not applicable.

     Principal Only Certificates:  As specified in the
Preliminary Statement.

     Principal Prepayment:  Any payment of principal by a
Mortgagor on a Mortgage Loan that is received in advance of its
scheduled Due Date and is not accompanied by an amount
representing scheduled interest due on any date or dates in any
month or months subsequent to the month of prepayment. Partial
Principal Prepayments shall be applied by the Master Servicer in
accordance with the terms of the related Mortgage Note.

     Principal Prepayment in Full:  Any Principal Prepayment made
by a Mortgagor of the entire principal balance of a Mortgage
Loan.

     Private Certificate:  As specified in the Preliminary
Statement.

     Proprietary Lease:  With respect to any Cooperative Unit, a
lease or occupancy agreement between a Cooperative Corporation
and a holder of related Coop Shares.

     PUD:  Planned Unit Development.

                              -25-

<PAGE>

     Purchase Price:  With respect to any Mortgage Loan required
to be purchased by the Seller pursuant to Section 2.2 or 2.3
hereof or purchased at the option of the Master Servicer pursuant
to Section 3.11, an amount equal to the sum of (i) 100% of the
unpaid principal balance of the Mortgage Loan on the date of such
purchase, (ii) accrued interest thereon at the applicable
Mortgage Rate (or at the applicable Adjusted Mortgage Rate if the
purchaser is the Master Servicer) from the date through which
interest was last paid by the Mortgagor to the Due Date in the
month in which the Purchase Price is to be distributed to
Certificateholders, and (iii) any costs and damages incurred by
the Trust in connection with the noncompliance of such Mortgage
Loan with any specifically applicable predatory or abusive
lending law.

     Qualified Insurer:  A mortgage guaranty insurance company
duly qualified as such under the laws of the state of its
principal place of business and each state having jurisdiction
over such insurer in connection with the insurance policy issued
by such insurer, duly authorized and licensed in such states to
transact a mortgage guaranty insurance business in such states
and to write the insurance provided by the insurance policy
issued by it, approved as a FNMA-approved mortgage insurer and
having a claims paying ability rating of at least "AA" or
equivalent rating by a nationally recognized statistical rating
organization. Any replacement insurer with respect to a Mortgage
Loan must have at least as high a claims paying ability rating as
the insurer it replaces had on the Closing Date.

     Rating Agency:  Each of the Rating Agencies specified in the
Preliminary Statement. If any such organization or a successor is
no longer in existence, "Rating Agency" shall be such nationally
recognized statistical rating organization, or other comparable
Person, as is designated by the Depositor, notice of which
designation shall be given to the Trustee. References herein to a
given rating category of a Rating Agency shall mean such rating
category without giving effect to any modifiers.

     Realized Loss:  With respect to each Liquidated Mortgage
Loan, an amount (not less than zero or more than the Stated
Principal Balance of the Mortgage Loan) as of the date of such
liquidation, equal to (i) the Stated Principal Balance of the
Liquidated Mortgage Loan as of the date of such liquidation, plus
(ii) interest at the Adjusted Net Mortgage Rate from the Due Date
as to which interest was last paid or advanced (and not
reimbursed) to Certificateholders up to the Due Date in the month
in which Liquidation Proceeds are required to be distributed on
the Stated Principal Balance of such Liquidated Mortgage Loan
from time to time, minus (iii) the Liquidation Proceeds, if any,
received during the month in which such liquidation occurred, to
the extent applied as recoveries of interest at the Adjusted Net
Mortgage Rate and to principal of the Liquidated Mortgage Loan.
With respect to each Mortgage Loan which has become the subject
of a Deficient Valuation, if the principal amount due under the
related Mortgage Note has been reduced, the difference between
the principal balance of the Mortgage Loan outstanding
immediately prior to such Deficient Valuation and the principal
balance of the Mortgage Loan as reduced by the Deficient
Valuation.

     Recognition Agreement:  With respect to any Cooperative
Loan, an agreement between the Cooperative Corporation and the
originator of such Mortgage Loan which establishes the rights of
such originator in the Cooperative Property.

                              -26-

<PAGE>

     Record Date:  With respect to any Distribution Date, the
close of business on the last Business Day of the month preceding
the month in which such Distribution Date occurs.

     Reference Bank:  A leading bank with an established place of
business in London engaged in transactions in Eurodollar deposits
in the international Eurocurrency market, not controlled by, or
under the common control with, the Trustee.

     Refinancing Mortgage Loan:  Any Mortgage Loan originated in
connection with the refinancing of an existing mortgage loan.

     Regular Certificates:  As specified in the Preliminary
Statement.

     Relief Act:  The Servicemembers Civil Relief Act or any
similar state or local legislation or regulations.

     Relief Act Reductions:  With respect to any Distribution
Date and any Mortgage Loan as to which there has been a reduction
in the amount of interest collectible thereon for the most
recently ended calendar month as a result of the application of
the Relief Act, the amount, if any, by which interest collectible
on such Mortgage Loan for the most recently ended calendar month
is less than interest accrued thereon for such month pursuant to
the Mortgage Note.

     REMIC:  A "real estate mortgage investment conduit" within
the meaning of section 860D of the Code.

     REMIC Change of Law:  Any proposed, temporary or final
regulation, revenue ruling, revenue procedure or other official
announcement or interpretation relating to REMICs and the REMIC
Provisions issued after the Closing Date.

     REMIC Provisions:  Provisions of the federal income tax law
relating to real estate mortgage investment conduits, which
appear at sections 860A through 860G of Subchapter M of Chapter 1
of the Code, and related provisions, and regulations promulgated
thereunder, as the foregoing may be in effect from time to time
as well as provisions of applicable state laws.

     REO Property:  A Mortgaged Property acquired by the Trust
Fund through foreclosure or deed-in-lieu of foreclosure in
connection with a defaulted Mortgage Loan.

     Request for Release:  The Request for Release submitted by
the Master Servicer to the Trustee, substantially in the form of
Exhibits L and M, as appropriate.

     Required Coupon:  With respect to Pool I, 6.75% per annum,
and with respect to Pool II, 6.50% per annum.

     Required Insurance Policy:  With respect to any Mortgage
Loan, any insurance policy that is required to be maintained from
time to time under this Agreement.

     Required Recordation States:  The states of Florida,
Maryland and Mississippi.

     Residual Certificates:  As specified in the Preliminary
Statement.

                              -27-

<PAGE>

     Responsible Officer:  When used with respect to the Trustee,
any Vice President, any Assistant Vice President, the Secretary,
any Assistant Secretary, any Trust Officer or any other officer
of the Trustee customarily performing functions similar to those
performed by any of the above designated officers and having
direct responsibility for the administration of this Agreement
and also to whom, with respect to a particular matter, such
matter is referred because of such officer's knowledge of and
familiarity with the particular subject.

     Retail/Lottery Certificates:  Not applicable.

     Retained Yield:  As to each Mortgage Loan and any
Distribution Date, an amount payable to First Horizon Home Loan
Corporation out of each full payment of interest received on such
Mortgage Loan and equal to one-twelfth of the Retained Yield Rate
multiplied by the Stated Principal Balance of such Mortgage Loan
as of the Due Date in the month of such Distribution Date (prior
to giving effect to any Scheduled Payments due on such Mortgage
Loan on such Due Date).

     Retained Yield Rate:  For any Non-Discount Mortgage Loan, a
per annum rate equal to the excess of (a) the applicable Mortgage
Rate over (b) the Required Coupon.  For any Discount Mortgage
Loan, 0%.

     RL Interest:  The REMIC residual interest, within the
meaning of the REMIC Provisions, issued by the Lower REMIC, which
shall be represented by the Class I-A-R Certificate.

     RM Interest:  The REMIC residual interest, within the
meaning of the REMIC Provisions, issued by the Middle REMIC,
which shall be represented by the Class I-A-R Certificate.

     RU Interest:  The REMIC residual interest, within the
meaning of the REMIC Provisions, issued by the Upper REMIC, which
shall be represented by the Class I-A-R Certificate.

     Scheduled Balances:  Not applicable.

     Scheduled Certificates:  Not applicable.

     Scheduled Payment:  The scheduled monthly payment on a
Mortgage Loan due on any Due Date allocable to principal and/or
interest on such Mortgage Loan which, unless otherwise specified
herein, shall give effect to any related Debt Service Reduction
and any Deficient Valuation that affects the amount of the
monthly payment due on such Mortgage Loan.

     Securities Act:  The Securities Act of 1933, as amended.

     Security Agreement: The security agreement with respect to a
Cooperative Loan.

     Seller:  First Horizon Home Loan Corporation, a Kansas
corporation, and its successors and assigns, in its capacity as
seller of the Mortgage Loans pursuant to MLPA I.

     Senior Certificates:  As specified in the Preliminary
Statement.

                              -28-

<PAGE>

     Senior Final Distribution Date:  For each Certificate Group,
the Distribution Date on which the Class Certificate Balance of
each Class of related Senior Certificates has been reduced to
zero.

     Senior Optimal Principal Amount:  As to a Mortgage Pool and
with respect to each Distribution Date, an amount equal to the
sum of:

          (1)  the related Senior Percentage of the applicable
Non-Class I-A-PO Percentage or Non-Class II-A-PO Percentage of
Scheduled Payments of principal due on each Mortgage Loan in such
Mortgage Pool on the first day of the month in which the
Distribution Date occurs, as specified in the amortization
schedule at the time applicable thereto after adjustment for
previous principal prepayments and the principal portion of Debt
Service Reductions after the Bankruptcy Loss Coverage Amount has
been reduced to zero, but before any adjustment to such
amortization schedule by reason of any other bankruptcy or
similar proceeding or any moratorium or similar waiver or grace
period;

          (2)  the related Senior Prepayment Percentage of the
applicable Non-Class I-A-PO Percentage or Non-Class II-A-PO
Percentage of the Stated Principal Balance of each Mortgage Loan
in such Mortgage Pool which was the subject of a Principal
Prepayment in Full received by the Master Servicer during the
applicable Prepayment Period;

          (3)  the related Senior Prepayment Percentage of the
applicable Non-Class I-A-PO Percentage or Non-Class II-A-PO
Percentage of all partial Principal Prepayments in respect of
each Mortgage Loan in such Mortgage Pool received during the
applicable Prepayment Period;

          (4)  the lesser of:

          (a)  the related Senior Prepayment Percentage of the
               sum of (x) the applicable Non-Class I-A-PO
               Percentage or Non-Class II-A-PO Percentage of the
               Liquidation Proceeds allocable to principal on
               each Mortgage Loan in such Mortgage Pool which
               became a Liquidated Mortgage Loan during the
               related Prepayment Period, other than Mortgage
               Loans described in clause (y), and (y) the
               applicable Non-Class I-A-PO Percentage or Non-
               Class II-A-PO Percentage of the principal balance
               of each Mortgage Loan in such Mortgage Pool that
               was purchased by a private mortgage insurer during
               the related Prepayment Period as an alternative to
               paying a claim under the related Insurance Policy;
               and

        (b)(i) the related Senior Percentage of the sum of (x)
               the applicable Non-Class I-A-PO Percentage or Non-
               Class II-A-PO Percentage of the Stated Principal
               Balance of each Mortgage Loan in such Mortgage
               Pool which became a Liquidated Mortgage Loan
               during the related Prepayment Period, other than
               Mortgage Loans described in clause (y), and (y)
               the applicable Non-Class I-A-PO Percentage or Non-
               Class II-A-PO Percentage of the Stated Principal
               Balance of each Mortgage Loan in such Mortgage
               Pool that was purchased by a private mortgage
               insurer during the related Prepayment

                              -29-

<PAGE>

               Period as an alternative to paying a claim under
               the related Insurance Policy minus (ii) the
               applicable Non-Class I-A-PO Percentage or Non-
               Class II-A-PO Percentage of the related Senior
               Percentage of the principal portion of the related
               Senior Percentage of the principal portion of
               Excess Losses (other than Debt Service Reductions)
               for such Mortgage Pool during the related
               Prepayment Period; and

          (5)  the related Senior Prepayment Percentage of the
sum of (a) the applicable Non-Class I-A-PO Percentage or Non-
Class II-A-PO Percentage of the Stated Principal Balance of each
Mortgage Loan in such Mortgage Pool which was repurchased by the
seller in connection with such Distribution Date and (b) the
difference, if any, between the applicable Non-Class I-A-PO
Percentage or Non-Class II-A-PO Percentage of the Stated
Principal Balance of a Mortgage Loan in such Mortgage Pool that
has been replaced by the seller with a Substitute Mortgage Loan
pursuant to this Agreement in connection with such Distribution
Date and the Stated Principal Balance of such Substitute Mortgage
Loan.

     Senior Percentage:  On any Distribution Date for a
Certificate Group, the lesser of 100% and the percentage (carried
to six places rounded up) obtained by dividing the aggregate
Class Certificate Balances of all Classes of Senior Certificates
of such Certificate Group (other than the Class I-A-PO and Class
II-A-PO Certificates) immediately preceding such Distribution
Date by the Pool Principal Balance of the related Mortgage Pool
(excluding the aggregate of the applicable Non-Class I-A-PO
Percentage or Non-Class II-A-PO Percentage of the principal
balance of each Discount Mortgage Loan in Pool I or Pool II,
respectively, included therein) for the immediately preceding
Distribution Date.

     Senior Prepayment Percentage:  On any Distribution Date
occurring during the periods set forth below, and as to each
Certificate Group, the Senior Prepayment Percentages, described
below:

Period (Dates Inclusive)       Senior Prepayment Percentage
-----------------------------  --------------------------------
July 2004 - June 2009          100%

July 2009 - June 2010          the related Senior Percentage
                               plus 70% of the related
                               Subordinated Percentage

July 2010 - June 2011          the related Senior Percentage
                               plus 60% of the related
                               Subordinated Percentage

July 2011 - June 2012          the related Senior Percentage
                               plus 40% of the related
                               Subordinated Percentage

July 2012 - June 2013          the related Senior Percentage
                               plus 20% of the related
                               Subordinated Percentage

July 2013 and thereafter       the related Senior Percentage

     Notwithstanding the foregoing, if the Senior Percentage for
a Certificate Group on any Distribution Date exceeds the initial
Senior Percentage for that Certificate Group, the Senior
Prepayment Percentage for both Certificate Groups for such
Distribution Date will equal 100%.

                              -30-

<PAGE>

     In addition, no reduction of the Senior Prepayment
Percentage for a Certificate Group below the level in effect for
the most recent prior period specified in the table above shall
be effective on any Distribution Date unless, as of the last day
of the month preceding such Distribution Date:

          (1)  the aggregate Stated Principal Balance of Mortgage
Loans in any Mortgage Pool delinquent 60 days or more (including
for this purpose any Mortgage Loans in foreclosure or subject to
bankruptcy proceedings and Mortgage Loans with respect to which
the related Mortgaged Property, including REO Property, has been
acquired by the Trust) does not exceed 50% of the related Group
Subordinate Amount as of such date; and

          (2)  cumulative Realized Losses in any Mortgage Pool do
not exceed:

          (a)  30% of the related Original Group Subordinate
               Amount if such Distribution Date occurs between
               and including July 2009 and June 2010;

          (b)  35% of the related Original Group Subordinate
               Amount if such Distribution Date occurs between
               and including July 2010 and June 2011;

          (c)  40% of the related Original Group Subordinate
               Amount if such Distribution Date occurs between
               and including July 2011 and June 2012;

          (d)  45% of the related Original Group Subordinate
               Amount if such Distribution Date occurs between
               and including July 2012 and June 2013; and

          (e)  50% of the related Original Group Subordinate
               Amount if such Distribution Date occurs during or
               after July 2013.

     Senior Support Certificates:  As specified in the
Preliminary Statement.

     Servicing Advances:  All customary, reasonable and necessary
"out of pocket" costs and expenses incurred in the performance by
the Master Servicer of its servicing obligations, including, but
not limited to, the cost of (i) the preservation, restoration and
protection of a Mortgaged Property, (ii) any expenses
reimbursable to the Master Servicer pursuant to Section 3.11 and
any enforcement or judicial proceedings, including foreclosures,
(iii) the management and liquidation of any REO Property and (iv)
compliance with the obligations under Section 3.9.

     Servicing Agreement:  The servicing agreement dated as of
November 26, 2002, by and between First Tennessee Bank National
Association and its assigns, as owner, and First Tennessee
Mortgage Services, Inc., as servicer.

     Servicing Officer:  Any officer of the Master Servicer
involved in, or responsible for, the administration and servicing
of the Mortgage Loans whose name and facsimile signature appear
on a list of servicing officers furnished to the Trustee by the
Master Servicer on the Closing Date pursuant to this Agreement,
as such list may from time to time be amended.

                              -31-

<PAGE>

     Servicing Rights Transfer and Subservicing Agreement:  The
servicing rights transfer and subservicing agreement dated as of
November 26, 2002, by and between First Horizon Home Loan
Corporation, as transferor and subservicer, and First Tennessee
Mortgage Services, Inc., as transferee and servicer.

     Special Hazard Coverage Termination Date:  The date on which
the Special Hazard Loss Coverage Amount is reduced to zero.

     Special Hazard Loss:  Any Realized Loss suffered by a
Mortgaged Property on account of direct physical loss but not
including (i) any loss of a type covered by a hazard insurance
policy or a flood insurance policy required to be maintained with
respect to such Mortgaged Property pursuant to Section 3.9 to the
extent of the amount of such loss covered thereby, or (ii) any
loss caused by or resulting from:

          (1)  normal wear and tear;

          (2)  fraud, conversion or other dishonest act on the
part of the Trustee, the Master Servicer or any of their agents
or employees (without regard to any portion of the loss not
covered by any errors and omissions policy);

          (3)  errors in design, faulty workmanship or faulty
materials, unless the collapse of the property or a part thereof
ensues and then only for the ensuing loss;

          (4)  nuclear or chemical reaction or nuclear radiation
or radioactive or chemical contamination, all whether controlled
or uncontrolled, and whether such loss be direct or indirect,
proximate or remote or be in whole or in part caused by,
contributed to or aggravated by a peril covered by the definition
of the term "Special Hazard Loss";

          (5)  hostile or warlike action in time of peace and
war, including action in hindering, combating or defending
against an actual, impending or expected attack:

          (i)  by any government or sovereign power, de jure or
               de facto, or by any authority maintaining or using
               military, naval or air forces;

          (ii) by military, naval or air forces; or

         (iii) by an agent of any such government, power,
               authority or forces;

          (6)  any weapon of war employing nuclear fission,
fusion or other radioactive force, whether in time of peace or
war; or

          (7)  insurrection, rebellion, revolution, civil war,
usurped power or action taken by governmental authority in
hindering, combating or defending against such an occurrence,
seizure or destruction under quarantine or customs regulations,
confiscation by order of any government or public authority or
risks of contraband or illegal transportation or trade.

                              -32-

<PAGE>

     Special Hazard Loss Coverage Amount:  Upon the initial
issuance of the Certificates, $2,059,960.  As of any Distribution
Date, the Special Hazard Loss Coverage Amount will equal the
greater of

          (a)  1.00% (or if greater than 1.00%, the highest
percentage of Mortgage Loans by principal balance secured by
Mortgaged Properties in any single California zip code) of the
outstanding principal balance of all the Mortgage Loans as of the
related Determination Date; and

          (b)  twice the outstanding principal balance of the
Mortgage Loan which has the largest outstanding principal balance
as of the related Determination Date,

less, in each case, the aggregate amount of Special Hazard Losses
that would have been previously allocated to the Subordinated
Certificates in the absence of the Loss Allocation Limitation.
As of any Distribution Date on or after the Cross-over Date, the
Special Hazard Loss Coverage Amount will be zero.

     Special Hazard Mortgage Loan:  A Liquidated Mortgage Loan as
to which a Special Hazard Loss has occurred.

     S&P:  Standard & Poor's Corporation, a division of The
McGraw-Hill Companies, Inc. If S&P is designated as a Rating
Agency in the Preliminary Statement, for purposes of Section
11.5(b) the address for notices to S&P shall be Standard &
Poor's, 55 Water Street, 41st Floor, New York, New York 10041,
Attention: Mortgage Surveillance Monitoring, or such other
address as S&P may hereafter furnish to the Depositor and the
Master Servicer.

     Startup Day:  The Closing Date.

     Stated Principal Balance:  As to any Mortgage Loan and Due
Date, the unpaid principal balance of such Mortgage Loan as of
such Due Date as specified in the amortization schedule at the
time relating thereto (before any adjustment to such amortization
schedule by reason of any moratorium or similar waiver or grace
period) after giving effect to any previous partial Principal
Prepayments and Liquidation Proceeds allocable to principal
(other than with respect to any Liquidated Mortgage Loan) and to
the payment of principal due on such Due Date and irrespective of
any delinquency in payment by the related Mortgagor.

     Streamlined Documentation Mortgage Loan:  Any Mortgage Loan
originated pursuant to the Seller's Streamlined Loan
Documentation Program then in effect.

     Subordinated Certificates:  As specified in the Preliminary
Statement.

     Subordinated Certificate Writedown Amount:  As of any
Distribution Date, the amount by which (a) the sum of the Class
Certificate Balances of all of the Certificates, after giving
effect to the distribution of principal and the allocation of
Realized Losses in reduction of the Class Certificate Balances of
all of the Certificates on such Distribution Date, exceeds (b)
the aggregate Pool Principal Balance for both Mortgage Pools on
the first day of the month of such Distribution Date less any
Deficient Valuations occurring before the Bankruptcy Loss
Coverage Amount has been reduced to zero.

                              -33-

<PAGE>

     Subordinated Optimal Principal Amount:  With respect to each
Mortgage Pool and each Distribution Date, an amount equal to the
sum of the following (but in no event greater than the aggregate
Class Certificate Balances of the Subordinated Certificates
immediately prior to such Distribution Date):

          (1)  the related Subordinated Percentage of the
applicable Non-Class I-A-PO Percentage or Non-Class II-A-PO
Percentage of all Scheduled Payments of principal due on each
outstanding Mortgage Loan in the related Mortgage Pool on the
first day of the month in which the Distribution Date occurs, as
specified in the amortization schedule at the time applicable
thereto, after adjustment for previous principal prepayments and
the principal portion of Debt Service Reductions after the
Bankruptcy Loss Coverage Amount has been reduced to zero, but
before any adjustment to such amortization schedule by reason of
any other bankruptcy or similar proceeding or any moratorium or
similar waiver or grace period;

          (2)  the related Subordinated Prepayment Percentage of
the applicable Non-Class I-A-PO Percentage or Non-Class II-A-PO
Percentage of the Stated Principal Balance of each Mortgage Loan
in the related Mortgage Pool which was the subject of a Principal
Prepayment in Full received by the Master Servicer during the
related Prepayment Period;

          (3)  the related Subordinated Prepayment Percentage of
the applicable Non-Class I-A-PO Percentage or Non-Class II-A-PO
Percentage of all partial Principal Prepayments received in
respect of each Mortgage Loan in the related Mortgage Pool during
the related Prepayment Period, plus, on the Senior Final
Distribution Date, 100% of any related Senior Optimal Principal
Amount remaining undistributed on such date;

          (4)  the amount, if any, by which the sum of (a) the
applicable Non-Class I-A-PO Percentage or Non-Class II-A-PO
Percentage of the net Liquidation Proceeds allocable to principal
received during the related Prepayment Period in respect of each
Liquidated Mortgage Loan in the related Mortgage Pool, other than
Mortgage Loans described in clause (b), and (b) the applicable
Non-Class I-A-PO Percentage or Non-Class II-A-PO Percentage of
the principal balance of each Mortgage Loan in the related
Mortgage Pool that was purchased by a private mortgage insurer
during the related Prepayment Period as an alternative to paying
a claim under the related Insurance Policy exceeds (c) the sum of
the amounts distributable to the Senior Certificateholders (other
than the holders of the Class I-A-PO and Class II-A-PO
Certificates) under clause (4) of the definition of applicable
Senior Optimal Principal Amount on such Distribution Date; and

          (5)  the related Subordinated Prepayment Percentage of
the sum of (a) the applicable Non-Class I-A-PO Percentage or Non-
Class II-A-PO Percentage of the Stated Principal Balance of each
Mortgage Loan in the related Mortgage Pool which was repurchased
by the seller in connection with such Distribution Date and (b)
the difference, if any, between the applicable Non-Class I-A-PO
Percentage or Non-Class II-A-PO Percentage of the Stated
Principal Balance of a Mortgage Loan in the related Mortgage Pool
that has been replaced by the seller with a Substitute Mortgage
Loan pursuant to the Agreement in connection with such
Distribution Date and the Stated Principal Balance of each such
Substitute Mortgage Loan.

                              -34-

<PAGE>

     Subordinated Percentage:  For any Distribution Date and each
Certificate Group, 100% minus the related Senior Percentage.

     Subordinated Prepayment Percentage:  For any Distribution
Date, 100% minus the Senior Prepayment Percentage.

     Subservicer:  Any person to whom the Master Servicer has
contracted for the servicing of all or a portion of the Mortgage
Loans pursuant to Section 3.2 hereof.

     Substitute Mortgage Loan:  A Mortgage Loan substituted by
the Seller for a Deleted Mortgage Loan which must, on the date of
such substitution, as confirmed in a Request for Release,
substantially in the form of Exhibit L, (i) have a Stated
Principal Balance, after deduction of the principal portion of
the Scheduled Payment due in the month of substitution, not in
excess of, and not more than 10% less than the Stated Principal
Balance of the Deleted Mortgage Loan; (ii) have an Adjusted Net
Mortgage Rate not lower than the applicable Required Coupon,
provided that the Master Servicing Fee for the Substitute
Mortgage Loan shall be equal to or greater than that of the
Deleted Mortgage Loan; (iii) be accruing interest at a rate no
lower than and not more than 1% per annum higher than, that of
the Deleted Mortgage Loan; (iv) have a Loan-to-Value Ratio no
higher than that of the Deleted Mortgage Loan; (v) have a
remaining term to maturity no greater than (and not more than one
year less than that of) the Deleted Mortgage Loan; (vi) not be a
Cooperative Loan unless the Deleted Mortgage Loan was a
Cooperative Loan and (vii) comply with each representation and
warranty set forth in Section 2.3 hereof.

     Substitution Adjustment Amount:  The meaning ascribed to
such term pursuant to Section 2.3.

     Super Senior Certificates:  As specified in the Preliminary
Statement.

     Support Classes:  Not applicable.

     Targeted Balances:  Not applicable.

     Targeted Principal Classes:  Not applicable.

     Tax Matters Person:  The person designated as "tax matters
person" in the manner provided under Treasury regulation  1.860F-
4(d) and Treasury regulation  301.6231(a)(7)-1. Initially, the
Tax Matters Person shall be the Trustee.

     Tax Matters Person Certificate:  The Class I-A-R
Certificates with a Denomination of $0.01.

     Transfer:  Any direct or indirect transfer or sale of any
Ownership Interest in a Residual Certificate.

     Trust Fund:  The corpus of the trust created hereunder
consisting of (i) the Mortgage Loans and all interest and
principal received on or with respect thereto after the Cut-off
Date to the extent not applied in computing the Cut-off Date
Principal Balance thereof; (ii) all of the

                              -35-

<PAGE>

Depositor's rights as purchaser under MLPA II; (iii) the
Certificate Account and the Distribution Account and all amounts
deposited therein pursuant to the applicable provisions of this
Agreement; (iv) property that secured a Mortgage Loan and has
been acquired by foreclosure, deed-in-lieu of foreclosure or
otherwise; and (v) all proceeds of the conversion, voluntary or
involuntary, of any of the foregoing; provided that the Trust
Fund shall exclude the Retained Yield.

     Trustee:  The Bank of New York and its successors and, if a
successor trustee is appointed hereunder, such successor.

     Trustee Fee:  As to any Distribution Date and a Mortgage
Pool, an amount equal to one-twelfth of the Trustee Fee Rate
multiplied by the applicable Pool Principal Balance with respect
to such Distribution Date.

     Trustee Fee Rate:  With respect to each Mortgage Loan, the
per annum rate agreed upon in writing on or prior to the Closing
Date by the Trustee and the Depositor.

     Unanticipated Recovery:  As defined in Section 4.2(h).

     Undercollateralization Distribution:  As defined in Section
4.2(i).

     Undercollateralized Group: With respect to any Distribution
Date, the Senior Certificates of any Certificate Group (other
than the Principal Only Certificates) as to which the aggregate
Certificate Principal Balance thereof, after giving effect to
distributions pursuant to Section 4.2(a) on such date, is greater
than the applicable Non-Class I-A-PO Percentage or Non-Class II-A-
PO Percentage of the Pool Principal Balance of the related
Mortgage Pool for such Distribution Date.

     Underwriters:  As specified in the Preliminary Statement.

     Upper REMIC:  The segregated pool of assets consisting of
the Middle REMIC Interests.

     Voting Rights:  The portion of the voting rights of all of
the Certificates which is allocated to any Certificate.  As of
any date of determination, (a) 98% of all Voting Rights will be
allocated among all Holders of the Certificates, other than the
Class I-A-3 and Class I-A-R Certificates, in proportion to their
then outstanding Class Certificate Balances; (b) 1% of all Voting
Rights will be allocated to the Class I-A-3 Certificates; and (c)
1% of all Voting Rights will be allocated to the Class I-A-R
Certificates.

                           ARTICLE II
                  CONVEYANCE OF MORTGAGE LOANS;
                 REPRESENTATIONS AND WARRANTIES

          SECTION 2.1  Conveyance of Mortgage Loans.

     (a)  The Depositor, concurrently with the execution and
          delivery hereof, hereby sells, transfers, assigns, sets
          over and otherwise conveys to the Trustee for the
          benefit of the Certificateholders, without recourse,
          all the right, title and interest of the

                              -36-

<PAGE>

          Depositor in and to the Trust Fund together with (i)
          the Depositor's right to (A) require the Seller to cure
          any breach of a representation or warranty made by the
          Seller pursuant to MLPA I, which right has been
          assigned to Depositor pursuant to MLPA II, or (B)
          repurchase or substitute for any affected Mortgage Loan
          in accordance herewith and (ii) all right, title and
          interest of First Tennessee Bank National Association
          in, to and under the Servicing Agreement, which right
          has been assigned to Depositor pursuant to MLPA II.

