Document:

Exhibit 4.1

     

    
 

    
                                                        

      Exhibit
        4.1

       

      Talk
        America Executive Nonqualified Savings
        Plan

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      
 

    

    
       

      TALK
        AMERICA

       

      EXECUTIVE
        NONQUALIFIED SAVINGS PLAN

       

      (Effective
        February 1, 2006)

      

      

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      ARTICLE
        1

      PURPOSE

       

      In
        recognition of the services provided by certain key employees, the Board
        of
        Directors of Talk America Holdings, Inc., a Delaware corporation, has adopted
        the Talk America Executive Nonqualified Savings Plan, effective February
        1,
        2006, to make additional retirement benefits and increased financial security
        available on a tax-favored basis to those individuals. The Plan is intended
        to
        be a nonqualified deferred compensation plan that complies with the provisions
        of Code Section 409A. The Plan is intended to be an unfunded plan maintained
        primarily for the purpose of providing deferred compensation benefits for
        a
        select group of management or highly compensated employees.

       

           
        ARTICLE 2  

      DEFINITIONS

       

      “Affiliate”
means:
        (a) any firm, partnership, or corporation that directly or indirectly through
        one or more intermediaries, controls, is controlled by, or is under common
        control with the Company; (b) any other organization similarly related to
        the
        Company that is designated as such by the Board; and (c) any other entity
        50% or
        more of the economic interests in which are owned, directly or indirectly,
        by
        the Company.

       

      “Beneficiary”
means
        the person or persons designated as such in accordance with Section
        7.3.

       

      “Board”
means
        the Board of Directors of Talk America Inc.

       

      “Change
        of Control”
means
        a
        change in the ownership or effective control of Holdings or the Company,
        or in
        the ownership of a substantial portion of the assets of Holdings or the Company,
        within the meaning of Code Section 409A and the regulations and Internal
        Revenue
        Service guidance issued thereunder.

       

      “Code”
means
        the Internal Revenue Code of 1986, as amended.

       

      “Committee”
means
        the Talk America Benefits Committee, appointed from time to time by the
        Board.

       

      “Company”
means
        Talk America Inc., a Pennsylvania corporation, as well as each Affiliate
        identified in Appendix A as may from time to time participate in the Plan
        by or
        pursuant to authorization of the Board and the board of directors of such
        Affiliate.

       

      “Compensation”
means,
        for any Eligible Employee, the total cash remuneration for services payable
        by
        the Company with respect to a Plan Year, as determined pursuant to guidelines
        established and revised by the Plan Administrator from time to time and
        communicated to Eligible Employees. 

       

      The
        Compensation of each Eligible Employee taken into account for determining
        all
        benefits provided under the Plan for any Plan Year shall not exceed the annual
        compensation limit under Code Section 401(a)(17) for such Plan Year ($220,000
        for 2006).

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      “Contribution
        Dollar Limitation”
means
        the limit stated in Code Section 415(c)(1)(A) ($44,000 for 2006), as adjusted
        in
        accordance with Code Section 415(d)(1)(C).

       

      “Disability”
means
        a
        disability as defined in Code Section 409A(a)(2)(C).

       

      “Disabled”
means
        having a Disability. The determination of whether a Participant is Disabled
        shall be made by the Plan Administrator, whose determination shall be
        conclusive.

       

      “Distribution
        Account(s)”
means,
        with respect to a Participant, the Fixed Distribution Account and/or the
        Flexible Distribution Account(s) established on the books of account of the
        Company, pursuant to Section
        5.1,
        for
        that Participant.

       

      “Earnings
        Crediting Options”
means
        the deemed investment options selected by the Participant from time to time
        pursuant to which deemed earnings or losses are credited or debited, as the
        case
        may be, to the Participant’s Distribution Accounts.

       

      “Effective
        Date”
means
        February 1, 2006.

       

      “Eligible
        Employee”
means
        an Employee who has attained age 21 and completed one (1) year of Service
        with
        the Company, and whose base salary from the Company for the previous twelve
        (12)
        months is at least $100,000. Notwithstanding the foregoing, for purposes
        of
        determining those Eligible Employee as of the Effective Date, the Employee’s
        base salary for the calendar year ending December 31, 2005 shall be
        considered.

       

      “Employee”
means
        any individual employed by the Company on a regular, full-time basis (in
        accordance with the personnel policies and practices of the Company), including
        citizens of the United States employed outside of their home country and
        resident aliens employed in the United States; provided,
        however,
        that to
        qualify as an “Employee” for purposes of the Plan, the individual must be a
        member of a “select group of management or highly compensated employees” within
        the meaning of Sections 201, 301 and 401 of the Employee Retirement Income
        Security Act of 1974, as amended; provided
        further,
        that
        the following individuals shall not be eligible to participate in the Plan:
        (a) individuals who are not classified by the Company as its employees,
        even if they are retroactively recharacterized as employees by a third party
        or
        the Company, (b) individuals for whom the Company does not report wages on
        Form
        W-2 or who are not on an employee payroll of the Company; and (c) individuals
        who have entered into an agreement with the Company which excludes them from
        participation in employee benefit plans of the Company (whether or not they
        are
        treated or classified as employees for certain specified purposes that do
        not
        include eligibility in the Plan).

       

      “Employer”
means
        Talk America Inc. and its Affiliates.

       

      “Enrollment
        Agreement”
means
        the authorization form which an Eligible Employee files with the Plan
        Administrator to participate in the Plan, including, without limitation,
        one
        that is completed and/or sent electronically in a manner specified by the
        Plan
        Administrator.

       

      “Holdings”
means
        Talk America Holdings, Inc., a Delaware corporation. 

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      “Key
        Employee”
means
        a
“specified employee” as defined in Code Section 409A(a)(2)(B)(i).

       

      “Matching
        Contributions”
are
        contributions credited to the Participant’s Fixed Distribution Account by the
        Company pursuant to Section
        4.3
        of the
        Plan.

       

      “Participant”
means
        an Eligible Employee who has filed a completed and executed Enrollment Agreement
        with the Plan Administrator or its designee and is participating in the Plan
        in
        accordance with the provisions of Article 4. In the event of the death or
        incompetency of a Participant, the term shall mean his or her personal
        representative or guardian. An individual shall remain a Participant until
        that
        individual has received full distribution of any amount credited to the
        Participant’s Distribution Account(s).

       

      “Plan”
means
        the Talk America Executive Nonqualified Savings Plan, as amended from time
        to
        time.

       

      “Plan
        Administrator”
means
        the Committee.

       

      “Plan
        Year”
means
        the 12-month period beginning on each January 1 and ending on the following
        December 31. Notwithstanding the foregoing, for purposes of the Plan Year
        which
        includes the Effective Date (the “Initial Plan Year”), “Plan Year” means the
        period beginning on the Effective Date and ending on December 31,
        2006.

       

      “Service”
means
        the period of time during which an employment relationship exists between
        an
        Employee and the Company, including any period during which the Employee
        is on
        an approved leave of absence, whether paid or unpaid. “Service” shall not be
        deemed to have ceased if an Employee transfers directly between the Company
        and
        an Affiliate. 

       

      “Subsequent
        Election”
means
        an election made by a Participant in accordance with Section
        4.1(d).

       

      “Unforeseeable
        Emergency”
means
        a
        severe financial hardship to the Participant resulting from an illness or
        accident of the Participant, the Participant’s spouse, or a dependent (as
        defined in Code Section 152(a)) of the Participant, loss of the Participant’s
        property due to casualty, or other similar extraordinary and unforeseeable
        circumstances arising as a result of events beyond the control of the
        Participant.

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      ARTICLE
        3  

      ADMINISTRATION
        OF THE PLAN AND DISCRETION

       

          3.1.  The
        Committee, as Plan Administrator, shall have full power and authority to
        interpret the Plan, to prescribe, amend and rescind any rules, forms and
        procedures as it deems necessary or appropriate for the proper administration
        of
        the Plan and to make any other determinations and to take any other such
        actions
        as it deems necessary or advisable in carrying out its duties under the Plan.
        All action taken by the Plan Administrator arising out of, or in connection
        with, the administration of the Plan or any rules adopted thereunder, shall,
        in
        each case, lie within its sole discretion, and shall be final, conclusive
        and
        binding upon Holdings, the Company, the Board, all Employees, all Beneficiaries
        and all persons and entities having an interest therein. The Committee, may,
        however, delegate to any person or entity any of its powers or duties under
        the
        Plan. To the extent of any such delegation, the delegate shall become the
        Plan
        Administrator responsible for administration of the Plan, and references
        to the
        Plan Administrator shall apply instead to the delegate. Any action by the
        Committee assigning any of its responsibilities to specific persons who are
        directors, officers, or employees of the Company shall not constitute delegation
        of the Committee’s responsibility but rather shall be treated as the manner in
        which the Committee has determined internally to discharge such
        responsibility.

       

          3.2.  The
        Plan
        Administrator shall serve without compensation for its services unless otherwise
        determined by the Board. All expenses of administering the Plan shall be
        paid by
        the Company.

       

          3.3.  The
        Company shall indemnify and hold harmless the Plan Administrator from any
        and
        all claims, losses, damages, expenses (including counsel fees) and liability
        (including any amounts paid in settlement of any claim or any other matter
        with
        the consent of the Board) arising from any act or omission of such member,
        except when the same is due to gross negligence or willful
        misconduct.

       

          3.4.  Any
        decisions, actions or interpretations to be made under the Plan by the Company,
        the Board or the Plan Administrator shall be made in its respective sole
        discretion, not as a fiduciary, and need not be uniformly applied to similarly
        situated individuals and shall be final, binding and conclusive on all persons
        interested in the Plan.

       

      

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

         
        ARTICLE 4  

      PARTICIPATION

       

          4.1.  Election
        to Participate.

       

                    
(a)  Eligibility
        and Timing of Election to Participate.
        Any
        Eligible Employee may enroll in the Plan effective as of the first day of
        a Plan
        Year by filing a completed
        and fully executed Enrollment Agreement with the Plan Administrator by a
        date
        set by the Plan Administrator.

       

        (i)  Filing
        of Enrollment Agreement.
        An
        executed Enrollment Agreement must be filed by December 31 of the Plan Year
        preceding the Plan Year in which such Compensation is to be earned, or such
        earlier time as may be established by the Plan Administrator. 

       

      (ii)  Initial
        Plan Year.
        For the
        short Initial Plan Year commencing on the Effective Date, an executed Enrollment
        Agreement must be submitted by January 31, 2006 and shall be effective for
        Compensation earned in payroll periods on and after the Effective
        Date.

       

                           
(iii)  Revocation
        of Election.
        Deferral elections for a Plan Year are irrevocable.

       

                      (b)  Amount
        of Deferral.
        Pursuant to the Enrollment Agreement, the Eligible Employee shall irrevocably
        elect the percentage by which (as a result of payroll deduction) an amount
        equal
        to any whole percentage of the Participant’s Compensation will be deferred for
        the Plan Year. Each Participant’s Enrollment Agreement shall designate
        separately the percentage of Compensation to be taken from the Participant’s
        base salary and bonus for the Plan Year. The amount that may be deferred
        is any
        whole percentage of the Participant’s Compensation, up to 15% and not in excess
        of the applicable dollar amount contained in Code Section 402(g)(1)(B) and
        (4)
        in effect at the beginning of the Plan Year ($15,000 for 2006); provided,
        however,
        that
        deferrals will be made after required non-deferrable payroll tax deductions
        and
        any deductions elected by the Participant (including, but not limited to,
        deductions for payment of health insurance premiums). The Plan Administrator
        may
        establish minimum amounts that may be deferred under this Section
        4.1
        and may
        change such standards from time to time. Any such minimum shall be communicated
        by the Plan Administrator to the Participants prior to the date by which
        Participants must submit an Enrollment Agreement with respect to the Plan
        Year
        to which the minimum applies. 

