10-K405

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

FORM 10-K
ANNUAL REPORT

(Mark One)

/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2001

OR

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                              to                             

Commission file number 1-13144

ITT EDUCATIONAL SERVICES, INC.
(Exact name of registrant as specified in its charter)

Delaware	36-2061311
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
5975 Castle Creek Parkway N. Drive P.O. Box 50466, Indianapolis, Indiana	46250-0466
(Address of principal executive offices)	(Zip Code)

Registrant's telephone number, including area code (317) 594-9499

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

Title of each class	Name of each exchange on which registered
COMMON STOCK, $.01 PAR VALUE	NEW YORK STOCK EXCHANGE, INC.

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

NONE

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

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

$996,200,641

      Aggregate market value of the voting stock held by nonaffiliates of the Registrant based on the last sale price for such stock at February 15, 2002 (assuming solely for the purposes of this calculation that all Directors and executive officers of the Registrant are "affiliates").

23,144,059

      Number of shares of Common Stock, $.01 par value, outstanding at February 15, 2002.

      DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the following documents have been incorporated by reference into this Annual Report on Form 10-K

IDENTITY OF DOCUMENT	PARTS OF FORM 10-K INTO WHICH DOCUMENT IS INCORPORATED
Definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 10, 2002	PART III

ITT EDUCATIONAL SERVICES, INC.
Indianapolis, Indiana

Annual Report to Securities and Exchange Commission
December 31, 2001

PART I

Item 1. BUSINESS.

You should keep in mind the following points as you read this report:

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References in this document to "we," "us," "our" and "ESI" refer to ITT Educational Services, Inc. and its subsidiaries.

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The terms "ITT Technical Institutes," "technical institutes" or "institutes" (in singular or plural form) refer to the individual schools owned and operated by ESI. The terms "institution" or "campus group" (in singular or plural form) mean a main campus and its additional locations or branch campuses, if any.

Background

        We are a Delaware corporation incorporated in 1946. Our principal executive offices are located at 5975 Castle Creek Parkway, North Drive, Indianapolis, Indiana 46250, and our telephone number is (317) 594-9499. From 1966 until our initial public offering on December 27, 1994, we were wholly owned by ITT Corporation, formerly a Delaware corporation and now known as ITT Industries, Inc., an Indiana corporation ("Old ITT"). On September 29, 1995, ITT Corporation, a Nevada corporation ("ITT") succeeded to the interests of Old ITT in the beneficial ownership of 83.3% of our common stock. On February 23, 1998, Starwood Hotels & Resorts Worldwide, Inc., a Maryland corporation ("Starwood Hotels") acquired ITT. Public offerings of our common stock by ITT in June 1998 (the "June 1998 Offering") and February 1999 (the "February 1999 Offering") and our repurchase of 1,500,000 shares of our common stock from ITT in February 1999 completely eliminated ITT's beneficial ownership.

Overview

        We are a leading provider of technology-oriented postsecondary degree programs in the United States based on revenues and student enrollment. We offer associate, bachelor and master degree programs and non-degree diploma programs to more than 30,000 students. We currently have 70 institutes located in 28 states. Each of our institutes is (a) authorized by the applicable education authorities of the states in which they operate and recruit and (b) accredited by an accrediting commission recognized by the U.S. Department of Education ("DOE"). We design our education programs, after consultation with employers, to help graduates begin to prepare for careers in various fields involving technology. As of December 31, 2001, approximately 98% of our students were enrolled in a degree program. We have provided career-oriented education programs for over 30 years and our institutes have graduated over 155,000 students since 1976.

        We opened three new institutes in 1999, two new institutes in 2000 and one new institute in 2001. We plan to open four additional new institutes in the remainder of 2002. In 2001, we expanded to 70 the number of institutes that offer our computer and electronics engineering technology ("CEET") curriculum and to 59 the number of institutes that offer our computer drafting and design ("CDD") curriculum. We also began offering an on-line bachelor degree program in technical project management for electronic commerce ("TPMEC") at one institute in 2001. In addition, we revised the curricula of our resident bachelor degree programs in 2001 in order to offer students who enroll in those programs a class schedule of three days per week instead of five days per week. We intend to

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continue expanding by opening new institutes and offering a broader range of both resident and on-line programs at our existing institutes, including new information technology ("IT") programs.