     (b)  In connection with the transfer and assignment set
          forth in clause (a) above, the Depositor has delivered
          or caused to be delivered to the Trustee or the
          Custodian on its behalf (or, in the case of the Delay
          Delivery Mortgage Loans, will deliver or cause to be
          delivered to the Trustee or the Custodian on its behalf
          within thirty (30) days following the Closing Date) for
          the benefit of the Certificateholders the following
          documents or instruments with respect to each Mortgage
          Loan so assigned:

          (i)  (A) the original Mortgage Note endorsed by manual
               or facsimile signature in blank in the following
               form: "Pay to the order of ________________,
               without recourse," with all intervening
               endorsements showing a complete chain of
               endorsement from the originator to the Person
               endorsing the Mortgage Note (each such endorsement
               being sufficient to transfer all right, title and
               interest of the party so endorsing, as noteholder
               or assignee thereof, in and to that Mortgage
               Note); or

               (B) with respect to any Lost Mortgage Note, a lost
               note affidavit from the Seller stating that the
               original Mortgage Note was lost or destroyed,
               together with a copy of such Mortgage Note;
          (ii) except as provided below, the original recorded
               Mortgage or a copy of such Mortgage certified by
               the Seller as being a true and complete copy of
               the Mortgage;

         (iii) a duly executed assignment of the Mortgage in
               blank (which may be included in a blanket
               assignment or assignments), together with, except
               as provided below, all interim recorded
               assignments of such mortgage (each such
               assignment, when duly and validly completed, to be
               in recordable form and sufficient to effect the
               assignment of and transfer to the assignee
               thereof, under the Mortgage to which the
               assignment relates); provided that, if the related
               Mortgage has not been returned from the applicable
               public recording office, such assignment of the
               Mortgage may exclude the information to be
               provided by the recording office;

          (iv) the original or copies of each assumption,
               modification, written assurance or substitution
               agreement, if any;

          (v)  either the original or duplicate original title
               policy (including all riders thereto) with respect
               to the related Mortgaged Property, if available,
               provided that the title policy (including all
               riders thereto) will be delivered

                              -37-

<PAGE>

               as soon as it becomes available, and if the title
               policy is not available, and to the extent
               required pursuant to the second paragraph below or
               otherwise in connection with the rating of the
               Certificates, a written commitment or interim
               binder or preliminary report of the title issued
               by the title insurance or escrow company with
               respect to the Mortgaged Property, and

          (vi) in the case of a Cooperative Loan, the originals
               of the following documents or instruments:

               (A)  The Coop Shares, together with a stock power
                    in blank;

               (B)  The executed Security Agreement;

               (C)  The executed Proprietary Lease;

               (D)  The executed Recognition Agreement;

               (E)  The executed UCC-1 financing statement with
                    evidence of recording thereon which have been
                    filed in all places required to perfect the
                    Seller's interest in the Coop Shares and the
                    Proprietary Lease; and

               (F)  Executed UCC-3 financing statements or other
                    appropriate UCC financing statements required
                    by state law, evidencing a complete and
                    unbroken line from the mortgagee to the
                    Trustee with evidence of recording thereon
                    (or in a form suitable for recordation).

     In the event that in connection with any Mortgage Loan the
Depositor cannot deliver (a) the original recorded Mortgage or
(b) all interim recorded assignments satisfying the requirements
of clause (ii) or (iii) above, respectively, concurrently with
the execution and delivery hereof because such document or
documents have not been returned from the applicable public
recording office,  the Depositor shall promptly deliver or cause
to be delivered to the Trustee or the Custodian on its behalf
such original Mortgage or such interim assignment, as the case
may be, with evidence of recording indicated thereon upon receipt
thereof from the public recording office, or a copy thereof,
certified, if appropriate, by the relevant recording office, but
in no event shall any such delivery of the original Mortgage and
each such interim assignment or a copy thereof, certified, if
appropriate, by the relevant recording office, be made later than
one year following the Closing Date; provided, however, in the
event the Depositor is unable to deliver or cause to be delivered
by such date each Mortgage and each such interim assignment by
reason of the fact that any such documents have not been returned
by the appropriate recording office, or, in the case of each such
interim assignment, because the related Mortgage has not been
returned by the appropriate recording office, the Depositor shall
deliver or cause to be delivered such documents to the Trustee or
the Custodian on its behalf as promptly as possible upon receipt
thereof and, in any event, within 720 days following the Closing
Date. The Depositor shall forward or cause to be forwarded to the
Trustee or the Custodian on its behalf (a) from time to time
additional original documents evidencing an assumption or
modification of a Mortgage Loan and (b) any other documents
required to be delivered by the Depositor or the Master Servicer
to the Trustee. In the event that the original Mortgage is not
delivered and in

                              -38-

<PAGE>

connection with the payment in full of the related Mortgage Loan
and the public recording office requires the presentation of a
"lost instruments affidavit and indemnity" or any equivalent
document, because only a copy of the Mortgage can be delivered
with the instrument of satisfaction or reconveyance, the Master
Servicer shall execute and deliver or cause to be executed and
delivered such a document to the public recording office. In the
case where a public recording office retains the original
recorded Mortgage or in the case where a Mortgage is lost after
recordation in a public recording office, the Depositor shall
deliver or cause to be delivered to the Trustee or the Custodian
on its behalf a copy of such Mortgage certified by such public
recording office to be a true and complete copy of the original
recorded Mortgage.

     In addition, in the event that in connection with any
Mortgage Loan the Depositor cannot deliver or cause to be
delivered the original or duplicate original lender's title
policy (together with all riders thereto), satisfying the
requirements of clause (v) above, concurrently with the execution
and delivery hereof because the related Mortgage has not been
returned from the applicable public recording office, the
Depositor shall promptly deliver or cause to be delivered to the
Trustee or the Custodian on its behalf such original or duplicate
original lender's title policy (together with all riders thereto)
upon receipt thereof from the applicable title insurer, but in no
event shall any such delivery of the original or duplicate
original lender's title policy be made later than one year
following the Closing Date; provided, however, in the event the
Depositor is unable to deliver or cause to be delivered by such
date the original or duplicate original lender's title policy
(together with all riders thereto) because the related Mortgage
has not been returned by the appropriate recording office, the
Depositor shall deliver or cause to be delivered such documents
to the Trustee or the Custodian on its behalf as promptly as
possible upon receipt thereof and, in any event, within 720 days
following the Closing Date.  Notwithstanding the preceding, in
connection with any Mortgage Loan for which either the original
or duplicate original title policy has not been delivered to the
Trust, if at any time during the term of this Agreement the
parent company of the Seller does not have a long term senior
debt rating of A- or higher from S&P and A- or higher from Fitch
(if rated by Fitch), then the Depositor shall within 30 days
deliver or cause to be delivered to the Trustee or the Custodian
on its behalf (if it has not previously done so) a written
commitment or interim binder or preliminary report of the title
issued by the title insurance or escrow company with respect to
the Mortgaged Property.

     Subject to the immediately following sentence, as promptly
as practicable subsequent to such transfer and assignment, and in
any event, within thirty (30) days thereafter, the Master
Servicer shall (i) complete each assignment of Mortgage, as
follows: "First Horizon Mortgage Pass-Through Certificates,
Series 2004-5, The Bank of New York, as trustee for the holders
of the Certificates", (ii) cause such assignment to be in proper
form for recording in the appropriate public office for real
property records and (iii) cause to be delivered for recording in
the appropriate public office for real property records the
assignments of the Mortgages to the Trustee, except that, with
respect to any assignments of Mortgage as to which the Master
Servicer has not received the information required to prepare
such assignment in recordable form, the Master Servicer's
obligation to do so and to deliver the same for such recording
shall be as soon as practicable after receipt of such information
and in any event within thirty (30) days after receipt thereof.
Notwithstanding the foregoing, the Master Servicer need not cause
to be recorded any assignment which relates to a Mortgage Loan in
any state other than the Required Recordation States.

                              -39-

<PAGE>

     In the case of Mortgage Loans that have been prepaid in full
as of the Closing Date, the Depositor, in lieu of delivering the
above documents to the Trustee or the Custodian on its behalf,
will deposit in the Certificate Account the portion of such
payment that is required to be deposited in the Certificate
Account pursuant to Section 3.8 hereof.

     Notwithstanding anything to the contrary in this Agreement,
within thirty days after the Closing Date, the Depositor shall
either (i) deliver or cause to be delivered to the Trustee or the
Custodian on its behalf the Mortgage File as required pursuant to
this Section 2.1 for each Delay Delivery Mortgage Loan or (ii)
(A) substitute or cause to be substituted a Substitute Mortgage
Loan for the Delay Delivery Mortgage Loan or (B) repurchase or
cause to be repurchased the Delay Delivery Mortgage Loan, which
substitution or repurchase shall be accomplished in the manner
and subject to the conditions set forth in Section 2.3 (treating
each Delay Delivery Mortgage Loan as a Deleted Mortgage Loan for
purposes of such Section 2.3), provided, however, that if the
Depositor fails to deliver a Mortgage File for any Delay Delivery
Mortgage Loan within the thirty-day period provided in the prior
sentence, the Depositor shall use its best reasonable efforts to
effect or cause to be effected a substitution, rather than a
repurchase of, such Deleted Mortgage Loan and provided further
that the cure period provided for in Section 2.2 or in Section
2.3 shall not apply to the initial delivery of the Mortgage File
for such Delay Delivery Mortgage Loan, but rather the Depositor
shall have five (5) Business Days to cure or cause to be cured
such failure to deliver. At the end of such thirty-day period,
the Trustee or the Custodian, on its behalf shall send a Delay
Delivery Certification for the Delay Delivery Mortgage Loans
delivered during such thirty-day period in accordance with the
provisions of Section 2.2.  Notwithstanding anything to the
contrary contained in this Agreement, none of the Mortgage Loans
in the Trust Fund is or will be Delay Delivery Mortgage Loans.

          SECTION 2.2  Acceptance by Trustee of the Mortgage
     Loans.

     The Trustee or the Custodian, on behalf of the Trustee,
acknowledges receipt of the documents identified in the Initial
Certification in the form annexed hereto as Exhibit E and
declares that it or the Custodian holds and will hold such
documents and the other documents delivered to it or the
Custodian, as applicable, constituting the Mortgage Files, and
that it or the Custodian, as applicable, holds or will hold such
other assets as are included in the Trust Fund, in trust for the
exclusive use and benefit of all present and future
Certificateholders. The Trustee acknowledges that the Custodian
will maintain possession of the Mortgage Notes in the State of
Illinois, unless otherwise permitted by the Rating Agencies.

     The Trustee agrees to execute and deliver or to cause the
Custodian to execute and deliver on the Closing Date to the
Depositor and the Master Servicer an Initial Certification in the
form annexed hereto as Exhibit E.  Based on its or the
Custodian's review and examination, and only as to the documents
identified in such Initial Certification, the Custodian, on
behalf of the Trustee, acknowledges that such documents appear
regular on their face and relate to such Mortgage Loan. Neither
the Trustee nor the Custodian shall be under any duty or
obligation to inspect, review or examine said documents,
instruments, certificates or other papers to determine that the
same are genuine, enforceable or appropriate for the represented
purpose or that they have actually been recorded in the real
estate records or that they are other than what they purport to
be on their face.

                              -40-

<PAGE>

     On or about the thirtieth (30th) day after the Closing Date,
the Trustee shall deliver or shall cause the Custodian to deliver
to the Depositor and the Master Servicer a Delay Delivery
Certification in the form annexed hereto as Exhibit F, with any
applicable exceptions noted thereon.  Notwithstanding anything to
the contrary contained in this Agreement, none of the Mortgage
Loans in the Trust Fund is or will be Delay Delivery Mortgage
Loans.

     Not later than 90 days after the Closing Date, the Trustee
shall deliver or shall cause the Custodian to deliver to the
Depositor and the Master Servicer a Final Certification in the
form annexed hereto as Exhibit G, with any applicable exceptions
noted thereon.

     If, in the course of such review, the Trustee or the
Custodian, on behalf of the Trustee finds any document
constituting a part of a Mortgage File which does not meet the
requirements of Section 2.1, the Trustee shall list or shall
cause the Custodian to list such as an exception in the Final
Certification; provided, however that neither the Trustee nor the
Custodian shall make any determination as to whether (i) any
endorsement is sufficient to transfer all right, title and
interest of the party so endorsing, as noteholder or assignee
thereof, in and to that Mortgage Note or (ii) any assignment is
in recordable form or is sufficient to effect the assignment of
and transfer to the assignee thereof under the mortgage to which
the assignment relates. The Seller shall promptly correct or cure
such defect within 90 days from the date it was so notified of
such defect and, if the Seller does not correct or cure such
defect within such period, the Seller shall either (a) substitute
for the related Mortgage Loan a Substitute Mortgage Loan, which
substitution shall be accomplished in the manner and subject to
the conditions set forth in Section 2.3, or (b) purchase such
Mortgage Loan from the Trustee within 90 days from the date the
Seller was notified of such defect in writing at the Purchase
Price of such Mortgage Loan; provided, however, that in no event
shall such substitution or purchase occur more than 540 days from
the Closing Date, except that if the substitution or purchase of
a Mortgage Loan pursuant to this provision is required by reason
of a delay in delivery of any documents by the appropriate
recording office, and there is a dispute between either the
Master Servicer or the Seller and the Trustee over the location
or status of the recorded document, then such substitution or
purchase shall occur within 720 days from the Closing Date. The
Trustee shall deliver or shall cause the Custodian to deliver
written notice to each Rating Agency within 270 days from the
Closing Date indicating each Mortgage Loan (a) which has not been
returned by the appropriate recording office or (b) as to which
there is a dispute as to location or status of such Mortgage
Loan. Such notice shall be delivered every 90 days thereafter
until the related Mortgage Loan is returned to the Trustee or the
Custodian on its behalf. Any such substitution pursuant to (a)
above or purchase pursuant to (b) above shall not be effected
prior to the delivery to the Trustee of the Opinion of Counsel
required by Section 2.5 hereof, if any, and any substitution
pursuant to (a) above shall not be effected prior to the
additional delivery to the Trustee of a Request for Release
substantially in the form of Exhibit L. No substitution is
permitted to be made in any calendar month after the
Determination Date for such month. The Purchase Price for any
such Mortgage Loan shall be deposited by the Seller in the
Certificate Account on or prior to the Distribution Account
Deposit Date for the Distribution Date in the month following the
month of repurchase and, upon receipt of such deposit and
certification with respect thereto in the form of Exhibit M
hereto, the Trustee shall  cause the Custodian to release the
related Mortgage File to the Seller and shall execute and deliver
at the Seller's request such instruments of transfer or
assignment prepared by the Seller, in each case without recourse,
as shall be necessary to vest in the Seller, or a designee, the
Trustee's interest in any Mortgage Loan released pursuant hereto.

                              -41-

<PAGE>

     The Trustee shall retain or shall cause the Custodian to
retain possession and custody of each Mortgage File in accordance
with and subject to the terms and conditions set forth herein.
The Master Servicer shall promptly deliver to the Trustee or the
Custodian on its behalf, upon the execution or receipt thereof,
the originals of such other documents or instruments constituting
the Mortgage File as come into the possession of the Master
Servicer from time to time.

     It is understood and agreed that the obligation of the
Seller to substitute for or to purchase any Mortgage Loan which
does not meet the requirements of Section 2.1 above shall
constitute the sole remedy respecting such defect available to
the Trustee, the Depositor and any Certificateholder against the
Seller.

     The mortgage loans permitted by the terms of this Agreement
to be included in the Trust Fund are limited to (i) the Mortgage
Loans (which the Depositor acquired pursuant to MLPA II, which
contains, among other representations and warranties, a
representation and warranty of the Seller that no Mortgage Loan
is a "high cost loan" as defined by the specific applicable
predatory and abusive lending laws, which includes the term "High-
Cost Home Loan" as defined in the New Jersey Home Ownership Act,
effective November 27, 2003, and the New Mexico Home Loan
Protection Act, effective as of April 11, 2003 (collectively, the
"Acts")), and (ii) Substitute Mortgage Loans (which, by
definition as set forth in this Agreement and referred to in MLPA
I, are required to conform to, among other representations and
warranties, a representation and warranty of the Seller set forth
in MLPA I that no Substitute Mortgage Loan is a "high cost loan"
as defined by the specific applicable predatory and abusive
lending laws, which includes the term "High-Cost Home Loan" as
defined in the Acts).  It is therefore understood and agreed by
the parties hereto that it is not intended that any Mortgage Loan
be included in the Trust Fund that is a "High-Cost Home Loan" as
defined in the Acts.

          SECTION 2.3  Representations and Warranties of the
     Master Servicer;  Covenants of the Seller.

     (a)  The Master Servicer hereby makes the representations
          and warranties set forth in Schedule II hereto and by
          this reference incorporated herein, to the Depositor
          and the Trustee, as of the Closing Date, or if so
          specified therein, as of the Cut-off Date.

     (b)  Upon discovery by any of the parties hereto of a breach
          of a representation or warranty made pursuant to
          Schedule B to MLPA I that materially and adversely
          affects the interests of the Certificateholders in any
          Mortgage Loan, the party discovering such breach shall
          give prompt notice thereof to the other parties. The
          Seller hereby covenants that within 90 days of the
          earlier of its discovery or its receipt of written
          notice from any party of a breach of any representation
          or warranty made pursuant to Schedule B to MLPA I which
          materially and adversely affects the interests of the
          Certificateholders in any Mortgage Loan, it shall cure
          such breach in all material respects, and if such
          breach is not so cured, shall, (i) if such 90-day
          period expires prior to the second anniversary of the
          Closing Date, remove such Mortgage Loan (a "Deleted
          Mortgage Loan") from the Trust Fund and substitute in
          its place a Substitute Mortgage Loan, in the manner and
          subject to the conditions set forth in this Section; or
          (ii) repurchase the affected Mortgage

                              -42-

<PAGE>

          Loan or Mortgage Loans from the Trustee at the Purchase
          Price in the manner set forth below; provided, however,
          that any such substitution pursuant to (i) above shall
          not be effected prior to the delivery to the Trustee of
          the Opinion of Counsel required by Section 2.5 hereof,
          if any, and any such substitution pursuant to (i) above
          shall not be effected prior to the additional delivery
          to the Trustee or the Custodian on its behalf of a
          Request for Release substantially in the form of
          Exhibit M and the Mortgage File for any such Substitute
          Mortgage Loan. The Seller shall promptly reimburse the
          Master Servicer and the Trustee for any expenses
          reasonably incurred by the Master Servicer or the
          Trustee in respect of enforcing the remedies for such
          breach.  With respect to the representations and
          warranties described in this Section which are made to
          the best of the Seller's knowledge, if it is discovered
          by either the Depositor, the Seller or the Trustee that
          the substance of such representation and warranty is
          inaccurate and such inaccuracy materially and adversely
          affects the value of the related Mortgage Loan or the
          interests of the Certificateholders therein,
          notwithstanding the Seller's lack of knowledge with
          respect to the substance of such representation or
          warranty, such inaccuracy shall be deemed a breach of
          the applicable representation or warranty.

     With respect to any Substitute Mortgage Loan or Loans, the
Seller shall deliver to the Trustee or the Custodian on its
behalf for the benefit of the Certificateholders the Mortgage
Note, the Mortgage, the related assignment of the Mortgage, and
such other documents and agreements as are required by Section
2.1, with the Mortgage Note endorsed and the Mortgage assigned as
required by Section 2.1. No substitution is permitted to be made
in any calendar month after the Determination Date for such
month. Scheduled Payments due with respect to Substitute Mortgage
Loans in the month of substitution shall not be part of the Trust
Fund and will be retained by the Seller on the next succeeding
Distribution Date. For the month of substitution, distributions
to Certificateholders will include the monthly payment due on any
Deleted Mortgage Loan for such month and thereafter the Seller
shall be entitled to retain all amounts received in respect of
such Deleted Mortgage Loan. The Master Servicer shall amend the
Mortgage Loan Schedule for the benefit of the Certificateholders
to reflect the removal of such Deleted Mortgage Loan and the
substitution of the Substitute Mortgage Loan or Loans and the
Master Servicer shall deliver the amended Mortgage Loan Schedule
to the Trustee.  Upon such substitution, the Substitute Mortgage
Loan or Loans shall be subject to the terms of this Agreement in
all respects, and the Seller shall be deemed to have made with
respect to such Substitute Mortgage Loan or Loans, as of the date
of substitution, the representations and warranties made pursuant
to Schedule B to MLPA I with respect to such Mortgage Loan. Upon
any such substitution and the deposit to the Certificate Account
of the amount required to be deposited therein in connection with
such substitution as described in the following paragraph, the
Trustee shall release or shall cause the Custodian to release the
Mortgage File held for the benefit of the Certificateholders
relating to such Deleted Mortgage Loan to the Seller and shall
execute and deliver at the Seller's direction such instruments of
transfer or assignment prepared by the Seller, in each case
without recourse, as shall be necessary to vest title in the
Seller, or its designee, the Trustee's interest in any Deleted
Mortgage Loan substituted for pursuant to this Section 2.3.

                              -43-

<PAGE>

     For any month in which the Seller substitutes one or more
Substitute Mortgage Loans for one or more Deleted Mortgage Loans,
the Master Servicer will determine the amount (if any) by which
the aggregate principal balance of all such Substitute Mortgage
Loans as of the date of substitution is less than the aggregate
Stated Principal Balance of all such Deleted Mortgage Loans
(after application of the scheduled principal portion of the
monthly payments due in the month of substitution). The amount of
such shortage (the "Substitution Adjustment Amount") plus an
amount equal to the aggregate of any unreimbursed Advances with
respect to such Deleted Mortgage Loans shall be deposited in the
Certificate Account by the Seller on or before the Distribution
Account Deposit Date for the Distribution Date in the month
succeeding the calendar month during which the related Mortgage
Loan became required to be purchased or replaced hereunder.

     In the event that the Seller shall have repurchased a
Mortgage Loan, the Purchase Price therefor and any Additional
Amounts shall be deposited in the Certificate Account pursuant to
Section 3.5 on or before the Distribution Account Deposit Date
for the Distribution Date in the month following the month during
which the Seller became obligated hereunder to repurchase or
replace such Mortgage Loan and upon such deposit of the Purchase
Price, the delivery of the Opinion of Counsel required by Section
2.5 and receipt of a Request for Release in the form of Exhibit M
hereto, the Trustee shall release or shall cause the Custodian to
release the related Mortgage File held for the benefit of the
Certificateholders to such Person, and the Trustee shall execute
and deliver or shall cause the Custodian to execute and deliver
at such Person's direction such instruments of transfer or
assignment prepared by such Person, in each case without
recourse, as shall be necessary to transfer title from the
Trustee. It is understood and agreed that the obligation under
this Agreement of the Seller to cure, repurchase or replace any
Mortgage Loan as to which a breach has occurred and is continuing
shall constitute the sole remedy against the Seller respecting
such breach available to Certificateholders, the Depositor or the
Trustee on their behalf.

     After giving effect to the sale of the Certificates by the
Depositor to the Underwriters, and thereafter, so long as any
Certificates remain outstanding, the Seller, its affiliates and
agents, collectively, shall not beneficially own Certificates the
aggregate fair value of which would represent 90% or more of the
beneficial interests in the Trust Fund.

     The representations and warranties made pursuant to this
Section 2.3 shall survive delivery of the respective Mortgage
Files to the Trustee or the Custodian for the benefit of the
Certificateholders.

          SECTION 2.4  Representations and Warranties of the
     Depositor as to the Mortgage Loans.

     The Depositor hereby represents and warrants to the Trustee
with respect to each Mortgage Loan as of the date hereof or such
other date set forth herein that as of the Closing Date, and
following the transfer of the Mortgage Loans to it pursuant to
MLPA II and immediately prior to the conveyance of the Mortgage
Loans by it to the Trustee pursuant to Section 2.1(a) hereof, the
Depositor had good title to the Mortgage Loans and the Mortgage
Notes were subject to no offsets, defenses or counterclaims.

                              -44-

<PAGE>

     It is understood and agreed that the representations and
warranties set forth in this Section 2.4 shall survive delivery
of the Mortgage Files to the Trustee. Upon discovery by the
Depositor or the Trustee of a breach of any of the foregoing
representations and warranties set forth in this Section 2.4
(referred to herein as a "breach"), which breach materially and
adversely affects the interest of the Certificateholders, the
party discovering such breach shall give prompt written notice to
the others and to each Rating Agency.

          SECTION 2.5  Delivery of Opinion of Counsel in
     Connection with Substitutions.

     (a)  Notwithstanding any contrary provision of this
          Agreement, no substitution pursuant to Section 2.2 or
          Section 2.3 shall be made more than 90 days after the
          Closing Date unless the Depositor delivers to the
          Trustee an Opinion of Counsel, which Opinion of Counsel
          shall not be at the expense of either the Trustee, the
          Trust Fund, addressed to the Trustee, to the effect
          that such substitution will not (i) result in the
          imposition of the tax on "prohibited transactions" on
          the Trust Fund or contributions after the Startup Date,
          as defined in Sections 860F(a)(2) and 860G(d) of the
          Code, respectively, or (ii) cause any REMIC created
          hereunder to fail to qualify as a REMIC at any time
          that any Certificates are outstanding.

     (b)  Upon discovery by the Depositor, the Master Servicer or
          the Trustee that any Mortgage Loan does not constitute
          a "qualified mortgage" within the meaning of Section
          860G(a)(3) of the Code, the party discovering such fact
          shall promptly (and in any event within five (5)
          Business Days of discovery) give written notice thereof
          to the other parties. In connection therewith, the
          Trustee shall require the Depositor to cause the
          Seller, pursuant to MLPA I and at the Seller's option,
          to either (i) substitute, if the conditions in Section
          2.3(b) with respect to substitutions are satisfied, a
          Substitute Mortgage Loan for the affected Mortgage
          Loan, or (ii) repurchase the affected Mortgage Loan
          within 90 days of such discovery in the same manner as
          it would a Mortgage Loan for a breach of representation
          or warranty made pursuant to Section 2.3. The Trustee
          shall reconvey or shall cause the Custodian to reconvey
          to the Seller the Mortgage Loan to be released pursuant
          hereto in the same manner, and on the same terms and
          conditions, as it would a Mortgage Loan repurchased for
          breach of a representation or warranty contained in
          Section 2.3.

          SECTION 2.6  Execution and Delivery of Certificates.

     The Trustee acknowledges the transfer and assignment to it
of the Trust Fund and, concurrently with such transfer and
assignment, has executed and delivered to or upon the order of
the Depositor, the Certificates in authorized denominations
evidencing directly or indirectly the entire ownership of the
Trust Fund. The Trustee agrees to hold the Trust Fund and
exercise the rights referred to above for the benefit of all
present and future Holders of the Certificates and to perform the
duties set forth in this Agreement to the best of its ability, to
the end that the interests of the Holders of the Certificates may
be adequately and effectively protected.

                              -45-

<PAGE>

          SECTION 2.7  REMIC Matters.

     The Preliminary Statement sets forth the "latest possible
maturity date" for federal income tax purposes of all REMIC
regular interests created hereby.

     The assets of the Lower REMIC shall be as set forth in the
definition thereof.  Each interest identified in the first table
below by a designation beginning with "L" shall be a "regular
interest" in the Lower REMIC and a Lower REMIC Interest, and the
RL Interests shall be the sole class of residual interest in the
Lower REMIC.  The Lower REMIC Interests shall be uncertificated
and shall be held by the Trustee as assets of the Middle REMIC.

     The assets of the Middle REMIC shall be as set forth in the
definition thereof.  Each interest identified in the second table
below by a designation beginning with "M" shall be a "regular
interest" in the Middle REMIC and a Middle REMIC Interest, and
the RM Interests shall be the sole class of residual interest in
the Middle REMIC.  The Middle REMIC Interests shall be
uncertificated and shall be held by the Trustee as assets of the
Upper REMIC.

     The assets of the Upper REMIC shall be as set forth in the
definition thereof.  The Regular Certificates shall represent
"regular interests" in the Upper REMIC.  The RU Interest shall be
the sole class of residual interest in the Upper REMIC.  The
Class I-A-R Certificate shall represent ownership of the RL
Interest, RM Interest and RU Interest.

     The "Startup Day" for purposes of the REMIC Provisions for
each REMIC hereunder shall be the Closing Date. The Tax Matters
Person with respect to each REMIC hereunder shall be the Trustee
and the Trustee shall hold the Tax Matters Person Certificate.
Each REMIC's taxable year shall be the calendar year and its
accounts shall be maintained using the accrual method.

                                             Corresponding Class
                                               of Middle REMIC
Lower REMIC                       REMIC           Interests
Interest or                     Interest    ---------------------
 Residual    Interest Balance     Rate       Interest
-----------  -----------------  --------    --------- -----------
L-I-A-1      $      40,103.47     6.50%        (1)      L-I-A-1
L-I-A-2      $       4,455.94     6.50%        (1)      L-I-A-2
L-I-PO       $   1,005,909.76      0%          N/A      L-I-PO
L-I-A-ZZZ    $ 170,329,581.62     6.50%        (1)      L-I-A-ZZZ
RL           $           0.00      N/A         N/A      RL
L-II-A-1     $       8,100.18     6.25%        (1)      L-II-A-1
L-II-A-2     $         900.02     6.25%        (1)      L-II-A-2

(1)  The Lower REMIC Interest L-I-A-1, Lower REMIC Interest
L-I-A-2 and Lower REMIC Interest L-I-A-ZZZ shall be Corresponding
Classes to these classes of Middle REMIC Interests:  M-I-A-1, M-I-
A-2, M-I-A-4, M-I-A-RU, M-B-1, M-B-2, M-B-3, M-B-4, M-B-5 and  M-
B-6  (provided that with respect to M-B-1, M-B-2, M-B-3, M-B-4, M-
B-5 and  M-B-6, such Lower REMIC Interests shall only correspond
to the portion supported by Pool I).  Lower REMIC Interest L-I-PO
shall be a Corresponding Class to M-I-PO.  The Lower REMIC
Interest L-II-A-1, Lower REMIC L-II-A-2 and Lower REMIC Interest
L-II-A-ZZZ shall be Corresponding Classes to these classes of
Middle REMIC Interests:  M-II-A-1, M-B-1, M-B-2, M-B-3, M-B-4, M-
B-5 and M-B-6 (provided that with respect to M-B-1, M-B-2, M-B-3,
M-B-4, M-B-5 and  M-B-6, such Lower REMIC Interests shall only
correspond to the portion supported by Pool II).  Lower REMIC
Interest L-II-PO shall be a Corresponding Class to M-II-PO.

                              -46-

<PAGE>

"L1 Interests" refers to the L-I-A-1 Lower REMIC Interest and the
L-II-A-1 Lower REMIC Interests.  "L2 Interests" refers to the L-I-
A-2 Lower REMIC Interest and the L-II-A-2 Lower REMIC Interest.
"LZZZ Interests" refers to L-I-A-ZZZ Lower REMIC Interest and L-
II-A-ZZZ Lower REMIC Interest.  "LPO Interests" refer to the L-I-
PO Lower REMIC Interest and the L-II-PO Lower REMIC Interest.
Each L1 Interest shall have a principal balance initially equal
to 0.9% of the Group Subordinate Amount of its corresponding
Mortgage Pool.  Each L2 Interest shall have a principal balance
initially equal to 0.1% of the Group Subordinate Amount of its
corresponding Mortgage Pool.  The initial principal balance of
each LZZZ Interest shall equal the excess of the Pool Principal
Balance of its corresponding Mortgage Pool over the sum of (i)
the initial principal balances of the L1 Interests and L2
Interests corresponding to such Mortgage Pool, and (ii) the
portion of the LPO Interest attributable to the Discount Mortgage
Loans in the Mortgage Pool corresponding to such LZZZ Interest.