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      (i)  Catch-Up
        Deferrals.
        Notwithstanding Section
        4.1(b),
        Eligible Employees who have attained age 50 before the close of a Plan Year
        shall be eligible to make catch-up deferrals subject to the limitations of
        Code
        Section 414(v)(2)(B)(i) and (C) ($5,000 for 2006). The maximum deferral
        percentage and dollar limits specified above in Section
        4.1(b)
        shall
        not apply to limit catch-up deferrals described in this Section, and such
        catch-up deferrals shall not be taken into account for purposes of the maximum
        contribution limitation in Section
        4.4
        of the
        Plan.

       

      (c)  Timing
        and Form of Payment of Distribution from Accounts.
        At the
        time that a Participant makes a deferral election with respect to a Plan
        Year,
        the Participant shall designate the time and form in which such deferral
        shall
        be distributed (together with any Matching Contributions made for such Plan
        Year) and all notional earnings thereon, and the Distribution Account(s)
        to
        which the amounts deferred by the Participant pursuant to that Enrollment
        Agreement will be credited. All Enrollment Agreements filed by an Eligible
        Employee must provide for distribution to be made at a time and in a form
        that
        is consistent with the distribution options made available under the Plan
        and
        permitted under applicable law, including, without limitation, Code Section
        409A. An election with respect to the time and form of benefit distributions
        may
        not be changed, except as expressly provided for herein. 

       

      (d)  Subsequent
        Elections.
        Each
        Participant who has made an election to defer Compensation may make a Subsequent
        Election to further defer the time of payment and/or change the form of payment
        for one or more of such Participant’s Distribution Account(s). No such
        Subsequent Election shall be valid unless it is made 12 months prior to the
        originally scheduled payment date applicable to such Distribution Account
        and
        the payment commencement date is deferred for not less than five (5) years
        from
        the originally scheduled payment date. In the event of the Participant’s
        termination of Service with the Company prior to the expiration of 12 months
        from the date the Subsequent Election is made, the Subsequent Election shall
        be
        of no effect and distribution shall be made in accordance with Section
        6.3.

       

      (e)  Vesting.
        All
        Compensation deferred by Participants under this Section
        4.1,
        and any
        deemed earnings thereon, shall be fully and immediately vested and
        nonforfeitable.

       

          4.2.  Filing
        of Elections by New Eligible Employees.
        

       

      (a)  New
        Eligible Employees.
        The
        Plan Administrator may, in its discretion, permit an Employee who first becomes
        an Eligible Employee after the beginning of a Plan Year to enroll in the
        Plan
        for that Plan Year by filing a completed and fully executed Enrollment
        Agreement, in accordance with Section
        4.1,
        as soon
        as practicable following the date the Employee becomes an Eligible Employee
        but,
        in any event, not later than 30 days after such date. Notwithstanding the
        foregoing, however, any election by an Eligible Employee to defer Compensation
        pursuant to this Section
        4.2(a)
        shall
        apply only to such amounts as are earned by the Eligible Employee after the
        date
        on which such Enrollment Agreement is filed.

       

      (b)  Promotions.
        The
        Plan Administrator may, in its discretion, permit an Employee who first becomes
        an Eligible Employee after the beginning of a Plan Year due to a promotion,
        to
        enroll in the Plan for that Plan Year by filing a completed and fully executed
        Enrollment Agreement, in accordance with Section
        4.1,
        as soon
        as practicable following the date the Employee becomes an Eligible Employee
        but,
        in any event, not later than 30 days after such date. Notwithstanding the
        foregoing, however, any election by an Eligible Employee to defer Compensation
        pursuant to this Section
        4.2(b)
        shall
        apply only to such amounts as are earned by the Eligible Employee after the
        date
        on which such Enrollment Agreement is filed.

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

          4.3.  Matching
        Contributions.
        The
        Company may make a Matching Contribution if a Participant defers Compensation
        under the Plan during a Plan Year. Such Matching Contribution will be made
        in
        the sole and absolute discretion of the Company, and to such Participants
        or
        group(s) or category(ies) of Participants as shall be determined in the sole
        and
        absolute discretion of the Committee. If made for a Plan Year, the Matching
        Contribution will be credited to the Participant’s Fixed Distribution Account in
        an amount equal to $.25 for each $1.00 of Compensation deferred by the
        Participant, up to a maximum of 4% of Compensation. 

       

          4.4.  Maximum
        Contribution.
        For
        each Plan Year, the maximum aggregate amount which may be deferred and
        contributed on a Participant’s behalf pursuant to Sections
        4.1(b) and 4.3
        shall
        not exceed the Contribution Dollar Limitation.

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      ARTICLE
        5  

      ALLOCATION
        TO ACCOUNTS

       

          5.1.  Distribution
        Accounts.
        For
        each Participant, the Plan Administrator shall establish and maintain one
        Fixed
        Distribution Account and shall establish and maintain up to five (5) separate
        Flexible Distribution Accounts. The amount of Compensation deferred pursuant
        to
Section
        4.1
        shall be
        credited by the Company to the Participant’s Distribution Account(s), in
        accordance with the Participant’s Enrollment Agreement, as soon as reasonably
        practicable following the close of the payroll period or bonus payment date
        for
        which the deferred Compensation would otherwise be payable, as determined
        by the
        Plan Administrator in its sole discretion. Any amount once taken into account
        as
        Compensation for purposes of the Plan shall not be taken into account
        thereafter. Matching Contributions, when credited, as determined by the Plan
        Administrator in its sole discretion, are credited only to the Fixed
        Distribution Account. The Participant’s Distribution Account(s) shall be reduced
        by the amount of payments made by the Company to the Participant or the
        Participant’s Beneficiary pursuant to the Plan.

       

          5.2.  Earnings
        on Distribution Accounts.

       

      (a)  General.
        A
        Participant’s Distribution Account shall be credited with earnings in accordance
        with the Earnings Crediting Options elected by the Participant from time
        to
        time. Participants may allocate their Distribution Accounts among the Earnings
        Crediting Options available under the Plan only in whole percentages of not
        less
        than 1%.

       

      (b)  Investment
        Options.
        The
        deemed rate of return, positive or negative, credited or debited, as the
        case
        may be, under each Earnings Crediting Option is based upon the actual investment
        performance of the investment fund(s) as the Plan Administrator may designate
        from time to time, and shall equal the total return of such investment fund
        net
        of asset based charges, including, without limitation and as the Plan
        Administrator determines from time to time, money management fees, fund expenses
        and mortality and expense risk insurance contract charges. The amount of
        such
        deemed investment rate of return shall be determined by the Plan Administrator
        and such determination shall be final and conclusive upon all concerned.
        The
        Plan Administrator reserves the right, on a prospective basis, to add or
        delete
        Earnings Crediting Options.

       

          5.3.  Earnings
        Crediting Options.
        Notwithstanding that the rates of return credited or debited to Participants’
Distribution Accounts under the Earnings Crediting Options are based upon
        the
        actual performance of the investment options specified in Section
        5.2,
        or such
        other investment funds as the Plan Administrator may designate, neither Holdings
        nor the Company shall be obligated to invest any Compensation deferred by
        Participants under this Plan, or any other amounts, in such portfolios or
        in any
        other investment funds.

       

          5.4.  Changes
        in Earnings Crediting Options.
        A
        Participant may change the Earnings Crediting Options to which his or her
        Distribution Account(s) are deemed to be allocated, subject to such rules
        and
        limitations as may be determined by the Plan Administrator. Each such change
        may
        include (a) reallocation of the Participant’s existing Distribution Account(s)
        in whole percentages of not less than 1%, and/or (b) change in investment
        allocation of amounts to be credited to the Participant’s Distribution
        Account(s) in the future, as the Participant may elect. The effect of a
        Participant’s change in Earnings Crediting Options shall be reflected in the
        Participant’s Distribution Account(s) as soon as reasonably practicable
        following the Plan Administrator’s receipt of notice of such change, as
        determined by the Plan Administrator in its sole discretion.

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

          5.5.  Valuation
        of Accounts.
        Except
        as otherwise provided in Section
        5.7,
        the
        value of a Participant’s Distribution Account(s) as of any date shall equal the
        amounts theretofore credited or debited to such Distribution Account(s),
        including any earnings (positive or negative) deemed to be earned on such
        Distribution Account(s) in accordance with Section
        5.2
        through
        the day preceding such date, less the amounts theretofore deducted from such
        Distribution Account(s).

       

          5.6.  Statement
        of Accounts.
        The
        Plan Administrator shall provide to each Participant, not less frequently
        than
        annually, a statement in such form as the Plan Administrator deems appropriate
        setting forth the balance standing to the credit of each Participant in each
        of
        his or her Distribution Account(s).

       

          5.7.  Distributions
        from Accounts.
        

       

                      (a)  For
        purposes of any provision of the Plan relating to distribution of benefits
        to
        Participants or Beneficiaries, the value of a Participant’s Distribution
        Account(s) shall be determined as of a date as soon as reasonably practicable
        preceding the distribution date, as determined by the Plan Administrator
        in its
        sole discretion. In the case of any benefit payable in the form of a single
        lump-sum payment, the value of a Participant’s Distribution Account(s), as
        determined pursuant to this Article, shall be distributed. In the case of
        any
        benefit payable in the form of annual installments, as of any payment date,
        the
        amount of each installment payment shall be determined as the quotient of
        (x)
        the value of the Participant’s Distribution Account subject to distribution, as
        determined pursuant to this Article, divided by (y) the number of remaining
        annual installments immediately preceding the payment date. 

       

      (b)  Any
        distribution made to or on behalf of a Participant from his or her Distribution
        Account in an amount which is less than the entire balance of any such
        Distribution Account shall be made pro rata from each of the Earnings Crediting
        Options to which such Distribution Account is then allocated.

       

      (c)  Any
        and
        all distributions from the Plan shall be made in cash.

       

          5.8.  Small
        Benefit Cash-Out.
        If a
        Participant or Beneficiary becomes eligible for a distribution in accordance
        with the provisions of Section
        6.3(a) or 6.3(b),
        relating to payments following termination of Service, Disability or death,
        the
        Plan Administrator shall, notwithstanding any election of the time and form
        of
        payment by the Participant, distribute to the Participant (or Beneficiary,
        as
        applicable) his or her Distribution Account(s) as soon as administratively
        practicable (but not later than required by Code Section 409A) following
        such
        Participant’s termination of Service, Disability or death, if the value of the
        Participant’s Distribution Account(s) does not exceed $10,000, or such higher
        amount as may be permitted under Code Section 409A.

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      ARTICLE
        6  

      BENEFITS
        TO PARTICIPANTS

       

          6.1.  Benefits
        From the Fixed Distribution Account.
        Benefits from a Participant’s Fixed Distribution Account shall be paid to the
        Participant as follows:

       

      (a)  Fixed
        Distributions.
        The
        Participant’s Fixed Distribution Account shall be distributed in one of the
        following methods, as elected by the Participant in the Enrollment Agreement:
        (i) in a lump sum; or (ii) in up to 15 annual installments. Unless elected
        otherwise in accordance with this Section
        6.1(a),
        the
        default form of payment of a Participant’s Fixed Distribution Account shall be a
        lump sum.

       

      (b)  Time
        of Payment.
        Any
        benefit payable in accordance with this Section
        6.1
        shall be
        paid or commence by January 31 of the Plan Year following the payment date
        elected by the Participant in the Enrollment Agreement or in a Subsequent
        Election. 