Business Strategy

        Our strategy is to pursue multiple opportunities for growth. We are implementing a business plan designed to increase revenues and operating efficiencies by increasing the number of program offerings and student enrollment at existing institutes and by opening new institutes across the United States. The principal elements of this strategy include the following:

Enhance Results at the Institute Level.

        Increase Enrollments at Existing Institutes.    We believe that current demographic and employment trends will allow us to enroll a greater number of recent high school graduates. In addition, we intend to increase recruiting efforts aimed at enrolling more working adults.

        Broaden Availability of Current Program Offerings.    We intend to continue expanding the number of program offerings at our existing institutes. Our objective is to offer multiple programs at each institute. Our 70 institutes provide significant potential for the introduction of existing programs to a broader number of institutes. We believe that introducing new programs at existing institutes will attract more students. In 2001, we increased the number of program offerings at 62 existing institutes, and in 2002 we intend to increase the number of program offerings at approximately 47 existing institutes.

        Develop or Acquire Additional Degree Programs.    We plan to introduce both resident and on-line degree programs in additional fields of study and at different degree levels. In 2001, we completed the introduction of our CEET and CDD curricula at our institutes, began offering an on-line bachelor degree program at one institute and increased the number of institutes offering more than one of our IT programs. In 2002, we intend to offer our TPMEC program on-line in additional states and in residence at 32 institutes. We also intend to introduce three new programs either on-line or in residence at one or more of our institutes. We believe that introducing new programs can attract a broader base of students and can motivate current students to extend their studies.

        Extend Total Program Duration.    We have increased the number of institutes that offer bachelor degree programs to graduates of our associate degree programs, and each of our recently introduced associate degree programs is 24 months in duration. When we revised the curricula of our resident bachelor degree programs in order to offer students a class schedule of three days per week, instead of five days per week, the duration of those programs increased either three or six months, depending on the program. The average combined total program time that graduates of one or more of our programs were enrolled has increased from 18 months in 1986 to 27 months in 2001, as a result of approximately 15% of the graduates of our associate degree programs enrolling in bachelor degree programs at our institutes and the increased duration of our bachelor degree programs. We expect that the average combined total program time of our students will increase further as additional bachelor degree programs are added at our institutes.

        Improve Student Outcomes.    We strive to improve the graduation and graduate employment rates of our undergraduate students by providing academic and career services and dedicating administrative resources to career services.

        Increase the Number of Our Institutes.    We plan to add new institutes at sites throughout the United States. Using our proprietary methodology, we determine locations for new institutes based on a number of factors, including demographics and population and employment growth. We opened three new institutes in 1999, two new institutes in 2000 and one new institute in 2001. We plan to open four new institutes in the remainder of 2002. We will continue to consider acquiring schools located in markets where our institutes are not presently located.

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        Increase Margins By Leveraging Fixed Costs at Institute and Headquarters Levels.    Our efforts to optimize school capacity and class size have helped us to increase student enrollment without incurring a proportionate increase in fixed costs at our institutes. In addition, we have realized substantial operating efficiencies by centralizing management functions and implementing operational uniformity among our institutes. We will continue to seek to improve margins by increasing enrollments and revenues without incurring a proportionate increase in fixed costs at our institutes.

Programs of Study

        As of December 31, 2001, we were teaching 19 degree programs and several diploma programs in various fields of study. All of our institutes were teaching degree or diploma programs involving IT and electronics, and 58 institutes were teaching a degree or diploma program involving drafting and design. The table below sets forth information regarding the programs of study we were teaching as of December 31, 2001.