     Unless a Cross-over Situation (as defined below) exists,
principal and Realized Losses arising with respect to each
Mortgage Pool shall be allocated first to cause the L1 and L2
Interests corresponding to such Mortgage Pool to equal 0.9% and
0.1% of the Group Subordinate Amount of such Mortgage Pool as of
such Distribution Date (after distributions of principal and
allocation of Realized Losses are made) and all excess principal
and Realized Losses shall be allocated to the LZZZ Interest
corresponding to such Mortgage Pool.  A L1, L2 or LZZZ Interest
that is allocated principal on any Distribution Date shall
receive such principal, and have its principal balance reduced by
the amount of such principal, on such Distribution Date.
Similarly, a L1, L2 or LZZZ Interest that is allocated a Realized
Loss on any Distribution Date shall have its principal balance
reduced by the amount of such Realized Loss on such Distribution
Date.

     A "Cross-over Situation" exists if on any Distribution Date
(after taking into account distributions of principal and
allocations of Realized Losses on such Distribution Date) the L1
and L2 Interests corresponding to any Mortgage Pool are in the
aggregate less than 1% of the Group Subordinate Amount of the
corresponding Mortgage Pool.  If a Cross-over Situation exists on
any Distribution Date, and the weighted average interest rate of
the outstanding L1 and L2 Interests is less than the Pass-Through
Rate for any Class of Subordinate Certificates for the following
Distribution Date, a Principal Reallocation Payment (as defined
below) shall be made proportionately to the outstanding L1
Interests prior to any other distributions of principal from each
such Mortgage Pool so that the Calculation Rate equals the Pass-
Through Rate for each Class of Subordinate Certificates.  If a
Cross-over Situation exists on any Distribution Date, and the
weighted average rate of the outstanding L1 and L2 Interests is
greater than the Pass-Through Rate for any Class of Subordinate
Certificates for the following Distribution Date, a Principal
Reallocation Payment shall be made proportionately to the
outstanding L2 Interests prior to any other distributions of
principal from each such Mortgage Pool so that the Calculation
Rate equals the Pass-Through Rate for each Class of Subordinate
Certificates.  A "Principal Reallocation Payment" is a
distribution of the minimum amount of principal that causes the
Calculation Rate (as defined below) with respect to the
outstanding L1 and L2 Interests to equal the Pass-Through Rate
for each Class of Subordinate Certificates.  The "Calculation
Rate" shall equal the product of (i) 10 and (ii) the weighted
average interest rate of the outstanding L1 and L2 Interests,
treating each L1 Interest as capped at zero or reduced by a fixed
percentage of 100% of the interest accruing on such class.
Principal Reallocation Payments shall be made from principal
received on the Mortgage Loans from a Mortgage Pool and shall
also consist of a proportionate

                              -47-

<PAGE>

allocation of Realized Losses from the Mortgage Loans of a
Mortgage Pool.  For purposes of making Principal Reallocation
Payments, to the extent that the principal received during the
applicable collection period from the related Mortgage Pool and
related Realized Losses are insufficient to make the necessary
reduction of principal, then interest shall accrue on the LZZZ
Interest (and be added to its principal balance) of the related
Mortgage Pool to allow the necessary Principal Reallocation
Payment to be made.  The Calculation Rate is designed to always
equal the Pass-Through Rate of each Class of Subordinated
Certificates.

     If a Cross-over Situation exists, the aggregate principal
balances of the outstanding L1 and L2 Interests of all of the
Mortgage Pools shall not be reduced below one percent of the
aggregate Pool Principal Balance of all of the Mortgage Pools for
the following Distribution Date in excess of the Senior
Certificates as of the related Distribution Date (after taking
into account distributions of principal and allocations of
Realized Losses on such Distribution Date).  To the extent this
limitation prevents the distribution of principal to the L1 and
L2 Interests of a Mortgage Pool and the related LZZZ Interest has
already been reduced to zero, such excess principal from such
Mortgage Pool shall be paid proportionately to the LZZZ Interests
of the Mortgage Pool whose aggregate L1 and L2 Interests are less
than one percent of the Group Subordinate Amount.  Any such
shortfall as a result of the Mortgage Pool receiving the extra
payment having a Designated Mortgage Pool Rate (as defined below)
lower than the Designated Mortgage Pool Rate of the Mortgage Pool
from which the payment was reallocated shall be treated as a
Realized Loss and if excess arises as result of the Mortgage Pool
receiving the extra payment having a Designated Mortgage Pool
Rate higher than the Mortgage Pool from which the payment was
reallocated it shall reimburse the Middle REMIC for prior
Realized Losses.
The Class L-I-PO Interest shall be entitled to receive the Class
PO Principal Distribution Amount for Pool I.

The Class L-II-PO Interest shall be entitled to receive the Class
PO Principal Distribution Amount for Pool II.

                              -48-

<PAGE>

  Middle                         Middle      Corresponding Class or
   REMIC                         REMIC              Interest
Interest or    Middle REMIC     Interest  ----------------------------
 Residual    Interest Balance     Rate      Interest       Principal
-----------  ----------------  ---------  ------------   -------------
M-I-A-1      $122,325,000.00     6.00%        I-A-1          I-A-1
M-I-A-2      $ 40,775,000.00     8.00%    I-A-2, I-A-3       I-A-2
M-I-A-4      $  2,818,100.00     6.50%        I-A-4          I-A-4
M-I-PO       $  1,005,909.76        0%         N/A           I-A-PO
M-I-A-RU     $        100.00     6.50%     RU Interest    RU Interest
M-II-A-1     $ 33,229,000.00     6.25%       II-A-1          II-A-1
M-II-A-PO    $    486,965.22        0%         N/A          II-A-PO
M-B-1        $  3,501,000.00      (1)          B-1            B-1
M-B-2        $    824,000.00      (1)          B-2            B-2
M-B-3        $    412,000.00      (1)          B-3            B-3
M-B-4        $    309,000.00      (1)          B-4            B-4
M-B-5        $    103,000.00      (1)          B-5            B-5
M-B-6        $    206,961.18      (1)          B-6            B-6
RM           $          0.00      N/A          N/A            N/A

(1)  The Middle REMIC Interest Rate for the Middle REMIC Interest
M-B-1, Middle REMIC Interest M-B-2, Middle REMIC Interest M-B-3,
Middle REMIC Interest M-B-4, Middle REMIC Interest M-B-5, Middle
REMIC Interest M-B-6 shall equal the Calculation Rate as defined
int this Section 2.7.  The Pass-Through Rate on each Class of
Subordinated Certificates is variable and will be equal to the
weighted average of the Middle REMIC Interest Rates on Middle
REMIC Interest M-B-1, Middle REMIC Interest M-B-2, Middle REMIC
Interest M-B-3, Middle REMIC Interest M-B-4, Middle REMIC
Interest M-B-5, Middle REMIC Interest M-B-6, weighted on the
basis of the principal balance of each such Middle REMIC
Interest.
     On each Distribution Date Available Funds shall be
distributed with respect to the Middle REMIC Interests in a
manner such that:

     (a)  interest accrued, if any, on each Middle REMIC Interest
          is distributed with respect to each such Middle REMIC
          Interest in the same manner that Accrued Certificate
          Interest is distributed (or accrued and added to
          principal in the case of the M-I-A-4 Middle REMIC
          Interest and the Class I-A-4 Certificate) with respect
          to the Corresponding Class or Classes of Certificates
          pursuant to Section 4.2; and

     (b)  principal is distributed (and Realized Losses shall be
          allocated) with respect to each such Middle REMIC
          Interest in the same manner that principal is
          distributed (and Realized Losses is allocated) with
          respect to the Corresponding Classes or Classes of
          Certificate pursuant to Section 4.2 and Section 4.4.

     Any Additional Amounts shall not be included in any REMIC
and shall be paid pro rata to the Class I-A-3 Certificates.

     The foregoing REMIC structure is intended to cause all of
the cash from the Mortgage Loans to flow through to the Upper
REMIC as cash flow on a REMIC regular interest, without creating
any shortfall-actual or potential (other than for credit losses)
to any REMIC

                              -49-

<PAGE>

regular interest.  To the extent that the structure is believed
to diverge from such intention the Trustee shall resolve
ambiguities to accomplish such result and shall to the extent
necessary rectify any drafting errors or seek clarification to
the structure without Certificateholder approval (but with
guidance of counsel) to accomplish such intention.

          SECTION 2.8  Covenants of the Master Servicer.

     The Master Servicer hereby covenants to the Depositor and
the Trustee as follows:

     (a)  the Master Servicer shall comply in the performance of
          its obligations under this Agreement with all
          reasonable rules and requirements of the insurer under
          each Required Insurance Policy; and

     (b)  no written information, certificate of an officer,
          statement furnished in writing or written report
          delivered to the Depositor, any affiliate of the
          Depositor or the Trustee and prepared by the Master
          Servicer pursuant to this Agreement will contain any
          untrue statement of a material fact or omit to state a
          material fact necessary to make such information,
          certificate, statement or report not misleading.

                           ARTICLE III
         ADMINISTRATION AND SERVICING OF MORTGAGE LOANS

          SECTION 3.1  Master Servicer to Service Mortgage Loans.

     For and on behalf of the Certificateholders, the Master
Servicer shall service and administer the Mortgage Loans in
accordance with the terms of (i) the Servicing Rights Transfer
and Subservicing Agreement, pursuant to which  First Tennessee
Mortgage Services, Inc. engaged the Master Servicer to subservice
the Mortgage Loans, (ii) this Agreement, and (iii) the customary
and usual standards of practice of prudent mortgage loan
servicers; provided that if there is a conflict between the terms
of the Servicing Agreement and the Servicing Rights Transfer and
Subservicing Agreement, on the one hand, and this Agreement, on
the other hand, the terms of this Agreement shall prevail. In
connection with such servicing and administration, the Master
Servicer shall have full power and authority, acting alone and/or
through Subservicers as provided in Section 3.2 hereof, to do or
cause to be done any and all things that it may deem necessary or
desirable in connection with such servicing and administration,
including but not limited to, the power and authority, subject to
the terms hereof (i) to execute and deliver, on behalf of the
Certificateholders and the Trustee, customary consents or waivers
and other instruments and documents, (ii) to consent to transfers
of any Mortgaged Property and assumptions of the Mortgage Notes
and related Mortgages (but only in the manner provided in this
Agreement), (iii) to collect any Insurance Proceeds and other
Liquidation Proceeds, and (iv) to effectuate foreclosure or other
conversion of the ownership of the Mortgaged Property securing
any Mortgage Loan; provided that the Master Servicer shall not
take any action that is inconsistent with or prejudices the
interests of the Trust Fund or the Certificateholders in any
Mortgage Loan or the rights and interests of the Depositor, the
Trustee and the Certificateholders under this Agreement. The
Master Servicer shall represent and protect the interests of the
Trust Fund in the same manner as it protects its own interests in
mortgage loans in its own portfolio in

                              -50-

<PAGE>

any claim, proceeding or litigation regarding a Mortgage Loan,
and shall not make or permit any modification, waiver or
amendment of any Mortgage Loan which would cause any REMIC
created hereunder to fail to qualify as a REMIC or result in the
imposition of any tax under Section 860F(a) or Section 860G(d) of
the Code. Without limiting the generality of the foregoing, the
Master Servicer, in its own name or in the name of the Depositor
and the Trustee, is hereby authorized and empowered by the
Depositor and the Trustee, when the Master Servicer believes it
appropriate in its reasonable judgment, to execute and deliver,
on behalf of the Trustee, the Depositor, the Certificateholders
or any of them, any and all instruments of satisfaction or
cancellation, or of partial or full release or discharge and all
other comparable instruments, with respect to the Mortgage Loans,
and with respect to the Mortgaged Properties held for the benefit
of the Certificateholders. The Master Servicer shall prepare and
deliver to the Depositor and/or the Trustee such documents
requiring execution and delivery by either or both of them as are
necessary or appropriate to enable the Master Servicer to service
and administer the Mortgage Loans to the extent that the Master
Servicer is not permitted to execute and deliver such documents
pursuant to the preceding sentence. Upon receipt of such
documents, the Depositor and/or the Trustee shall execute such
documents and deliver them to the Master Servicer.

     In accordance with the standards of the preceding paragraph,
the Master Servicer shall advance or cause to be advanced funds
as necessary for the purpose of effecting the payment of taxes
and assessments on the Mortgaged Properties, which advances shall
be reimbursable in the first instance from related collections
from the Mortgagors pursuant to Section 3.6, and further as
provided in Section 3.8. The costs incurred by the Master
Servicer, if any, in effecting the timely payments of taxes and
assessments on the Mortgaged Properties and related insurance
premiums shall not, for the purpose of calculating monthly
distributions to the Certificateholders, be added to the Stated
Principal Balances of the related Mortgage Loans, notwithstanding
that the terms of such Mortgage Loans so permit.

          SECTION 3.2  Subservicing; Enforcement of the
     Obligations of Servicers.

     (a)  The Master Servicer may arrange for the subservicing of
          any Mortgage Loan by a Subservicer pursuant to a
          subservicing agreement; provided, however, that such
          subservicing arrangement and the terms of the related
          subservicing agreement must provide for the servicing
          of such Mortgage Loans in a manner consistent with the
          servicing arrangements contemplated hereunder. Unless
          the context otherwise requires, references in this
          Agreement to actions taken or to be taken by the Master
          Servicer in servicing the Mortgage Loans include
          actions taken or to be taken by a Subservicer on behalf
          of the Master Servicer. Notwithstanding the provisions
          of any subservicing agreement, any of the provisions of
          this Agreement relating to agreements or arrangements
          between the Master Servicer and a Subservicer or
          reference to actions taken through a Subservicer or
          otherwise, the Master Servicer shall remain obligated
          and liable to the Depositor, the Trustee and the
          Certificateholders for the servicing and administration
          of the Mortgage Loans in accordance with the provisions
          of this Agreement without diminution of such obligation
          or liability by virtue of such subservicing agreements
          or arrangements or by virtue of indemnification from
          the Subservicer and to the same extent and under the
          same terms and conditions as if the Master Servicer

                              -51-

<PAGE>

          alone were servicing and administering the Mortgage
          Loans. All actions of each Subservicer performed
          pursuant to the related subservicing agreement shall be
          performed as an agent of the Master Servicer with the
          same force and effect as if performed directly by the
          Master Servicer.

     (b)  For purposes of this Agreement, the Master Servicer
          shall be deemed to have received any collections,
          recoveries or payments with respect to the Mortgage
          Loans that are received by a Subservicer regardless of
          whether such payments are remitted by the Subservicer
          to the Master Servicer.

          SECTION 3.3  Rights of the Depositor and the Trustee in
     Respect of the Master Servicer.

     The Depositor may, but is not obligated to, enforce the
obligations of the Master Servicer hereunder and may, but is not
obligated to, perform, or cause a designee to perform, any
defaulted obligation of the Master Servicer hereunder and in
connection with any such defaulted obligation to exercise the
related rights of the Master Servicer hereunder; provided that
the Master Servicer shall not be relieved of any of its
obligations hereunder by virtue of such performance by the
Depositor or its designee. Neither the Trustee nor the Depositor
shall have any responsibility or liability for any action or
failure to act by the Master Servicer nor shall the Trustee or
the Depositor be obligated to supervise the performance of the
Master Servicer hereunder or otherwise.

          SECTION 3.4  Trustee to Act as Master Servicer.

     In the event that the Master Servicer shall for any reason
no longer be the Master Servicer hereunder (including by reason
of an Event of Default), the Trustee or its successor shall
thereupon assume all of the rights and obligations of the Master
Servicer hereunder arising thereafter (except that the Trustee
shall not be (i) liable for losses of the Master Servicer
pursuant to Section 3.9 hereof or any acts or omissions of the
predecessor Master Servicer hereunder), (ii) obligated to make
Advances if it is prohibited from doing so by applicable law,
(iii) obligated to effectuate repurchases or substitutions of
Mortgage Loans hereunder including, but not limited to,
repurchases or substitutions of Mortgage Loans pursuant to
Section 2.2 or 2.3 hereof, (iv) responsible for expenses of the
Master Servicer pursuant to Section 2.3 or (v) deemed to have
made any representations and warranties of the Master Servicer
hereunder). Any such assumption shall be subject to Section 7.2
hereof. If the Master Servicer shall for any reason no longer be
the Master Servicer (including by reason of any Event of
Default), the Trustee or its successor shall succeed to any
rights and obligations of the Master Servicer under each
subservicing agreement.

     The Master Servicer shall, upon request of the Trustee, but
at the expense of the Master Servicer, deliver to the assuming
party all documents and records relating to each subservicing
agreement or substitute subservicing agreement and the Mortgage
Loans then being serviced thereunder and an accounting of amounts
collected or held by it and otherwise use its best efforts to
effect the orderly and efficient transfer of the substitute
subservicing agreement to the assuming party.

                              -52-

<PAGE>

          SECTION 3.5  Collection of Mortgage Loan Payments;
     Certificate Account; Distribution Account.

     (a)  The Master Servicer shall make reasonable efforts in
          accordance with the customary and usual standards of
          practice of prudent mortgage servicers to collect all
          payments called for under the terms and provisions of
          the Mortgage Loans to the extent such procedures shall
          be consistent with this Agreement and the terms and
          provisions of any related Required Insurance Policy.
          Consistent with the foregoing, the Master Servicer may
          in its discretion (i) waive any late payment charge or
          any prepayment charge or penalty interest in connection
          with the prepayment of a Mortgage Loan and (ii) extend
          the due dates for payments due on a Mortgage Note for a
          period not greater than 180 days; provided, however,
          that the Master Servicer cannot extend the maturity of
          any such Mortgage Loan past the date on which the final
          payment is due on the latest maturing Mortgage Loan as
          of the Cut-off Date. In the event of any such
          arrangement, the Master Servicer shall make Advances on
          the related Mortgage Loan in accordance with the
          provisions of Section 4.1 during the scheduled period
          in accordance with the amortization schedule of such
          Mortgage Loan without modification thereof by reason of
          such arrangements. The Master Servicer shall not be
          required to institute or join in litigation with
          respect to collection of any payment (whether under a
          Mortgage, Mortgage Note or otherwise or against any
          public or governmental authority with respect to a
          taking or condemnation) if it reasonably believes that
          enforcing the provision of the Mortgage or other
          instrument pursuant to which such payment is required
          is prohibited by applicable law.

     (b)  The Master Servicer shall establish and maintain the
          Certificate Account.  The Certificate Account shall
          consist of two separate subaccounts, each of which
          shall relate to a particular Mortgage Pool. The Master
          Servicer shall deposit or cause to be deposited into
          the appropriate subaccount of the Certificate Account
          no later than two Business Days after receipt, except
          as otherwise specifically provided herein, the
          following payments and collections remitted by
          Subservicers or received by it in respect of the
          Mortgage Loans subsequent to the Cut-off Date (other
          than in respect of principal and interest due on the
          Mortgage Loans on or before the Cut-off Date) and the
          following amounts required to be deposited hereunder:

          (i)  all payments on account of principal on the
               Mortgage Loans in the related Mortgage Pool,
               including Principal Prepayments;

          (ii) all payments on account of interest on the
               Mortgage Loans in the related Mortgage Pool, net
               of the related Master Servicing Fee, any
               Prepayment Interest Excess and, for so long as
               First Horizon is the Master Servicer, any Retained
               Yield;

         (iii) all Insurance Proceeds and Liquidation Proceeds
               in respect of the related Mortgage Loans in the
               related Mortgage Pool, other than proceeds to be
               applied to the restoration or repair of the
               Mortgaged Property or released

                              -53-

<PAGE>

               to the Mortgagor in accordance with the Master
               Servicer's normal servicing procedures;

          (iv) any amount required to be deposited by the Master
               Servicer in respect of the related Mortgage Pool
               pursuant to Section 3.5(c) in connection with any
               losses on Permitted Investments;

          (v)  any amounts required to be deposited by the Master
               Servicer in respect of the related Mortgage Pool
               pursuant to Section 3.9(b), 3.9(d), and in respect
               of net monthly rental income from any related REO
               Property pursuant to Section 3.11 hereof;

          (vi) all Substitution Adjustment Amounts in respect of
               the related Mortgage Pool;

         (vii) all Advances in respect of the related Mortgage
               Pool made by the Master Servicer pursuant to
               Section 4.1; and

        (viii) any other amounts required to be deposited
               hereunder in respect of the related Mortgage Pool.

          In addition, with respect to any Mortgage Loan that is
     subject to a buydown agreement, on each Due Date for such
     Mortgage Loan, in addition to the monthly payment remitted
     by the Mortgagor, the Master Servicer shall cause funds to
     be deposited into the applicable subaccount of the
     Certificate Account in an amount required to cause an amount
     of interest to be paid with respect to such Mortgage Loan
     equal to the amount of interest that has accrued on such
     Mortgage Loan from the preceding Due Date at the related
     Adjusted Mortgage Rate on such date.

          The foregoing requirements for remittance by the Master
     Servicer shall be exclusive, it being understood and agreed
     that, without limiting the generality of the foregoing,
     payments in the nature of prepayment penalties, late payment
     charges, assumption fees or amounts attributable to
     reimbursements of Advances, if collected, need not be
     remitted by the Master Servicer. In the event that the
     Master Servicer shall remit any amount not required to be
     remitted, it may at any time withdraw or direct the
     institution maintaining the Certificate Account to withdraw
     such amount from the Certificate Account, any provision
     herein to the contrary notwithstanding. Such withdrawal or
     direction may be accomplished by delivering written notice
     thereof to the Trustee or such other institution maintaining
     the Certificate Account which describes the amounts
     deposited in error in the Certificate Account. The Master
     Servicer shall maintain adequate records with respect to all
     withdrawals made pursuant to this Section. All funds
     deposited in the Certificate Account shall be held in trust
     for the Certificateholders until withdrawn in accordance
     with Section 3.8.

     (c)  The Trustee shall establish and maintain, on behalf of
          the Certificateholders, the Distribution Account.  The
          Distribution Account shall consist of two separate
          subaccounts, each of which shall relate to a particular
          Mortgage Pool.  The

                              -54-

<PAGE>

          Trustee shall, promptly upon receipt, deposit in the
          Distribution Account and retain therein the following:

          (i)  the aggregate amount remitted by the Master
               Servicer to the Trustee in respect of a Mortgage
               Pool pursuant to Section 3.8(a)(ix);

          (ii) any amount deposited by the Master Servicer
               pursuant to this Section 3.5(c) in connection with
               any losses on Permitted Investments; and

         (iii) any other amounts deposited hereunder which are
               required to be deposited in the Distribution
               Account.

          In the event that the Master Servicer shall remit any
     amount not required to be remitted, it may at any time
     direct the Trustee to withdraw such amount from the
     applicable subaccount of the Distribution Account, any
     provision herein to the contrary notwithstanding.  Such
     direction may be accomplished by delivering an Officer's
     Certificate to the Trustee which describes the amounts
     deposited in error in the Distribution Account.  All funds
     deposited in the Distribution Account shall be held by the
     Trustee in trust for the related Certificateholders until
     disbursed in accordance with this Agreement or withdrawn in
     accordance with Section 3.8. In no event shall the Trustee
     incur liability for withdrawals from the Distribution
     Account at the direction of the Master Servicer.

          (iv) The institutions at which the Certificate Account
               and the Distribution Account are maintained shall
               invest funds as directed by the Master Servicer in
               Permitted Investments which in both cases shall
               mature not later than (i) in the case of the
               Certificate Account, the second Business Day next
               preceding the related Distribution Account Deposit
               Date (except that if such Permitted Investment is
               an obligation of the institution that maintains
               such account, then such Permitted Investment shall
               mature not later than the Business Day next
               preceding such Distribution Account Deposit Date)
               and (ii) in the case of the Distribution Account,
               the Business Day next preceding the Distribution
               Date (except that if such Permitted Investment is
               an obligation of the institution that maintains
               such fund or account, then such Permitted
               Investment shall mature not later than such
               Distribution Date) and, in each case, shall not be
               sold or disposed of prior to its maturity. All
               such Permitted Investments shall be made in the
               name of the Trustee, for the benefit of the
               Certificateholders.  All income and gain net of
               any losses realized from any such investment of
               funds on deposit in the Certificate Account shall
               be for the benefit of the Master Servicer as
               servicing compensation and all income and gain net
               of any losses realized from any such investment of
               funds on deposit in the Distribution Account shall
               be for the benefit of the Trustee. The amount of
               any Realized Losses in the Certificate Account in
               respect of any such investments shall promptly be

                              -55-

<PAGE>

               deposited by the Master Servicer in the
               Certificate Account and the amount of any Realized
               Losses in the Distribution Account in respect of
               any such investments shall promptly be deposited
               by the Trustee into the Distribution Account.  All
               reinvestment income earned on amounts on deposit
               in the Distribution Account shall be for the
               benefit of the Trustee. The Trustee in its
               fiduciary capacity shall not be liable for the
               amount of any loss incurred in respect of any
               investment or lack of investment of funds held in
               the Certificate Account and made in accordance
               with this Section 3.5.

          (v)  The Master Servicer shall give notice to the
               Trustee, the Seller, each Rating Agency and the
               Depositor of any proposed change of the location
               of the Certificate Account prior to any change
               thereof. The Trustee shall give notice to the
               Master Servicer, the Seller, each Rating Agency
               and the Depositor of any proposed change of the
               location of the Distribution Account prior to any
               change thereof.

          SECTION 3.6  Collection of Taxes, Assessments and
     Similar Items; Escrow Accounts.

     (a)  To the extent required by the related Mortgage Note and
          not violative of current law, the Master Servicer shall
          establish and maintain one or more accounts (each, an
          "Escrow Account") and deposit and retain therein all
          collections from the Mortgagors (or advances by the
          Master Servicer) for the payment of taxes, assessments,
          hazard insurance premiums or comparable items for the
          account of the Mortgagors. Nothing herein shall require
          the Master Servicer to compel a Mortgagor to establish
          an Escrow Account in violation of applicable law.

     (b)  Withdrawals of amounts so collected from the Escrow
          Accounts may be made only to effect timely payment of
          taxes, assessments, hazard insurance premiums,
          condominium or PUD association dues, or comparable
          items, to reimburse the Master Servicer out of related
          collections for any payments made pursuant to Sections
          3.1 hereof (with respect to taxes and assessments and
          insurance premiums) and 3.9 hereof (with respect to
          hazard insurance), to refund to any Mortgagors any sums
          determined to be overages, to pay interest, if required
          by law or the terms of the related Mortgage or Mortgage
          Note, to Mortgagors on balances in the Escrow Account
          or to clear and terminate the Escrow Account at the
          termination of this Agreement in accordance with
          Section 9.1 hereof. The Escrow Accounts shall not be a
          part of the Trust Fund.

     (c)  The Master Servicer shall advance any payments referred
          to in Section 3.6(a) that are not timely paid by the
          Mortgagors on the date when the tax, premium or other
          cost for which such payment is intended is due, but the
          Master Servicer shall be required so to advance only to
          the extent that such advances, in the good faith
          judgment of the Master Servicer, will be recoverable by
          the Master Servicer out of Insurance Proceeds,
          Liquidation Proceeds or otherwise.

                              -56-

<PAGE>

          SECTION 3.7  Access to Certain Documentation and
     Information Regarding the Mortgage Loans.

     The Master Servicer shall afford the Depositor and the
Trustee reasonable access to all records and documentation
regarding the Mortgage Loans and all accounts, insurance
information and other matters relating to this Agreement, such
access being afforded without charge, but only upon reasonable
request and during normal business hours at the office designated
by the Master Servicer.

     Upon reasonable advance notice in writing, the Master
Servicer will provide to each Certificateholder or Certificate
Owner which is a savings and loan association, bank or insurance
company certain reports and reasonable access to information and
documentation regarding the Mortgage Loans sufficient to permit
such Certificateholder or Certificate Owner to comply with
applicable regulations of the OTS or other regulatory authorities
with respect to investment in the Certificates; provided that the
Master Servicer shall be entitled to be reimbursed by each such
Certificateholder or Certificate Owner for actual expenses
incurred by the Master Servicer in providing such reports and
access.

          SECTION 3.8  Permitted Withdrawals from the Certificate
     Account and Distribution Account.

     (a)  The Master Servicer may from time to time make
          withdrawals from the applicable subaccount of the
          Certificate Account for the following purposes:

          (i)  to the extent not previously retained by the
               Master Servicer, to pay to First Horizon the
               Retained Yield and to pay to the Master Servicer
               the master servicing compensation to which it is
               entitled pursuant to Section 3.14, and earnings on
               or investment income with respect to funds in or
               credited to the Certificate Account as additional
               master servicing compensation;

          (ii) to the extent not previously retained by the
               Master Servicer, to reimburse the Master Servicer
               for unreimbursed Advances made by it in respect of
               the related Mortgage Pool, such right of
               reimbursement pursuant to this subclause (ii)
               being limited to amounts received on the Mortgage
               Loan(s) in respect of which  any such Advance was
               made;

         (iii) to reimburse the Master Servicer for any
               Nonrecoverable Advance previously made in respect
               of the related Mortgage Pool;

          (iv) to reimburse the Master Servicer for Insured
               Expenses from the  related Insurance Proceeds in
               respect of the related Mortgage Pool;

          (v)  to reimburse the Master Servicer for (a)
               unreimbursed Servicing Advances in respect of the
               related Mortgage Pool, the Master Servicer's right
               to reimbursement pursuant to this clause (a) with
               respect to any Mortgage Loan being limited to
               amounts received on such Mortgage Loan(s) which
               represent late recoveries of the payments for
               which such advances were

                              -57-

<PAGE>

               made pursuant to Section 3.1 or Section 3.6 and
               (b) for unpaid Master Servicing Fees as provided
               in Section 3.11 hereof;

          (vi) to pay to the Seller or Master Servicer, as
               applicable, with respect to each Mortgage Loan in
               respect of the related Mortgage Pool or property
               acquired in respect thereof that has been
               purchased pursuant to Section 2.2, 2.3 or 3.11,
               all amounts received thereon after the date of
               such purchase;

         (vii) to reimburse the Seller, the Master Servicer or
               the Depositor for expenses incurred by any of them
               and reimbursable pursuant to Section 6.3 hereof;

        (viii) to withdraw any amount deposited in the
               Certificate Account and not required to be
               deposited therein;

          (ix) on or prior to the Distribution Account Deposit
               Date, to withdraw an amount equal to the related
               Available Funds, Additional Amounts, if any, and
               the Trustee Fee for such Distribution Date and
               remit such amount to the Trustee for deposit in
               the Distribution Account; and

          (x)  to clear and terminate the Certificate Account
               upon termination of this Agreement pursuant to
               Section 9.1 hereof.