       

      (c)  Forfeiture.
        If a
        Participant terminates Service, other than due to retirement (as determined
        pursuant to the terms of the Talk America, Inc. 401(k) Plan), Disability
        or
        death, prior to being credited with three (3) years of Service, as determined
        by
        the Plan Administrator in its sole discretion, the portion (if any) of the
        Participant’s Fixed Distribution Account attributable to Matching Contributions
        shall be forfeited, as follows:

       

      
        	
                Termination
                  Prior to

                Completion
                  of Year

              	
                Portion
                  Forfeited

              
	
                1

              	
                100%

              
	
                2

              	
                67%

              
	
                3

              	
                34%

              

      

      

          6.2.  Benefits
        From the Flexible Distribution Account.
        Benefits from a Participant’s Flexible Distribution Account shall be paid to the
        Participant as follows:

       

      (a)          Flexible
        Distributions.
        In the
        case of a Participant who continues in Service, the Participant’s Flexible
        Distribution Account shall be paid or commence to be paid to the Participant
        by
        January 31 of the Plan Year following the payment date elected by the
        Participant in the Enrollment Agreement pursuant to which such Flexible
        Distribution Account was established (which payment date may be no earlier
        than
        two (2) years after the date such Flexible Distribution Account was
        established), in a lump sum or in up to 15 annual installments, as elected
        by
        the Participant in the Enrollment Agreement or in a Subsequent
        Election.

       

          6.3.  Acceleration
        of Payment.

       

      (a)  Termination
        of Service.
        In the
        case of a Participant whose Service with the Company ceases, the Participant’s
        Distribution Account(s) shall be distributed as elected by the Participant
        in
        the Enrollment Agreement or in a Subsequent Election; provided,
        however,
        that
        the Distribution Account(s) of Participants who are Key Employees shall not
        be
        distributed prior to the expiration of six (6) months from the date of such
        termination, as determined by the Plan Administrator in its sole discretion.
        Prior to distribution, such Participant’s Distribution Account(s) shall continue
        to be credited with earnings and/or losses in accordance with Section
        5.2
        until
        fully distributed.

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      (b)  Disability
        or Death.
        In the
        case of a Participant who becomes Disabled or dies, the Participant’s
        Distribution Account(s) shall be distributed as elected by the Participant
        in
        the Enrollment Agreement or in a Subsequent Election. Prior to distribution,
        such Participant’s Distribution Account(s) shall continue to be credited with
        earnings and/or losses in accordance with Section
        5.2
        until
        fully distributed.

       

      (c)  Unforeseeable
        Emergency.
        In the
        event that the Plan Administrator, upon written request of a Participant,
        determines, in its sole discretion, that the Participant has suffered an
        Unforeseeable Emergency, the Company shall pay to the Participant from his
        or
        her Distribution Account(s), as soon as practicable following such
        determination, an amount necessary to meet such Unforeseeable Emergency,
        in a
        manner consistent with Code Section 409A and the regulations and Internal
        Revenue Service guidance issued thereunder, after deduction of any and all
        taxes
        as may be required pursuant to Section
        7.9
        (the
“Emergency Benefit”). Emergency Benefits shall be paid first from the
        Participant’s Flexible Distribution Account(s), if any, to the extent the
        balance of one or more of such Flexible Distribution Accounts is sufficient
        to
        meet the emergency, in the order in which such Accounts would otherwise be
        distributed to the Participant. If the distribution exhausts the Flexible
        Distribution Account(s), the vested portion of the Fixed Distribution Account
        may be accessed. With respect to that portion of any Distribution Account
        which
        is distributed to a Participant as an Emergency Benefit in accordance with
        this
Section
        6.3(c),
        no
        further benefit shall be payable to the Participant under this
        Plan.

       

      (d)  Change
        of Control.
        To the
        extent permitted by the regulations and other guidance under Code Section
        409A,
        within the 30 days preceding or the twelve (12) months following a Change
        of
        Control, the Board may exercise its discretion to terminate this Plan and,
        notwithstanding any other provision of the Plan or the terms of any Enrollment
        Agreement or Subsequent Election, distribute to or with respect to each
        Participant his or her entire Distribution Account.

       

      (e)  Other
        Acceleration Events.
        To the
        extent permitted by Code Section 409A and the regulations and Internal Revenue
        Service guidance issued thereunder, notwithstanding the terms of an Enrollment
        Agreement or Subsequent Election, distribution of all or part of a Participant’s
        Distribution Account(s) may be made:

       

      (i)  to
        the
        extent necessary to fulfill a domestic relations order (as defined in Code
        Section 414(p)(1)(B)); or

       

      (ii)  to
        the
        extent necessary to pay the amount included in income by the Participant
        as a
        result of the Plan failing to meet the requirements of Code Section 409A
        and the
        regulations thereunder.

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      ARTICLE
        7  

      MISCELLANEOUS

       

          7.1.  Amendment
        and Termination.
        The
        Plan may be amended, suspended, discontinued or terminated at any time by
        the
        Company; provided,
        however,
        that no
        such amendment, suspension, discontinuance or termination shall reduce or
        in any
        manner adversely affect the rights of any Participant with respect to benefits
        that are payable or may become payable under the Plan based upon the balance
        of
        the Participant’s Distribution Account(s) as of the effective date of such
        amendment, suspension, discontinuance or termination. Notwithstanding the
        preceding provisions of this Section
        7.1,
        the
        Company reserves the right to amend the Plan, either retroactively or
        prospectively, in whatever manner is required to achieve compliance with
        the
        requirements of Code Section 409A.

       

          7.2.  Claims
        Procedure.
        It is
        intended that the claims procedures of this Plan be administered in accordance
        with the claims procedure regulations of the Department of Labor set forth
        in 29
        CFR §2560.503-1.

       

      (a)  Claim.
        A
        person who believes that he is being denied a benefit to which he is entitled
        under the Plan (hereinafter referred to as a “Claimant”) may file a written
        request for such benefit with the Plan Administrator, setting forth the
        claim.

       

      (b)  Claim
        Decision.
        Upon
        receipt of a claim, the Plan Administrator shall advise the Claimant within
        ninety (90) days of receipt of the claim whether the claim is denied. If
        special
        circumstances require more than ninety (90) days for processing, the Claimant
        will be notified in writing within ninety (90) days of filing the claim that
        the
        Plan Administrator requires up to an additional ninety (90) days to reply.
        The
        notice will explain what special circumstances make an extension necessary
        and
        indicate the date a final decision is expected to be made.

       

      If
        the
        claim is denied in whole or in part, the Claimant shall be provided a written
        opinion, using language calculated to be understood by the Claimant, setting
        forth:

       

      (i)  The
        specific reason or reasons for such denial;

       

      (ii)  The
        specific reference to pertinent provisions of this Plan on which such denial
        is
        based;

       

      (iii)  A
        description of any additional material or information necessary for the Claimant
        to perfect his or her claim and an explanation why such material or such
        information is necessary;

       

      (iv)  Appropriate
        information as to the steps to be taken if the Claimant wishes to submit
        the
        claim for review; 

       

      (v)  The
        time
        limits for requesting a review under subsection (c) and for review under
        subsection (d) hereof; and 

       

      (vi)  The
        Claimant’s right to bring a civil action under Section 502(a) of the Employee
        Retirement Income Security Act following an adverse benefit
        determination.

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      (c)  Request
        for Review.
        Within
        sixty (60) days after the receipt by the Claimant of the written opinion
        described above, the Claimant may request in writing that the Plan Administrator
        review its determination. The Claimant or his or her duly authorized
        representative may, but need not, review the pertinent documents and submit
        issues and comments in writing for consideration by the Plan Administrator.
        If
        the Claimant does not request a review of the initial determination within
        such
        sixty (60) day period, the Claimant shall be barred and estopped from
        challenging the determination.

       

      (d)  Review
        of Decision.
        Within
        sixty (60) days after the Plan Administrator’s receipt of a request for review,
        it will review the initial determination. After considering all materials
        presented by the Claimant, the Plan Administrator will render a written opinion,
        written in a manner calculated to be understood by the Claimant, setting
        forth
        the specific reasons for the decision and containing specific references
        to the
        pertinent provisions of the Plan on which the decision is based. If special
        circumstances require that the sixty (60) day time period be extended, the
        Plan
        Administrator will so notify the Claimant and will render the decision as
        soon
        as possible, but no later than one hundred twenty (120) days after receipt
        of
        the request for review.

       

          7.3.  Designation
        of Beneficiary.
        Each
        Participant may designate a Beneficiary or Beneficiaries (which Beneficiary
        may
        be an entity other than a natural person) to receive any payments which may
        be
        made following the Participant’s death. Such designation may be changed or
        canceled at any time without the consent of any such Beneficiary. Any such
        designation, change or cancellation must be made in a form approved by the
        Plan
        Administrator and shall not be effective until received by the Plan
        Administrator, or its designee. If no Beneficiary has been named, or the
        designated Beneficiary or Beneficiaries shall have predeceased the Participant,
        the Beneficiary shall be the Participant’s estate. If a Participant designates
        more than one Beneficiary, the interests of such Beneficiaries shall be paid
        in
        equal shares, unless the Participant has specifically designated
        otherwise.

       

          7.4.  Limitation
        of Participant’s Right.
        Nothing
        in this Plan shall be construed as conferring upon any Participant any right
        to
        continue in Service, nor shall it interfere with the rights of the Company
        to
        terminate the employment of any Participant and/or to take any personnel
        action
        affecting any Participant without regard to the effect which such action
        may
        have upon such Participant as a recipient or prospective recipient of benefits
        under the Plan. Any amounts payable hereunder shall not be deemed salary
        or
        other compensation to a Participant for the purposes of computing benefits
        to
        which the Participant may be entitled under any other arrangement established
        by
        the Company or its Affiliates for the benefit of its employees.

       

          7.5.  No
        Limitation on Company Actions.
        Nothing
        contained in the Plan shall be construed to prevent the Company from taking
        any
        action which is deemed by it to be appropriate or in its best interest. No
        Participant, Beneficiary, or other person shall have any claim against the
        Company as a result of such action.

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

          7.6.  Obligations
        to Company.
        If a
        Participant becomes entitled to a distribution of benefits under the Plan,
        and
        if at such time the Participant has outstanding any debt, obligation, or
        other
        liability representing an amount owing to the Employer, then the Employer
        may
        offset such amount owed to it against the amount of benefits otherwise
        distributable. Such determination shall be made by the Plan Administrator
        in its
        sole discretion.

       

          7.7.  Nonalienation
        of Benefits.
        Except
        as expressly provided herein, no Participant or Beneficiary shall have the
        power
        or right to transfer (otherwise than by will or the laws of descent and
        distribution), alienate, or otherwise encumber the Participant’s or
        Beneficiary’s interest under the Plan. The Employer’s obligations under this
        Plan are not assignable or transferable, except to (a) any corporation or
        other entity which acquires all or substantially all of the Employer’s assets or
        (b) any corporation or other entity into which the Employer may be merged
        or consolidated. The provisions of the Plan shall inure to the benefit of
        each
        Participant and the Participant’s Beneficiaries, heirs, executors,
        administrators or successors in interest.

       

          7.8.  Protective
        Provisions.
        Each
        Participant shall cooperate with the Company by furnishing any and all
        information requested by the Company in order to facilitate the payment of
        benefits hereunder, taking such physical examinations as the Company may
        deem
        necessary and taking such other relevant action as may be requested by the
        Company. If a Participant refuses to cooperate, the Company shall have no
        further obligation to the Participant under the Plan, other than payment
        to such
        Participant of the then current vested balance of the Participant’s Distribution
        Account(s) in accordance with his or her Enrollment Agreement and/or Subsequent
        Election.