	Number of Institutes Teaching at December 31, 2001
Program of Study	Master Degree	Bachelor Degree	Associate Degree	Diploma(1)
Automated Manufacturing Technology(3)	—	6	—	—
Chemical Technology	—	—	2	—
Computer-Aided Drafting and Design Technology(2)	—	—	8	—
Computer-Aided Drafting Technology(2)	—	—	48	—
Computer Drafting and Design(2)	—	—	56	3
Computer and Electronics Engineering Technology(3)	—	—	66	4
Computer Network Systems(4)	—	—	70	—
Computer Network Systems Technology(4)	—	—	37	—
Computer Visualization Technology(2)	—	7	—	—
Electronics Engineering Technology	—	19	66	—
Industrial Design(2)	—	3	—	—
Multimedia(4)	—	—	51	6
Project Management	1	—	—	—
Software Applications and Programming(4)	—	—	46	6
Technical Project Management for Electronic Commerce	—	1	—	—
Telecommunications Engineering Technology(3)	—	3	—	—
Web Development(4)	—	—	38	7
Other Programs of Study(5)	—	1	2	—

(1)

We have submitted, or are in the process of submitting, the requisite applications to the applicable state education authorities for approval to offer the diploma programs identified in this column as associate degree programs at each of the affected ITT Technical Institutes.

(2)

Drafting program.

(3)

Electronics program.

(4)

IT program. Depending on the location of the ITT Technical Institute, this program of study may have been approved by the applicable state education authority(ies) either as a separate program or one of as many as four disciplines of one IT program of study. For purposes of this table, this program is considered to be a separate program of study at every ITT Technical Institute where it was taught.

(5)

Other programs consist of Business Technology and Administration and Business Management and Accounting.

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        As of December 31, 2001, approximately 42% of our students were enrolled in IT programs, approximately 43% were enrolled in electronics programs and approximately 14% were enrolled in drafting programs. We design our IT programs to help graduates begin to prepare for careers in various fields involving IT by offering students a broad-based foundation in a variety of technical skills used in those fields. Graduates of our IT programs have obtained a variety of entry-level positions in various fields involving IT, such as network administrator, technical support, network technician and systems technician. We design our electronics programs to help graduates begin to prepare for careers in various fields involving electronics by offering students a practical education with respect to specific electronic circuits and specialized techniques. Graduates of our electronics programs have obtained a variety of entry-level positions in various fields involving electronics, such as electronics product design and fabrication, communications, computer technology, industrial electronics, instrumentation, telecommunications and consumer electronics. We design our drafting programs to help graduates begin to prepare for careers in various fields involving drafting and design through the teaching of computer-aided drafting and design techniques. Graduates of our drafting programs have obtained a variety of entry-level positions in various fields involving drafting and design, such as computer-aided drafting, electrical and electronics drafting, mechanical drafting, architectural and construction drafting, civil drafting, interior design and landscape architecture.

        In late 2001, we began offering the TPMEC bachelor degree program on-line. This is currently the only distance education program that we offer. All of our other programs are resident programs of study. Less than 1% of our students were enrolled in our distance education program of study on December 31, 2001.

        We generally organize the academic schedule of undergraduate programs at our institutes on the basis of four 12-week quarters of instruction with new students beginning at the start of each academic quarter. Students can complete our associate degree programs in eight academic quarters or less, and bachelor degree programs in at least 12 academic quarters. We typically offer classes in most programs in 3.5 to 5 hour sessions three or five days a week and, depending on student enrollment, sessions are generally available in the morning, afternoon and evening. This class schedule generally provides students with the flexibility to pursue employment opportunities concurrently with their studies. Based on student surveys, we believe that a substantial majority of our students work at least part-time during their programs of study.

        We organize the academic schedule of the Master of Project Management ("MPM") program, currently our only graduate degree program of study, on a non-term basis. Students attending the MPM program take one- to six-week courses sequentially one at a time and can complete the MPM program in 21 months. We typically offer classes in the MPM program in four-hour sessions one night a week, which generally accommodates students who work full-time. Students may generally begin the MPM program once the minimum number of applicants necessary to start a new class has been assembled. Our Indianapolis institute is the only institute that presently offers the MPM program.

        Our institutes' programs of study blend traditional academic content with applied learning concepts and have the objective of helping graduates begin to prepare for a changing economic and technological environment. A significant portion of each associate degree program offered at our institutes involves practical study in a lab environment.