          The Master Servicer shall keep and maintain separate
     accounting, on a Mortgage Loan-by-Mortgage Loan basis and on
     a Mortgage Pool-by-Mortgage Pool basis, for the purpose of
     justifying any withdrawal from the Certificate Account
     pursuant to such subclauses (i), (ii), (iv), (v) and (vi).
     Prior to making any withdrawal from the Certificate Account
     pursuant to subclause (iii), the Master Servicer shall
     deliver to the Trustee an Officer's Certificate of a
     Servicing Officer indicating the amount of any previous
     Advance determined by the Master Servicer to be a
     Nonrecoverable Advance and identifying the related Mortgage
     Loans(s), and their respective portions of such
     Nonrecoverable Advance.

          The Master Servicer shall distribute the Retained
     Yield, if any, to First Horizon on each Distribution Account
     Deposit Date during the term of this Agreement.

     (b)  The Trustee shall withdraw funds from the applicable
          subaccount of the Distribution Account for
          distributions to the related Certificateholders in the
          manner specified in this Agreement (and to withhold
          from the amounts so withdrawn, the amount of any taxes
          that it is authorized to withhold pursuant to the last
          paragraph of Section 8.11).  In addition, the Trustee
          may (and with respect to clause (ii) below, shall),
          prior to making the distribution pursuant to Section
          4.2 from time to time make withdrawals from the
          Distribution Account for the following purposes:

          (i)  to pay to itself the Trustee Fee for the related
               Distribution Date;

                              -58-

<PAGE>

          (ii) to pay to itself earnings on or investment income
               with respect to funds in the Distribution Account;

         (iii) to withdraw and return to the Master Servicer any
               amount deposited in the Distribution Account and
               not required to be deposited therein; and

          (iv) to clear and terminate the Distribution Account
               upon termination of the Agreement pursuant to
               Section 9.1 hereof.

          SECTION 3.9  Maintenance of Hazard Insurance;
     Maintenance of Primary Insurance Policies.

     (a)  The Master Servicer shall cause to be maintained, for
          each Mortgage Loan, hazard insurance with extended
          coverage in an amount that is at least equal to the
          lesser of (i) the maximum insurable value of the
          improvements securing such Mortgage Loan or (ii) the
          greater of (y) the outstanding principal balance of the
          Mortgage Loan and (z) an amount such that the proceeds
          of such policy shall be sufficient to prevent the
          Mortgagor and/or the mortgagee from becoming a co-
          insurer. Each such policy of standard hazard insurance
          shall contain, or have an accompanying endorsement that
          contains, a standard mortgagee clause. Any amounts
          collected by the Master Servicer under any such
          policies (other than the amounts to be applied to the
          restoration or repair of the related Mortgaged Property
          or amounts released to the Mortgagor in accordance with
          the Master Servicer's normal servicing procedures)
          shall be deposited in the applicable subaccount of the
          Certificate Account. Any cost incurred by the Master
          Servicer in maintaining any such insurance shall not,
          for the purpose of calculating monthly distributions to
          the Certificateholders or remittances to the Trustee
          for their benefit, be added to the principal balance of
          the Mortgage Loan, notwithstanding that the terms of
          the Mortgage Loan so permit. Such costs shall be
          recoverable by the Master Servicer out of late payments
          by the related Mortgagor or out of Liquidation Proceeds
          to the extent permitted by Section 3.8 hereof. It is
          understood and agreed that no earthquake or other
          additional insurance is to be required of any Mortgagor
          or maintained on property acquired in respect of a
          Mortgage other than pursuant to such applicable laws
          and regulations as shall at any time be in force and as
          shall require such additional insurance. If the
          Mortgaged Property is located at the time of
          origination of the Mortgage Loan in a federally
          designated special flood hazard area and such area is
          participating in the national flood insurance program,
          the Master Servicer shall cause flood insurance to be
          maintained with respect to such Mortgage Loan. Such
          flood insurance shall be in an amount equal to the
          least of (i) the original principal balance of the
          related Mortgage Loan, (ii) the replacement value of
          the improvements which are part of such Mortgaged
          Property, and (iii) the maximum amount of such
          insurance available for the related Mortgaged Property
          under the national flood insurance program.

     (b)  In the event that the Master Servicer shall obtain and
          maintain a blanket policy insuring against hazard
          losses on all of the Mortgage Loans, it shall
          conclusively

                              -59-

<PAGE>

          be deemed to have satisfied its obligations as set
          forth in the first sentence of this Section, it being
          understood and agreed that such policy may contain a
          deductible clause on terms substantially equivalent to
          those commercially available and maintained by
          comparable servicers.  If such policy contains a
          deductible clause, the Master Servicer shall, in the
          event that there shall not have been maintained on the
          related Mortgaged Property a policy complying with the
          first sentence of this Section, and there shall have
          been a loss that would have been covered by such
          policy, deposit in the applicable subaccount of the
          Certificate Account the amount not otherwise payable
          under the blanket policy because of such deductible
          clause.  In connection with its activities as Master
          Servicer of the Mortgage Loans, the Master Servicer
          agrees to present, on behalf of itself, the Depositor,
          and the Trustee for the benefit of the
          Certificateholders, claims under any such blanket
          policy.

     (c)  The Master Servicer shall not take any action which
          would result in non-coverage under any applicable
          Primary Insurance Policy of any loss which, but for the
          actions of the Master Servicer, would have been covered
          thereunder.  The Master Servicer shall not cancel or
          refuse to renew any such Primary Insurance Policy that
          is in effect at the date of the initial issuance of the
          Certificates and is required to be kept in force
          hereunder unless the replacement Primary Insurance
          Policy for such canceled or non-renewed policy is
          maintained with a Qualified Insurer.

     The Master Servicer shall not be required to maintain any
Primary Insurance Policy (i) with respect to any Mortgage Loan
with a Loan-to-Value Ratio less than or equal to 80% as of any
date of determination or, based on a new appraisal, the principal
balance of such Mortgage Loan represents 80% or less of the new
appraised value or (ii) if maintaining such Primary Insurance
Policy is prohibited by applicable law.

     The Master Servicer agrees to effect the timely payment of
the premiums on each Primary Insurance Policy, and such costs not
otherwise recoverable shall be recoverable by the Master Servicer
from the related liquidation proceeds.

     (d)  In connection with its activities as Master Servicer of
          the Mortgage Loans, the Master Servicer agrees to
          present on behalf of itself, the Trustee and
          Certificateholders, claims to the insurer under any
          Primary Insurance Policies and, in this regard, to take
          such reasonable action as shall be necessary to permit
          recovery under any Primary Insurance Policies
          respecting defaulted Mortgage Loans. Any amounts
          collected by the Master Servicer under any Primary
          Insurance Policies shall be deposited in the applicable
          subaccount of the Certificate Account.

          SECTION 3.10  Enforcement of Due-on-Sale Clauses;
     Assumption Agreements.

     (a)  Except as otherwise provided in this Section, when any
          property subject to a Mortgage has been conveyed by the
          Mortgagor, the Master Servicer shall to the extent that
          it has knowledge of such conveyance, enforce any due-on-
          sale clause contained in any Mortgage Note or Mortgage,
          to the extent permitted under

                              -60-

<PAGE>

          applicable law and governmental regulations, but only
          to the extent that such enforcement will not adversely
          affect or jeopardize coverage under any Required
          Insurance Policy. Notwithstanding the foregoing, the
          Master Servicer is not required to exercise such rights
          with respect to a Mortgage Loan if the Person to whom
          the related Mortgaged Property has been conveyed or is
          proposed to be conveyed satisfies the terms and
          conditions contained in the Mortgage Note and Mortgage
          related thereto and the consent of the mortgagee under
          such Mortgage Note or Mortgage is not otherwise so
          required under such Mortgage Note or Mortgage as a
          condition to such transfer. In the event that the
          Master Servicer is prohibited by law from enforcing any
          such due-on-sale clause, or if coverage under any
          Required Insurance Policy would be adversely affected,
          or if nonenforcement is otherwise permitted hereunder,
          the Master Servicer is authorized, subject to Section
          3.10(b), to take or enter into an assumption and
          modification agreement from or with the person to whom
          such property has been or is about to be conveyed,
          pursuant to which such person becomes liable under the
          Mortgage Note and, unless prohibited by applicable
          state law, the Mortgagor remains liable thereon,
          provided that the Mortgage Loan shall continue to be
          covered (if so covered before the Master Servicer
          enters such agreement) by the applicable Required
          Insurance Policies. The Master Servicer, subject to
          Section 3.10(b), is also authorized with the prior
          approval of the insurers under any Required Insurance
          Policies to enter into a substitution of liability
          agreement with such Person, pursuant to which the
          original Mortgagor is released from liability and such
          Person is substituted as Mortgagor and becomes liable
          under the Mortgage Note. Notwithstanding the foregoing,
          the Master Servicer shall not be deemed to be in
          default under this Section by reason of any transfer or
          assumption which the Master Servicer reasonably
          believes it is restricted by law from preventing, for
          any reason whatsoever.

     (b)  Subject to the Master Servicer's duty to enforce any
          due-on-sale clause to the extent set forth in Section
          3.10(a) hereof, in any case in which a Mortgaged
          Property has been conveyed to a Person by a Mortgagor,
          and such Person is to enter into an assumption
          agreement or modification agreement or supplement to
          the Mortgage Note or Mortgage that requires the
          signature of the Trustee, or if an instrument of
          release signed by the Trustee is required releasing the
          Mortgagor from liability on the Mortgage Loan, the
          Master Servicer shall prepare and deliver or cause to
          be prepared and delivered to the Trustee for signature
          and shall direct, in writing, the Trustee to execute
          the assumption agreement with the Person to whom the
          Mortgaged Property is to be conveyed and such
          modification agreement or supplement to the Mortgage
          Note or Mortgage or other instruments as are reasonable
          or necessary to carry out the terms of the Mortgage
          Note or Mortgage or otherwise to comply with any
          applicable laws regarding assumptions or the transfer
          of the Mortgaged Property to such Person. In connection
          with any such assumption, no material term of the
          Mortgage Note may be changed. In addition, the
          substitute Mortgagor and the Mortgaged Property must be
          acceptable to the Master Servicer in accordance with
          its underwriting standards as then in effect. Together
          with each such substitution, assumption or other
          agreement or instrument delivered to the Trustee for
          execution by it, the Master Servicer shall

                              -61-

<PAGE>

          deliver an Officer's Certificate signed by a Servicing
          Officer stating that the requirements of this
          subsection have been met in connection therewith. The
          Master Servicer shall notify the Trustee that any such
          substitution or assumption agreement has been completed
          by forwarding to the Trustee the original of such
          substitution or assumption agreement, which in the case
          of the original shall be added to the related Mortgage
          File and shall, for all purposes, be considered a part
          of such Mortgage File to the same extent as all other
          documents and instruments constituting a part thereof.
          Any fee collected by the Master Servicer for entering
          into an assumption or substitution of liability
          agreement will be retained by the Master Servicer as
          additional servicing compensation.

          SECTION 3.11  Realization Upon Defaulted Mortgage
     Loans; Repurchase of Certain Mortgage Loans.

     The Master Servicer shall use reasonable efforts to
foreclose upon or otherwise comparably convert the ownership of
properties securing such of the Mortgage Loans as come into and
continue in default and as to which no satisfactory arrangements
can be made for collection of delinquent payments. In connection
with such foreclosure or other conversion, the Master Servicer
shall follow such practices and procedures as it shall deem
necessary or advisable and as shall be normal and usual in its
general mortgage servicing activities and meet the requirements
of the insurer under any Required Insurance Policy; provided,
however, that the Master Servicer shall not be required to expend
its own funds in connection with any foreclosure or towards the
restoration of any property unless it shall determine (i) that
such restoration and/or foreclosure will increase the proceeds of
liquidation of the Mortgage Loan after reimbursement to itself of
such expenses and (ii) that such expenses will be recoverable to
it through Liquidation Proceeds (respecting which it shall have
priority for purposes of withdrawals from the Certificate
Account). The Master Servicer shall be responsible for all other
costs and expenses incurred by it in any such proceedings;
provided, however, that it shall be entitled to reimbursement
thereof from the liquidation proceeds with respect to the related
Mortgaged Property, as provided in the definition of Liquidation
Proceeds. If the Master Servicer has knowledge that a Mortgaged
Property which the Master Servicer is contemplating acquiring in
foreclosure or by deed in lieu of foreclosure is located within a
1 mile radius of any site listed in the Expenditure Plan for the
Hazardous Substance Clean Up Bond Act of 1984 or other site with
environmental or hazardous waste risks known to the Master
Servicer, the Master Servicer will, prior to acquiring the
Mortgaged Property, consider such risks and only take action in
accordance with its established environmental review procedures.

     With respect to any REO Property, the deed or certificate of
sale shall be taken in the name of the Trust Fund for the benefit
of the Certificateholders, or its nominee, on behalf of the
Certificateholders. The Master Servicer shall ensure that the
title to such REO Property references the Pooling and Servicing
Agreement and the Trust Fund's capacity thereunder. Pursuant to
its efforts to sell such REO Property, the Master Servicer shall
either itself or through an agent selected by the Master Servicer
protect and conserve such REO Property in the same manner and to
such extent as is customary in the locality where such REO
Property is located and may, incident to its conservation and
protection of the interests of the Certificateholders, rent the
same, or any part thereof, as the Master Servicer deems to be in
the best interest of the Certificateholders for the period prior
to the sale of such REO Property. The Master Servicer

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<PAGE>

shall prepare for and deliver to the Trustee a statement with
respect to each REO Property that has been rented showing the
aggregate rental income received and all expenses incurred in
connection with the management and maintenance of such REO
Property at such times as is necessary to enable the Trustee to
comply with the reporting requirements of the REMIC Provisions.
The net monthly rental income, if any, from such REO Property
shall be deposited in the Certificate Account no later than the
close of business on each Determination Date. The Master Servicer
shall perform the tax reporting and withholding required by
Sections 1445 and 6050J of the Code with respect to foreclosures
and abandonments, the tax reporting required by Section 6050H of
the Code with respect to the receipt of mortgage interest from
individuals and any tax reporting required by Section 6050P of
the Code with respect to the cancellation of indebtedness by
certain financial entities, by preparing such tax and information
returns as may be required, in the form required, and delivering
the same to the Trustee for filing.

     In the event that the Trust Fund acquires any Mortgaged
Property as aforesaid or otherwise in connection with a default
or imminent default on a Mortgage Loan, the Master Servicer shall
dispose of such Mortgaged Property prior to the close of the
third taxable year after the taxable year of its acquisition by
the Trust Fund unless the Trustee shall have been supplied with
an Opinion of Counsel to the effect that the holding by the Trust
Fund of such Mortgaged Property subsequent to such three-year
period will not result in the imposition of taxes on "prohibited
transactions" of any REMIC hereunder as defined in Section 860F
of the Code or cause any REMIC created hereunder to fail to
qualify as a REMIC at any time that any Certificates are
outstanding, in which case the Trust Fund may continue to hold
such Mortgaged Property (subject to any conditions contained in
such Opinion of Counsel).  Notwithstanding any other provision of
this Agreement, no Mortgaged Property acquired by the Trust Fund
shall be rented (or allowed to continue to be rented) or
otherwise used for the production of income by or on behalf of
the Trust Fund in such a manner or pursuant to any terms that
would (i) cause such Mortgaged Property to fail to qualify as
"foreclosure property" within the meaning of Section 860G(a)(8)
of the Code or (ii) subject any REMIC hereunder to the imposition
of any federal, state or local income taxes on the income earned
from such Mortgaged Property under Section 860G(c) of the Code or
otherwise, unless the Master Servicer has agreed to indemnify and
hold harmless the Trust Fund with respect to the imposition of
any such taxes.

     In the event of a default on a Mortgage Loan one or more of
whose obligor is not a United States Person, as that term is
defined in Section 7701(a)(30) of the Code, in connection with
any foreclosure or acquisition of a deed in lieu of foreclosure
(together, "foreclosure") in respect of such Mortgage Loan, the
Master Servicer will cause compliance with the provisions of
Treasury Regulation Section 1.1445-2(d)(3) (or any successor
thereto) necessary to assure that no withholding tax obligation
arises with respect to the proceeds of such foreclosure except to
the extent, if any, that proceeds of such foreclosure are
required to be remitted to the obligors on such Mortgage Loan.

     The decision of the Master Servicer to foreclose on a
defaulted Mortgage Loan shall be subject to a determination by
the Master Servicer that the proceeds of such foreclosure would
exceed the costs and expenses of bringing such a proceeding. The
income earned from the management of any REO Properties, net of
reimbursement to the Master Servicer for expenses incurred
(including any property or other taxes) in connection with such
management and net of unreimbursed Master Servicing Fees,
Advances and Servicing Advances, shall be applied to the

                              -63-

<PAGE>

payment of principal of and interest on the related defaulted
Mortgage Loans (with interest accruing as though such Mortgage
Loans were still current) and all such income shall be deemed,
for all purposes in this Agreement, to be payments on account of
principal and interest on the related Mortgage Notes and shall be
deposited into the applicable subaccount of the Certificate
Account.  To the extent the net income received during any
calendar month is in excess of the amount attributable to
amortizing principal and accrued interest at the related Mortgage
Rate on the related Mortgage Loan for such calendar month, such
excess shall be considered to be a partial prepayment of
principal of the related Mortgage Loan.

     The proceeds from any liquidation of a Mortgage Loan, as
well as any income from an REO Property, will be applied in the
following order of priority: first, to reimburse the Master
Servicer for any related unreimbursed Servicing Advances and
Master Servicing Fees; second, to reimburse the Master Servicer
for any unreimbursed Advances; third, to reimburse the applicable
subaccount of the Certificate Account for any Nonrecoverable
Advances (or portions thereof) that were previously withdrawn by
the Master Servicer pursuant to Section 3.8(a)(iii) that related
to such Mortgage Loan; fourth, to accrued and unpaid interest (to
the extent no Advance has been made for such amount or any such
Advance has been reimbursed) on the Mortgage Loan or related REO
Property, at the Adjusted Net Mortgage Rate to the Due Date
occurring in the month in which such amounts are required to be
distributed; and fifth, as a recovery of principal of the
Mortgage Loan. Excess Proceeds, if any, from the liquidation of a
Liquidated Mortgage Loan will be retained by the Master Servicer
as additional servicing compensation pursuant to Section 3.14.

     The Master Servicer, with the consent of the Trustee, shall
have the right to purchase for its own account from the Trust
Fund any Mortgage Loan which is 91 days or more delinquent at a
price equal to the Purchase Price. The Purchase Price for any
Mortgage Loan purchased hereunder and any Additional Amounts
shall be deposited in the applicable subaccount of the
Certificate Account and the Trustee, upon receipt of a
certificate from the Master Servicer in the form of Exhibit M
hereto, shall release or cause to be released to the purchaser of
such Mortgage Loan the related Mortgage File and shall execute
and deliver such instruments of transfer or assignment prepared
by the purchaser of such Mortgage Loan, in each case without
recourse, as shall be necessary to vest in the purchaser of such
Mortgage Loan any Mortgage Loan released pursuant hereto and the
purchaser of such Mortgage Loan shall succeed to all the
Trustee's right, title and interest in and to such Mortgage Loan
and all security and documents related thereto.  The Additional
Amounts, if any, to be paid by the Master Servicer pursuant to
this Section 3.11 shall be determined using the procedures
applicable to the Seller as provided in Section 4.1(c) of MLPA I.
Such assignment shall be an assignment outright and not for
security. The purchaser of such Mortgage Loan shall thereupon own
such Mortgage Loan, and all security and documents, free of any
further obligation to the Trustee or the Certificateholders with
respect thereto.

          SECTION 3.12  Trustee to Cooperate; Release of Mortgage
     Files.

     Upon the payment in full of any Mortgage Loan, or the
receipt by the Master Servicer of a notification that payment in
full will be escrowed in a manner customary for such purposes,
the Master Servicer will immediately notify the Trustee by
delivering, or causing to be delivered a "Request for Release"
substantially in the form of Exhibit M. Upon receipt of such
request, the Trustee shall or shall cause the Custodian to
promptly release the related Mortgage File to the

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<PAGE>

Master Servicer, and the Trustee shall at the Master Servicer's
direction execute and deliver to the Master Servicer the request
for reconveyance, deed of reconveyance or release or satisfaction
of mortgage or such instrument releasing the lien of the Mortgage
in each case provided by the Master Servicer, together with the
Mortgage Note with written evidence of cancellation thereon.
Expenses incurred in connection with any instrument of
satisfaction or deed of reconveyance shall be chargeable to the
related Mortgagor. From time to time and as shall be appropriate
for the servicing or foreclosure of any Mortgage Loan, including
for such purpose, collection under any policy of flood insurance,
any fidelity bond or errors or omissions policy, or for the
purposes of effecting a partial release of any Mortgaged Property
from the lien of the Mortgage or the making of any corrections to
the Mortgage Note or the Mortgage or any of the other documents
included in the Mortgage File, the Trustee shall, upon delivery
to the Trustee of a Request for Release in the form of Exhibit L
signed by a Servicing Officer, release the Mortgage File to the
Master Servicer. Subject to the further limitations set forth
below, the Master Servicer shall cause the Mortgage File or
documents so released to be returned to the Trustee or its
Custodian when the need therefor by the Master Servicer no longer
exists, unless the Mortgage Loan is liquidated and the proceeds
thereof are deposited in the applicable subaccount of the
Certificate Account, in which case the Master Servicer shall
deliver to the Trustee a Request for Release in the form of
Exhibit M, signed by a Servicing Officer.

     If the Master Servicer at any time seeks to initiate a
foreclosure proceeding in respect of any Mortgaged Property as
authorized by this Agreement, the Master Servicer shall deliver
or cause to be delivered to the Trustee, for signature, as
appropriate, any court pleadings, requests for trustee's sale or
other documents necessary to effectuate such foreclosure or any
legal action brought to obtain judgment against the Mortgagor on
the Mortgage Note or the Mortgage or to obtain a deficiency
judgment or to enforce any other remedies or rights provided by
the Mortgage Note or the Mortgage or otherwise available at law
or in equity.

          SECTION 3.13  Documents Records and Funds in Possession
     of Master Servicer to be Held for the Trustee.

     Notwithstanding any other provisions of this Agreement, the
Master Servicer shall transmit to the Trustee as required by this
Agreement all documents and instruments in respect of a Mortgage
Loan coming into the possession of the Master Servicer from time
to time and shall account fully to the Trustee for any funds
received by the Master Servicer or which otherwise are collected
by the Master Servicer as Liquidation Proceeds or Insurance
Proceeds in respect of any Mortgage Loan. All Mortgage Files and
funds collected or held by, or under the control of, the Master
Servicer in respect of any Mortgage Loans, whether from the
collection of principal and interest payments or from Liquidation
Proceeds, including but not limited to, any funds on deposit in
the Certificate Account, shall be held by the Master Servicer for
and on behalf of the Trustee and shall be and remain the sole and
exclusive property of the Trustee, subject to the applicable
provisions of this Agreement. The Master Servicer also agrees
that it shall not create, incur or subject any Mortgage File or
any funds that are deposited in the Certificate Account,
Distribution Account or any Escrow Account, or any funds that
otherwise are or may become due or payable to the Trustee for the
benefit of the Certificateholders, to any claim, lien, security
interest, judgment, levy, writ of attachment or other
encumbrance, or assert by legal action or otherwise any claim or
right of setoff against any Mortgage File or any funds collected
on, or in connection with, a Mortgage Loan, except, however, that
the Master Servicer shall be entitled to

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<PAGE>

set off against and deduct from any such funds any amounts that
are properly due and payable to the Master Servicer under this
Agreement.

          SECTION 3.14  Master Servicing Compensation.

     As compensation for its activities as Master Servicer
hereunder and as a subservicer pursuant to the Servicing Rights
Transfer and Subservicing Agreement, the Master Servicer shall be
entitled to retain or withdraw from the Certificate Account an
amount equal to the Master Servicing Fee for each Mortgage Loan,
provided that the aggregate Master Servicing Fee with respect to
any Distribution Date shall be reduced (i) by the amount of any
Compensating Interest paid by the Master Servicer with respect to
such Distribution Date, and (ii) with respect to the first
Distribution Date, an amount equal to any amount to be deposited
into the Distribution Account by the Depositor pursuant to
Section 2.1(a) and not so deposited.

     Additional servicing compensation in the form of (i)
Retained Yield, Excess Proceeds, Prepayment Interest Excess and
all income and gain net of any losses realized from Permitted
Investments and (ii) prepayment penalties, assumption fees and
late payment charges in each case under the circumstances and in
the manner set forth in the applicable Mortgage Note or Mortgage
shall be retained by the Master Servicer to the extent not
required to be deposited in the Certificate Account pursuant to
Section 3.5 hereof; provided that in the event the Master
Servicer is terminated pursuant to Section 7.1, the Retained
Yield shall be payable to First Horizon Home Loan Corporation in
its individual capacity and shall not be payable to the Trustee
or any successor to the Master Servicer. The Master Servicer
shall be required to pay all expenses incurred by it in
connection with its master servicing activities hereunder
(including payment of any premiums for hazard insurance and any
Primary Insurance Policy and maintenance of the other forms of
insurance coverage required by this Agreement) and shall not be
entitled to reimbursement therefor except as specifically
provided in this Agreement.

          SECTION 3.15  Access to Certain Documentation.

     The Master Servicer shall provide to the OTS and the FDIC
and to comparable regulatory authorities supervising Holders of
Certificates or Certificate Owners and the examiners and
supervisory agents of the OTS, the FDIC and such other
authorities, access to the documentation regarding the Mortgage
Loans required by applicable regulations of the OTS and the FDIC.
Such access shall be afforded without charge, but only upon
reasonable and prior written request and during normal business
hours at the offices designated by the Master Servicer. Nothing
in this Section shall limit the obligation of the Master Servicer
to observe any applicable law prohibiting disclosure of
information regarding the Mortgagors and the failure of the
Master Servicer to provide access as provided in this Section as
a result of such obligation shall not constitute a breach of this
Section.

          SECTION 3.16  Annual Statement as to Compliance.

     The Master Servicer shall deliver to the Depositor and the
Trustee on or before 120 days after the end of the Master
Servicer's fiscal year, commencing with its 2003 fiscal year, an
Officer's Certificate stating, as to the signer thereof, that (i)
a review of the activities of the Master Servicer during the
preceding calendar year and of the performance of the Master

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<PAGE>

Servicer under this Agreement has been made under such officer's
supervision and (ii) to the best of such officer's knowledge,
based on such review, the Master Servicer has fulfilled all its
obligations under this Agreement throughout such year, or, if
there has been a default in the fulfillment of any such
obligation, specifying each such default known to such officer
and the nature and status thereof. The Trustee shall forward a
copy of each such statement to each Rating Agency.

          SECTION 3.17  Annual Independent Public Accountants'
     Servicing Statement; Financial Statements.

     On or before 120 days after the end of the Master Servicer's
fiscal year, commencing with its 2003 fiscal year, the Master
Servicer at its expense shall cause a nationally or regionally
recognized firm of independent public accountants (who may also
render other services to the Master Servicer, the Seller or any
affiliate thereof) which is a member of the American Institute of
Certified Public Accountants to furnish a statement to the
Trustee and the Depositor to the effect that-such firm has
examined certain documents and records relating to the servicing
of the Mortgage Loans under this Agreement or of mortgage loans
under pooling and servicing agreements substantially similar to
this Agreement (such statement to have attached thereto a
schedule setting forth the pooling and servicing agreements
covered thereby) and that, on the basis of such examination,
conducted substantially in compliance with the Uniform Single
Attestation Program for Mortgage Bankers or the Audit Program for
Mortgages serviced for FNMA and FHLMC, such servicing has been
conducted in compliance with such pooling and servicing
agreements except for such significant exceptions or errors in
records that, in the opinion of such firm, the Uniform Single
Attestation Program for Mortgage Bankers or the Audit Program for
Mortgages serviced for FNMA and FHLMC requires it to report. In
rendering such statement, such firm may rely, as to matters
relating to direct servicing of mortgage loans by Subservicers,
upon comparable statements for examinations conducted
substantially in compliance with the Uniform Single Attestation
Program for Mortgage Bankers or the Audit Program for Mortgages
serviced for FNMA and FHLMC (rendered within one year of such
statement) of independent public accountants with respect to the
related Subservicer. Copies of such statement shall be provided
by the Trustee to any Certificateholder or Certificate Owner upon
request at the Master Servicer's expense, provided such statement
is delivered by the Master Servicer to the Trustee.

          SECTION 3.18  Errors and Omissions Insurance; Fidelity
     Bonds.

     The Master Servicer shall for so long as it acts as master
servicer under this Agreement, obtain and maintain in force (a) a
policy or policies of insurance covering errors and omissions in
the performance of its obligations as Master Servicer hereunder
and (b) a fidelity bond in respect of its officers, employees and
agents. Each such policy or policies and bond shall, together,
comply with the requirements from time to time of FNMA or FHLMC
for persons performing servicing for mortgage loans purchased by
FNMA or FHLMC. In the event that any such policy or bond ceases
to be in effect, the Master Servicer shall obtain a comparable
replacement policy or bond from an insurer or issuer, meeting the
requirements set forth above as of the date of such replacement.

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<PAGE>

                           ARTICLE IV
        DISTRIBUTIONS AND ADVANCES BY THE MASTER SERVICER

          SECTION 4.1  Advances.

     The Master Servicer shall determine on the Business Day
prior to each Master Servicer Advance Date whether it is required
to make an Advance pursuant to the definition thereof. If the
Master Servicer determines it is required to make an Advance, it
shall, on or before the Master Servicer Advance Date, either (i)
deposit into the applicable subaccount of the Certificate Account
an amount equal to the Advance or (ii) make an appropriate entry
in its records relating to the applicable subaccount of the
Certificate Account that any Amount Held for Future Distribution
has been used by the Master Servicer in discharge of its
obligation to make any such Advance.  Any funds so applied shall
be replaced by the Master Servicer by deposit in the applicable
subaccount of the Certificate Account no later than the close of
business on the next Business Day preceding the next Master
Servicer Advance Date. The Master Servicer shall be entitled to
be reimbursed from the applicable subaccount of the Certificate
Account for all Advances of its own funds made pursuant to this
Section as provided in Section 3.8.  The obligation to make
Advances with respect to any Mortgage Loan shall continue until
the ultimate disposition of the REO Property or Mortgaged
Property relating to such Mortgage Loan.  As to any Distribution
Date, the Master Servicer shall inform the Trustee in writing of
the amount of the Advance to be made by the Master Servicer on
each Master Servicer Advance Date no later 1:30 p.m. Central time
on the second Business Day immediately preceding such
Distribution Date.