       

          7.9.  Taxes.
        The
        Company may make such provisions and take such action as it may deem appropriate
        for the withholding of any taxes which the Company is required by any law
        or
        regulation of any governmental authority, whether Federal, state or local,
        to
        withhold in connection with any benefits under the Plan, including, but not
        limited to, the withholding of appropriate sums from any amount otherwise
        payable to the Participant (or his or her Beneficiary). Each Participant,
        however, shall be responsible for the payment of all individual tax liabilities
        relating to any such benefits.

       

          7.10.  Unfunded
        Status of Plan.
        The
        Plan is an “unfunded” plan for tax and Employee Retirement Income Security Act
        purposes. This means that the value of a Participant’s Distribution Account(s)
        is based on the value assigned to a hypothetical bookkeeping account, which
        is
        invested in hypothetical shares or units of investments funds available under
        the Plan. As the nature of the investment fund which forms the “index” or
“meter” for the valuation of the bookkeeping account changes, the valuation of
        the bookkeeping account changes as well. The amount owed to a Participant
        is
        based on the value assigned to the bookkeeping account. Holdings may decide
        to
        use a “rabbi trust” to anticipate its and the Company’s potential Plan
        liabilities, and it may attempt to have Plan investments mirror the hypothetical
        investments deemed credited to the bookkeeping accounts. However, the liability
        to pay the benefits is Holdings’ and the Company’s, and the assets of the rabbi
        trust are potentially available to satisfy the claims of non-participant
        creditors of Holdings and/or the Company. A Participant’s Distribution
        Account(s) shall at all times represent a general obligation of Holdings
        and the
        Company. The Participant shall be a general creditor of Holdings and the
        Company
        with respect to this obligation, and shall not have a secured or preferred
        position with respect to the Participant’s Distribution Account(s). Nothing
        contained herein shall be deemed to create an escrow, trust, custodial account
        or fiduciary relationship of any kind.

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

          7.11.  Severability.
        If any
        provision of this Plan is held unenforceable, the remainder of the Plan shall
        continue in full force and effect without regard to such unenforceable provision
        and shall be applied as though the unenforceable provision were not contained
        in
        the Plan.

       

          7.12.  Governing
        Law.
        The
        Plan shall be construed in accordance with and governed by the laws of the
        Commonwealth of Pennsylvania, without reference to the principles of conflict
        of
        laws.

       

          7.13.  Headings.
        Headings are inserted in this Plan for convenience of reference only and
        are to
        be ignored in the construction of the provisions of the Plan.

       

          7.14.  Gender,
        Singular and Plural.
        All
        pronouns and any variations thereof shall be deemed to refer to the masculine,
        feminine, or neuter, as the identity of the person or persons may require.
        As
        the context may require, the singular may read as the plural and the plural
        as
        the singular.

       

          7.15.  Notice.
        Any
        notice or filing required or permitted to be given to the Plan Administrator
        under the Plan shall be sufficient if in writing and hand delivered, or sent
        by
        registered or certified mail, to Talk America Inc., 6805 Route 202, New Hope,
        Pennsylvania 18938; Attention: General Counsel, or to such other entity as
        the
        Plan Administrator may designate from time to time. Such notice shall be
        deemed
        given as to the date of delivery, or, if delivery is made by mail, as of
        the
        date shown on the postmark on the receipt for registration or
        certification.

       

      IN
        WITNESS WHEREOF, Talk America Holdings, Inc. has caused this Plan to be executed
        by its officers thereunto duly authorized, on this 23rd day of January
        2006.

       

      
        	
                 

                 

                 

                 

                Attest:   
                  /s/
                  Aloysius T. Lawn IV

                Aloysius
                  T. Lawn, IV

                Secretary

              	
                TALK
                  AMERICA HOLDINGS, INC.

                 

                 

                 

                By:        
                  /s/
                  Edward B. Meyercord, III

                Edward
                  B. Meyercord, III

                Chief
                  Executive Officer

              

      

      

      

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

      APPENDIX
        A

       

      PARTICIPATING
        AFFILIATES

       

      Participating
        Affiliates of Talk America Inc. as of February 1, 2006:

       

      
        	·  	
                LDMI
                  Telecommunications, Inc., a Michigan
                  corporationExhibit 4.1

                         FORM OF FIXED RATE SENIOR NOTE

REGISTERED                                                          REGISTERED
No. FXR-1                                                           U.S. $
                                                                    CUSIP:

         Unless this certificate is presented by an authorized representative of
The Depository Trust Company (55 Water Street, New York, New York) to the issuer
or its agent for registration of transfer, exchange or payment, and any
certificate issued is registered in the name of Cede & Co. or such other name as
requested by an authorized representative of The Depository Trust Company and
any payment is made to Cede & Co., ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR
VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL since the registered owner
hereof, Cede & Co., has an interest herein.

<PAGE>

<TABLE>

                                                    MORGAN STANLEY
                                      SENIOR GLOBAL MEDIUM-TERM NOTES, SERIES F

                                         BEAR MARKET PLUS DUE APRIL 20, 2007
                                               MANDATORILY EXCHANGEABLE
                                        FOR AN AMOUNT PAYABLE IN U.S. DOLLARS
                                         BASED INVERSELY ON THE VALUE OF THE
                                 PHILADELPHIA STOCK EXCHANGE HOUSING SECTOR INDEX(SM)
<S>                             <C>                          <C>                          <C>
--------------------------------------------------------------------------------------------------------------------
ORIGINAL ISSUE DATE:            INITIAL REDEMPTION DATE:     INTEREST RATE: None          MATURITY DATE: See
                                  N/A                                                       "Maturity Date" below.
--------------------------------------------------------------------------------------------------------------------
INTEREST ACCRUAL DATE: N/A      INITIAL REDEMPTION           INTEREST PAYMENT DATES: N/A  OPTIONAL REPAYMENT
                                  PERCENTAGE: N/A                                           DATE(S):  N/A
--------------------------------------------------------------------------------------------------------------------
SPECIFIED CURRENCY: U.S.        ANNUAL REDEMPTION            INTEREST PAYMENT PERIOD:     APPLICABILITY OF MODIFIED
  dollars                         PERCENTAGE REDUCTION:        N/A                          PAYMENT UPON
                                  N/A                                                       ACCELERATION: See
                                                                                            "Alternate Exchange
                                                                                            Calculation in Case of
                                                                                            an Event of Default"
                                                                                            below.
--------------------------------------------------------------------------------------------------------------------
IF SPECIFIED CURRENCY OTHER     REDEMPTION NOTICE PERIOD:    APPLICABILITY OF ANNUAL      If yes, state Issue Price:
  THAN U.S. DOLLARS, OPTION       N/A                          INTEREST PAYMENTS: N/A       N/A
  TO ELECT PAYMENT IN U.S.
  DOLLARS: N/A
--------------------------------------------------------------------------------------------------------------------
EXCHANGE RATE AGENT: N/A        TAX REDEMPTION AND PAYMENT                                ORIGINAL YIELD TO
                                  OF ADDITIONAL AMOUNTS:                                    MATURITY: N/A
                                  N/A
--------------------------------------------------------------------------------------------------------------------
OTHER PROVISIONS: See below     If yes, state Initial
                                  Offering Date: N/A
--------------------------------------------------------------------------------------------------------------------
</TABLE>

Maturity Date................  April 20, 2007, subject to extension in
                               accordance with the following paragraph in the
                               event of a Market Disruption Event on the
                               scheduled Index Valuation Date (as defined
                               below).

                               If due to a Market Disruption Event or otherwise,
                               the Index Valuation Date is postponed so that it
                               falls less than two scheduled Trading Days prior
                               to the scheduled Maturity Date, the Maturity Date
                               shall be the second scheduled Trading Day
                               following that Index Valuation Date as postponed.
                               See "Index Valuation Date" below.

                                                          2
<PAGE>

                               In the event that the Maturity Date of the Bear
                               Market PLUS is postponed due to postponement of
                               the Index Valuation Date as described in the
                               immediately preceding paragraph, the Issuer shall
                               give notice of such postponement and, once it has
                               been determined, of the date to which the
                               Maturity Date has been rescheduled (i) to the
                               holder of this Bear Market PLUS by mailing notice
                               of such postponement by first class mail, postage
                               prepaid, to the holder's last address as it shall
                               appear upon the registry books, (ii) to the
                               Trustee by telephone or facsimile confirmed by
                               mailing such notice to the Trustee by first class
                               mail, postage prepaid, at its New York office and
                               (iii) to The Depository Trust Company (the
                               "Depositary") by telephone or facsimile confirmed
                               by mailing such notice to the Depositary by first
                               class mail, postage prepaid. Any notice that is
                               mailed in the manner herein provided shall be
                               conclusively presumed to have been duly given,
                               whether or not the holder of this Bear Market
                               PLUS receives the notice. The Issuer shall give
                               such notice as promptly as possible, and in no
                               case later than (i) with respect to notice of
                               postponement of the Maturity Date, the Business
                               Day immediately following April 18, 2007, and
                               (ii) with respect to notice of the date to which
                               the Maturity Date has been rescheduled, the
                               Business Day immediately following the actual
                               Index Valuation Date for determining the Final
                               Index Value (as defined below).

Denominations................  $10 and integral multiples thereof

Payment at Maturity..........  At maturity, upon delivery of this Bear Market
                               PLUS to the Trustee, the Issuer shall pay with
                               respect to each $10 principal amount of this Bear
                               Market PLUS an amount in cash equal to (i) if the
                               Final Index Value is less than or equal to the
                               Initial Index Value (as defined below), the
                               lesser of (a) $10 plus the Enhanced Downside
                               Payment (as defined below) and (b) the Maximum
                               Payment at Maturity (as defined below) or (ii) if
                               the Final Index Value is greater than the Initial
                               Index Value, the greater of (a) $10 minus the
                               Upside Reduction Amount (as defined below) and
                               (b) the Minimum Payment at Maturity (as defined
                               below).

                               The Issuer shall, or shall cause the Calculation
                               Agent to, (i) provide written notice to the
                               Trustee and to the Depositary of the amount of
                               cash to be delivered with

                                       3
<PAGE>

                               respect to each $10 principal amount of this Bear
                               Market PLUS, on or prior to 10:30 a.m. on the
                               Trading Day preceding the Maturity Date (but if
                               such Trading Day is not a Business Day, prior to
                               the close of business on the Business Day
                               preceding the Maturity Date), and (ii) deliver
                               the aggregate cash amount due with respect to
                               this Bear Market PLUS to the Trustee for delivery
                               to the holder of this Bear Market PLUS on the
                               Maturity Date.

Maximum Payment at Maturity..  $

Minimum Payment at Maturity..  $5 per Bear Market PLUS

Enhanced Downside Payment ...  The product of (i) $10 and (ii) 300% and (iii)
                               the Index Percent Decrease (as defined below).

Index Percent Decrease.......  A fraction, the numerator of which shall be the
                               Initial Index Value minus the Final Index Value
                               and the denominator of which shall be the Initial
                               Index Value.

Upside Reduction Amount......  $10 multiplied by the Index Percent Increase.

Index Percent Increase.......  A fraction, the numerator of which shall be the
                               Final Index Value minus the Initial Index Value
                               and the denominator of which shall be the Initial
                               Index Value.

Initial Index Value..........