        The content of technical courses in each program of study is substantially standardized among our institutes to provide greater uniformity and to better enable students to transfer, if necessary, to other institutes offering the same programs with less disruption to their education. We regularly review each curriculum to respond to changes in technology and industry needs. Each of our institutes has established an advisory committee for each field of study, which is comprised of representatives of local employers. These advisory committees assist our institutes in assessing and updating curricula, equipment and laboratory design. In addition to courses directly related to a student's program of

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study, degree programs may also include general education courses, such as economics, humanities, oral and written communications and sociology.

        Tuition for a student entering an undergraduate program in December 2001 for 36 quarter credit hours (the minimum course load of a full-time student for an academic year at traditional two- and four-year colleges) is $11,304 for the IT programs and $10,548 for each of the CEET and CDD programs. We typically adjust the tuition for our programs of study at least annually. The majority of students attending one of our institutes lived in that institute's metropolitan area prior to enrollment. We do not provide any student housing.

Student Recruitment

        We strive to attract students with the motivation and ability to complete the career-oriented educational programs offered by our institutes. To generate interest among potential students, we engage in a broad range of activities to inform potential students and their parents about our institutes and the programs they offer. These activities include television, Internet and other media advertising, direct mailings and high school visits.

        We centrally coordinate and develop our television advertising. We direct our television advertising at a combination of both the national market and the local markets in which our institutes are located. Our television commercials generally include a toll free telephone number and a web site address for direct responses and information about the location of our institutes in the area. We centrally receive, track and forward responses to our television advertising to the appropriate institute representatives to contact prospective students and schedule interviews. We target our direct mail campaigns at different groups of potential postsecondary students, including, among others, high school students and working adults. We centrally receive, track and forward responses to direct mail campaigns to the appropriate institute representatives.

        We employ a director of recruitment at each of our institutes, who reports to the director of that institute. We centrally establish, but implement at the local level, recruiting policies and procedures, as well as standards for hiring and training sales representatives. We employ sales representatives to assist in local recruiting efforts. Approximately 425 of these representatives perform their services solely in student recruitment offices located at each of our institutes, while approximately 225 work outside these offices and visit the homes of high school seniors and other prospective students. Our sales representatives also make thousands of presentations to students at high schools. These presentations promote our institutes and obtain information about high school juniors and seniors who may be interested in attending our institutes.

        Local sales representatives of an institute pursue expressions of interest from potential undergraduate students for our resident programs of study by contacting prospective students and arranging for interviews either at such institute or at prospective students' homes. We have designed these interviews to establish a prospective student's qualifications, academic background, interests, motivation and goals for the future. We pursue expressions of interest from potential undergraduate students for our distance education program of study by providing program and resource information on our website and through telecommunications and the mail. We also pursue expressions of interest from potential graduate students by contacting them and arranging for their attendance at an informational seminar providing information about the institute and the MPM program.

        Student recruitment activities are subject to substantial regulation at both the state and federal level. Most states have bonding and licensing requirements that apply to many of our representatives. Our National Director of Recruitment and the directors of field recruitment and training oversee the implementation of recruitment policies and procedures. In addition, our internal audit department generally reviews student recruiting practices relating to student presentations and the execution and completion of enrollment agreements at each of our institutes on an annual basis.

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Student Admission and Retention

        We strive to ensure that incoming students have the necessary academic background to complete their chosen programs of study. We require all applicants for admission to any of our institutes' associate degree or diploma programs to have a high school diploma or a recognized equivalent and either pass an admission examination administered by the school or demonstrate achievement of a desired score on one of the two more widely recognized college entrance examinations. Students interested in bachelor degree programs or the MPM program must satisfy additional admission criteria that generally require, among other things: (1) in the case of bachelor degree programs, that the student must first earn an associate degree, complete an equivalent level program or complete an equivalent number of credit hours of coursework in the same or related subject matter; and (2) in the case of the MPM program, that the student must first earn a bachelor degree and possess at least three years' full-time work experience. Students of varying ages and backgrounds attend our institutes. At December 31, 2001, approximately 93% of the students were high school graduates and the remaining students possessed the recognized equivalent of a high school diploma. Approximately 29% of the students were 19 years of age or younger, 36% were between 20 and 24 years of age, 20% were between 25 and 30 years of age and 15% were age 31 or over. Male students accounted for approximately 88% of total enrollment as of December 31, 2001, while total minority enrollment at our institutes (based on applicable federal classifications) was approximately 40%.