     The Master Servicer shall deliver to the Trustee on the
related Master Servicer Advance Date an Officer's Certificate of
a Servicing Officer indicating the amount of any proposed Advance
determined by the Master Servicer to be a Nonrecoverable Advance.

          SECTION 4.2  Priorities of Distribution.

     (a)  On each Distribution Date, the Trustee shall withdraw
          the Available Funds for each Certificate Group from the
          applicable subaccount of the Distribution Account and
          apply such funds to distributions on the Certificates
          of the related Certificate Group in the following order
          and priority and, in each case, to the extent of
          Available Funds remaining:

          (i)  to the Classes of Senior Certificates of the
               related Certificate Group entitled to
               distributions of interest, the Accrued Certificate
               Interest on each such Class for such Distribution
               Date, any shortfall in available amounts being
               allocated among such Classes in proportion to the
               amount of Accrued Certificate Interest otherwise
               distributable thereon; provided, however, that on
               each Distribution Date through the Accretion
               Termination Date, such amounts with respect to the
               Accrual Certificates will not be distributed on
               such Certificates under this Section 4.2(a)(i) but
               will instead be added to the Class Certificate
               Balances thereof and distributed in accordance
               with Section 4.2(d) below;

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<PAGE>

          (ii) to the Classes of Senior Certificates of the
               related Certificate Group entitled to
               distributions of interest, any Accrued Certificate
               Interest thereon remaining undistributed from
               previous Distribution Dates, to the extent of
               remaining Available Funds from the related
               Mortgage Pool, any shortfall in available amounts
               being allocated among such Classes in proportion
               to the amount of such Accrued Certificate Interest
               remaining undistributed for each such Class for
               such Distribution Date; provided, however, that on
               each Distribution Date through the Accretion
               Termination Date, such amounts with respect to the
               Accrual Certificates will not be distributed on
               such Certificates under this Section 4.2(a)(ii)
               but will instead be added to the Class Certificate
               Balances thereof, to the extent not previously
               added pursuant to Section 4.2(a)(i) above, and
               distributed in accordance with Section 4.2(d)
               below;

         (iii) (1) to the classes of Senior Certificates of the
               related Certificate Group entitled to
               distributions of principal, other than the Class I-
               A-PO and Class II-A-PO Certificates, in reduction
               of the Class Certificate Balances thereof, to the
               extent of remaining Available Funds from the
               related Mortgage Pool, the related Senior Optimal
               Principal Amount for such Distribution Date, in
               the order of priority set forth below in Section
               4.2(b) or 4.2(c), as applicable, until the
               respective Class Certificate Balances thereof have
               been reduced to zero, and (2) concurrently with
               the Group I Senior Certificates, from the
               Available Funds for such Mortgage Pool, to the
               Class I-A-PO Certificates and concurrently with
               the Group II Senior Certificates, from the
               available Funds for such Mortgage Pool, to the
               Class II-A-PO Certificates, the applicable Class
               PO Principal Distribution Amount for such
               Distribution Date;

          (iv) to the Class I-A-PO and Class II-A-PO
               Certificates, the applicable Class PO Deferred
               Amount for such Distribution Date, until the Class
               Certificate Balance thereof has been reduced to
               zero; provided that, (1) on any Distribution Date,
               distributions pursuant to this Section 4.2(a)(iv)
               shall not exceed the related Subordinated Optimal
               Principal Amount for both Mortgage Pools for such
               Distribution Date, (2) such distributions shall
               not reduce the Class Certificate Balances of the
               Class I-A-PO and Class II-A-PO Certificates and
               (3) no distribution will be made in respect of the
               applicable Class PO Deferred Amount after the
               Cross-over Date;

          (v)  to the Class B-1 Certificates, to the extent of
               remaining Available Funds for both Mortgage Pools,
               but subject to the prior payment of amounts
               described under Section 4.2(i), in the following
               order: (1) the Accrued Certificate Interest
               thereon for such Distribution Date, (2) any
               Accrued Certificate Interest thereon remaining
               undistributed from previous Distribution Dates and
               (3) such Class' Allocable Share for such
               Distribution Date;

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<PAGE>

          (vi) to the Class B-2 Certificates, to the extent of
               remaining Available Funds for both Mortgage Pools,
               but subject to the prior payment of amounts
               described under Section 4.2(i), in the following
               order: (1) the Accrued Certificate Interest
               thereon for such Distribution Date, (2) any
               Accrued Certificate Interest thereon remaining
               undistributed from previous Distribution Dates and
               (3) such Class' Allocable Share for such
               Distribution Date;

         (vii) to the Class B-3 Certificates, to the extent of
               remaining Available Funds for both Mortgage Pools,
               but subject to the prior payment of amounts
               described under Section 4.2(i), in the following
               order: (1) the Accrued Certificate Interest
               thereon for such Distribution Date, (2) any
               Accrued Certificate Interest thereon remaining
               undistributed from previous Distribution Dates and
               (3) such Class' Allocable Share for such
               Distribution Date;

        (viii) to the Class B-4 Certificates, to the extent of
               remaining Available Funds for both Mortgage Pools,
               but subject to the prior payment of amounts
               described under Section 4.2(i), in the following
               order: (1) the Accrued Certificate Interest
               thereon for such Distribution Date, (2) any
               Accrued Certificate Interest thereon remaining
               undistributed from previous Distribution Dates and
               (3) such Class' Allocable Share for such
               Distribution Date;

          (ix) to the Class B-5 Certificates, to the extent of
               remaining Available Funds for both Mortgage Pools,
               but subject to the prior payment of amounts
               described under Section 4.2(i), in the following
               order: (1) the Accrued Certificate Interest
               thereon for such Distribution Date, (2) any
               Accrued Certificate Interest thereon remaining
               undistributed from previous Distribution Dates and
               (3) such Class' Allocable Share for such
               Distribution Date; and

          (x)  to the Class B-6 Certificates, to the extent of
               remaining Available Funds for both Mortgage Pools,
               but subject to the prior payment of amounts
               described under Section 4.2(i), in the following
               order: (1) the Accrued Certificate Interest
               thereon for such Distribution Date, (2) any
               Accrued Certificate Interest thereon remaining
               undistributed from previous Distribution Dates and
               (3) such Class' Allocable Share for such
               Distribution Date.

     (b)  Amounts allocated to the Group I Senior Certificates
          pursuant to Section 4.2(a)(iii) above will be
          distributed in the following order of priority:

          (i)  to the Class I-A-R Certificates until their Class
               Certificate Balances has been reduced to zero;

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<PAGE>

          (ii) concurrently to the Class I-A-1 and Class I-A-2
               Certificates, pro rata, until their respective
               Class Certificate Balances have each been reduced
               to zero; and

         (iii) to the Class I-A-4 Certificates, until the Class
               Certificate Balance thereof has been reduced to
               zero.

     (c)  Amounts allocated to the Group II Senior Certificates
          pursuant to Section 4.2(a)(iii) above will be
          distributed to the Class II-A-1 Certificates, until the
          Class Certificate Balance thereof has been reduced to
          zero.

     (d)  On each Distribution Date through the Accretion
          Termination Date, the Accrual Amount for the Accrual
          Certificates will be added to the Class Certificate
          Balances thereof and will be distributed to the
          following Classes (prior to giving effect to the
          distributions above) in reduction of their Class
          Certificate Balances in the following order of
          priority:

          (i)  concurrently, to the Class I-A-1 and Class I-A-2
               Certificates, pro rata, until their respective
               Class Certificate Balances have each been reduced
               to zero; and

          (ii) to the Class I-A-4 Certificates, until the Class
               Certificate Balance thereof has been reduced to
               zero.

     (e)  On each Distribution Date, the Trustee shall distribute
          to the Holders of the Class I-A-R Certificates
          representing the RL Interest, RM Interest and RU
          Interest, any Available Funds remaining in the related
          REMIC created hereunder for such Distribution Date
          after application of all amounts described in clauses
          (a), (b) and (c) of this Section 4.2.  Any
          distributions pursuant to this subsection (d) shall not
          reduce the Class Certificate Balances of the Class I-A-
          R Certificates.

     (f)  On and after the Cross-Over Date, the amount
          distributable to the Senior Certificates of the related
          Certificate Group pursuant to Section 4.2(a)(iii) for
          the related Distribution Date shall be allocated among
          the related Classes of Senior Certificates, pro rata
          (other than the Principal Only Certificates, in the
          case of the Group I Senior Certificates), on the basis
          of their respective Class Certificate Balances
          immediately prior to such Distribution Date, regardless
          of the priorities and amounts set forth in Section 4.2.

     (g)  If on any Distribution Date (i) the Class Certificate
          Balance of any Class of Subordinated Certificates
          (other than the Class of Subordinated Certificates with
          the highest priority of distribution) for which the
          related Class Prepayment Distribution Trigger was
          satisfied on such Distribution Date is reduced to zero
          and (ii) amounts distributable to such Class or Classes
          of Subordinated Certificates pursuant to clauses (2),
          (3) and (5) of the applicable Subordinated Optimal
          Principal Amount remain undistributed on such
          Distribution Date after all amounts otherwise
          distributable on such date pursuant to clauses (v)
          through (ix) of Section 4.2(a) have been distributed,
          such amounts, to the extent of such

                              -71-

<PAGE>

          Class' remaining Allocable Share, shall be distributed
          on such Distribution Date to the remaining Classes of
          Subordinated Certificates on a pro rata basis, subject
          to the priority of payments described in Section
          4.2(a).

     (h)  In the event that in any calendar month the Master
          Servicer recovers an amount (an "Unanticipated
          Recovery") in respect of principal of a Mortgage Loan
          which had previously been allocated as a Realized Loss
          to any Class of Certificates pursuant to Section 4.4,
          on the Distribution Date in the next succeeding
          calendar month, the Trustee shall withdraw the
          Unanticipated Recovery from the Distribution Account
          and sequentially increase the Class Certificate Balance
          of each Class of Certificates to which such Realized
          Losses were previously allocated by the amount of such
          Unanticipated Recovery, but not to exceed the amount of
          such Realized Loss previously allocated to such Class,
          and shall distribute the amount of such Unanticipated
          Recovery to each such Class of Certificates in the
          order of payment priority described in Section 4.2(a)
          of this Agreement.  When the Class Certificate Balance
          of a Class of Certificates has been reduced to zero,
          the Holders of such Class shall not be entitled to any
          share of an Unanticipated Recovery, and such
          Unanticipated Recovery shall be allocated among all
          outstanding Classes of Certificates entitled thereto in
          accordance with the preceding sentence, subject to the
          remainder of this subsection (g).  In the event that
          (i) any Unanticipated Recovery remains undistributed in
          accordance with the preceding sentence or (ii) the
          amount of an Unanticipated Recovery exceeds the amount
          of the Realized Loss previously allocated to any
          outstanding Classes with respect to the related
          Mortgage Loan, on the applicable Distribution Date the
          Trustee shall distribute such Unanticipated Recoveries
          in accordance with the priorities set forth in Section
          4.2(a).

          For purposes of the preceding paragraph, the share of
     an Unanticipated Recovery allocable to any Class of
     Certificates with respect to a Mortgage Loan shall be (i)
     with respect to the Principal Only Certificates, based on
     the applicable Non-Class I-A-PO Percentage or Class II-A-PO
     Percentage of the principal portion of the Realized Loss
     previously allocated thereto with respect to such Mortgage
     Loan (or all Mortgage Loans for purposes of the next to last
     sentence of the preceding paragraph), and (ii) with respect
     to any other Class of Certificates, based on its pro rata
     share (in proportion to the Class Certificate Balances
     thereof with respect to such Distribution Date) of the
     applicable Non-Class I-A-PO Percentage or Class II-A-PO
     Percentage of the principal portion of any such Realized
     Loss previously allocated with respect to such Mortgage Loan
     (or Loans); provided however, that (i) the share of an
     Unanticipated Recovery allocable to a Principal Only
     Certificate with respect to any Mortgage Loan (or Loans)
     shall be reduced by the applicable Non-Class I-A-PO
     Percentage or Class II-A-PO Percentage of the aggregate
     amount previously distributed to such Class in respect of
     such Mortgage Loan (or Loans) and (ii) the amount by which
     the distributions to the Principal Only Certificates have
     been so reduced shall be distributed to the Classes of
     Certificates described in clause (ii) of the preceding
     paragraph in the same proportion as described in such clause
     (ii).  For purposes of the preceding sentence, any Class PO
     Deferred Amount distributable to a Principal Only
     Certificate on previous Distribution Dates shall be deemed
     to have been allocated in respect of the Mortgage Loans as
     to which the

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<PAGE>

     applicable Non-Class I-A-PO Percentage or Class II-A-PO
     Percentage of the principal portion of Realized Losses has
     previously been allocated to such Class on a pro rata basis
     (based on the amount of Realized Losses so allocated).

     (i)  On any Distribution Date on which any Certificate Group
          constitutes an Undercollateralized Group, all amounts
          otherwise distributable as principal on the
          Subordinated Certificates, in reverse order of priority
          (or, following the Cross-over Date, such other amounts
          described in the immediately following sentence), will
          be distributed as principal to the Senior Certificates
          of such Undercollateralized Group (other than the
          Principal Only Certificates) in accordance with the
          priorities set forth in Sections 4.2(b) and (c), until
          the total Class Certificate Balance of such Senior
          Certificates equals the Pool Principal Balance of the
          related Mortgage Pool (such distribution, an
          "Undercollateralization Distribution").  If the Senior
          Certificates of a Certificate Group (other than the
          Principal Only Certificates) constitute an
          Undercollateralized Group on any Distribution Date
          following the Cross-over Date, Undercollateralization
          Distributions will be made from the excess of the
          Available Funds for the other Mortgage Pool remaining
          after all required amounts for that Distribution Date
          have been distributed to the Senior Certificates of the
          other Certificate Group (other than the Principal Only
          Certificates).  In addition, the amount of any unpaid
          Accrued Certificate Interest with respect to an
          Undercollateralized Group on any Distribution Date
          (including any Accrued Certificate Interest for the
          related Distribution Date) will be distributed to the
          Senior Certificates of the Undercollateralized Group
          (other than the Principal Only Certificates) prior to
          the payment of any Undercollateralization Distributions
          from amounts otherwise distributable as principal on
          the Subordinated Certificates, in reverse order of
          priority (or, following the Cross-over Date, as
          provided in the preceding sentence).

          In addition, if on any Distribution Date the total
     Class Certificate Balance of the Senior Certificates of a
     Certificate Group (other than the Principal Only
     Certificates) (after giving effect to distributions to be
     made on that Distribution Date) has been reduced to zero,
     all amounts otherwise distributable as prepayments of
     principal to the Subordinated Certificates, in reverse order
     of priority, will instead be distributed as principal to the
     Senior Certificates of the other Certificate Group (other
     than the Principal Only Certificates) unless (a) the
     weighted average of the Subordinated Percentages for both
     Mortgage Pools, weighted on the basis of the Stated
     Principal Balance of the Mortgage Loans in the related
     Mortgage Pool (other than the Principal Only Certificates),
     is at least two times the weighted average of the initial
     Subordinate Percentage for both Mortgage Pools (calculated
     on such basis) and (b) the aggregate Stated Principal
     Balance of all of the Mortgage Loans in both Mortgage Pools
     delinquent 60 days or more (including for this purpose any
     such Mortgage Loans in foreclosure or subject to bankruptcy
     proceedings and Mortgage Loans with respect to which the
     related Mortgaged Property has been acquired by the Trust
     Fund), averaged over the preceding six month period, as a
     percentage of the then current aggregate Class Certificate
     Balance of the Subordinated Certificates, is less than 50%.
     All distributions described above will be made in accordance
     with the priorities set forth in Sections 4.2(b) and (c).

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<PAGE>

     (j)  On each Distribution Date, the Trustee shall withdraw
          any Additional Amounts from the applicable subaccount
          of the Distribution Account and shall distribute such
          Additional Amounts to the Holders of the Class I-A-3
          Certificates.  Such Additional Amounts will not reduce
          the Notional Amount.

          SECTION 4.3  Method of Distribution.

     (a)  All distributions with respect to each Class of
          Certificates on each Distribution Date shall be made
          pro rata among the outstanding Certificates of such
          Class, based on the Percentage Interest in such Class
          represented by each Certificate.  Payments to the
          Certificateholders on each Distribution Date will be
          made by the Trustee to the Certificateholders of record
          on the related Record Date by check or money order
          mailed to a Certificateholder at the address appearing
          in the Certificate Register, or upon written request by
          such Certificateholder to the Trustee made not later
          than the applicable Record Date, by wire transfer to a
          U.S. depository institution acceptable to the Trustee,
          or by such other means of payment as such
          Certificateholder and the Trustee shall agree.

     (b)  Each distribution with respect to a Book-Entry
          Certificate shall be paid to the Depository, which
          shall credit the amount of such distribution to the
          accounts of its Depository Participants in accordance
          with its normal procedures.  Each Depository
          Participant shall be responsible for disbursing such
          distribution to the Certificate Owners that it
          represents and to each financial intermediary for which
          it acts as agent.  Each such financial intermediary
          shall be responsible for disbursing funds to the
          Certificate Owners that it represents.  All such
          credits and disbursements with respect to a Book-Entry
          Certificate are to be made by the Depository and the
          Depository Participants in accordance with the
          provisions of the applicable Certificates.  Neither the
          Trustee nor the Master Servicer shall have any
          responsibility therefor except as otherwise provided by
          applicable law.

     (c)  The Trustee shall withhold or cause to be withheld such
          amounts as it reasonably determines are required by the
          Code (giving full effect to any exemptions from
          withholding and related certifications required to be
          furnished by Certificateholders or Certificate Owners
          and any reductions to withholding by virtue of any
          bilateral tax treaties and any applicable certification
          required to be furnished by Certificateholders or
          Certificate Owners with respect thereto) from
          distributions to be made to Non-U.S. Persons.  If the
          Trustee reasonably determines that a more accurate
          determination of the amount required to be withheld for
          a distribution can be made within a reasonable period
          after the scheduled date for such distribution, it may
          hold such distribution in trust for a Holder of a
          Residual Certificate until such determination can be
          made.  For the purposes of this paragraph, a "Non-U.S.
          Person" is (i) an individual other than a citizen or
          resident of the United States, (ii) a partnership,
          corporation or entity treated as a partnership or
          corporation for U.S. federal income tax purposes not
          formed under the laws of the United States, any state
          thereof or the District of Columbia (unless, in the
          case of a partnership, Treasury regulations provide
          otherwise), (iii) any estate, the income of which is
          not subject to U.S. federal

                              -74-

<PAGE>

          income taxation, regardless of source, and (iv) any
          trust, other than a trust that a court within the
          United States is able to exercise primary supervision
          over the administration of the trust and one or more
          U.S. Persons have the authority to control all
          substantial decisions of the trust.

          SECTION 4.4  Allocation of Losses.

     (a)  On or prior to each Determination Date, the Master
          Servicer shall determine the amount of any Realized
          Loss in respect of each Mortgage Loan that occurred
          during the immediately preceding calendar month.

     (b)  With respect to any Distribution Date, the principal
          portion of each Realized Loss (other than any Excess
          Loss) with respect to a Mortgage Pool shall be
          allocated as follows:

          (i)  the applicable Class I-A-PO Percentage or Class II-
               A-PO Percentage of the principal portion of any
               such Realized Loss on a Discount Mortgage Loan in
               Pool I or Pool II shall be allocated to the Class
               I-A-PO or Class II-A-PO Certificates,
               respectively, until the Class Certificate Balance
               thereof has been reduced to zero; and

          (ii) the principal portion of any such Realized Loss
               (or the applicable Class I-A-PO Percentage or
               Class II-A-PO Percentage thereof) shall be
               allocated in the following order of priority:

               first, to the Class B-6 Certificates until the
               Class Certificate Balance thereof has been reduced
               to zero;

               second, to the Class B-5 Certificates until the
               Class Certificate Balance thereof has been reduced
               to zero;

               third, to the Class B-4 Certificates until the
               Class Certificate Balance thereof has been reduced
               to zero;

               fourth, to the Class B-3 Certificates until the
               Class Certificate Balance thereof has been reduced
               to zero;

               fifth, to the Class B-2 Certificates until the
               Class Certificate Balance thereof has been reduced
               to zero;

               sixth, to the Class B-1 Certificates until the
               Class Certificate Balance thereof has been reduced
               to zero;

               seventh, to the Classes of Senior Certificates of
               the related Certificate Group (other than the
               Principal Only Certificates), pro rata, in
               accordance with their Class Certificate Balances;
               provided, that any such loss allocated to the
               Accrual Certificates shall instead be allocated on
               the basis of the lesser of (x) the Class
               Certificate Balance thereof immediately prior

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<PAGE>

               to the applicable Distribution Date and (y) the
               Class Certificate Balance thereof on the Closing
               Date (as reduced by any Realized Losses previously
               allocated thereto).

     (c)  With respect to any Distribution Date, the principal
          portion of any Excess Loss with respect to a Mortgage
          Pool (other than Excess Bankruptcy Losses attributable
          to Debt Service Reductions) shall be allocated pro rata
          to each Class of Certificates of the related
          Certificate Group based on their respective Class
          Certificate Balances (in the case of the Senior
          Certificates) or Apportioned Principal Balances (in the
          case of the Subordinated Certificates); provided, that
          any such loss allocated to the Accrual Certificates
          shall instead be allocated on the basis of the lesser
          of (x) the Class Certificate Balance thereof
          immediately prior to the applicable Distribution Date
          and (y) the Class Certificate Balance thereof on the
          Closing Date (as reduced by any Realized Losses
          previously allocated thereto).

     (d)  Any Realized Losses allocated to a Class of
          Certificates pursuant to Section 4.4(a) or (b) shall be
          allocated among the Certificates of such Class in
          proportion to their respective Certificate Principal
          Balances.  Any allocation of Realized Losses pursuant
          to this paragraph (c) shall be accomplished by reducing
          the Certificate Principal Balances of the related
          Certificates on the related Distribution Date in
          accordance with Section 4.4(d).

     (e)  Realized Losses allocated in accordance with this
          Section 4.4 shall be allocated on the Distribution Date
          in the month following the month in which such loss was
          incurred and, (i) in the case of the principal portion
          thereof, after giving effect to the distributions made
          on such Distribution Date and (ii) in the case of the
          interest portion thereof, after giving effect to the
          calculation of the Accrual Amount for the Accrual
          Certificates for such Distribution Date.  The aggregate
          amount of Realized Losses to be allocated to the
          Principal Only Certificates on such Distribution Date
          will be taken into account in determining distributions
          in respect of any Class PO Deferred Amount for such
          Distribution Date.

     (f)  On each Distribution Date, the Master Servicer shall
          determine the Subordinated Certificate Writedown
          Amount, if any.  Any such Subordinated Certificate
          Writedown Amount shall effect, without duplication of
          any other provision in this Section 4.4 that provides
          for a reduction in the Class Certificate Balance of the
          Subordinated Certificates, a corresponding reduction in
          the Class Certificate Balance of the Subordinated
          Certificates, which reduction shall occur on such
          Distribution Date after giving effect to distributions
          made on such Distribution Date.

     (g)  Notwithstanding the foregoing, no such allocation of
          any Realized Loss shall be made on a Distribution Date
          to a Class of Certificates to the extent that such
          allocation would result in the reduction of the
          aggregate Class Certificate Balances of all the Senior
          Certificates of a related Certificate Group as of such
          Distribution Date plus the Apportioned Principal
          Balances of the Subordinated

                              -76-

<PAGE>

          Certificates of such Certificate Group as of such
          Distribution Date, after giving effect to all
          distributions and prior allocations of Realized Losses
          on such date, to an amount less than the aggregate
          Stated Principal Balance of the Mortgage Loans in the
          related Mortgage Pool as of the first day of the month
          of such Distribution Date, less any Deficient
          Valuations occurring on or prior to the Bankruptcy
          Coverage Termination Date (such limitation, the "Loss
          Allocation Limitation").

          SECTION 4.5  Reserved.

          SECTION 4.6  Monthly Statements to Certificateholders.

     (a)  Not later than each Distribution Date, the Trustee
          shall prepare and cause to be forwarded by first class
          mail to each Certificateholder, the Master Servicer,
          the Depositor and each Rating Agency a statement
          setting forth with respect to the related distribution
          and/or may post such statement on its website located
          at www.mbsreporting.com:

          (i)  the amount thereof allocable to principal,
               separately identifying the aggregate amount of any
               Principal Prepayments and Liquidation Proceeds
               included therein;

          (ii) the amount thereof allocable to interest, the
               amount of any Compensating Interest included in
               such distribution and any remaining Net Interest
               Shortfalls after giving effect to such
               distribution;

         (iii) if the distribution to the Holders of such Class
               of Certificates is less than the full amount that
               would be distributable to such Holders if there
               were sufficient funds available therefor, the
               amount of the shortfall and the allocation thereof
               as between principal and interest;

          (iv) the Class Certificate Balance of each Class of
               Certificates after giving effect to the
               distribution of principal on such Distribution
               Date;

          (v)  the Pool Principal Balance for each Mortgage Pool
               for the following Distribution Date;

          (vi) the Senior Percentage and Subordinated Percentage
               for each Certificate Group for the following
               Distribution Date;

         (vii) the amount of the Master Servicing Fees paid to
               or retained by the Master Servicer with respect to
               such Distribution Date;

        (viii) the Pass-Through Rate for each such Class of
               Certificates with respect to such Distribution
               Date;

          (ix) the amount of Advances for each Mortgage Pool
               included in the distribution on such Distribution
               Date and the aggregate amount of

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<PAGE>

               Advances for each Mortgage Pool outstanding as of
               the close of business on such Distribution Date;

          (x)  the number and aggregate principal amounts of
               Mortgage Loans (A) delinquent (exclusive of
               Mortgage Loans in foreclosure) (1) 1 to 30 days
               (2) 31 to 60 days (3) 61 to 90 days and (4) 91 or
               more days and (B) in foreclosure and delinquent
               (1) 1 to 30 days (2) 31 to 60 days (3) 61 to 90
               days and (4) 91 or more days, as of the close of
               business on the last day of the calendar month
               preceding such Distribution Date;

          (xi) with respect to any Mortgage Loan in a Mortgage
               Pool that became an REO Property during the
               preceding calendar month, the loan number and
               Stated Principal Balance of such Mortgage Loan as
               of the close of business on the Determination Date
               preceding such Distribution Date and the date of
               acquisition thereof;

         (xii) the total number and principal balance of any REO
               Properties (and market value, if available) in
               each Mortgage Pool as of the close of business on
               the Determination Date preceding such Distribution
               Date;

        (xiii) the Senior Prepayment Percentage for each
               Certificate Group for the following Distribution
               Date;

         (xiv) the aggregate amount of Realized Losses incurred
               in respect of each Mortgage Pool during the
               preceding calendar month;

          (xv) the cumulative amount of Realized Losses applied
               in reduction of the principal balance of each
               class of Certificates since the Closing Date;

         (xvi) the Special Hazard Loss Coverage Amount, the
               Fraud Loss Coverage Amount and the Bankruptcy Loss
               Coverage Amount, in each case as of the related
               Determination Date;

        (xvii) with respect to the second Distribution Date,
               the number and aggregate balance of any Delay
               Delivery Mortgage Loans not delivered within
               thirty days after the Closing Date; and

       (xviii) the amount of any Additional Amounts
               distributed to the Holders of the Class I-A-3
               Certificates.

     (b)  The Trustee's responsibility for disbursing the above
          information to the Certificateholders is limited to the
          availability, timeliness and accuracy of the
          information provided by the Master Servicer.

     (c)  On or before the fifth Business Day following the end
          of each Prepayment Period (but in no event later than
          the third Business Day prior to the related
          Distribution Date), the Master Servicer shall deliver
          to the Trustee (which delivery may be by

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<PAGE>

          electronic data transmission) a report in substantially
          the form set forth as Schedule III hereto.

     (d)  Within a reasonable period of time after the end of
          each calendar year, the Trustee shall cause to be
          furnished to each Person who at any time during the
          calendar year was a Certificateholder, a statement
          containing the information set forth in clauses (a)(i),
          (a)(ii) and (a)(vii) of this Section 4.6 aggregated for
          such calendar year or applicable portion thereof during
          which such Person was a Certificateholder. Such
          obligation of the Trustee shall be deemed to have been
          satisfied to the extent that substantially comparable
          information shall be provided by the Trustee pursuant
          to any requirements of the Code as from time to time in
          effect.

          SECTION 4.7  [RESERVED]

          SECTION 4.8  [RESERVED]

          SECTION 4.9  Determination of Pass-Through Rates for
     LIBOR Certificates.

     (a)  On each Interest Determination Date so long as any
          LIBOR Certificates are outstanding, the Trustee will
          determine LIBOR on the basis of the British Bankers'
          Association ("BBA") "Interest Settlement Rate" for one-
          month deposits in U.S. dollars as found on Telerate
          page 3750 as of 11:00 a.m. London time on each LIBOR
          Determination Date. "Telerate Page 3750" means the
          display page currently so designated on the Bridge
          Telerate Service (formerly the Dow Jones Markets) (or
          such other page as may replace that page on that
          service for the purpose of displaying comparable rates
          or prices.)

     (b)  If LIBOR cannot be determined as provided in paragraph
          (a) of this Section 4.9, the Trustee shall either (i)
          request each Reference Bank inform the Trustee of the
          quotation offered by such Reference Bank's principal
          London office for making one-month United States dollar
          deposits in leading banks in the London interbank
          market, as of 11:00 a.m. (London time) on such Interest
          Determination Date or (ii) in lieu of making any such
          request, rely on such Reference Bank quotations that
          appear at such time on the Reuters Screen LIBO Page (as
          defined in the  International Swap Dealers Association
          Inc. Code of Standard Wording, Assumptions and
          Provisions for Swaps, 1986 Edition), to the extent
          available. With respect to this Section 4.2(b), LIBOR
          for the next Interest Accrual Period will be
          established by the Trustee on each Interest
          Determination Date as follows:

          (i)  If on any Interest Determination Date two or more
               Reference Banks provide such offered quotations,
               LIBOR for the next Interest Accrual Period shall
               be the arithmetic mean of such offered quotations
               (rounding such arithmetic mean upwards if
               necessary to the nearest whole multiple of 1/32%).