Index Closing Value..........  The Index Closing Value on any Trading Day shall
                               equal the closing value of the PHLX Housing
                               Sector Index or any Successor Index (as defined
                               under "Discontinuance of the Philadelphia Stock
                               Exchange Housing Sector Index; Alteration of
                               Method of Calculation" below) published at the
                               regular weekday close of trading on that Trading
                               Day. In certain circumstances, the Index Closing
                               Value shall be based on the alternate calculation
                               of the PHLX Housing Sector Index described under
                               "Discontinuance of the Philadelphia Stock
                               Exchange Housing Sector Index; Alteration of
                               Method of Calculation."

Final Index Value............  The Index Closing Value of the PHLX Housing
                               Sector Index on the Index Valuation Date.

Index Valuation Date.........  The Index Valuation Date shall be the second
                               scheduled Trading Day prior to the Maturity Date,

                                       4
<PAGE>

                               subject to adjustment for Market Disruption
                               Events as described in the following paragraph.

                               If there is a Market Disruption Event on the
                               scheduled Index Valuation Date or if the
                               scheduled Index Valuation Date is not otherwise a
                               Trading Day, the Index Valuation Date shall be
                               the immediately succeeding Trading Day during
                               which no Market Disruption Event shall have
                               occurred.

Trading Day..................  A day, as determined by the Calculation Agent, on
                               which trading is generally conducted on the New
                               York Stock Exchange, Inc. ("NYSE"), the American
                               Stock Exchange LLC ("AMEX"), the Nasdaq National
                               Market, the Chicago Mercantile Exchange, the
                               Philadelphia Stock Exchange and the Chicago Board
                               of Options Exchange and in the over-the-counter
                               market for equity securities in the United
                               States.

Calculation Agent............  Morgan Stanley & Co. Incorporated and its
                               successors ("MS & Co.").

                               All determinations made by the Calculation Agent
                               shall be at the sole discretion of the
                               Calculation Agent and shall, in the absence of
                               manifest error, be conclusive for all purposes
                               and binding on the holder of this Bear Market
                               PLUS, the Trustee and the Issuer.

                               All calculations with respect to the Payment at
                               Maturity shall be rounded to the nearest one
                               hundred-thousandth, with five one-millionths
                               rounded upward (e.g., .876545 would be rounded to
                               .87655); all dollar amounts related to
                               determination of the amount of cash payable for
                               each $10 principal amount of this Bear Market
                               PLUS shall be rounded to the nearest
                               ten-thousandth, with five one hundred-thousandths
                               rounded upward (e.g., .76545 would be rounded up
                               to .7655); and all dollar amounts paid on the
                               aggregate number of Bear Market PLUS shall be
                               rounded to the nearest cent, with one-half cent
                               rounded upward.

Market Disruption Event......  Market Disruption Event means, with respect to
                               the PHLX Housing Sector Index:

                               (i)the occurrence or existence of a suspension,
                               absence or material limitation of trading of
                               stocks then constituting 20 percent or more of
                               the level of the

                                       5
<PAGE>

                               PHLX Housing Sector Index (or the Successor
                               Index) on the Relevant Exchanges for such
                               securities for more than two hours of trading or
                               during the one-half hour period preceding the
                               close of the principal trading session on such
                               Relevant Exchange; or a breakdown or failure in
                               the price and trade reporting systems of any
                               Relevant Exchange as a result of which the
                               reported trading prices for stocks then
                               constituting 20 percent or more of the level of
                               the PHLX Housing Sector Index (or the Successor
                               Index) during the last one-half hour preceding
                               the close of the principal trading session on
                               such Relevant Exchange are materially inaccurate;
                               or the suspension, material limitation or absence
                               of trading on any major U.S. securities market
                               for trading in futures or options contracts or
                               exchange traded funds related to the PHLX Housing
                               Sector Index (or the Successor Index) for more
                               than two hours of trading or during the one-half
                               hour period preceding the close of the principal
                               trading session on such market, in each case as
                               determined by the Calculation Agent in its sole
                               discretion; and

                               (ii) a determination by the Calculation Agent in
                               its sole discretion that any event described in
                               clause (i) above materially interfered with the
                               ability of the Issuer or any of its affiliates to
                               unwind or adjust all or a material portion of the
                               hedge position with respect to the Bear Market
                               PLUS due April 20, 2007, Mandatorily Exchangeable
                               for an Amount Payable in U.S. Dollars Based
                               Inversely on the Value of the Philadelphia Stock
                               Exchange Housing Sector Index(SM).

                               For the purpose of determining whether a Market
                               Disruption Event exists at any time, if trading
                               in a security included in the PHLX Housing Sector
                               Index is materially suspended or materially
                               limited at that time, then the relevant
                               percentage contribution of that security to the
                               level of the PHLX Housing Sector Index shall be
                               based on a comparison of (x) the portion of the
                               value of the PHLX Housing Sector Index
                               attributable to that security relative to (y) the
                               overall value of the PHLX Housing Sector Index,
                               in each case immediately before that suspension
                               or limitation.

                               For the purpose of determining whether a Market
                               Disruption Event has occurred: (1) a limitation
                               on the hours or number of days of trading shall
                               not constitute

                                       6
<PAGE>

                               a Market Disruption Event if it results from an
                               announced change in the regular business hours of
                               the relevant exchange or market, (2) a decision
                               to permanently discontinue trading in the
                               relevant futures or options contract or exchange
                               traded fund shall not constitute a Market
                               Disruption Event, (3) limitations pursuant to the
                               rules of any Relevant Exchange similar to NYSE
                               Rule 80A (or any applicable rule or regulation
                               enacted or promulgated by any other
                               self-regulatory organization or any government
                               agency of scope similar to NYSE Rule 80A as
                               determined by the Calculation Agent) on trading
                               during significant market fluctuations shall
                               constitute a suspension, absence or material
                               limitation of trading, (4) a suspension of
                               trading in futures or options contracts on the
                               PHLX Housing Sector Index by the primary
                               securities market trading in such contracts by
                               reason of (a) a price change exceeding limits set
                               by such securities exchange or market, (b) an
                               imbalance of orders relating to such contracts or
                               (c) a disparity in bid and ask quotes relating to
                               such contracts shall constitute a suspension,
                               absence or material limitation of trading in
                               futures or options contracts related to the PHLX
                               Housing Sector Index and (5) a "suspension,
                               absence or material limitation of trading" on any
                               Relevant Exchange or on the primary market on
                               which futures or options contracts related to the
                               PHLX Housing Sector Index are traded shall not
                               include any time when such securities market is
                               itself closed for trading under ordinary
                               circumstances.

Relevant Exchange............  Relevant Exchange means the primary U.S.
                               organized exchange or market of trading for any
                               security (or any combination thereof) then
                               included in the PHLX Housing Sector Index or any
                               Successor Index.

Alternate Exchange Calculation
  in Case of an Event of
  Default....................  In case an event of default with respect to the
                               Bear Market PLUS shall have occurred and be
                               continuing, the amount declared due and payable
                               for each $10 principal amount of this Bear Market
                               PLUS upon any acceleration of this Bear Market
                               PLUS shall be determined by the Calculation Agent
                               and shall be an amount in cash equal to the
                               Payment at Maturity calculated using the Index
                               Closing Value as of the date of such acceleration
                               as the Final Index Value.

                                       7
<PAGE>

                               If the maturity of the Bear Market PLUS is
                               accelerated because of an event of default as
                               described above, the Issuer shall, or shall cause
                               the Calculation Agent to, provide written notice
                               to the Trustee at its New York office, on which
                               notice the Trustee may conclusively rely, and to
                               the Depositary of the cash amount due with
                               respect to each $10 principal amount of this Bear
                               Market PLUS as promptly as possible and in no
                               event later than two Business Days after the date
                               of acceleration.

Discontinuance of the
  Philadelphia Stock Exchange
  Housing Sector Index;
  Alteration of Method
  of Calculation.............  If the Philadelphia Stock Exchange, Inc. ("PHLX")
                               discontinues publication of the PHLX Housing
                               Sector Index and PHLX or another entity
                               (including MS & Co.) publishes a successor or
                               substitute index that the Calculation Agent
                               determines, in its sole discretion, to be
                               comparable to the discontinued PHLX Housing
                               Sector Index (such index being referred to herein
                               as a "Successor Index"), then any subsequent
                               Index Closing Value shall be determined by
                               reference to the published value of such
                               Successor Index at the regular weekday close of
                               trading on the Trading Day that any Index Closing
                               Value is to be determined.

                               Upon any selection by the Calculation Agent of a
                               Successor Index, the Calculation Agent shall
                               cause written notice thereof to be furnished to
                               the Trustee, to the Issuer and to the Depositary,
                               as holder of the Bear Market PLUS, within three
                               Trading Days of such selection.

                               If PHLX discontinues publication of the PHLX
                               Housing Sector Index prior to, and such
                               discontinuance is continuing on, the Index
                               Valuation Date or the date of acceleration and
                               the Calculation Agent determines, in its sole
                               discretion, that no Successor Index is available
                               at such time, then the Calculation Agent shall
                               determine the Index Closing Value for such date.
                               The Index Closing Value shall be computed by the
                               Calculation Agent in accordance with the formula
                               for calculating the PHLX Housing Sector Index
                               last in effect prior to such discontinuance,
                               using the closing price (or, if trading in the
                               relevant

                                       8
<PAGE>

                               securities has been materially suspended or
                               materially limited, its good faith estimate of
                               the closing price that would have prevailed but
                               for such suspension or limitation) at the close
                               of the principal trading session of the Relevant
                               Exchange on such date of each security most
                               recently constituting the PHLX Housing Sector
                               Index without any rebalancing or substitution of
                               such securities following such discontinuance.

                               If at any time the method of calculating the PHLX
                               Housing Sector Index or a Successor Index, or the
                               value thereof, is changed in a material respect,
                               or if the PHLX Housing Sector Index or a
                               Successor Index is in any other way modified so
                               that such index does not, in the opinion of the
                               Calculation Agent, fairly represent the value of
                               the PHLX Housing Sector Index or such Successor
                               Index had such changes or modifications not been
                               made, then, from and after such time, the
                               Calculation Agent shall, at the close of business
                               in New York City on the date on which the Index
                               Closing Value is to be determined, make such
                               calculations and adjustments as, in the good
                               faith judgment of the Calculation Agent, may be
                               necessary in order to arrive at a value of a
                               stock index comparable to the PHLX Housing Sector
                               Index or such Successor Index, as the case may
                               be, as if such changes or modifications had not
                               been made, and the Calculation Agent shall
                               calculate the Final Index Value with reference to
                               the PHLX Housing Sector Index or such Successor
                               Index, as adjusted. Accordingly, if the method of
                               calculating the PHLX Housing Sector Index or a
                               Successor Index is modified so that the value of
                               such index is a fraction of what it would have
                               been if it had not been modified (e.g., due to a
                               split in the index), then the Calculation Agent
                               shall adjust such index in order to arrive at a
                               value of the PHLX Housing Sector Index or such
                               Successor Index as if it had not been modified
                               (e.g., as if such split had not occurred).

Treatment of Bear Market
  PLUS for United States
  Federal Income Tax
  Purposes...................  The Issuer, by its sale of this Bear Market PLUS,
                               and the holder of this Bear Market PLUS (and any
                               successor holder of, or holder of a beneficial
                               interest in, this Bear Market PLUS), by its
                               respective purchase hereof, agree (in the absence
                               of an administrative determination or judicial
                               ruling to the contrary) to

                                       9
<PAGE>

                               characterize each $10 principal amount of this
                               Bear Market PLUS for all tax purposes as a single
                               financial contract with respect to the PHLX
                               Housing Sector Index that (i) requires the holder
                               of this Bear Market PLUS to pay to the Issuer at
                               inception an amount equal to $10 and (ii)
                               entitles the holder to receive at maturity an
                               amount in cash based upon the performance of the
                               PHLX Housing Sector Index.