        The faculty and staff at each of our institutes strive to help students overcome obstacles to the completion of their programs of study. As is the case in other postsecondary institutions, however, students often fail to complete their programs for a variety of personal, financial or academic reasons. Student withdrawals prior to program completion not only affect the student, they also have a negative regulatory, financial and marketing effect on the institute. To minimize student withdrawals, each of our institutes devotes staff resources to assist and advise students regarding academic and financial matters. We encourage academic advising and tutoring in the case of undergraduate students experiencing academic difficulties. We also offer assistance and advice to undergraduate students looking for part-time employment and housing. In addition, we consider factors relating to student retention in the performance evaluation of all of our instructors.

        Students who withdraw are most likely to do so before they begin their second academic quarter of study at our institutes. Approximately 23% of all students who enroll in our institutes withdraw before their second academic quarter of study and approximately 22% withdraw at some point after the start of their second quarter. As a result, new institutes generally have higher withdrawal rates than institutes which have been open for five or more years. Approximately 71% of all students who continue their education past their first academic quarter complete their education at one of our institutes.

Graduate Employment

        We believe that the success of graduates from undergraduate programs who begin their careers in fields involving their programs of study is critical to the ability of our institutes to continue to recruit undergraduate students. We try to obtain data on the number of undergraduate students employed following graduation. The reliability of such data depends largely on information that students and employers report to us. Based on this information, we believe that approximately 90% of the students graduating from our institutes' undergraduate programs (other than those students who continued in a bachelor degree program at one of our institutes) during 2000 obtained employment or were already employed in fields involving their programs of study by May 30, 2001.

        Each of our institutes employs personnel to offer students and graduates of undergraduate programs career services. These persons assist in job searches and solicit employment opportunities from employers. In addition, certain courses in our associate degree and diploma programs of study include instruction on job search techniques, the use of relevant reference materials, the composition of

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resumes and letters of introduction and the appropriate preparation, appearance and conduct for interviews. We do not offer career services to students in the graduate program of study.

        Based on information from students and employers who responded to our inquiries, we estimate that the reported annual starting salaries averaged approximately $28,100 for the students of our institutes' undergraduate degree programs who graduated in 2000 and obtained employment or were already employed in fields involving their programs of study.

        The average annual salary upon graduation for our graduates may vary significantly among our institutes depending on local employment conditions and each graduate's background. Initial employers of graduates from our institutes' undergraduate programs include both small, technology-oriented companies and well recognized corporations.

Faculty

        We hire faculty members in accordance with criteria established by us, the accrediting commission that accredits our institutes and the state education authorities that regulate our institutes. We strive to hire faculty with related work experience and academic credentials to teach most technical subjects. Faculty members typically include education supervisors, who act as program chairs for a program of study, and various categories of instructors. Our institutes currently employ a total of approximately 1,400 full-time and 500 part-time faculty members.

Administration and Employees

        Each of our institutes is administered by a director who has overall responsibility for the management of the institute. The administrative staff of each institute also includes a director of recruitment, a director of career services, a director of finance, a dean and a registrar. We employ approximately 150 people at our corporate headquarters in Indianapolis, Indiana. We currently have approximately 3,000 full-time and 900 part-time employees. In addition, we currently employ approximately 500 students as laboratory assistants and in other part-time positions. None of our employees are represented by labor unions.

        Our headquarters provides centralized services to all of our institutes in the following areas:

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accounting



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marketing



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public relations



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curricula development



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data processing



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purchasing



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human resources



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regulatory and legislative affairs



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real estate



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network systems

        In addition, national directors of each of the following major institute functions reside at our headquarters and develop policies and procedures to guide these functions at our institutes:

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recruiting



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finance



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academic affairs



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career services



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library

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        Managers located at our headquarters closely monitor the operating results of each of our institutes and periodically conduct on-site reviews.