          (ii) If on any Interest Determination Date only one or
               none of the Reference Banks provides such offered
               quotations, LIBOR for the next Interest

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<PAGE>

               Accrual Period shall be whichever is the higher of
               (i) LIBOR as determined on the previous Interest
               Determination Date or (ii) the Reserve Interest
               Rate. The "Reserve Interest Rate" shall be the
               rate per annum which the Trustee determines to be
               either (i) the arithmetic mean (rounded upwards if
               necessary to the nearest whole multiple of 1/32%)
               of the one-month United States dollar lending
               rates that New York City banks selected by the
               Trustee are quoting, on the relevant Interest
               Determination Date, to the principal London
               offices of at least two of the Reference Banks to
               which such quotations are, in the opinion of the
               Trustee, being so made, or (ii) in the event that
               the Trustee can determine no such arithmetic mean,
               the lowest one-month United States dollar lending
               rate which New York City banks selected by the
               Trustee are quoting on such Interest Determination
               Date to leading European banks.

         (iii) If on any Interest Determination Date the
               trustee is required but is unable to determine the
               Reserve Interest Rate in the manner provided in
               paragraph (b) above, LIBOR shall be LIBOR as
               determined on the preceding Interest Determination
               Date.

     The Master Servicer shall designate at least four Reference
Banks. Until all of the LIBOR Certificates are paid in full, the
Trustee will refer to the four Reference Banks designated by the
Master Servicer to determine LIBOR with respect to each Interest
Determination Date.  Each "Reference Bank" shall be a leading
bank engaged in transactions in Eurodollar deposits in the
international Eurocurrency market, shall not control, be
controlled by, or be under common control with, the Trustee and
shall have an established place of business in London. If any
such Reference Bank should be unwilling or unable to act as such
or if the Master Servicer should terminate its appointment as
Reference Bank, the Master Servicer shall promptly appoint or
cause to be appointed another Reference Bank. The Trustee shall
have no liability or responsibility to any Person for (i) the
selection of any Reference Bank for purposes of determining LIBOR
or (ii) any inability of the Master Servicer to designate at
least four Reference Banks.

     (c)  The Pass-Through Rate for each Class of LIBOR
          Certificates for each Interest Accrual Period shall be
          determined by the Trustee on each Interest
          Determination Date so long as the LIBOR Certificates
          are outstanding on the basis of LIBOR and the
          respective formulae appearing in footnotes
          corresponding to the LIBOR Certificates in the table
          relating to the Certificates in the Preliminary
          Statement.

     In determining LIBOR, any Pass-Through Rate for the LIBOR
Certificates, any Interest Settlement Rate, or any Reserve
Interest Rate, the Trustee may conclusively rely and shall be
protected in relying upon the offered quotations (whether
written, oral or on the Dow Jones Markets) from the BBA
designated banks, the Reference Banks or the New York City banks
as to LIBOR, the Interest Settlement Rate or the Reserve Interest
Rate, as appropriate, in effect from time to time. The Trustee
shall not have any liability or responsibility to any Person for
(i) the Trustee's selection of New York City banks for purposes
of determining any Reserve Interest Rate or (ii) its inability,
following a good-faith reasonable effort, to obtain such
quotations from,

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<PAGE>

the BBA designated banks, the Reference Banks or the New York
City banks or to determine such arithmetic mean, all as provided
for in this Section 4.9.

     (d)  The establishment of LIBOR and each Pass-Through Rate
          for the LIBOR Certificates by the Trustee shall (in the
          absence of manifest error) be final, conclusive and
          binding upon each Holder of a Certificate and the
          Trustee.

                            ARTICLE V
                        THE CERTIFICATES

          SECTION 5.1  The Certificates.

     The Certificates shall be substantially in the forms
attached hereto as exhibits. The Certificates shall be issuable
in registered form, in the minimum denominations, integral
multiples in excess thereof (except that one Certificate in each
Class may be issued in a different amount which must be in excess
of the applicable minimum denomination) and aggregate
denominations per Class set forth in the Preliminary Statement.

     Subject to Section 9.2 hereof respecting the final
distribution on the Certificates, on each Distribution Date the
Trustee shall make distributions to each Certificateholder of
record on the preceding Record Date either (x) by wire transfer
in immediately available funds to the account of such Holder at a
bank or other entity having appropriate facilities therefor, if
(i) such Holder has so notified the Trustee at least five
Business Days prior to the related Record Date and (ii) such
Holder shall hold (A) 100% of the Class Certificate Balance of
any Class of Certificates or (B) Certificates of any Class with
aggregate principal Denominations of not less than $1,000,000 or
(y) by check mailed by first class mail to such Certificateholder
at the address of such Holder appearing in the Certificate
Register.

     The Certificates shall be executed by manual or facsimile
signature on behalf of the Trustee by an authorized officer.
Certificates bearing the manual or facsimile signatures of
individuals who were, at the time when such signatures were
affixed, authorized to sign on behalf of the Trustee shall bind
the Trustee, notwithstanding that such individuals or any of them
have ceased to be so authorized prior to the countersignature and
delivery of such Certificates or did not hold such offices at the
date of such Certificate. No Certificate shall be entitled to any
benefit under this Agreement, or be valid for any purpose, unless
countersigned by the Trustee by manual signature, and such
countersignature upon any Certificate shall be conclusive
evidence, and the only evidence, that such Certificate has been
duly executed and delivered hereunder. All Certificates shall be
dated the date of their countersignature. On the Closing Date,
the Trustee shall countersign the Certificates to be issued at
the direction of the Depositor, or any affiliate thereof.

     The Depositor shall provide, or cause to be provided, to the
Trustee on a continuous basis, an adequate inventory of
Certificates to facilitate transfers.

                              -81-

<PAGE>

          SECTION 5.2  Certificate Register; Registration of
     Transfer and Exchange of Certificates.

     (a)  The Trustee shall maintain, or cause to be maintained
          in accordance with the provisions of Section 5.6
          hereof, a Certificate Register for the Trust Fund in
          which, subject to the provisions of subsections (b) and
          (c) below and to such reasonable regulations as it may
          prescribe, the Trustee shall provide for the
          registration of Certificates and of transfers and
          exchanges of Certificates as herein provided. Upon
          surrender for registration of transfer of any
          Certificate, the Trustee shall execute and deliver, in
          the name of the designated transferee or transferees,
          one or more new Certificates of the same Class and
          aggregate Percentage Interest.

          At the option of a Certificateholder, Certificates may
     be exchanged for other Certificates of the same Class in
     authorized denominations and evidencing the same aggregate
     Percentage Interest upon surrender of the Certificates to be
     exchanged at the office or agency of the Trustee. Whenever
     any Certificates are so surrendered for exchange, the
     Trustee shall execute, authenticate, and deliver the
     Certificates which the Certificateholder making the exchange
     is entitled to receive. Every Certificate presented or
     surrendered for registration of transfer or exchange shall
     be accompanied by a written instrument of transfer in form
     satisfactory to the Trustee duly executed by the Holder
     thereof or his attorney duly authorized in writing.

          No service charge to the Certificateholders shall be
     made for any registration of transfer or exchange of
     Certificates, but payment of a sum sufficient to cover any
     tax or governmental charge that may be imposed in connection
     with any transfer or exchange of Certificates may be
     required.

          All Certificates surrendered for registration of
     transfer or exchange shall be cancelled and subsequently
     destroyed by the Trustee in accordance with the Trustee's
     customary procedures.

     (b)  No transfer of a Private Certificate shall be made
          unless such transfer is made pursuant to an effective
          registration statement under the Securities Act and any
          applicable state securities laws or is exempt from the
          registration requirements under said Act and such state
          securities laws. In the event that a transfer is to be
          made in reliance upon an exemption from the Securities
          Act and such laws, in order to assure compliance with
          the Securities Act and such laws, the Certificateholder
          desiring to effect such transfer and such
          Certificateholder's prospective transferee shall each
          certify to the Trustee in writing the facts surrounding
          the transfer in substantially the forms set forth in
          Exhibit I (the "Transferor Certificate") and (i)
          deliver a letter in substantially the form of either
          Exhibit J (the "Investment Letter") or Exhibit K (the
          "Rule 144A Letter") or (ii) there shall be delivered to
          the Trustee at the expense of the transferor an Opinion
          of Counsel that such transfer may be made pursuant to
          an exemption from the Securities Act. The Depositor
          shall provide to any Holder of a Private Certificate
          and any prospective transferee designated by any such
          Holder, information

                              -82-

<PAGE>

          regarding the related Certificates and the Mortgage
          Loans and such other information as shall be necessary
          to satisfy the condition to eligibility set forth in
          Rule 144A(d)(4) for transfer of any such Certificate
          without registration thereof under the Securities Act
          pursuant to the registration exemption provided by Rule
          144A. The Trustee and the Master Servicer shall
          cooperate with the Depositor in providing the Rule 144A
          information referenced in the preceding sentence,
          including providing to the Depositor such information
          regarding the Certificates, the Mortgage Loans and
          other matters regarding the Trust Fund as the Depositor
          shall reasonably request to meet its obligation under
          the preceding sentence. Each Holder of a Private
          Certificate desiring to effect such transfer shall, and
          does hereby agree to, indemnify the Trustee and the
          Depositor, the Seller and the Master Servicer against
          any liability that may result if the transfer is not so
          exempt or is not made in accordance with such federal
          and state laws.

          No transfer of a Class I-A-PO or Class I-A-PO
     Certificate shall be made unless the transferee of such
     Certificate (i) is not an employee benefit plan or
     arrangement subject to Section 406 of ERISA or Section 4975
     of the Code, nor a person acting on behalf of any such plan
     or arrangement, nor using the assets of any such plan or
     arrangement to effect such transfer, (ii) such Class I-A-PO
     or Class I-A-PO Certificate has been subject to an ERISA-
     Qualified Underwriting, or (iii) in the case of any such
     Class I-A-PO or Class I-A-PO Certificate not satisfying
     clause (ii) and presented for registration in the name of an
     employee benefit plan subject to ERISA, or a plan or
     arrangement subject to Section 4975 of the Code (or
     comparable provisions of any subsequent enactments), or a
     trustee of any such plan or any other person acting on
     behalf of any such plan or arrangement, or using such plan's
     or arrangement's assets, an Opinion of Counsel satisfactory
     to the Trustee, which Opinion of Counsel shall not be an
     expense of either the Trustee or the Trust Fund, addressed
     to the Trustee to the effect that the purchase or holding of
     such Class I-A-PO or Class I-A-PO Certificate will not
     result in prohibited transactions under Section 406 of ERISA
     and Section 4975 of the Code and will not subject the
     Trustee, the Depositor or the Master Servicer to any
     obligation in addition to those expressly undertaken in this
     Agreement or to any liability.

          No transfer of an ERISA-Restricted Certificate shall be
     made unless the Trustee shall have received a Transferor
     Certificate from the related transferor and either (i) a
     representation from the transferee of such Certificate
     acceptable to and in form and substance satisfactory to the
     Trustee (in the event such Certificate is a Private
     Certificate, such requirement is satisfied only by the
     Trustee's receipt of a representation letter from the
     transferee substantially in the form of Exhibit J or Exhibit
     K), to the effect that such transferee is not an employee
     benefit plan or arrangement subject to Section 406 of ERISA
     or a plan or arrangement subject to Section 4975 of the
     Code, nor a person acting on behalf of any such plan or
     arrangement, nor using the assets of any such plan or
     arrangement to effect such transfer, (ii) in the case of a
     Private Certificate (that has been subject to an ERISA-
     Qualified Underwriting) or a Residual Certificate, if the
     purchaser is an insurance company, a representation that the
     purchaser is an insurance company which is purchasing such
     Certificates with funds contained in an "insurance company
     general account" (as such term is defined in Section V(e) of
     Prohibited Transaction Class Exemption 95-60 ("PTCE 95-60"))
     and that the purchase and holding of such Certificates

                              -83-

<PAGE>

     are covered under Sections I and III of PTCE 95-60 or (iii)
     in the case of any such ERISA-Restricted Certificate
     presented for registration in the name of an employee
     benefit plan subject to ERISA, or a plan or arrangement
     subject to Section 4975 of the Code (or comparable
     provisions of any subsequent enactments), or a trustee of
     any such plan or any other person acting on behalf of any
     such plan or arrangement, or using such plan's or
     arrangement's assets, an Opinion of Counsel satisfactory to
     the Trustee, which Opinion of Counsel shall not be an
     expense of either the Trustee, the Depositor, the Master
     Servicer or the Trust Fund, addressed to the Trustee to the
     effect that the purchase or holding of such ERISA-Restricted
     Certificate will not result in prohibited transactions under
     Section 406 of ERISA and Section 4975 of the Code and will
     not subject the Trustee, the Depositor or the Master
     Servicer to any obligation in addition to those expressly
     undertaken in this Agreement or to any liability.
     Notwithstanding anything else to the contrary herein, any
     purported transfer of an ERISA-Restricted Certificate to or
     on behalf of an employee benefit plan subject to ERISA or to
     the Code without the delivery to the Trustee of an Opinion
     of Counsel satisfactory to the Trustee as described above
     shall be void and of no effect.

          To the extent permitted under applicable law
     (including, but not limited to, ERISA), the Trustee shall be
     under no liability to any Person for any registration of
     transfer of any ERISA-Restricted Certificate that is in fact
     not permitted by this Section 5.2(b) or for making any
     payments due on such Certificate to the Holder thereof or
     taking any other action with respect to such Holder under
     the provisions of this Agreement so long as the transfer was
     registered by the Trustee in accordance with the foregoing
     requirements.

     (c)  Each Person who has or who acquires any Ownership
          Interest in a Residual Certificate shall be deemed by
          the acceptance or acquisition of such Ownership
          Interest to have agreed to be bound by the following
          provisions, and the rights of each Person acquiring any
          Ownership Interest in a Residual Certificate are
          expressly subject to the following provisions:

          (i)  Each Person holding or acquiring any Ownership
               Interest in a Residual Certificate shall be a
               Permitted Transferee and shall promptly notify the
               Trustee of any change or impending change in its
               status as a Permitted Transferee.

          (ii) No Ownership Interest in a Residual Certificate
               may be registered on the Closing Date or
               thereafter transferred, and the Trustee shall not
               register the Transfer of any Residual Certificate
               unless, in addition to the certificates required
               to be delivered to the Trustee under subparagraph
               (b) above, the Trustee shall have been furnished
               with an affidavit (a "Transfer Affidavit") of the
               initial owner or the proposed transferee in the
               form attached hereto as Exhibit H.

         (iii) Each Person holding or acquiring any Ownership
               Interest in a Residual Certificate shall agree (A)
               to obtain a Transfer Affidavit from any other
               Person to whom such Person attempts to Transfer
               its Ownership Interest in

                              -84-

<PAGE>

               a Residual Certificate, (B) to obtain a Transfer
               Affidavit from any Person for whom such Person is
               acting as nominee, trustee or agent in connection
               with any Transfer of a Residual Certificate and
               (C) not to Transfer its Ownership Interest in a
               Residual Certificate or to cause the Transfer of
               an Ownership Interest in a Residual Certificate to
               any other Person if it has actual knowledge that
               such Person is not a Permitted Transferee.

          (iv) Any attempted or purported Transfer of any
               Ownership Interest in a Residual Certificate in
               violation of the provisions of this Section 5.2(c)
               shall be absolutely null and void and shall vest
               no rights in the purported Transferee. If any
               purported transferee shall become a Holder of a
               Residual Certificate in violation of the
               provisions of this Section 5.2(c), then the last
               preceding Permitted Transferee shall be restored
               to all rights as Holder thereof retroactive to the
               date of registration of Transfer of such Residual
               Certificate. The Trustee shall be under no
               liability to any Person for any registration of
               Transfer of a Residual Certificate that is in fact
               not permitted by Section 5.2(b) and this Section
               5.2(c) or for making any payments due on such
               Certificate to the Holder thereof or taking any
               other action with respect to such Holder under the
               provisions of this Agreement so long as the
               Transfer was registered after receipt of the
               related Transfer Affidavit, Transferor Certificate
               and, in the case of a Residual Certificate which
               is also a Private Certificate, either the Rule
               144A Letter or the Investment Letter. The Trustee
               shall be entitled but not obligated to recover
               from any Holder of a Residual Certificate that was
               in fact not a Permitted Transferee at the time it
               became a Holder or, at such subsequent time as it
               became other than a Permitted Transferee, all
               payments made on such Residual Certificate at and
               after either such time. Any such payments so
               recovered by the Trustee shall be paid and
               delivered by the Trustee to the last preceding
               Permitted Transferee of such Certificate.

          (v)  The Depositor shall use its best efforts to make
               available, upon receipt of written request from
               the Trustee, all information necessary to compute
               any tax imposed under Section 860E(e) of the Code
               as a result of a Transfer of an Ownership Interest
               in a Residual Certificate to any Holder who is not
               a Permitted Transferee.

          The restrictions on Transfers of a Residual Certificate
     set forth in this Section 5.2(c) shall cease to apply (and
     the applicable portions of the legend on a Residual
     Certificate may be deleted) with respect to Transfers
     occurring after delivery to the Trustee of an Opinion of
     Counsel, which Opinion of Counsel shall not be an expense of
     the Trust Fund, the Trustee, the Seller or the Master
     Servicer, to the effect that the elimination of such
     restrictions will not cause any REMIC created hereunder to
     fail to qualify as a REMIC at any time that the Certificates
     are outstanding or result in the imposition of any tax on
     the Trust Fund, a Certificateholder or another Person. Each
     Person holding or acquiring any Ownership Interest in a
     Residual Certificate hereby consents to any amendment of
     this Agreement which, based on an Opinion of Counsel
     furnished to the Trustee, is reasonably necessary (a) to
     ensure that the record ownership

                              -85-

<PAGE>

     of, or any beneficial interest in, a Residual Certificate is
     not transferred, directly or indirectly, to a Person that is
     not a Permitted Transferee and (b) to provide for a means to
     compel the Transfer of a Residual Certificate which is held
     by a Person that is not a Permitted Transferee to a Holder
     that is a Permitted Transferee.

     (d)  The preparation and delivery of all certificates and
          opinions referred to above in this Section 5.2 in
          connection with transfer shall be at the expense of the
          parties to such transfers.

     (e)  Except as provided below, the Book-Entry Certificates
          shall at all times remain registered in the name of the
          Depository or its nominee and at all times: (i)
          registration of the Certificates may not be transferred
          by the Trustee except to another Depository; (ii) the
          Depository shall maintain book-entry records with
          respect to the Certificate Owners and with respect to
          ownership and transfers of such Book-Entry
          Certificates; (iii) ownership and transfers of
          registration of the Book-Entry Certificates on the
          books of the Depository shall be governed by applicable
          rules established by the Depository; (iv) the
          Depository may collect its usual and customary fees,
          charges and expenses from its Depository Participants;
          (v) the Trustee shall deal with the Depository,
          Depository Participants and indirect participating
          firms as representatives of the Certificate Owners of
          the Book-Entry Certificates for purposes of exercising
          the rights of holders under this Agreement, and
          requests and directions for and votes of such
          representatives shall not be deemed to be inconsistent
          if they are made with respect to different Certificate
          Owners; and (vi) the Trustee may rely and shall be
          fully protected in relying upon information furnished
          by the Depository with respect to its Depository
          Participants and furnished by the Depository
          Participants with respect to indirect participating
          firms and persons shown on the books of such indirect
          participating firms as direct or indirect Certificate
          Owners.

          All transfers by Certificate Owners of Book-Entry
     Certificates shall be made in accordance with the procedures
     established by the Depository Participant or brokerage firm
     representing such Certificate Owner. Each Depository
     Participant shall only transfer Book-Entry Certificates of
     Certificate Owners it represents or of brokerage firms for
     which it acts as agent in accordance with the Depository's
     normal procedures.

          If (x) (i) the Depository or the Depositor advises the
     Trustee in writing that the Depository is no longer willing
     or able to properly discharge its responsibilities as
     Depository, and (ii) the Trustee or the Depositor is unable
     to locate a qualified successor, (y) the Depositor at its
     option advises the Trustee in writing that it elects to
     terminate the book-entry system through the Depository or
     (z) after the occurrence of an Event of Default, Certificate
     Owners representing at least 51% of the Class Certificate
     Balance of the Book-Entry Certificates together advise the
     Trustee and the Depository through the Depository
     Participants in writing that the continuation of a book-
     entry system through the Depository is no longer in the best
     interests of the Certificate Owners, the Trustee shall
     notify all Certificate Owners, through the Depository, of
     the occurrence of any such event and of the availability of
     definitive, fully-registered Certificates (the "Definitive
     Certificates") to Certificate Owners requesting the same.
     Upon surrender to the Trustee

                              -86-

<PAGE>

     of the related Class of Certificates by the Depository,
     accompanied by the instructions from the Depository for
     registration, the Trustee shall issue the Definitive
     Certificates. Neither the Master Servicer, the Depositor nor
     the Trustee shall be liable for any delay in delivery of
     such instruction and each may conclusively rely on, and
     shall be protected in relying on, such instructions. The
     Master Servicer shall provide the Trustee with an adequate
     inventory of certificates to facilitate the issuance and
     transfer of Definitive Certificates. Upon the issuance of
     Definitive Certificates all references herein to obligations
     imposed upon or to be performed by the Depository shall be
     deemed to be imposed upon and performed by the Trustee, to
     the extent applicable with respect to such Definitive
     Certificates and the Trustee shall recognize the Holders of
     the Definitive Certificates as Certificateholders hereunder;
     provided that the Trustee shall not by virtue of its
     assumption of such obligations become liable to any party
     for any act or failure to act of the Depository.

          SECTION 5.3  Mutilated, Destroyed, Lost or Stolen
     Certificates.

     If (a) any mutilated Certificate is surrendered to the
Trustee, or the Trustee receives evidence to its satisfaction of
the destruction, loss or theft of any Certificate and (b) there
is delivered to the Master Servicer and the Trustee such security
or indemnity as may be required by them to save each of them
harmless, then, in the absence of notice to the Trustee that such
Certificate has been acquired by a bona fide purchaser, the
Trustee shall execute, countersign and deliver, in exchange for
or in lieu of any such mutilated, destroyed, lost or stolen
Certificate, a new Certificate of like Class, tenor and
Percentage Interest. In connection with the issuance of any new
Certificate under this Section 5.3, the Trustee may require the
payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and
any other expenses (including the fees and expenses of the
Trustee) connected therewith. Any replacement Certificate issued
pursuant to this Section 5.3 shall constitute complete and
indefeasible evidence of ownership, as if originally issued,
whether or not the lost, stolen or destroyed Certificate shall be
found at any time.

          SECTION 5.4  Persons Deemed Owners.

     The Master Servicer, the Trustee and any agent of the Master
Servicer or the Trustee may treat the Person in whose name any
Certificate is registered as the owner of such Certificate for
the purpose of receiving distributions as provided in this
Agreement and for all other purposes whatsoever, and neither the
Master Servicer, the Trustee nor any agent of the Master Servicer
or the Trustee shall be affected by any notice to the contrary.

          SECTION 5.5  Access to List of Certificateholders'
     Names and Addresses.

     If three or more Certificateholders or Certificate Owners
(a) request such information in writing from the Trustee, (b)
state that such Certificateholders or Certificate Owners desire
to communicate with other Certificateholders with respect to
their rights under this Agreement or under the Certificates, and
(c) provide a copy of the communication which such
Certificateholders or Certificate Owners propose to transmit, or
if the Depositor or Master Servicer shall request such
information in writing from the Trustee, then the Trustee shall,
within ten Business Days after the receipt of such request,
provide the Depositor, the Master Servicer or

                              -87-

<PAGE>

such Certificateholders or Certificate Owners at such recipients'
expense the most recent list of the Certificateholders of such
Trust Fund held by the Trustee, if any. The Depositor and every
Certificateholder or Certificate Owner, by receiving and holding
a Certificate, agree that the Trustee shall not be held
accountable by reason of the disclosure of any such information
as to the list of the Certificateholders hereunder, regardless of
the source from which such information was derived.

          SECTION 5.6  Maintenance of Office or Agency.

     The Trustee will maintain or cause to be maintained at its
expense an office or offices or agency or agencies in New York
City where Certificates may be surrendered for registration of
transfer or exchange. The Trustee initially designates its
Corporate Trust Office for such purposes. The Trustee will give
prompt written notice to the Certificateholders of any change in
such location of any such office or agency.

                           ARTICLE VI
              THE DEPOSITOR AND THE MASTER SERVICER

          SECTION 6.1  Respective Liabilities of the Depositor
     and the Master Servicer.

     The Depositor and the Master Servicer shall each be liable
in accordance herewith only to the extent of the obligations
specifically and respectively imposed upon and undertaken by them
herein.

          SECTION 6.2  Merger or Consolidation of the Depositor
     or the Master Servicer.

     The Depositor and the Master Servicer will each keep in full
effect its existence, rights and franchises as a corporation
under the laws of the United States or under the laws of one of
the states thereof and will each obtain and preserve its
qualification to do business as a foreign corporation in each
jurisdiction in which such qualification is or shall be necessary
to protect the validity and enforceability of this Agreement, or
any of the Mortgage Loans and to perform its respective duties
under this Agreement.

     Any Person into which the Depositor or the Master Servicer
may be merged or consolidated, or any Person resulting from any
merger or consolidation to which the Depositor or the Master
Servicer shall be a party, or any person succeeding to the
business of the Depositor or the Master Servicer, shall be the
successor of the Depositor or the Master Servicer, as the case
may be, hereunder, without the execution or filing of any paper
or any further act on the part of any of the parties hereto,
anything herein to the contrary notwithstanding; provided,
however, that the successor or surviving Person to the Master
Servicer shall be qualified to sell mortgage loans to, and to
service mortgage loans on behalf of, FNMA or FHLMC.

          SECTION 6.3  Limitation on Liability of the Depositor,
     the Master Servicer and Others.

     None of the Depositor, the Master Servicer or any of the
directors, officers, employees or agents of the Depositor or the
Master Servicer shall be under any liability to the
Certificateholders for any action taken or for refraining from
the taking of any action in good

                              -88-

<PAGE>

faith pursuant to this Agreement, or for errors in judgment;
provided, however, that this provision shall not protect the
Depositor, the Master Servicer or any such Person against any
breach of representations or warranties made by it herein or
protect the Depositor, the Master Servicer or any such Person
from any liability which would otherwise be imposed by reasons of
willful misfeasance, bad faith or gross negligence in the
performance of duties or by reason of reckless disregard of
obligations and duties hereunder.  The Depositor, the Master
Servicer and any director, officer, employee or agent of the
Depositor or the Master Servicer may rely in good faith on any
document of any kind prima facie properly executed and submitted
by any Person respecting any matters arising hereunder.  The
Depositor, the Master Servicer and any director, officer,
employee or agent of the Depositor or the Master Servicer shall
be indemnified by the Trust Fund and held harmless against any
loss, liability or expense incurred in connection with any audit,
controversy or judicial proceeding relating to a governmental
taxing authority or any legal action relating to this Agreement
or the Certificates, other than any loss, liability or expense
related to any specific Mortgage Loan or Mortgage Loans (except
as any such loss, liability or expense shall be otherwise
reimbursable pursuant to this Agreement) and any loss, liability
or expense incurred by reason of willful misfeasance, bad faith
or gross negligence in the performance of duties hereunder or by
reason of reckless disregard of obligations and duties hereunder.
Neither the Depositor nor the Master Servicer shall be under any
obligation to appear in, prosecute or defend any legal action
that is not incidental to its respective duties hereunder and
which in its opinion may involve it in any expense or liability;
provided, however, that either the Depositor or the Master
Servicer may in its discretion undertake any such action that it
may deem necessary or desirable in respect of this Agreement and
the rights and duties of the parties hereto and interests of the
Trustee and the Certificateholders hereunder.  In such event, the
legal expenses and costs of such action and any liability
resulting therefrom shall be expenses, costs and liabilities of
the Trust Fund, and the Depositor and the Master Servicer shall
be entitled to be reimbursed therefor out of the applicable
subaccount of the Certificate Account.

          SECTION 6.4  Limitation on Resignation of Master
     Servicer.

     The Master Servicer shall not resign from the obligations
and duties hereby imposed on it except (a) upon appointment of a
successor servicer and receipt by the Trustee of a letter from
each Rating Agency that such a resignation and appointment will
not result in a downgrading of the rating of any of the
Certificates, or (b) upon determination that its duties hereunder
are no longer permissible under applicable law.  Any such
determination under clause (b) permitting the resignation of the
Master Servicer shall be evidenced by an Opinion of Counsel to
such effect delivered to the Trustee.  No such resignation shall
become effective until the Trustee or a successor master servicer
shall have assumed the Master Servicer's responsibilities,
duties, liabilities and obligations hereunder.

                           ARTICLE VII
                             DEFAULT

          SECTION 7.1  Events of Default.

     "Event of Default," wherever used herein, means any one of
the following events:

                              -89-

<PAGE>

          (i)  any failure by the Master Servicer to deposit in
               the applicable subaccount of the Certificate
               Account or remit to the Trustee any payment
               required to be made under the terms of this
               Agreement, which failure shall continue unremedied
               for five days after the date upon which written
               notice of such failure shall have been given to
               the Master Servicer by the Trustee or the
               Depositor or to the Master Servicer and the
               Trustee by the Holders of Certificates having not
               less than 25% of the Voting Rights evidenced by
               the Certificates; or

          (ii) any failure by the Master Servicer to observe or
               perform in any material respect any other of the
               covenants or agreements on the part of the Master
               Servicer contained in this Agreement, which
               failure materially affects the rights of
               Certificateholders, which failure continues
               unremedied for a period of 60 days after the date
               on which written notice of such failure shall have
               been given to the Master Servicer by the Trustee
               or the Depositor, or to the Master Servicer and
               the Trustee by the Holders of Certificates
               evidencing not less than 25% of the Voting Rights
               evidenced by the Certificates; provided, however,
               that the 60-day cure period shall not apply to the
               initial delivery of the Mortgage File for Delay
               Delivery Mortgage Loans nor the failure to
               substitute or repurchase in lieu thereof; or

         (iii) a decree or order of a court or agency or
               supervisory authority having jurisdiction in the
               premises for the appointment of a receiver or
               liquidator in any insolvency, readjustment of
               debt, marshalling of assets and liabilities or
               similar proceedings, or for the winding-up or
               liquidation of its affairs, shall have been
               entered against the Master Servicer and such
               decree or order shall have remained in force
               undischarged or unstayed for a period of 60
               consecutive days; or

          (iv) the Master Servicer shall consent to the
               appointment of a receiver or liquidator in any
               insolvency, readjustment of debt, marshalling of
               assets and liabilities or similar proceedings of
               or relating to the Master Servicer or all or
               substantially all of the property of the Master
               Servicer; or

          (v)  the Master Servicer shall admit in writing its
               inability to pay its debts generally as they
               become due, file a petition to take advantage of,
               or commence a voluntary case under, any applicable
               insolvency or reorganization statute, make an
               assignment for the benefit of its creditors, or
               voluntarily suspend payment of its obligations; or

          (vi) the failure of the Master Servicer to remit any
               Advance required to be remitted by the Master
               Servicer pursuant to Section 4.1 which failure
               continues unremedied at 11:00 a.m., Central time,
               on the related Distribution Date.