                                       10
<PAGE>

     Morgan Stanley, a Delaware corporation (together with its successors and
assigns, the "Issuer"), for value received, hereby promises to pay to CEDE &
Co., or registered assignees, the principal sum of U.S. $              (UNITED
STATES DOLLARS                                             ), on the Maturity
Date specified above (except to the extent redeemed or repaid prior to maturity)
and to pay interest thereon at the Interest Rate per annum specified above, from
and including the Interest Accrual Date specified above until the principal
hereof is paid or duly made available for payment weekly, monthly, quarterly,
semiannually or annually in arrears as specified above as the Interest Payment
Period on each Interest Payment Date (as specified above), commencing on the
Interest Payment Date next succeeding the Interest Accrual Date specified above,
and at maturity (or on any redemption or repayment date); provided, however,
that if the Interest Accrual Date occurs between a Record Date, as defined
below, and the next succeeding Interest Payment Date, interest payments will
commence on the second Interest Payment Date succeeding the Interest Accrual
Date to the registered holder of this Note on the Record Date with respect to
such second Interest Payment Date; and provided, further, that if this Note is
subject to "Annual Interest Payments," interest payments shall be made annually
in arrears and the term "Interest Payment Date" shall be deemed to mean the
first day of March in each year.

     Interest on this Note will accrue from and including the most recent date
to which interest has been paid or duly provided for, or, if no interest has
been paid or duly provided for, from and including the Interest Accrual Date,
until but excluding the date the principal hereof has been paid or duly made
available for payment. The interest so payable, and punctually paid or duly
provided for, on any Interest Payment Date will, subject to certain exceptions
described herein, be paid to the person in whose name this Note (or one or more
predecessor Notes) is registered at the close of business on the date 15
calendar days prior to such Interest Payment Date (whether or not a Business Day
(as defined below)) (each such date, a "Record Date"); provided, however, that
interest payable at maturity (or any redemption or repayment date) will be
payable to the person to whom the principal hereof shall be payable. As used
herein, "Business Day" means any day, other than a Saturday or Sunday, (a) that
is neither a legal holiday nor a day on which banking institutions are
authorized or required by law or regulation to close (x) in The City of New York
or (y) if this Note is denominated in a Specified Currency other than U.S.
dollars, euro or Australian dollars, in the principal financial center of the
country of the Specified Currency, or (z) if this Note is denominated in
Australian dollars, in Sydney and (b) if this Note is denominated in euro, that
is also a day on which the Trans-European Automated Real-time Gross Settlement
Express Transfer System ("TARGET") is operating (a "TARGET Settlement Day").

     Payment of the principal of this Note, any premium and the interest due at
maturity (or any redemption or repayment date), unless this Note is denominated
in a Specified Currency other than U.S. dollars and is to be paid in whole or in
part in such Specified Currency, will be made in immediately available funds
upon surrender of this Note at the office or agency of the Paying Agent, as
defined on the reverse hereof, maintained for that purpose in the Borough of
Manhattan, The City of New York, or at such other paying agency as the Issuer
may determine, in U.S. dollars. U.S. dollar payments of interest, other than
interest due at maturity or on any date of redemption or repayment, will be made
by U.S. dollar check mailed to the address of the person entitled thereto as
such address shall appear in the Note register. A holder of U.S. $10,000,000 (or
the equivalent in a Specified Currency) or more in aggregate principal amount

                                       11
<PAGE>

of Notes having the same Interest Payment Date, the interest on which is payable
in U.S. dollars, shall be entitled to receive payments of interest, other than
interest due at maturity or on any date of redemption or repayment, by wire
transfer of immediately available funds if appropriate wire transfer
instructions have been received by the Paying Agent in writing not less than 15
calendar days prior to the applicable Interest Payment Date.

     If this Note is denominated in a Specified Currency other than U.S.
dollars, and the holder does not elect (in whole or in part) to receive payment
in U.S. dollars pursuant to the next succeeding paragraph, payments of interest,
principal or any premium with regard to this Note will be made by wire transfer
of immediately available funds to an account maintained by the holder hereof
with a bank located outside the United States if appropriate wire transfer
instructions have been received by the Paying Agent in writing, with respect to
payments of interest, on or prior to the fifth Business Day after the applicable
Record Date and, with respect to payments of principal or any premium, at least
ten Business Days prior to the Maturity Date or any redemption or repayment
date, as the case may be; provided that, if payment of interest, principal or
any premium with regard to this Note is payable in euro, the account must be a
euro account in a country for which the euro is the lawful currency, provided,
further, that if such wire transfer instructions are not received, such payments
will be made by check payable in such Specified Currency mailed to the address
of the person entitled thereto as such address shall appear in the Note
register; and provided, further, that payment of the principal of this Note, any
premium and the interest due at maturity (or on any redemption or repayment
date) will be made upon surrender of this Note at the office or agency referred
to in the preceding paragraph.

     If so indicated on the face hereof, the holder of this Note, if denominated
in a Specified Currency other than U.S. dollars, may elect to receive all or a
portion of payments on this Note in U.S. dollars by transmitting a written
request to the Paying Agent, on or prior to the fifth Business Day after such
Record Date or at least ten Business Days prior to the Maturity Date or any
redemption or repayment date, as the case may be. Such election shall remain in
effect unless such request is revoked by written notice to the Paying Agent as
to all or a portion of payments on this Note at least five Business Days prior
to such Record Date, for payments of interest, or at least ten calendar days
prior to the Maturity Date or any redemption or repayment date, for payments of
principal, as the case may be.

     If the holder elects to receive all or a portion of payments of principal
of, premium, if any, and interest on this Note, if denominated in a Specified
Currency other than U.S. dollars, in U.S. dollars, the Exchange Rate Agent (as
defined on the reverse hereof) will convert such payments into U.S. dollars. In
the event of such an election, payment in respect of this Note will be based
upon the exchange rate as determined by the Exchange Rate Agent based on the
highest bid quotation in The City of New York received by such Exchange Rate
Agent at approximately 11:00 a.m., New York City time, on the second Business
Day preceding the applicable payment date from three recognized foreign exchange
dealers (one of which may be the Exchange Rate Agent unless such Exchange Rate
Agent is an affiliate of the Issuer) for the purchase by the quoting dealer of
the Specified Currency for U.S. dollars for settlement on such payment date in
the amount of the Specified Currency payable in the absence of such an election
to such holder and at which the applicable dealer commits to execute a contract.
If such bid quotations are not available, such payment will be made in the
Specified Currency. All currency exchange costs will be borne by the holder of
this Note by deductions from such payments.

                                       12
<PAGE>

     Reference is hereby made to the further provisions of this Note set forth
on the reverse hereof, which further provisions shall for all purposes have the
same effect as if set forth at this place.

     Unless the certificate of authentication hereon has been executed by the
Trustee referred to on the reverse hereof by manual signature, this Note shall
not be entitled to any benefit under the Senior Indenture, as defined on the
reverse hereof, or be valid or obligatory for any purpose.

                                       13
<PAGE>

     IN WITNESS WHEREOF, the Issuer has caused this Note to be duly executed.

DATED:                                         MORGAN STANLEY

                                               By:
                                                   -----------------------------
                                                   Name:
                                                   Title:

TRUSTEE'S CERTIFICATE
  OF AUTHENTICATION

This is one of the Notes referred
  to in the within-mentioned
  Senior Indenture.

JPMORGAN CHASE BANK, N.A.,
  as Trustee

By:
    -----------------------------
    Authorized Officer

                                       14
<PAGE>

                           FORM OF REVERSE OF SECURITY

     This Note is one of a duly authorized issue of Senior Global Medium-Term
Notes, Series F, having maturities more than nine months from the date of issue
(the "Notes") of the Issuer. The Notes are issuable under a Senior Indenture,
dated as of November 1, 2004, between the Issuer and JPMorgan Chase Bank, N.A.
(formerly known as JPMorgan Chase Bank), as Trustee (the "Trustee," which term
includes any successor trustee under the Senior Indenture) (as may be amended or
supplemented from time to time, the "Senior Indenture"), to which Senior
Indenture and all indentures supplemental thereto reference is hereby made for a
statement of the respective rights, limitations of rights, duties and immunities
of the Issuer, the Trustee and holders of the Notes and the terms upon which the
Notes are, and are to be, authenticated and delivered. The Issuer has appointed
JPMorgan Chase Bank, N.A. at its corporate trust office in The City of New York
as the paying agent (the "Paying Agent," which term includes any additional or
successor Paying Agent appointed by the Issuer) with respect to the Notes. The
terms of individual Notes may vary with respect to interest rates, interest rate
formulas, issue dates, maturity dates, or otherwise, all as provided in the
Senior Indenture. To the extent not inconsistent herewith, the terms of the
Senior Indenture are hereby incorporated by reference herein.

     Unless otherwise indicated on the face hereof, this Note will not be
subject to any sinking fund and, unless otherwise provided on the face hereof in
accordance with the provisions of the following two paragraphs, will not be
redeemable or subject to repayment at the option of the holder prior to
maturity.

     If so indicated on the face hereof, this Note may be redeemed in whole or
in part at the option of the Issuer on or after the Initial Redemption Date
specified on the face hereof on the terms set forth on the face hereof, together
with interest accrued and unpaid hereon to the date of redemption. If this Note
is subject to "Annual Redemption Percentage Reduction," the Initial Redemption
Percentage indicated on the face hereof will be reduced on each anniversary of
the Initial Redemption Date by the Annual Redemption Percentage Reduction
specified on the face hereof until the redemption price of this Note is 100% of
the principal amount hereof, together with interest accrued and unpaid hereon to
the date of redemption. Notice of redemption shall be mailed to the registered
holders of the Notes designated for redemption at their addresses as the same
shall appear on the Note register not less than 30 nor more than 60 calendar
days prior to the date fixed for redemption or within the Redemption Notice
Period specified on the face hereof, subject to all the conditions and
provisions of the Senior Indenture. In the event of redemption of this Note in
part only, a new Note or Notes for the amount of the unredeemed portion hereof
shall be issued in the name of the holder hereof upon the cancellation hereof.

     If so indicated on the face of this Note, this Note will be subject to
repayment at the option of the holder on the Optional Repayment Date or Dates
specified on the face hereof on the terms set forth herein. On any Optional
Repayment Date, this Note will be repayable in whole or in part in increments of
$1,000 or, if this Note is denominated in a Specified Currency other than U.S.
dollars, in increments of 1,000 units of such Specified Currency (provided that
any remaining principal amount hereof shall not be less than the minimum
authorized denomination hereof) at the option of the holder hereof at a price
equal to 100% of the principal amount to be repaid, together with interest
accrued and unpaid hereon to the date of repayment, provided that

                                       15
<PAGE>

if this Note is issued with original issue discount, this Note will be repayable
on the applicable Optional Repayment Date or Dates at the price(s) specified on
the face hereof. For this Note to be repaid at the option of the holder hereof,
the Paying Agent must receive at its corporate trust office in the Borough of
Manhattan, The City of New York, at least 15 but not more than 30 calendar days
prior to the date of repayment, (i) this Note with the form entitled "Option to
Elect Repayment" below duly completed or (ii) a telegram, telex, facsimile
transmission or a letter from a member of a national securities exchange or the
National Association of Securities Dealers, Inc. or a commercial bank or a trust
company in the United States setting forth the name of the holder of this Note,
the principal amount hereof, the certificate number of this Note or a
description of this Note's tenor and terms, the principal amount hereof to be
repaid, a statement that the option to elect repayment is being exercised
thereby and a guarantee that this Note, together with the form entitled "Option
to Elect Repayment" duly completed, will be received by the Paying Agent not
later than the fifth Business Day after the date of such telegram, telex,
facsimile transmission or letter; provided, that such telegram, telex, facsimile
transmission or letter shall only be effective if this Note and form duly
completed are received by the Paying Agent by such fifth Business Day. Exercise
of such repayment option by the holder hereof shall be irrevocable. In the event
of repayment of this Note in part only, a new Note or Notes for the amount of
the unpaid portion hereof shall be issued in the name of the holder hereof upon
the cancellation hereof.