Competition

        The postsecondary education market in the United States is highly fragmented and competitive with no private or public institution enjoying a significant market share. Our institutes compete for students with four-year and two-year degree-granting institutions, which include nonprofit public and private colleges and for-profit institutions, as well as with alternatives to higher education such as military service or immediate employment. We believe competition among educational institutions is based on the quality of the educational program, perceived reputation of the institution, cost of the program and employability of graduates. Certain public and private colleges may offer programs similar to those offered by our institutes at a lower tuition cost due in part to government subsidies, foundation grants, tax deductible contributions or other financial resources not available to for-profit institutions. Other for-profit institutions offer programs that compete with those of our institutes. Certain of our competitors in both the public and private sector have greater financial and other resources than we do.

Federal and Other Financial Aid Programs

        In 2001, we indirectly derived approximately 65% of our revenues, determined on a cash accounting basis, from the federal student financial aid programs under Title IV (the "Title IV Programs") of the Higher Education Act of 1965, as amended (the "HEA"). Our institutes' students also rely on state financial aid programs, family contributions, unaffiliated private loan programs, scholarships, personal savings, employment and other resources to pay their educational expenses. Students at our institutes receive grants and loans to fund the cost of their education under the following Title IV Programs:

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the Federal Family Education Loan ("FFEL") program, which accounted in aggregate for approximately 55% of our revenues in 2001;



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the Federal Pell Grant ("Pell") program, which accounted in aggregate for approximately 12% of our revenues in 2001;



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the William D. Ford Federal Direct Loan ("FDL") program, which accounted in aggregate for approximately 2% of our revenues in 2001;



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the Federal Work-Study ("Work-Study") program, which makes federal funds available to provide part-time employment to students and under which our institutes employed approximately 700 students and paid $1,965,000 in student wages in 2001;



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the Federal Perkins Loan ("Perkins") program, which accounted in aggregate for less than 1% of our revenues in 2001; and



•

the Federal Supplemental Educational Opportunity Grant ("SEOG") program, which accounted in aggregate for less than 1% of our revenues in 2001.

        The Work-Study, Perkins and SEOG programs each require our institutions to make a 25% matching contribution for all of the federal funds the institution receives from the DOE under those programs. In 2001, our 25% matching contribution amounted to $482,000 for the Work-Study program, $0 for the Perkins program and $82,000 for the SEOG program.

        In 2001, we indirectly derived approximately 4% of our revenues from state student financial aid programs and our students were awarded approximately $1.7 million in institutional scholarships. We

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also provide tuition discounts to our full-time employees and their dependents to attend our institutes. For 2001, the cost of these employee educational discounts was approximately $1.7 million.

        In 2001, we indirectly derived approximately 9% of our revenues from unaffiliated, private loan programs that were made available to eligible students (and, under some programs, their parents) at various ITT Technical Institutes to help fund a portion of the students' cost of education. We have no financial responsibility with respect to any loans made to students or their parents under those programs, except for approximately $600,000 of loans that we guaranteed repayment to the lender if the borrowers fail to pay. Based on our experience with the repayment of Title IV Program loans by students, we do not believe that such guaranty will result in a material adverse effect on our financial condition, results of operations or cash flows.

Regulation of Federal Financial Aid Programs

        In order to participate in Title IV Programs, our institutions must each comply with the standards set forth in the HEA and the regulations promulgated thereunder by the DOE. The purpose of these standards is to limit institutional dependence on Title IV Program funds, prevent institutions with unacceptable student loan default rates from participating in Title IV Programs and, in general, require institutions to satisfy certain criteria related to educational value, administrative capability and financial responsibility. These standards are applied primarily on an institutional basis, with an institution defined as a main campus and its additional locations or branch campuses, if any. Twenty-nine of our 70 institutes are main campuses and 41 are additional locations. The HEA standards require an institution to obtain and periodically renew its certification by the DOE as an "eligible institution" that has been authorized by the relevant state education authority or authorities and accredited by an accrediting commission recognized by the DOE. All 70 of our institutes currently participate in Title IV Programs.

        The DOE and other regulatory authorities subject for-profit providers of postsecondary education to increased scrutiny and regulation. We believe that all of our institutes substantially comply with the HEA and its implementing regulations. We cannot, however, predict with certainty how all of the HEA provisions and the implementing regulations will be applied. As described below, the violation of Title IV Program requirements by us or any of our institutes could have a material adverse effect on our financial condition, results of operations or cash flows. In addition, it is possible that the HEA and its implementing regulations may be applied in a way that could hinder our operations or expansion plans.