                              -90-

<PAGE>

     If an Event of Default described in clauses (i) to (v) of
this Section shall occur, then, and in each and every such case,
so long as such Event of Default shall not have been remedied,
the Trustee may, or at the direction of the Holders of
Certificates evidencing not less than 66 2/3% of the Voting
Rights evidenced by the Certificates, the Trustee shall by notice
in writing to the Master Servicer (with a copy to each Rating
Agency), terminate all of the rights and obligations of the
Master Servicer under this Agreement and in and to the Mortgage
Loans and the proceeds thereof, other than its rights as a
Certificateholder hereunder.  If an Event of Default described in
clause (vi) of this Section shall occur, the Trustee shall
immediately, by notice in writing to the Master Servicer (with a
copy to each Rating Agency), terminate all of the rights and
obligations of the Master Servicer under this Agreement and in
and to the Mortgage Loans and proceeds thereof, other than its
rights as a Certificateholder hereunder.  On and after the
receipt by the Master Servicer of such written notice, all
authority and power of the Master Servicer hereunder, whether
with respect to the Mortgage Loans or otherwise, shall pass to
and be vested in the Trustee or another successor to the Master
Servicer appointed by the Trustee pursuant to Section 7.2.  The
Trustee, in its capacity as successor to the Master Servicer,
shall thereupon make any Advance which the Master Servicer failed
to make subject to Section 4.1 hereof.  The Trustee is hereby
authorized and empowered to execute and deliver, on behalf of the
Master Servicer, as attorney-in-fact or otherwise, any and all
documents and other instruments, and to do or accomplish all
other acts or things necessary or appropriate to effect the
purposes of such notice of termination, whether to complete the
transfer and endorsement or assignment of the Mortgage Loans and
related documents, or otherwise.  Unless expressly provided in
such written notice, no such termination shall affect any
obligation of the Master Servicer to pay amounts owed pursuant to
Article VIII.  The Master Servicer agrees to cooperate with the
Trustee in effecting the termination of the Master Servicer's
responsibilities and rights hereunder, including, without
limitation, the transfer to the Trustee of all cash amounts which
shall at the time be credited to the Certificate Account, or
thereafter be received with respect to the Mortgage Loans.  All
expenses incurred in the transferring of the servicing duties
from the Master Servicer to a Successor Servicer shall be paid by
the Master Servicer, and if not paid by the Master Servicer,
shall be paid from amounts on deposit in the Certificate Account.

     Notwithstanding any termination of the activities of the
Master Servicer hereunder, the Master Servicer shall be entitled
to receive, out of any late collection of a Scheduled Payment on
a Mortgage Loan which was due prior to the notice terminating
such Master Servicer's rights and obligations as Master Servicer
hereunder and received after such notice, that portion thereof to
which such Master Servicer would have been entitled pursuant to
Sections 3.8(a)(i) through (viii),and any other amounts payable
to such Master Servicer hereunder the entitlement to which arose
prior to the termination of its activities hereunder.  Any
termination of the activities of the Master Servicer hereunder
will simultaneously result in the termination of the Master
Servicer's duties as a subservicer pursuant to the Servicing
Rights Transfer and Subservicing Agreement.

          SECTION 7.2  Trustee to Act; Appointment of Successor.

     On and after the time the Master Servicer receives a notice
of termination pursuant to Section 7.1 hereof, the Trustee shall,
subject to and to the extent provided in Section 3.4, be the
successor to the Master Servicer under this Agreement and the
transactions set forth or provided for herein and shall be
subject to all the responsibilities, duties and liabilities
relating thereto placed on the Master Servicer by the terms and
provisions hereof and applicable law including

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the obligation to make Advances pursuant to Section 4.1. As
compensation therefor, the Trustee shall be entitled to all funds
relating to the Mortgage Loans that the Master Servicer would
have been entitled to charge to the Certificate Account or
Distribution Account if the Master Servicer had continued to act
hereunder. Notwithstanding the foregoing, if the Trustee has
become the successor to the Master Servicer in accordance with
Section 7.1 hereof, the Trustee may, if it shall be unwilling to
so act, or shall, if it is prohibited by applicable law from
making Advances pursuant to Section 4.1 hereof or if it is
otherwise unable to so act, appoint, or petition a court of
competent jurisdiction to appoint, any established mortgage loan
servicing institution the appointment of which does not adversely
affect the then current rating of the Certificates by each Rating
Agency as the successor to the Master Servicer hereunder in the
assumption of all or any part of the responsibilities, duties or
liabilities of the Master Servicer hereunder. Any successor to
the Master Servicer shall be an institution which is a FNMA and
FHLMC approved seller/servicer in good standing, which has a net
worth of at least $10,000,000, and which is willing to service
the Mortgage Loans and executes and delivers to the Depositor and
the Trustee an agreement accepting such delegation and
assignment, which contains an assumption by such Person of the
rights, powers, duties, responsibilities, obligations and
liabilities of the Master Servicer (other than liabilities of the
Master Servicer under Section 6.3 hereof incurred prior to
termination of the Master Servicer under Section 7.1), with like
effect as if originally named as a party to this Agreement; and
provided further that each Rating Agency acknowledges that its
rating of the Certificates in effect immediately prior to such
assignment and delegation will not be qualified or reduced, as a
result of such assignment and delegation. Pending appointment of
a successor to the Master Servicer hereunder, the Trustee, unless
the Trustee is prohibited by law from so acting, shall, subject
to Section 3.4 hereof, act in such capacity as  provided above.
In connection with such appointment and assumption, the Trustee
may make such arrangements for the compensation of such successor
out of payments on Mortgage Loans as it and such successor shall
agree; provided, however, that no such compensation shall be in
excess of the Master Servicing Fee permitted the Master Servicer
hereunder. The Trustee and such successor shall take such action,
consistent with this Agreement, as shall be necessary to
effectuate any such succession. Neither the Trustee nor any other
successor master servicer shall be deemed to be in default
hereunder by reason of any failure to make, or any delay in
making, any distribution hereunder or any portion thereof or any
failure to perform, or any delay in performing, any duties or
responsibilities hereunder, in either case caused by the failure
of the Master Servicer to deliver or provide, or any delay in
delivering or providing, any cash, information, documents or
records to it.

     Any successor to the Master Servicer as master servicer
shall give notice to the Mortgagors of such change of servicer
and shall, during the term of its service as master servicer
maintain in force the policy or policies that the Master Servicer
is required to maintain pursuant to Section 3.18.

          SECTION 7.3  Notification to Certificateholders.

     (a)  Upon any termination of or appointment of a successor
          to the Master Servicer, the Trustee shall give prompt
          written notice thereof to Certificateholders and to
          each Rating Agency.

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     (b)  Within 60 days after the occurrence of any Event of
          Default, the Trustee shall transmit by mail to all
          Certificateholders notice of each such Event of Default
          hereunder known to the Trustee, unless such Event of
          Default shall have been cured or waived.

                          ARTICLE VIII
                     CONCERNING THE TRUSTEE

          SECTION 8.1  Duties of Trustee.

     The Trustee, prior to the occurrence of an Event of Default
of which a Responsible Officer of the Trustee has actual
knowledge and after the curing of all Events of Default that may
have occurred, shall undertake to perform such duties and only
such duties as are specifically set forth in this Agreement. In
case an Event of Default of which a Responsible Officer of the
Trustee has actual knowledge has occurred and remains uncured,
the Trustee shall exercise such of the rights and powers vested
in it by this Agreement, and use the same degree of care and
skill in their exercise as a prudent person would exercise or use
under the circumstances in the conduct of such person's own
affairs.

     The Trustee, upon receipt of all resolutions, certificates,
statements, opinions, reports, documents, orders or other
instruments furnished to the Trustee that are specifically
required to be furnished pursuant to any provision of this
Agreement shall examine them to determine whether they are in the
form required by this Agreement; provided, however, that the
Trustee shall not be responsible for the accuracy or content of
any such resolution, certificate, statement, opinion, report,
document, order or other instrument.  If any such instrument is
found not to conform in any material respect to the requirements
of this Agreement, the Trustee shall notify the
Certificateholders of such instrument in the event that the
Trustee, after so requesting, does not receive a satisfactorily
corrected instrument.

     No provision of this Agreement shall be construed to relieve
the Trustee from liability for its own negligent action, its own
negligent failure to act or its own willful misconduct; provided,
however, that:

          (i)  unless an Event of Default of which a Responsible
               Officer of the Trustee has actual knowledge shall
               have occurred and be continuing, the duties and
               obligations of the Trustee shall be determined
               solely by the express provisions of this
               Agreement, the Trustee shall not be liable except
               for the performance of such duties and obligations
               as are specifically set forth in this Agreement,
               no implied covenants or obligations shall be read
               into this Agreement against the Trustee and the
               Trustee may conclusively rely, as to the truth of
               the statements and the correctness of the opinions
               expressed therein, upon any certificates or
               opinions furnished to the Trustee and conforming
               to the requirements of this Agreement which it
               believed in good faith to be genuine and to have
               been duly executed by the proper authorities
               respecting any matters arising hereunder;

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<PAGE>

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

         (iii) the Trustee shall not be liable with respect to
               any action taken, suffered or omitted to be taken
               by it in good faith in accordance with the
               direction of Holders of Certificates evidencing
               not less than 25% of the Voting Rights of
               Certificates relating to the time, method and
               place of conducting any proceeding for any remedy
               available to the Trustee, or exercising any trust
               or power conferred upon the Trustee under this
               Agreement;

          (iv) the Trustee shall not be required to expend or
               risk its own funds or otherwise incur financial
               liability in the performance of any of its duties
               hereunder or the exercise of any of its rights or
               powers if there is reasonable ground for believing
               that the repayment of such funds or adequate
               indemnity against such risk or liability is not
               assured to it, and none of the provisions
               contained in this Agreement shall in any event
               require the Trustee to perform, or be responsible
               for the manner of performance of, any of the
               obligations of the Master Servicer under this
               Agreement except during such time, if any, as the
               Trustee shall be the successor to, and be vested
               with the rights, duties, powers and privileges of,
               the Master Servicer; and

          (v)  without limiting the generality of this Section
               8.1, the Trustee shall have no duty (A) to see to
               any recording, filing, or depositing of this
               Agreement or any agreement referred to herein or
               any financing statement or continuation statement
               evidencing a security interest, or to see to the
               maintenance of any such recording or filing or
               deposit or to any rerecording, refiling or
               redepositing of any thereof, (B) to see to any
               insurance, (C) to see to the payment or discharge
               of any tax, assessment, or other governmental
               charge or any lien or encumbrance of any kind
               owing with respect to, assessed or levied against,
               any part of the Trust Fund other than from funds
               available in the Distribution Account (D) to
               confirm or verify the contents of any reports or
               certificates of the Servicer delivered to the
               Trustee pursuant to this Agreement believed by the
               Trustee to be genuine and to have been signed or
               presented by the proper party or parties.

          SECTION 8.2  Certain Matters Affecting the Trustee.

     Except as otherwise provided in Section 8.1:

          (i)  the Trustee may request and rely upon and shall be
               protected in acting or refraining from acting upon
               any resolution, Officers' Certificate, certificate
               of auditors or any other certificate, statement,
               instrument, opinion, report, notice, request,
               consent, order, appraisal, bond or other

                              -94-

<PAGE>

               paper or document believed by it to be genuine and
               to have been signed or presented by the proper
               party or parties and the Trustee shall have no
               responsibility to ascertain or confirm the
               genuineness of any signature of any such party or
               parties;

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

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

          (iv) the Trustee shall not be bound to make any
               investigation into the facts or matters stated in
               any resolution, certificate, statement,
               instrument, opinion, report, notice, request,
               consent, order, approval, bond or other paper or
               document, unless requested in writing so to do by
               Holders of Certificates evidencing not less than
               25% of the Voting Rights allocated to each Class
               of Certificates; provided, however, that if the
               payment within a reasonable time to the Trustee of
               the costs, expenses or liabilities likely to be
               incurred by it in the making of such investigation
               is, in the opinion of the Trustee, not assured to
               the Trustee by the security afforded to it by the
               terms of this Agreement, the Trustee may require
               indemnity satisfactory to the Trustee against such
               cost, expense or liability as a condition to
               taking any such action.  The reasonable expense of
               every such examination shall be paid by the Master
               Servicer or, if paid by the Trustee, shall be
               repaid by the Master Servicer upon demand from the
               Servicer's own funds.

          (v)  the Trustee may execute any of the trusts or
               powers hereunder or perform any duties hereunder
               either directly or by or through agents,
               accountants or attorneys and the Trustee shall not
               be responsible for any misconduct or negligence on
               the part of such agent, accountant or attorney
               appointed by the Trustee with due care;

          (vi) the Trustee shall not be required to risk or
               expend its own funds or otherwise incur any
               financial liability in the performance of any of
               its duties or in the exercise of any of its rights
               or powers hereunder if it shall have reasonable
               grounds for believing that repayment of such funds
               or adequate indemnity against such risk or
               liability is not assured to it;

          (vii) the Trustee shall not be liable for any loss on
               any investment of funds pursuant to this Agreement
               (other than as issuer of the investment security);

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<PAGE>

        (viii) the Trustee shall not be deemed to have
               knowledge of an Event of Default until a
               Responsible Officer of the Trustee shall have
               received written notice thereof and in the absence
               of such notice, the Trustee may conclusively
               assume that there is no Event of Default;

          (ix) the Trustee shall be under no obligation to
               exercise any of the trusts, rights or powers
               vested in it by this Agreement or to institute,
               conduct or defend any litigation hereunder or in
               relation hereto at the request, order or direction
               of any of the Certificateholders, pursuant to the
               provisions of this Agreement, unless such
               Certificateholders shall have offered to the
               Trustee reasonable security or indemnity
               satisfactory to the Trustee against the costs,
               expenses and liabilities which may be incurred
               therein or thereby;

          (x)  the right of the Trustee to perform any
               discretionary act enumerated in this Agreement
               shall not be construed as a duty, and the Trustee
               shall not be answerable for other than its
               negligence or willful misconduct in the
               performance of such act; and

          (xi) the Trustee shall not be required to give any bond
               or surety in respect of the execution of the Trust
               Fund created hereby or the powers granted
               hereunder.

          SECTION 8.3  Trustee Not Liable for Certificates or
     Mortgage Loans.

     The recitals contained herein and in the Certificates shall
be taken as the statements of the Depositor and the Trustee
assumes no responsibility for their correctness. The Trustee
makes no representations as to the validity or sufficiency of
this Agreement or of the Certificates or of any Mortgage Loan or
related document other than with respect to the Trustee's
execution and counter-signature of the Certificates. The Trustee
shall not be accountable for the use or application by the
Depositor or the Master Servicer of any funds paid to the
Depositor or the Master Servicer in respect of the Mortgage Loans
or deposited in or withdrawn from the Certificate Account by the
Depositor or the Master Servicer.

          SECTION 8.4  Trustee May Own Certificates.

     The Trustee in its individual or any other capacity may
become the owner or pledgee of Certificates with the same rights
as it would have if it were not the Trustee.

          SECTION 8.5  Trustee's Fees and Expenses.

     The Trustee, as compensation for its activities prior to
making the distributions pursuant to Section 4.2 hereunder, shall
be entitled to withdraw from the Distribution Account on each
Distribution Date an amount equal to the Trustee Fee for such
Distribution Date. The Trustee and any director, officer,
employee or agent of the Trustee shall be indemnified by the
Master Servicer and held harmless against any loss, liability or
expense (including reasonable attorney's fees) (i) incurred in
connection with any claim or legal action relating to (a) this
Agreement, (b) the Certificates or (c) in connection with the
performance of any of the Trustee's duties

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<PAGE>

hereunder, other than any loss, liability or expense incurred by
reason of willful misfeasance, bad faith or negligence in the
performance of any of the Trustee's duties hereunder or incurred
by reason of any action of the Trustee taken at the direction of
the Certificateholders and (ii) resulting from any error in any
tax or information return prepared by the Master Servicer. Such
indemnity shall survive the termination of this Agreement or the
resignation or removal of the Trustee hereunder. Without limiting
the foregoing, the Master Servicer covenants and agrees, except
as otherwise agreed upon in writing by the Depositor and the
Trustee, and except for any such expense, disbursement or advance
as may arise from the Trustee's negligence, bad faith or willful
misconduct, to pay or reimburse the Trustee, for all reasonable
expenses, disbursements and advances incurred or made by the
Trustee in accordance with any of the provisions of this
Agreement with respect to: (A) the reasonable compensation and
the expenses and disbursements of its counsel not associated with
the closing of the issuance of the Certificates, (B) the
reasonable compensation, expenses and disbursements of any
accountant, engineer or appraiser that is not regularly employed
by the Trustee, to the extent that the Trustee must engage such
persons to perform acts or services hereunder and (C) printing
and engraving expenses in connection with preparing any
Definitive Certificates. Except as otherwise provided herein, the
Trustee shall not be entitled to payment or reimbursement for any
routine ongoing expenses incurred by the Trustee in the ordinary
course of its duties as Trustee, Registrar, Tax Matters Person or
Paying Agent hereunder or for any other expenses.

          SECTION 8.6  Eligibility Requirements for Trustee.

     The Trustee hereunder shall at all times be a corporation or
association organized and doing business under the laws of a
state or the United States of America, authorized under such laws
to exercise corporate trust powers, having a combined capital and
surplus of at least $50,000,000, subject to supervision or
examination by federal or state authority and with a credit
rating which would not cause either of the Rating Agencies to
reduce their respective then current ratings of the Certificates
(or having provided such security from time to time as is
sufficient to avoid such reduction). If such corporation or
association publishes reports of condition at least annually,
pursuant to law or to the requirements of the aforesaid
supervising or examining authority, then for the purposes of this
Section 8.6 the combined capital and surplus of such corporation
or association shall be deemed to be its combined capital and
surplus as set forth in its most recent report of condition so
published. In case at any time the Trustee shall cease to be
eligible in accordance with the provisions of this Section 8.6,
the Trustee shall resign immediately in the manner and with the
effect specified in Section 8.7 hereof. The entity serving as
Trustee may have normal banking and trust relationships with the
Depositor and its affiliates or the Master Servicer and its
affiliates; provided, however, that such entity cannot be an
affiliate of the Master Servicer other than the Trustee in its
role as successor to the Master Servicer.

          SECTION 8.7  Resignation and Removal of Trustee.

     The Trustee may at any time resign and be discharged from
the trusts hereby created by giving written notice of resignation
to the Depositor and the Master Servicer and each Rating Agency
not less than 60 days before the date specified in such notice
when, subject to Section 8.8, such resignation is to take effect,
and acceptance by a successor trustee in accordance with Section
8.8 meeting the qualifications set forth in Section 8.6. If no
successor trustee meeting such qualifications shall have been so
appointed and have accepted appointment within 30 days

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<PAGE>

after the giving of such notice or resignation, the resigning
Trustee may petition any court of competent jurisdiction for the
appointment of a successor trustee.

     If at any time the Trustee shall cease to be eligible in
accordance with the provisions of Section 8.6 hereof and shall
fail to resign after written request thereto by the Depositor, or
if at any time the Trustee shall become incapable of acting, or
shall be adjudged as bankrupt or insolvent, or a receiver of the
Trustee or of its property shall be appointed, or any public
officer shall take charge or control of the Trustee or of its
property or affairs for the purpose of rehabilitation,
conservation or liquidation, or a tax is imposed with respect to
the Trust Fund by any state in which the Trustee or the Trust
Fund is located and the imposition of such tax would be avoided
by the appointment of a different trustee, then the Depositor or
the Master Servicer may remove the Trustee and appoint a
successor trustee by written instrument, in triplicate, one copy
of which instrument shall be delivered to the Trustee, one copy
of which shall be delivered to the Master Servicer and one copy
to the successor trustee.

     The Holders of Certificates entitled to at least 51% of the
Voting Rights may at any time remove the Trustee and appoint a
successor trustee by written instrument or instruments, in
triplicate, signed by such Holders or their attorneys-in-fact
duly authorized, one complete set of which instruments shall be
delivered by the successor Trustee to the Master Servicer, one
complete set to the Trustee so removed and one complete set to
the successor so appointed. Notice of any removal of the Trustee
shall be given to each Rating Agency by the Successor Trustee.

     Any resignation or removal of the Trustee and appointment of
a successor trustee pursuant to any of the provisions of this
Section 8.7 shall become effective upon acceptance of appointment
by the successor trustee as provided in Section 8.8 hereof.

          SECTION 8.8  Successor Trustee.

     Any successor trustee appointed as provided in Section 8.7
hereof shall execute, acknowledge and deliver to the Depositor
and to its predecessor trustee and the Master Servicer an
instrument accepting such appointment hereunder and thereupon the
resignation or removal of the predecessor trustee shall become
effective and such successor trustee, without any further act,
deed or conveyance, shall become fully vested with all the
rights, powers, duties and obligations of its predecessor
hereunder, with the like effect as if originally named as trustee
herein. The Depositor, the Master Servicer and the predecessor
trustee shall execute and deliver such instruments and do such
other things as may reasonably be required for more fully and
certainly vesting and confirming in the successor trustee all
such rights, powers, duties, and obligations.

     No successor trustee shall accept appointment as provided in
this Section 8.8 unless at the time of such acceptance such
successor trustee shall be eligible under the provisions of
Section 8.6 hereof and its appointment shall not adversely affect
the then current rating of the Certificates.

     Upon acceptance of appointment by a successor trustee as
provided in this Section 8.8, the Depositor shall mail notice of
the succession of such trustee hereunder to all Holders of

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Certificates. If the Depositor fails to mail such notice within
10 days after acceptance of appointment by the successor trustee,
the successor trustee shall cause such notice to be mailed at the
expense of the Depositor.

          SECTION 8.9  Merger or Consolidation of Trustee.

     Any corporation into which the Trustee may be merged or
converted or with which it may be consolidated or any corporation
resulting from any merger, conversion or consolidation to which
the Trustee shall be a party, or any corporation succeeding to
the business of the Trustee, shall be the successor of the
Trustee hereunder, provided that such corporation shall be
eligible under the provisions of Section 8.6 hereof without the
execution or filing of any paper or further act on the part of
any of the parties hereto, anything herein to the contrary
notwithstanding.

          SECTION 8.10  Appointment of Co-Trustee or Separate
     Trustee.

     Notwithstanding any other provisions of this Agreement, at
any time, for the purpose of meeting any legal requirements of
any jurisdiction in which any part of the Trust Fund or property
securing any Mortgage Note may at the time be located, the Master
Servicer and the Trustee acting jointly shall have the power and
shall execute and deliver all instruments to appoint one or more
Persons approved by the Trustee to act as co-trustee or co-
trustees jointly with the Trustee, or separate trustee or
separate trustees, of all or any part of the Trust Fund, and to
vest in such Person or Persons, in such capacity and for the
benefit of the Certificateholders, such title to the Trust Fund
or any part thereof, whichever is applicable, and, subject to the
other provisions of this Section 8.10, such powers, duties,
obligations, rights and trusts as the Master Servicer and the
Trustee may consider necessary or desirable. If the Master
Servicer shall not have joined in such appointment within 15 days
after the receipt by it of a request to do so, or in the case an
Event of Default shall have occurred and be continuing, the
Trustee alone shall have the power to make such appointment. No
co-trustee or separate trustee hereunder shall be required to
meet the terms of eligibility as a successor trustee under
Section 8.6 and no notice to Certificateholders of the
appointment of any co-trustee or separate trustee shall be
required under Section 8.8.

     Every separate trustee and co-trustee shall, to the extent
permitted by law, be appointed and act subject to the following
provisions and conditions:

          (i)  To the extent necessary to effectuate the purposes
               of this Section 8.10, all rights, powers, duties
               and obligations conferred or imposed upon the
               Trustee shall be conferred or imposed upon and
               exercised or performed by the Trustee and such
               separate trustee or co-trustee jointly (it being
               understood that such separate trustee or co-
               trustee is not authorized to act separately
               without the Trustee joining in such act), except
               to the extent that under any law of any
               jurisdiction in which any particular act or acts
               are to be performed (whether as Trustee hereunder
               or as successor to the Master Servicer hereunder),
               the Trustee shall be incompetent or unqualified to
               perform such act or acts, in which event such
               rights, powers, duties and obligations (including
               the holding of title to the

                              -99-

<PAGE>

               applicable Trust Fund or any portion thereof in
               any such jurisdiction) shall be exercised and
               performed singly by such separate trustee or co-
               trustee, but solely at the direction of the
               Trustee;

          (ii) No trustee hereunder shall be held personally
               liable by reason of any act or omission of any
               other trustee hereunder and such appointment shall
               not, and shall not be deemed to, constitute any
               such separate trustee or co-trustee as agent of
               the Trustee;

         (iii) The Trustee may at any time accept the
               resignation of or remove any separate trustee or
               co-trustee; and

          (iv) The Master Servicer, and not the Trustee, shall be
               liable for the payment of reasonable compensation,
               reimbursement and indemnification to any such
               separate trustee or co-trustee.

     Any notice, request or other writing given to the Trustee
shall be deemed to have been given to each of the separate
trustees and co-trustees, when and as effectively as if given to
each of them. Every instrument appointing any separate trustee or
co-trustee shall refer to this Agreement and the conditions of
this Article VIII. Each separate trustee and co-trustee, upon its
acceptance of the trusts conferred, shall be vested with the
estates or property specified in its instrument of appointment,
either jointly with the Trustee or separately, as may be provided
therein, subject to all the provisions of this Agreement,
specifically including every provision of this Agreement relating
to the conduct of, affecting the liability of, or affording
protection to, the Trustee. Every such instrument shall be filed
with the Trustee and a copy thereof given to the Master Servicer
and the Depositor.

     Any separate trustee or co-trustee may, at any time,
constitute the Trustee its agent or attorney-in-fact, with full
power and authority, to the extent not prohibited by law, to do
any lawful act under or in respect of this Agreement on its
behalf and in its name. If any separate trustee or co-trustee
shall die, become incapable of acting, resign or be removed, all
of its estates, properties, rights, remedies and trusts shall
vest in and be exercised by the Trustee, to the extent permitted
by law, without the appointment of a new or successor trustee.

          SECTION 8.11  Tax Matters.

     It is intended that the assets with respect to which each
REMIC election is to be made, as set forth in the preliminary
statement shall constitute, and that the conduct of matters
relating to such assets shall be such as to qualify such assets
as, a "real estate mortgage investment conduit" as defined in and
in accordance with the REMIC Provisions. In furtherance of such
intention, the Trustee covenants and agrees that it shall act as
agent (and the Trustee is hereby appointed to act as agent) on
behalf of any such REMIC and that in such capacity it shall: (a)
prepare and file, or cause to be prepared and filed, in a timely
manner, a U.S. Real Estate Mortgage Investment Conduit Income Tax
Return (Form 1066 or any successor form adopted by the Internal
Revenue Service) and prepare and file or cause to be prepared and
filed with the Internal Revenue Service and applicable state or
local tax authorities income tax or information returns for each
taxable year with respect to any such REMIC, containing such
information and at the times and in the

                              -100-

<PAGE>

manner as may be required by the Code or state or local tax laws,
regulations, or rules, and furnish or cause to be furnished to
Certificateholders the schedules, statements or information at
such times and in such manner as may be required thereby; (b)
within thirty days of the Closing Date, furnish or cause to be
furnished to the Internal Revenue Service, on Forms 8811 or as
otherwise may be required by the Code, the name, title, address,
and telephone number of the person that the Holders of the
Certificates may contact for tax information relating thereto,
together with such additional information as may be required by
such Form, and update such information at the time or times in
the manner required by the Code; (c) make or cause to be made
elections that such assets be treated as a REMIC on the federal
tax return for its first taxable year (and, if necessary, under
applicable state law); (d) prepare and forward, or cause to be
prepared and forwarded, to the Certificateholders and to the
Internal Revenue Service and, if necessary, state tax
authorities, all information returns and reports as and when
required to be provided to them in accordance with the REMIC
Provisions, including without limitation, the calculation of any
original issue discount using the prepayment assumption; (e)
provide information necessary for the computation of tax imposed
on the transfer of a Residual Certificate to a Person that is not
a Permitted Transferee, or an agent (including a broker, nominee
or other middleman) of a Non-Permitted Transferee, or a pass-
through entity in which a Non-Permitted Transferee is the record
holder of an interest (the reasonable cost of computing and
furnishing such information may be charged to the Person liable
for such tax); (f) to the extent that they are under its control
conduct matters relating to such assets at all times that any
Certificates are outstanding so as to maintain the status as a
REMIC under the REMIC Provisions; (g) not knowingly or
intentionally take any action or omit to take any action that
would cause the termination of any REMIC status; (h) pay, from
the sources specified in the last paragraph of this Section 8.11,
the amount of any federal or state tax, including prohibited
transaction taxes as described below, imposed on any such REMIC
prior to its termination when and as the same shall be due and
payable (but such obligation shall not prevent the Trustee or any
other appropriate Person from contesting any such tax in
appropriate proceedings and shall not prevent the Trustee from
withholding payment of such tax, if permitted by law, pending the
outcome of such proceedings); (i) ensure that federal, state or
local income tax or information returns shall be signed by the
Trustee or such other person as may be required to sign such
returns by the Code or state or local laws, regulations or rules;
(j) maintain records relating to any such REMIC, including but
not limited to the income, expenses, assets and liabilities
thereof and the fair market value and adjusted basis of the
assets determined at such intervals as may be required by the
Code, as may be necessary to prepare the foregoing returns,
schedules, statements or information; and (k) as and when
necessary and appropriate, represent any such REMIC in any
administrative or judicial proceedings relating to an examination
or audit by any governmental taxing authority, request an
administrative adjustment as to any taxable year of any such
REMIC, enter into settlement agreements with any governmental
taxing agency, extend any statute of limitations relating to any
tax item of any such REMIC, and otherwise act on behalf of any
such REMIC in relation to any tax matter or controversy involving
it.

     In order to enable the Trustee to perform its duties as set
forth herein, the Depositor shall provide, or cause to be
provided, to the Trustee within ten (10) days after the Closing
Date all information or data that the Trustee requests in writing
and determines to be relevant for tax purposes to the valuations
and offering prices of the Certificates, including, without
limitation, the price, yield, prepayment assumption and projected
cash flows of the Certificates and the Mortgage Loans.
Thereafter, the Depositor shall provide to the Trustee promptly
upon written

                              -101-

<PAGE>

request therefor, any such additional information or data that
the Trustee may, from time to time, reasonably request in order
to enable the Trustee to perform its duties as set forth herein.
The Depositor hereby indemnifies the Trustee for any losses,
liabilities, damages, claims or expenses of the Trustee arising
from any errors or miscalculations of the Trustee that result
from any failure of the Depositor to provide, or to cause to be
provided, accurate information or data to the Trustee on a timely
basis.