     Interest payments on this Note will include interest accrued to but
excluding the Interest Payment Dates or the Maturity Date (or any earlier
redemption or repayment date), as the case may be. Unless otherwise provided on
the face hereof, interest payments for this Note will be computed and paid on
the basis of a 360-day year of twelve 30-day months.

     In the case where the Interest Payment Date or the Maturity Date (or any
redemption or repayment date) does not fall on a Business Day, payment of
interest, premium, if any, or principal otherwise payable on such date need not
be made on such date, but may be made on the next succeeding Business Day with
the same force and effect as if made on the Interest Payment Date or on the
Maturity Date (or any redemption or repayment date), and no interest on such
payment shall accrue for the period from and after the Interest Payment Date or
the Maturity Date (or any redemption or repayment date) to such next succeeding
Business Day.

     This Note and all the obligations of the Issuer hereunder are direct,
unsecured obligations of the Issuer and rank without preference or priority
among themselves and pari passu with all other existing and future unsecured and
unsubordinated indebtedness of the Issuer, subject to certain statutory
exceptions in the event of liquidation upon insolvency.

     This Note, and any Note or Notes issued upon transfer or exchange hereof,
is issuable only in fully registered form, without coupons, and, if denominated
in U.S. dollars, unless otherwise stated above, is issuable only in
denominations of U.S. $1,000 and any integral multiple of U.S. $1,000 in excess
thereof. If this Note is denominated in a Specified Currency other than U.S.
dollars, then, unless a higher minimum denomination is required by applicable
law, it is issuable only in denominations of the equivalent of U.S. $1,000
(rounded to an integral multiple of 1,000 units of such Specified Currency), or
any amount in excess thereof which is an integral multiple of 1,000 units of
such Specified Currency, as determined by reference to the noon dollar buying
rate in The City of New York for cable transfers of such Specified Currency

                                       16
<PAGE>

published by the Federal Reserve Bank of New York (the "Market Exchange Rate")
on the Business Day immediately preceding the date of issuance.

     The Trustee has been appointed registrar for the Notes, and the Trustee
will maintain at its office in The City of New York a register for the
registration and transfer of Notes. This Note may be transferred at the
aforesaid office of the Trustee by surrendering this Note for cancellation,
accompanied by a written instrument of transfer in form satisfactory to the
Issuer and the Trustee and duly executed by the registered holder hereof in
person or by the holder's attorney duly authorized in writing, and thereupon the
Trustee shall issue in the name of the transferee or transferees, in exchange
herefor, a new Note or Notes having identical terms and provisions and having a
like aggregate principal amount in authorized denominations, subject to the
terms and conditions set forth herein; provided, however, that the Trustee will
not be required (i) to register the transfer of or exchange any Note that has
been called for redemption in whole or in part, except the unredeemed portion of
Notes being redeemed in part, (ii) to register the transfer of or exchange any
Note if the holder thereof has exercised his right, if any, to require the
Issuer to repurchase such Note in whole or in part, except the portion of such
Note not required to be repurchased, or (iii) to register the transfer of or
exchange Notes to the extent and during the period so provided in the Senior
Indenture with respect to the redemption of Notes. Notes are exchangeable at
said office for other Notes of other authorized denominations of equal aggregate
principal amount having identical terms and provisions. All such exchanges and
transfers of Notes will be free of charge, but the Issuer may require payment of
a sum sufficient to cover any tax or other governmental charge in connection
therewith. All Notes surrendered for exchange shall be accompanied by a written
instrument of transfer in form satisfactory to the Issuer and the Trustee and
executed by the registered holder in person or by the holder's attorney duly
authorized in writing. The date of registration of any Note delivered upon any
exchange or transfer of Notes shall be such that no gain or loss of interest
results from such exchange or transfer.

     In case this Note shall at any time become mutilated, defaced or be
destroyed, lost or stolen and this Note or evidence of the loss, theft or
destruction thereof (together with the indemnity hereinafter referred to and
such other documents or proof as may be required in the premises) shall be
delivered to the Trustee, the Issuer in its discretion may execute a new Note of
like tenor in exchange for this Note, but, if this Note is destroyed, lost or
stolen, only upon receipt of evidence satisfactory to the Trustee and the Issuer
that this Note was destroyed or lost or stolen and, if required, upon receipt
also of indemnity satisfactory to each of them. All expenses and reasonable
charges associated with procuring such indemnity and with the preparation,
authentication and delivery of a new Note shall be borne by the owner of the
Note mutilated, defaced, destroyed, lost or stolen.

     The Senior Indenture provides that (a) if an Event of Default (as defined
in the Senior Indenture) due to the default in payment of principal of, premium,
if any, or interest on, any series of debt securities issued under the Senior
Indenture, including the series of Senior Medium-Term Notes of which this Note
forms a part, or due to the default in the performance or breach of any other
covenant or warranty of the Issuer applicable to the debt securities of such
series but not applicable to all outstanding debt securities issued under the
Senior Indenture shall have occurred and be continuing, either the Trustee or
the holders of not less than 25% in aggregate principal amount of the
outstanding debt securities of each affected series, voting as

                                       17
<PAGE>

one class, by notice in writing to the Issuer and to the Trustee, if given by
the securityholders, may then declare the principal of all debt securities of
all such series and interest accrued thereon to be due and payable immediately
and (b) if an Event of Default due to a default in the performance of any other
of the covenants or agreements in the Senior Indenture applicable to all
outstanding debt securities issued thereunder, including this Note, or due to
certain events of bankruptcy, insolvency or reorganization of the Issuer, shall
have occurred and be continuing, either the Trustee or the holders of not less
than 25% in aggregate principal amount of all outstanding debt securities issued
under the Senior Indenture, voting as one class, by notice in writing to the
Issuer and to the Trustee, if given by the securityholders, may declare the
principal of all such debt securities and interest accrued thereon to be due and
payable immediately, but upon certain conditions such declarations may be
annulled and past defaults may be waived (except a continuing default in payment
of principal or premium, if any, or interest on such debt securities) by the
holders of a majority in aggregate principal amount of the debt securities of
all affected series then outstanding.

     If the face hereof indicates that this Note is subject to "Modified Payment
upon Acceleration or Redemption," then (i) if the principal hereof is declared
to be due and payable as described in the preceding paragraph, the amount of
principal due and payable with respect to this Note shall be limited to the
aggregate principal amount hereof multiplied by the sum of the Issue Price
specified on the face hereof (expressed as a percentage of the aggregate
principal amount) plus the original issue discount amortized from the Interest
Accrual Date to the date of declaration, which amortization shall be calculated
using the "interest method" (computed in accordance with generally accepted
accounting principles in effect on the date of declaration), (ii) for the
purpose of any vote of securityholders taken pursuant to the Senior Indenture
prior to the acceleration of payment of this Note, the principal amount hereof
shall equal the amount that would be due and payable hereon, calculated as set
forth in clause (i) above, if this Note were declared to be due and payable on
the date of any such vote and (iii) for the purpose of any vote of
securityholders taken pursuant to the Senior Indenture following the
acceleration of payment of this Note, the principal amount hereof shall equal
the amount of principal due and payable with respect to this Note, calculated as
set forth in clause (i) above.

     If the face hereof indicates that this Note is subject to "Tax Redemption
and Payment of Additional Amounts," this Note may be redeemed, as a whole, at
the option of the Issuer at any time prior to maturity, upon the giving of a
notice of redemption as described below, at a redemption price equal to 100% of
the principal amount hereof, together with accrued interest to the date fixed
for redemption (except that if this Note is subject to "Modified Payment upon
Acceleration or Redemption," such redemption price would be limited to the
aggregate principal amount hereof multiplied by the sum of the Issue Price
specified on the face hereof (expressed as a percentage of the aggregate
principal amount) plus the original issue discount amortized from the Interest
Accrual Date to the date of redemption, which amortization shall be calculated
using the "interest method" (computed in accordance with generally accepted
accounting principles in effect on the date of redemption) (the "Amortized
Amount")), if the Issuer determines that, as a result of any change in or
amendment to the laws, or any regulations or rulings promulgated thereunder, of
the United States or of any political subdivision or taxing authority thereof or
therein affecting taxation, or any change in official position regarding the
application or interpretation of such laws, regulations or rulings, which change
or amendment becomes effective on or after the Initial Offering Date hereof, the
Issuer has or will become obligated to

                                       18
<PAGE>

pay Additional Amounts, as defined below, with respect to this Note as described
below. Prior to the giving of any notice of redemption pursuant to this
paragraph, the Issuer shall deliver to the Trustee (i) a certificate stating
that the Issuer is entitled to effect such redemption and setting forth a
statement of facts showing that the conditions precedent to the right of the
Issuer to so redeem have occurred, and (ii) an opinion of independent legal
counsel satisfactory to the Trustee to such effect based on such statement of
facts; provided that no such notice of redemption shall be given earlier than 60
calendar days prior to the earliest date on which the Issuer would be obligated
to pay such Additional Amounts if a payment in respect of this Note were then
due.

     Notice of redemption will be given not less than 30 nor more than 60
calendar days prior to the date fixed for redemption or within the Redemption
Notice Period specified on the face hereof, which date and the applicable
redemption price will be specified in the notice.

     If the face hereof indicates that this Note is subject to "Tax Redemption
and Payment of Additional Amounts," the Issuer will, subject to certain
exceptions and limitations set forth below, pay such additional amounts (the
"Additional Amounts") to the holder of this Note who is a United States Alien as
may be necessary in order that every net payment of the principal of and
interest on this Note and any other amounts payable on this Note, after
withholding or deduction for or on account of any present or future tax,
assessment or governmental charge imposed upon or as a result of such payment by
the United States, or any political subdivision or taxing authority thereof or
therein, will not be less than the amount provided for in this Note to be then
due and payable. The Issuer will not, however, make any payment of Additional
Amounts to any such holder who is a United States Alien for or on account of:

          (a) any present or future tax, assessment or other governmental charge
     that would not have been so imposed but for (i) the existence of any
     present or former connection between such holder, or between a fiduciary,
     settlor, beneficiary, member or shareholder of such holder, if such holder
     is an estate, a trust, a partnership or a corporation for United States
     federal income tax purposes, and the United States, including, without
     limitation, such holder, or such fiduciary, settlor, beneficiary, member or
     shareholder, being or having been a citizen or resident thereof or being or
     having been engaged in a trade or business or present therein or having, or
     having had, a permanent establishment therein or (ii) the presentation by
     or on behalf of the holder of this Note for payment on a date more than 15
     calendar days after the date on which such payment became due and payable
     or the date on which payment thereof is duly provided for, whichever occurs
     later;

          (b) any estate, inheritance, gift, sales, transfer, excise or personal
     property tax or any similar tax, assessment or governmental charge;

          (c) any tax, assessment or other governmental charge imposed by reason
     of such holder's past or present status as a personal holding company or
     foreign personal holding company or controlled foreign corporation or
     passive foreign investment company with respect to the United States or as
     a corporation which accumulates earnings to avoid United States federal
     income tax or as a private foundation or other tax-exempt

                                       19
<PAGE>

     organization or a bank receiving interest under Section 881(c)(3)(A) of the
     Internal Revenue Code of 1986, as amended;

          (d) any tax, assessment or other governmental charge that is payable
     otherwise than by withholding or deduction from payments on or in respect
     of this Note;

          (e) any tax, assessment or other governmental charge required to be
     withheld by any Paying Agent from any payment of principal of, or interest
     on, this Note, if such payment can be made without such withholding by any
     other Paying Agent in a city in Western Europe;

          (f) any tax, assessment or other governmental charge that would not
     have been imposed but for the failure to comply with certification,
     information or other reporting requirements concerning the nationality,
     residence or identity of the holder or beneficial owner of this Note, if
     such compliance is required by statute or by regulation of the United
     States or of any political subdivision or taxing authority thereof or
     therein as a precondition to relief or exemption from such tax, assessment
     or other governmental charge;

          (g) any tax, assessment or other governmental charge imposed by reason
     of such holder's past or present status as the actual or constructive owner
     of 10% or more of the total combined voting power of all classes of stock
     entitled to vote of the Issuer or as a direct or indirect subsidiary of the
     Issuer; or

          (h) any combination of items (a), (b), (c), (d), (e), (f) or (g).