        Significant factors relating to Title IV Programs that could adversely affect us include the following:

        Legislative Action.    Political and budgetary concerns significantly affect Title IV Programs. The U.S. Congress must reauthorize the HEA approximately every six years. The most recent reauthorization, which occurred in October 1998, reauthorized the HEA through 2003. In addition, the U.S. Congress determines federal appropriations for Title IV Programs on an annual basis. The U.S. Congress can also make changes in the laws affecting Title IV Programs in those annual appropriations bills and in other laws it enacts between the HEA reauthorizations. Since a significant percentage of our revenues are indirectly derived from Title IV Programs, any action by the U.S. Congress that significantly reduces Title IV Program funding or the ability of our institutes or students to participate in Title IV Programs could have a material adverse effect on our financial condition or results of operations.

        If one of our institutes lost its eligibility to participate in Title IV Programs, or if Congress significantly reduced the amount of available Title IV Program funding, we would try to arrange or provide alternative sources of financial aid for that institute's students. There are a number of private organizations that provide loans to students. Although we believe that one or more private organizations would be willing to provide loans to students attending one of our institutes, we cannot

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assure you that this would occur or that the interest rate and other terms of such loans would be as favorable as for Title IV Program loans. In addition, the private organizations could require us to guarantee all or part of this assistance and we might incur other additional costs. If we provided more direct financial assistance to our students, we would incur additional costs and assume increased credit risks.

        Legislative action may also increase our administrative costs and burden and require us to adjust our practices in order for our institutes to comply fully with the legislative requirements, which could have a material adverse effect on our financial condition or results of operations.

        Student Loan Defaults.    Under the HEA, an institution may lose its eligibility to participate in some or all Title IV Programs, if the rates at which the institution's students default on their federal student loans exceed specified percentages. The DOE calculates these rates on an institutional basis, based on the number of students who have defaulted, not the dollar amount of such defaults. The DOE calculates an institution's cohort default rate on an annual basis as the rate at which borrowers scheduled to begin repayment on their loans in one year default on those loans by the end of the next year. Each institution participating in the FFEL and/or FDL programs receives a FFEL/FDL cohort default rate for each federal fiscal year based on defaulted FFEL and FDL program loans. An institution whose FFEL/FDL cohort default rate is 25% or greater for three consecutive federal fiscal years loses eligibility to participate in the FFEL, FDL and Pell programs for the remainder of the federal fiscal year in which the DOE determines that the institution has lost its eligibility and for the two subsequent federal fiscal years. An institution can appeal this loss of eligibility. During the pendency of any such appeal, the institution remains eligible to participate in the FFEL, FDL and Pell programs. If an institution continues its participation in the FFEL and/or FDL programs during the pendency of any such appeal and the appeal is unsuccessful, the institution must pay the DOE the amount of interest, special allowance, reinsurance and any related payments paid by the DOE (or which the DOE is obligated to pay) with respect to the FFEL and FDL program loans made to the institution's students or their parents that would not have been made if the institution had not continued its participation (the "Direct Costs"). If a substantial number of our campus groups were subject to losing their eligibility to participate because of their FFEL/FDL cohort default rates, the potential amount of the Direct Costs for which we would be liable if our appeals were unsuccessful would prevent us from continuing some or all of the affected campus groups' participation in the FFEL and/or FDL programs during the pendency of those appeals. In addition to the consequences resulting from an institution having three consecutive years of FFEL/FDL cohort default rates of 25% or greater, the DOE will terminate the eligibility to participate in all Title IV Programs of an institution whose FFEL/FDL cohort default rate for any single federal fiscal year exceeds 40%.

        None of our campus groups had a FFEL/FDL cohort default rate equal to or greater than 25% for the 1997, 1998 or 1999 federal fiscal years, the most recent years for which the DOE has published FFEL/FDL official cohort default rates. None of our campus groups had a FFEL/FDL preliminary cohort default rate equal to or greater than 25% for the 2000 federal fiscal year, which preliminary rates were issued by the DOE in February 2002.