     In the event that any tax is imposed on "prohibited
transactions" of any REMIC as defined in Section 860F(a)(2) of
the Code, on the "net income from foreclosure property" of any
REMIC as defined in Section 860G(c) of the Code, on any
contribution to any REMIC after the Startup Day pursuant to
Section 860G(d) of the Code, or any other tax is imposed, if not
paid as otherwise provided for herein, such tax shall be paid by
(i) the Trustee, if any such other tax arises out of or results
from a breach by the Trustee of any of its obligations under this
Agreement which breach was caused by its negligence or willful
misconduct, (ii) the Master Servicer, in the case of any such
minimum tax, or if such tax arises out of or results from a
breach by the Master Servicer of any of their obligations under
this Agreement, (iii) the Seller, if any such tax arises out of
or results from the Seller's obligation to repurchase a Mortgage
Loan pursuant to Section 2.2 or 2.3 or (iv) in all other cases,
or in the event that the Trustee, the Master Servicer or the
Seller fails to honor its obligations under the preceding clauses
(i), (ii) or (iii), any such tax will be paid with amounts
otherwise to be distributed to the Certificateholders, as
provided in Section 3.8(b).

          SECTION 8.12  Periodic Filings.

     The Depositor hereby directs the Trustee to prepare, execute
(pursuant to a limited power of attorney given to the Trustee by
the Depositor) and file on behalf of the Depositor all periodic
reports required under the Securities Exchange Act of 1934 in
conformity with the terms of the "no-action" relief granted by
the SEC to issuers of asset-backed securities such as the
Certificates and the Trustee hereby agrees to do so.  The Master
Servicer will also prepare and execute any certifications to be
filed with the Form 10-K as required under the Sarbanes-Oxley Act
of 2002.  In connection with the preparation and filing of such
periodic reports, the Depositor and the Master Servicer shall
timely provide to the Trustee all material information available
to them which is required to be included in such reports and not
known to them to be in the possession of the Trustee and such
other information as the Trustee reasonably may request from
either of them and otherwise reasonably shall cooperate with the
Trustee. The Trustee shall have no liability with respect to any
failure to properly prepare or file such periodic reports
resulting from or relating to the Trustee's inability or failure
to obtain any information not resulting from its own negligence
or willful misconduct.

                           ARTICLE IX
                           TERMINATION

          SECTION 9.1  Termination upon Liquidation or Purchase
     of all Mortgage Loans.

     Subject to Section 9.3, the obligations and responsibilities
of the Depositor, the Master Servicer and the Trustee created
hereby with respect to the Trust Fund shall terminate upon the
earlier of (a) the purchase by the Master Servicer of all
Mortgage Loans (and REO Properties)

                              -102-

<PAGE>

remaining in the Trust Fund at the price equal to the sum of (i)
100% of the Stated Principal Balance of each Mortgage Loan (other
than a Mortgage Loan that has been foreclosed and subject to
clause (ii)) plus one month's accrued interest thereon at the
applicable Adjusted Mortgage Rate, (ii) the lesser of (x) the
appraised value of any REO Property as determined by the higher
of two appraisals completed by two independent appraisers
selected by the Master Servicer at the expense of the Master
Servicer and (y) the Stated Principal Balance of each Mortgage
Loan related to any REO Property, plus accrued and unpaid
interest thereon at the applicable Adjusted Mortgage Rate, and
(iii) any costs and damages incurred by the Trust in connection
with the noncompliance of such Mortgage Loan with any
specifically applicable predatory or abusive lending law, and (b)
the later of (i) the maturity or other liquidation (or any
Advance with respect thereto) of the last Mortgage Loan remaining
in the Trust Fund and the disposition of all REO Property and
(ii) the distribution to Certificateholders of all amounts
required to be distributed to them pursuant to this Agreement. In
no event shall the trusts created hereby continue beyond the
earlier of (i) the expiration of 21 years from the death of the
survivor of the descendants of Joseph P. Kennedy, the late
Ambassador of the United States to the Court of St. James's,
living on the date hereof, and (ii) the Latest Possible Maturity
Date. The right to purchase all Mortgage Loans and REO Properties
pursuant to clause (a) above shall be conditioned upon the Pool
Principal Balance for both Mortgage Pools, at the time of any
such repurchase, aggregating less than ten percent of the
aggregate Cut-off Date Principal Balance of the Mortgage Loans.

          SECTION 9.2  Final Distribution on the Certificates.

     If on any Determination Date, the Master Servicer determines
that there are no Outstanding Mortgage Loans and no other funds
or assets in the Trust Fund other than the funds in the
Certificate Account, the Master Servicer shall direct the Trustee
promptly to send a final distribution notice to each
Certificateholder.  If the Master Servicer elects to terminate
the Trust Fund pursuant to clause (a) of Section 9.1, at least 20
days prior to the date notice is to be mailed to the affected
Certificateholders, the Master Servicer shall notify the
Depositor and the Trustee of the date the Master Servicer intends
to terminate the Trust Fund and of the applicable repurchase
price of the Mortgage Loans and REO Properties.

     Notice of any termination of the Trust Fund, specifying the
Distribution Date on which Certificateholders may surrender their
Certificates for payment of the final distribution and
cancellation, shall be given promptly by the Trustee by letter to
Certificateholders mailed not earlier than the 10th day and no
later than the 15th day of the month next preceding the month of
such final distribution.  Any such notice shall specify (a) the
Distribution Date upon which final distribution on the
Certificates will be made upon presentation and surrender of
Certificates at the office therein designated, (b) the amount of
such final distribution, (c) the location of the office or agency
at which such presentation and surrender must be made, and (d)
that the Record Date otherwise applicable to such Distribution
Date is not applicable, distributions being made only upon
presentation and surrender of the Certificates at the office
therein specified. The Master Servicer will give such notice to
each Rating Agency at the time such notice is given to
Certificateholders.

     In the event such notice is given, the Master Servicer shall
cause all funds in the Certificate Account to be remitted to the
Trustee for deposit in the applicable subaccounts of the

                              -103-

<PAGE>

Distribution Account on the Business Day prior to the applicable
Distribution Date in an amount equal to the final distribution in
respect of the Certificates. Upon such final deposit with respect
to the Trust Fund and the receipt by the Trustee of a Request for
Release therefor, the Trustee shall promptly release to the
Master Servicer the Mortgage Files for the Mortgage Loans.

     Upon presentation and surrender of the Certificates, the
Trustee shall cause to be distributed to the Certificateholders
of each Class, in the order set forth in Section 4.2 hereof, on
the final Distribution Date, in the case of the
Certificateholders, in proportion to their respective Percentage
Interests, with respect to Certificateholders of the same Class,
an amount equal to (i) as to each Class of Regular Certificates,
the Class Certificate Balance thereof plus accrued interest
thereon (or on their Notional Amount, if applicable) in the case
of an interest bearing Certificate, and (ii) as to the Residual
Certificates, the amount, if any, which remains on deposit in the
Distribution Account (other than the amounts retained to meet
claims) after application pursuant to clause (i) above.

     In the event that any affected Certificateholders shall not
surrender Certificates for cancellation within six months after
the date specified in the above mentioned written notice, the
Trustee shall give a second written notice to the remaining
Certificateholders to surrender their Certificates for
cancellation and receive the final distribution with respect
thereto. If within six months after the second notice all the
applicable Certificates shall not have been surrendered for
cancellation, the Trustee may take appropriate steps, or may
appoint an agent to take appropriate steps, to contact the
remaining Certificateholders concerning surrender of their
Certificates, and the cost thereof shall be paid out of the funds
and other assets which remain a part of the Trust Fund. If within
one year after the second notice all Certificates shall not have
been surrendered for cancellation, the Holders of each of the
Class I-A-R Certificates shall be entitled to all unclaimed funds
and other assets of the Trust Fund, held for distribution to such
Certificateholders, which remain subject hereto.

          SECTION 9.3  Additional Termination Requirements.

     (a)  In the event the Master Servicer exercises its purchase
          option as provided in Section 9.1, the Trust Fund and
          each REMIC created hereunder shall be terminated in
          accordance with the following additional requirements,
          unless the Trustee has been supplied with an Opinion of
          Counsel, at the expense of the Master Servicer, to the
          effect that the failure to comply with the requirements
          of this Section 9.3 will not (i) result in the
          imposition of taxes on "prohibited transactions" on any
          REMIC as defined in Section 860F of the Code, or (ii)
          cause any REMIC to fail to qualify as a REMIC at any
          time that any Certificates are outstanding:

                    (1)   Within  90  days  prior  to  the  final
               Distribution Date set forth in the notice given by
               the  Master Servicer under Section 9.2, the Master
               Servicer  shall  prepare and the Trustee,  at  the
               expense of the "tax matters person," shall adopt a
               plan of complete liquidation within the meaning of
               Section  860F(a)(4)  of the Code  for  each  REMIC
               created  hereunder  which,  as  evidenced  by   an
               Opinion of Counsel addressed to the Trustee (which

                              -104-

<PAGE>

               opinion shall not be an expense of the Trustee  or
               the Tax Matters Person), meets the requirements of
               a qualified liquidation; and

                    (2)   Within  90  days  after  the  time   of
               adoption  of  such plans of complete  liquidation,
               the  Trustee shall sell all of the assets  of  the
               Trust  Fund  to the Master Servicer  for  cash  in
               accordance with Section 9.1.

     (b)  The Trustee as agent for any REMIC established
          hereunder hereby agrees to adopt and sign such a plan
          of complete liquidation upon the written request of the
          Master Servicer, and the receipt of the Opinion of
          Counsel referred to in Section 9.3(a)(1) and to take
          such other action in connection therewith as may be
          reasonably requested by the Master Servicer.

     (c)  By their acceptance of the Certificates, the Holders
          thereof hereby authorize the Master Servicer to prepare
          and the Trustee to adopt and sign plans of complete
          liquidation.

                            ARTICLE X
                           [RESERVED]

                           ARTICLE XI
                    MISCELLANEOUS PROVISIONS

          SECTION 11.1  Amendment.

     This Agreement may be amended from time to time by the
Depositor, the Master Servicer and the Trustee without the
consent of any of the Certificateholders (i) to cure any
ambiguity or mistake, (ii) to correct any defective provision
herein or to supplement any provision herein which may be
inconsistent with any other provision herein, (iii) to add to the
duties of the Depositor, the Seller or the Master Servicer, (iv)
to add any other provisions with respect to matters or questions
arising hereunder or (v) to modify, alter, amend, add to or
rescind any of the terms or provisions contained in this
Agreement; provided that any action pursuant to clauses (iv) or
(v) above shall not, as evidenced by an Opinion of Counsel
delivered to the Trustee (which Opinion of Counsel shall not be
an expense of the Trustee or the Trust Fund), adversely affect in
any material respect the interests of any Certificateholder;
provided, however, that the amendment shall not be deemed to
adversely affect in any material respect the interests of the
Certificateholders if the Person requesting the amendment obtains
a letter from each Rating Agency stating that the amendment would
not result in the downgrading or withdrawal of the respective
ratings then assigned to the Certificates; it being understood
and agreed that any such letter in and of itself will not
represent a determination as to the materiality of any such
amendment and will represent a determination only as to the
credit issues affecting any such rating.  The Trustee, the
Depositor and the Master Servicer also may at any time and from
time to time amend this Agreement without the consent of the
Certificateholders to modify, eliminate or add to any of its
provisions to such extent as shall be necessary or helpful to (i)
maintain the qualification of any REMIC established hereunder as
a REMIC under the Code, (ii) avoid or minimize the risk of the
imposition of any tax on any REMIC established hereunder pursuant
to the Code that would be a claim at any time prior to the final
redemption of the Certificates or (iii)

                              -105-

<PAGE>

comply with any other requirements of the Code, provided that the
Trustee has been provided an Opinion of Counsel, which opinion
shall be an expense of the party requesting such opinion but in
any case shall not be an expense of the Trustee or the Trust
Fund, to the effect that such action is necessary or helpful to,
as applicable, (i) maintain such qualification, (ii) avoid or
minimize the risk of the imposition of such a tax or (iii) comply
with any such requirements of the Code.

     This Agreement may also be amended from time to time by the
Depositor, the Master Servicer and the Trustee with the consent
of the Holders of a Majority in Interest of each Class of
Certificates affected thereby for the purpose of adding any
provisions to or changing in any manner or eliminating any of the
provisions of this Agreement or of modifying in any manner the
rights of the Holders of Certificates; provided, however, that no
such amendment shall (i) reduce in any manner the amount of, or
delay the timing of, payments required to be distributed on any
Certificate without the consent of the Holder of such
Certificate, (ii) adversely affect in any material respect the
interests of the Holders of any Class of Certificates in a manner
other than as described in (i), without the consent of the
Holders of Certificates of such Class evidencing, as to such
Class, Percentage Interests aggregating 66%, or (iii) reduce the
aforesaid percentages of Certificates the Holders of which are
required to consent to any such amendment, without the consent of
the Holders of all such Certificates then outstanding.

     Notwithstanding any contrary provision of this Agreement,
the Trustee shall not consent to any amendment to this Agreement
unless it shall have first received an Opinion of Counsel, which
opinion shall not be an expense of the Trustee or the Trust Fund,
to the effect that such amendment will not cause the imposition
of any tax on any REMIC established hereunder or the
Certificateholders or cause any REMIC established hereunder to
fail to qualify as a REMIC at any time that any Certificates are
outstanding.

     Promptly after the execution of any amendment to this
Agreement requiring the consent of Certificateholders, the
Trustee shall furnish written notification of the substance or a
copy of such amendment to each Certificateholder and each Rating
Agency.

     It shall not be necessary for the consent of
Certificateholders under this Section to approve the particular
form of any proposed amendment, but it shall be sufficient if
such consent shall approve the substance thereof. The manner of
obtaining such consents and of evidencing the authorization of
the execution thereof by Certificateholders shall be subject to
such reasonable regulations as the Trustee may prescribe.

     Nothing in this Agreement shall require the Trustee to enter
into an amendment without receiving an Opinion of Counsel (which
Opinion shall not be an expense of the Trustee or the Trust
Fund), satisfactory to the Trustee that (i) such amendment is
permitted and is not prohibited by this Agreement and that all
requirements for amending this Agreement have been complied with;
and (ii) either (A) the amendment does not adversely affect in
any material respect the interests of any Certificateholder or
(B) the conclusion set forth in the immediately preceding clause
(A) is not required to be reached pursuant to this Section 11.1.

                              -106-

<PAGE>

          SECTION 11.2  Recordation of Agreement; Counterparts.

     This Agreement is subject to recordation in all appropriate
public offices for real property records in all the counties or
other comparable jurisdictions in which any or all of the
properties subject to the Mortgages are situated, and in any
other appropriate public recording office or elsewhere, such
recordation to be effected by the Master Servicer at its expense,
but only upon direction a majority of the Certificateholders to
the effect that such recordation materially and beneficially
affects the interests of the Certificateholders.

     For the purpose of facilitating the recordation of this
Agreement as herein provided and for other purposes, this
Agreement may be executed (by facsimile or otherwise)
simultaneously in any number of counterparts, each of which
counterparts shall be deemed to be an original, and such
counterparts shall constitute but one and the same instrument.

          SECTION 11.3  Governing Law.

     THIS AGREEMENT (OTHER THAN SECTION 2.1 HEREOF) SHALL BE
CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE SUBSTANTIVE LAWS
OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE
PERFORMED IN THE STATE OF NEW YORK AND THE OBLIGATIONS, RIGHTS
AND REMEDIES OF THE PARTIES HERETO AND THE CERTIFICATEHOLDERS
SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS.  SECTION 2.1 OF
THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED
BY THE SUBSTANTIVE LAWS OF THE STATE OF DELAWARE APPLICABLE TO
AGREEMENTS MADE AND TO BE PERFORMED IN THE STATE OF DELAWARE AND
THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HERETO AND
THE CERTIFICATEHOLDERS UNDER SUCH SECTION SHALL BE DETERMINED IN
ACCORDANCE WITH SUCH LAWS.

          SECTION 11.4  Intention of Parties.

     It is the express intent of the parties hereto that the
conveyance of the Trust Fund by the Depositor to the Trustee be,
and be construed as, absolute sales thereof to the Trustee. It
is, further, not the intention of the parties that such
conveyances be deemed a pledge thereof by the Depositor to the
Trustee.  However, in the event that, notwithstanding the intent
of the parties, such assets are held to be the property of the
Depositor, or if for any other reason this Agreement is held or
deemed to create a security interest in such assets, then (i)
this Agreement shall be deemed to be a security agreement within
the meaning of the Uniform Commercial Code of the State of New
York and (ii) the conveyance provided for in this Agreement shall
be deemed to be an assignment and a grant by the Depositor to the
Trustee, for the benefit of the Certificateholders, of a security
interest in all of the assets that constitute the Trust Fund,
whether now owned or hereafter acquired.

     The Depositor, for the benefit of the Certificateholders,
shall, to the extent consistent with this Agreement, take such
actions as may be necessary to ensure that, if this Agreement
were deemed to create a security interest in the Trust Fund, such
security interest would be deemed to be a perfected security
interest of first priority under applicable law and will be
maintained as

                              -107-

<PAGE>

such throughout the term of the Agreement. The Depositor shall
arrange for filing any Uniform Commercial Code continuation
statements in connection with any security interest granted or
assigned to the Trustee for the benefit of the
Certificateholders.

          SECTION 11.5  Notices.

     (a)  The Trustee shall use its best efforts to promptly
          provide notice to each Rating Agency with respect to
          each of the following of which it has actual knowledge:

               (1)  Any material change or amendment to this
                    Agreement;

               (2)  The occurrence of any Event of Default that
                    has not been cured;

               (3)  The resignation or termination of the Master
                    Servicer or the Trustee and the appointment
                    of any successor;

               (4)  The repurchase or substitution of Mortgage
                    Loans pursuant to Section 2.3; and

               (5)  The final payment to Certificateholders.

               (6)  Any rating action involving the long-term
                    credit rating of the Master Servicer, which
                    notice shall be made by first-class mail
                    within two Business Days after the Trustee
                    gains actual knowledge thereof.

     In addition, the Trustee shall promptly furnish to each
Rating Agency copies of the following:

               (7)  Each report to Certificateholders described
                    in Section 4.6;

               (8)  Each annual statement as to compliance
                    described in Section 3.16;

               (9)  Each annual independent public accountants'
                    servicing report described in Section 3.17;
                    and

               (10) Any notice of a purchase of a Mortgage Loan
                    pursuant to Section 2.2, 2.3 or 3.11.

     (b)  All directions, demands, authorizations, consents,
          waivers, communications and notices hereunder shall be
          in writing and shall be deemed to have been duly given
          when delivered to by first class mail, facsimile or
          courier (a) in the case of the Depositor, First Horizon
          Asset Securities Inc., 4000 Horizon Way, Irving, Texas
          75063, Attention: Wade Walker; (b) in the case of the
          Master Servicer, First Horizon Home Loan Corporation,
          4000 Horizon Way, Irving, Texas 75063, Attention: Larry
          P. Cole or such other address as may be hereafter
          furnished to the Depositor and the Trustee by the
          Master Servicer in writing; (c) in the case of the
          Trustee, The Bank of New York, 101 Barclay Street, 8W,
          New York, New

                              -108-

<PAGE>

          York 10286, Attention: Diane Pickett, or such other
          address as the Trustee may hereafter furnish to the
          Depositor or Master Servicer, and (d) in the case of
          the Rating Agencies, the address specified therefor in
          the definition corresponding to the name of such Rating
          Agency. Notices to Certificateholders shall be deemed
          given when mailed, first class postage prepaid, to
          their respective addresses appearing in the Certificate
          Register.

          SECTION 11.6  Severability of Provisions.

     If any one or more of the covenants, agreements, provisions
or terms of this Agreement shall be for any reason whatsoever
held invalid, then such covenants, agreements, provisions or
terms shall be deemed severable from the remaining covenants,
agreements, provisions or terms of this Agreement and shall in no
way affect the validity or enforceability of the other provisions
of this Agreement or of the Certificates or the rights of the
Holders thereof.

          SECTION 11.7  Assignment.

     Notwithstanding anything to the contrary contained herein,
except as provided in Section 6.2, this Agreement may not be
assigned by the Master Servicer without the prior written consent
of the Trustee and Depositor.

          SECTION 11.8  Limitation on Rights of
     Certificateholders.

     The death or incapacity of any Certificateholder shall not
operate to terminate this Agreement or the trust created hereby,
nor entitle such Certificateholder's legal representative or
heirs to claim an accounting or to take any action or commence
any proceeding in any court for a petition or winding up of the
trust created hereby, or otherwise affect the rights, obligations
and liabilities of the parties hereto or any of them.

     No Certificateholder shall have any right to vote (except as
provided herein) or in any manner otherwise control the operation
and management of the Trust Fund, or the obligations of the
parties hereto, nor shall anything herein set forth or contained
in the terms of the Certificates be construed so as to constitute
the Certificateholders from time to time as partners or members
of an association; nor shall any Certificateholder be under any
liability to any third party by reason of any action taken by the
parties to this Agreement pursuant to any provision hereof.

     No Certificateholder shall have any right by virtue or by
availing itself of any provisions of this Agreement to institute
any suit, action or proceeding in equity or at law upon or under
or with respect to this Agreement, unless such Holder previously
shall have given to the Trustee a written notice of an Event of
Default and of the continuance thereof, as herein provided, and
unless the Holders of Certificates evidencing not less than 25%
of the Voting Rights evidenced by the Certificates shall also
have made written request to the Trustee to institute such
action, suit or proceeding in its own name as Trustee hereunder
and shall have offered to the Trustee such reasonable indemnity
as it may require against the costs, expenses, and liabilities to
be incurred therein or thereby, and the Trustee, for 60 days
after its receipt of such notice, request and offer of indemnity
shall have neglected or refused to institute any such action,
suit or proceeding; it being understood and intended, and being
expressly covenanted by each Certificateholder with every other
Certificateholder and the Trustee, that no one or more Holders

                              -109-

<PAGE>

of Certificates shall have any right in any manner whatever by
virtue or by availing itself or themselves of any provisions of
this Agreement to affect, disturb or prejudice the rights of the
Holders of any other of the Certificates, or to obtain or seek to
obtain priority over or preference to any other such Holder or to
enforce any right under this Agreement, except in the manner
herein provided and for the common benefit of all
Certificateholders. For the protection and enforcement of the
provisions of this Section 11.8, each and every Certificateholder
and the Trustee shall be entitled to such relief as can be given
either at law or in equity.

          SECTION 11.9  Inspection and Audit Rights.

     The Master Servicer agrees that, on reasonable prior notice,
it will permit and will cause each Subservicer to permit any
representative of the Depositor or the Trustee during the Master
Servicer's normal business hours, to examine all the books of
account, records, reports and other papers of the Master Servicer
relating to the Mortgage Loans, to make copies and extracts
therefrom, to cause such books to be audited by independent
certified public accountants selected by the Depositor or the
Trustee and to discuss its affairs, finances and accounts
relating to the Mortgage Loans with its officers, employees and
independent public accountants (and by this provision the Master
Servicer hereby authorizes said accountants to discuss with such
representative such affairs, finances and accounts), all at such
reasonable times and as often as may be reasonably requested. Any
out-of-pocket expense incident to the exercise by the Depositor
or the Trustee of any right under this Section 11.9 shall be
borne by the party requesting such inspection; all other such
expenses shall be borne by the Master Servicer or the related
Subservicer.

          SECTION 11.10  Certificates Nonassessable and Fully
     Paid.

     It is the intention of the Depositor that Certificateholders
shall not be personally liable for obligations of the Trust Fund,
that the interests in the Trust Fund represented by the
Certificates shall be nonassessable for any reason whatsoever,
and that the Certificates, upon due authentication thereof by the
Trustee pursuant to this Agreement, are and shall be deemed fully
paid.

          SECTION 11.11  Limitations on Actions; No Proceedings.

     (a)  Other than pursuant to this Agreement, or in connection
          with or incidental to the provisions or purposes of
          this Agreement, the trust created hereunder shall not
          (i) issue debt or otherwise borrow money, (ii) merge or
          consolidate with any other entity reorganize, liquidate
          or transfer all or substantially all of its assets to
          any other entity, or (iii) otherwise engage in any
          activity or exercise any power not provided for in this
          Agreement.

     (b)  Notwithstanding any prior termination of this
          Agreement, the Trustee, the Master Servicer and the
          Depositor shall not, prior to the date which is one
          year and one day after the termination of this
          Agreement, acquiesce, petition or otherwise invoke or
          cause any Person to invoke the process of any court or
          government authority for the purpose of commencing or
          sustaining a case against the Depositor or the Trust
          Fund under any federal or state bankruptcy, insolvency
          or

                              -110-

<PAGE>

          other similar law or appointing a receiver, liquidator,
          assignee, trustee, custodian, sequestrator or other
          similar official of the Depositor or the Trust Fund or
          any substantial part of their respective property, or
          ordering the winding up or liquidation of the affairs
          of the Depositor or the Trust Fund.

          SECTION 11.12  Acknowledgment of Seller.

     Seller hereby acknowledges the provisions of this Agreement,
including the obligations under Sections 2.1(a), 2.2, 2.3(b) and
8.11 of this Agreement and further acknowledges the Depositor's
assignment of its rights and remedies for the breach of the
representations and warranties made by the Seller under MLPA I.

                           * * * * * *

                              -111-

<PAGE>

     IN WITNESS WHEREOF, the Depositor, the Trustee and the
Master Servicer have caused their names to be signed hereto by
their respective officers thereunto duly authorized as of the day
and year first above written.

                              FIRST HORIZON ASSET SECURITIES
                              INC.,
                              as Depositor

                              By:  /s/  WADE WALKER
                                 --------------------------
                                   Wade Walker
                                   Senior Vice President -
                                     Asset Securitization

                              THE BANK OF NEW YORK,
                              not in its individual capacity, but
                              solely as Trustee

                              By:  /s/  DIANE PICKETT
                                 --------------------------
                                   Diane Pickett
                                   Vice President

                              FIRST HORIZON HOME LOAN
                              CORPORATION, in its capacity as
                              Master Servicer

                              By:   /s/  WADE WALKER
                                 --------------------------
                                   Wade Walker
                                   Senior Vice President -
                                     Asset Securitization

The foregoing agreement is hereby
acknowledged and accepted as of the
date first above written:

FIRST HORIZON HOME LOAN CORPORATION,
in its capacity as Seller

By:  /s/  WADE WALKER
   ---------------------------
     Wade Walker
     Senior Vice President -
       Asset Securitization

FHASI 2004-5
Pooling and Servicing Agreement - Signature Page

<PAGE>

                           SCHEDULE I

               First Horizon Asset Securities Inc.
        Mortgage Pass-Through Certificates Series 2004-5

                     Mortgage Loan Schedule
                     ----------------------

              [Available Upon Request from Trustee]

                               I-1

<PAGE>

                           SCHEDULE II

               First Horizon Asset Securities Inc.
        Mortgage Pass-Through Certificates Series 2004-5

      Representations and Warranties of the Master Servicer
      -----------------------------------------------------

     First Horizon Home Loan Corporation ("First Horizon") hereby
makes the representations and warranties set forth in this
Schedule II to the Depositor and the Trustee, as of the Closing
Date, or if so specified herein, as of the Cut-off Date.
Capitalized terms used but not otherwise defined in this Schedule
II shall have the meanings ascribed thereto in the Pooling and
Servicing Agreement (the "Pooling and Servicing Agreement")
relating to the above-referenced Series, among First Horizon, as
master servicer, First Horizon Asset Securities Inc., as
depositor, and The Bank of New York, as trustee.

          (1)  First Horizon is duly organized as a Kansas
     corporation and is validly existing and in good standing
     under the laws of the State of Kansas and is duly authorized
     and qualified to transact any and all business contemplated
     by the Pooling and Servicing Agreement to be conducted by
     First Horizon in any state in which a Mortgaged Property is
     located or is otherwise not required under applicable law to
     effect such qualification and, in any event, is in
     compliance with the doing business laws of any such state,
     to the extent necessary to ensure its ability to enforce
     each Mortgage Loan, to service the Mortgage Loans in
     accordance with the terms of the Pooling and Servicing
     Agreement and to perform any of its other obligations under
     the Pooling and Servicing Agreement in accordance with the
     terms thereof.

          (2)   First Horizon has the full corporate power and
     authority to service each Mortgage Loan, and to execute,
     deliver and perform, and to enter into and consummate the
     transactions contemplated by the Pooling and Servicing
     Agreement and has duly authorized by all necessary corporate
     action on the part of First Horizon the execution, delivery
     and performance of the Pooling and Servicing Agreement; and
     the Pooling and Servicing Agreement, assuming the due
     authorization, execution and delivery thereof by the other
     parties thereto, constitutes a legal, valid and binding
     obligation of First Horizon, enforceable against First
     Horizon in accordance with its terms, except that (a) the
     enforceability thereof may be limited by bankruptcy,
     insolvency, moratorium, receivership and other similar laws
     relating to creditors' rights generally and (b) the remedy
     of specific performance and injunctive and other forms of
     equitable relief may be subject to equitable defenses and to
     the discretion of the court before which any proceeding
     therefor may be brought.

          (3)  The execution and delivery of the Pooling and
     Servicing Agreement by First Horizon, the servicing of the
     Mortgage Loans by First Horizon under the Pooling and
     Servicing Agreement, the consummation of any other of the
     transactions contemplated by the Pooling and Servicing
     Agreement, and the fulfillment of or compliance with the
     terms thereof are in the ordinary course of business of
     First Horizon and will not (A) result in a material breach
     of any term or provision of the charter or by-laws of First
     Horizon or (B) materially conflict with, result in a
     material breach, violation or acceleration of, or result in
     a material default under, the terms of any other material

                              II-1

<PAGE>

     agreement or instrument to which First Horizon is a party or
     by which it may be bound, or (C) constitute a material
     violation of any statute, order or regulation applicable to
     First Horizon of any court, regulatory body, administrative
     agency or governmental body having jurisdiction over First
     Horizon; and First Horizon is not in breach or violation of
     any material indenture or other material agreement or
     instrument, or in violation of any statute, order or
     regulation of any court, regulatory body, administrative
     agency or governmental body having jurisdiction over it
     which breach or violation may materially impair First
     Horizon's ability to perform or meet any of its obligations
     under the Pooling and Servicing Agreement.

          (4)  No litigation is pending or, to the best of First
     Horizon's knowledge, threatened against First Horizon that
     would prohibit the execution or delivery of, or performance
     under, the Pooling and Servicing Agreement by First Horizon.

                              II-2

<PAGE>

                          SCHEDULE III

               First Horizon Asset Securities Inc.
        Mortgage Pass-Through Certificates Series 2004-5

             Form of Monthly Master Servicer Report
             --------------------------------------

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                              III-3

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