In addition, the Issuer shall not be required to make any payment of Additional
Amounts (i) to any such holder where such withholding or deduction is imposed on
a payment to an individual and is required to be made pursuant to any law
implementing or complying with, or introduced in order to conform to, any
European Union Directive on the taxation of savings; or (ii) by or on behalf of
a holder who would have been able to avoid such withholding or deduction by
presenting this Note or the relevant coupon to another Paying Agent in a member
state of the European Union. Nor shall the Issuer pay Additional Amounts with
respect to any payment on this Note to a United States Alien who is a fiduciary
or partnership or other than the sole beneficial owner of such payment to the
extent such payment would be required by the laws of the United States (or any
political subdivision thereof) to be included in the income, for tax purposes,
of a beneficiary or settlor with respect to such fiduciary or a member of such
partnership or a beneficial owner who would not have been entitled to the
Additional Amounts had such beneficiary, settlor, member or beneficial owner
been the holder of this Note.

     The Senior Indenture permits the Issuer and the Trustee, with the consent
of the holders of not less than a majority in aggregate principal amount of the
debt securities of all series issued under the Senior Indenture then outstanding
and affected (voting as one class), to execute supplemental indentures adding
any provisions to or changing in any manner the rights of the holders of each
series so affected; provided that the Issuer and the Trustee may not, without
the consent of the holder of each outstanding debt security affected thereby,
(a) extend the final maturity of any such debt security, or reduce the principal
amount thereof, or reduce the rate or

                                       20
<PAGE>

extend the time of payment of interest thereon, or reduce any amount payable on
redemption thereof, or change the currency of payment thereof, or modify or
amend the provisions for conversion of any currency into any other currency, or
modify or amend the provisions for conversion or exchange of the debt security
for securities of the Issuer or other entities or for other property or the cash
value of the property (other than as provided in the antidilution provisions or
other similar adjustment provisions of the debt securities or otherwise in
accordance with the terms thereof), or impair or affect the rights of any holder
to institute suit for the payment thereof or (b) reduce the aforesaid percentage
in principal amount of debt securities the consent of the holders of which is
required for any such supplemental indenture.

     Except as set forth below, if the principal of, premium, if any, or
interest on this Note is payable in a Specified Currency other than U.S. dollars
and such Specified Currency is not available to the Issuer for making payments
hereon due to the imposition of exchange controls or other circumstances beyond
the control of the Issuer or is no longer used by the government of the country
issuing such currency or for the settlement of transactions by public
institutions within the international banking community, then the Issuer will be
entitled to satisfy its obligations to the holder of this Note by making such
payments in U.S. dollars on the basis of the Market Exchange Rate on the date of
such payment or, if the Market Exchange Rate is not available on such date, as
of the most recent practicable date; provided, however, that if the euro has
been substituted for such Specified Currency, the Issuer may at its option (or
shall, if so required by applicable law) without the consent of the holder of
this Note effect the payment of principal of, premium, if any, or interest on
any Note denominated in such Specified Currency in euro in lieu of such
Specified Currency in conformity with legally applicable measures taken pursuant
to, or by virtue of, the Treaty establishing the European Community, as amended.
Any payment made under such circumstances in U.S. dollars or euro where the
required payment is in an unavailable Specified Currency will not constitute an
Event of Default. If such Market Exchange Rate is not then available to the
Issuer or is not published for a particular Specified Currency, the Market
Exchange Rate will be based on the highest bid quotation in The City of New York
received by the Exchange Rate Agent at approximately 11:00 a.m., New York City
time, on the second Business Day preceding the date of such payment from three
recognized foreign exchange dealers (the "Exchange Dealers") for the purchase by
the quoting Exchange Dealer of the Specified Currency for U.S. dollars for
settlement on the payment date, in the aggregate amount of the Specified
Currency payable to those holders or beneficial owners of Notes and at which the
applicable Exchange Dealer commits to execute a contract. One of the Exchange
Dealers providing quotations may be the Exchange Rate Agent unless the Exchange
Rate Agent is an affiliate of the Issuer. If those bid quotations are not
available, the Exchange Rate Agent shall determine the market exchange rate at
its sole discretion.

     The "Exchange Rate Agent" shall be Morgan Stanley & Co. Incorporated,
unless otherwise indicated on the face hereof.

     All determinations referred to above made by, or on behalf of, the Issuer
or by, or on behalf of, the Exchange Rate Agent shall be at such entity's sole
discretion and shall, in the absence of manifest error, be conclusive for all
purposes and binding on holders of Notes and coupons.

                                       21
<PAGE>

     So long as this Note shall be outstanding, the Issuer will cause to be
maintained an office or agency for the payment of the principal of and premium,
if any, and interest on this Note as herein provided in the Borough of
Manhattan, The City of New York, and an office or agency in said Borough of
Manhattan for the registration, transfer and exchange as aforesaid of the Notes.
The Issuer may designate other agencies for the payment of said principal,
premium and interest at such place or places (subject to applicable laws and
regulations) as the Issuer may decide. So long as there shall be such an agency,
the Issuer shall keep the Trustee advised of the names and locations of such
agencies, if any are so designated. If any European Union Directive on the
taxation of savings comes into force, the Issuer will, to the extent possible as
a matter of law, maintain a Paying Agent in a member state of the European Union
that will not be obligated to withhold or deduct tax pursuant to any such
Directive or any law implementing or complying with, or introduced in order to
conform to, such Directive.

     With respect to moneys paid by the Issuer and held by the Trustee or any
Paying Agent for payment of the principal of or interest or premium, if any, on
any Notes that remain unclaimed at the end of two years after such principal,
interest or premium shall have become due and payable (whether at maturity or
upon call for redemption or otherwise), (i) the Trustee or such Paying Agent
shall notify the holders of such Notes that such moneys shall be repaid to the
Issuer and any person claiming such moneys shall thereafter look only to the
Issuer for payment thereof and (ii) such moneys shall be so repaid to the
Issuer. Upon such repayment all liability of the Trustee or such Paying Agent
with respect to such moneys shall thereupon cease, without, however, limiting in
any way any obligation that the Issuer may have to pay the principal of or
interest or premium, if any, on this Note as the same shall become due.

     No provision of this Note or of the Senior Indenture shall alter or impair
the obligation of the Issuer, which is absolute and unconditional, to pay the
principal of, premium, if any, and interest on this Note at the time, place, and
rate, and in the coin or currency, herein prescribed unless otherwise agreed
between the Issuer and the registered holder of this Note.

     Prior to due presentment of this Note for registration of transfer, the
Issuer, the Trustee and any agent of the Issuer or the Trustee may treat the
holder in whose name this Note is registered as the owner hereof for all
purposes, whether or not this Note be overdue, and none of the Issuer, the
Trustee or any such agent shall be affected by notice to the contrary.

     No recourse shall be had for the payment of the principal of, premium, if
any, or the interest on this Note, for any claim based hereon, or otherwise in
respect hereof, or based on or in respect of the Senior Indenture or any
indenture supplemental thereto, against any incorporator, shareholder, officer
or director, as such, past, present or future, of the Issuer or of any successor
corporation, either directly or through the Issuer or any successor corporation,
whether by virtue of any constitution, statute or rule of law or by the
enforcement of any assessment or penalty or otherwise, all such liability being,
by the acceptance hereof and as part of the consideration for the issue hereof,
expressly waived and released.

     This Note shall for all purposes be governed by, and construed in
accordance with, the laws of the State of New York.

                                       22
<PAGE>

     As used herein, the term "United States Alien" means any person who is, for
United States federal income tax purposes, (i) a nonresident alien individual,
(ii) a foreign corporation, (iii) a nonresident alien fiduciary of a foreign
estate or trust or (iv) a foreign partnership one or more of the members of
which is, for United States federal income tax purposes, a nonresident alien
individual, a foreign corporation or a nonresident alien fiduciary of a foreign
estate or trust.

     All terms used in this Note which are defined in the Senior Indenture and
not otherwise defined herein shall have the meanings assigned to them in the
Senior Indenture.

                                       23
<PAGE>

                                  ABBREVIATIONS

     The following abbreviations, when used in the inscription on the face of
this instrument, shall be construed as though they were written out in full
according to applicable laws or regulations:

        TEN COM  -  as tenants in common
        TEN ENT  -  as tenants by the entireties
        JT TEN   -  as joint tenants with right of survivorship and not as
                    tenants in common

     UNIF GIFT MIN ACT -                        Custodian
                         ----------------------           ----------------------
                                 (Minor)                          (Cust)

     Under Uniform Gifts to Minors Act
                                       -----------------------------------------
                                                       (State)

     Additional abbreviations may also be used though not in the above list.

                            ------------------------

                                       24
<PAGE>

     FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and
transfer(s) unto

---------------------------------------
[PLEASE INSERT SOCIAL SECURITY OR OTHER
  IDENTIFYING NUMBER OF ASSIGNEE]

--------------------------------------------------------------------------------

--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
    [PLEASE PRINT OR TYPE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE]

the within Note and all rights thereunder, hereby irrevocably constituting and
appointing such person attorney to transfer such note on the books of the
Issuer, with full power of substitution in the premises.

Dated:__________________________________

NOTICE:   The signature to this assignment must correspond with the name as
          written upon the face of the within Note in every particular without
          alteration or enlargement or any change whatsoever.

                                       25
<PAGE>

                            OPTION TO ELECT REPAYMENT

     The undersigned hereby irrevocably requests and instructs the Issuer to
repay the within Note (or portion thereof specified below) pursuant to its terms
at a price equal to the principal amount thereof, together with interest to the
Optional Repayment Date, to the undersigned at

--------------------------------------------------------------------------------

--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
         (Please print or typewrite name and address of the undersigned)

     If less than the entire principal amount of the within Note is to be
repaid, specify the portion thereof which the holder elects to have repaid:
___________________; and specify the denomination or denominations (which shall
not be less than the minimum authorized denomination) of the Notes to be issued
to the holder for the portion of the within Note not being repaid (in the
absence of any such specification, one such Note shall be issued for the portion
not being repaid): _______________________.

Dated:_______________________________   ________________________________________
                                        NOTICE: The signature on this Option to
                                        Elect Repayment must correspond with the
                                        name as written upon the face of the
                                        within instrument in every particular
                                        without alteration or enlargement.

                                       26

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