        If an institution's FFEL/FDL cohort default rate is 25% or greater in any of the three most recent federal fiscal years, or if its cohort default rate for loans under the Perkins program exceeds 15% for any federal award year, the DOE may place that institution on provisional certification status. A federal award year is July 1 through June 30. Twenty-one of our campus groups (consisting of 53 institutes) had a Perkins cohort default rate in excess of 15% for students who were scheduled to begin repayment in the 1999/2000 federal award year (the most recent year for which the DOE has published Perkins cohort default rates) and went into default by June 30, 2001. When all of the ITT Technical Institute campus groups were recertified by the DOE to participate in Title IV Programs during December 2001 and January 2002, one of the reasons given by the DOE for placing seven of our

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campus groups (consisting of 13 institutes) on provisional certification was their Perkins cohort default rate. See "—Administrative Capability" and "—Eligibility and Certification Procedures."

        The servicing and collection efforts of student loan lenders and guaranty agencies help to control our FFEL/FDL cohort default rates. We are not affiliated with any student loan lenders or guaranty agencies. We supplement their efforts by attempting to contact students to advise them of their responsibilities and any deferment or forbearance for which they may qualify. We have also contracted with third-party servicers who provide additional assistance in reducing defaults under the FFEL, FDL and Perkins programs by students who attended some of our institutes.

        Financial Responsibility Standards.    The HEA and its implementing regulations prescribe specific and detailed financial responsibility standards that an institution must satisfy to participate in Title IV Programs. The DOE's current standards of financial responsibility involve three ratios:

•

the equity ratio, which measures the institution's capital resources, ability to borrow and financial viability;



•

the primary reserve ratio, which measures the institution's ability to support current operations from expendable resources; and



•

the net income ratio, which measures the ability of an institution to operate at a profit.

The DOE assigns a strength factor to the results of each of these ratios on a scale from negative 1.0 to positive 3.0, with negative 1.0 reflecting financial weakness and 3.0 reflecting financial strength. The DOE then weights an institution's strength factors based on an assigned weighting percentage for each ratio and adds the weighted scores for the three ratios together to produce a composite score for the institution. The composite score must be at least 1.5 for the institution to be deemed financially responsible by the DOE without the need for further oversight. We have calculated that the application of these regulations to our audited financial statements for our 2001 fiscal year results in a composite score of 2.3 for our institutions on a consolidated basis.

        Historically, the DOE has evaluated the financial condition of our institutes on a consolidated basis based on our financial statements. The DOE's regulations, however, permit the DOE to examine our financial statements, the financial statements of each campus group, and the financial statements of any related party. When the DOE reviewed the applications of our campus groups for continued certification to participate in Title IV Programs in late 2001, the DOE determined that each of our campus groups satisfied the DOE's financial responsibility standards. If the DOE determines that an institution does not satisfy the DOE's financial responsibility standards, that institution may establish its financial responsibility on one of several alternative bases, including posting a letter of credit in an amount equal to a specified percentage of the total Title IV Program funds received by the institution during the institution's most recently completed fiscal year and agreeing to receive Title IV Program funds under an arrangement other than the DOE's standard advance funding arrangement while being provisionally certified.

        Another significant financial responsibility standard requires an institution to post a letter of credit with the DOE in an amount equal to 25% of the total dollar amount of refunds paid by the institution in its most recently completed fiscal year, if the institution has made a material number of late refunds (as defined by the DOE) in either of its two most recently completed fiscal years. No review by the DOE, a state or a guaranty agency has found that any of our institutes was violating the DOE's standard on late refunds. Based on our current understanding of how the DOE applies the current financial responsibility standards, we do not believe that these standards will have a material adverse effect on our financial condition, results of operations or expansion plans.

        Return of Funds for Withdrawn Students.    Prior to October 7, 2000, the HEA limited how much of a student's tuition and fees an institution could retain for a student who withdrew from the institution

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("Refund Policy"). A student was only obligated for a pro rata portion of the education costs charged by the institution, if the student withdrew during the first 60% of the student's first period of enrollment. For our institutes, a period of enrollment is generally an academic quarter. A student who withdrew after the first period of enrollment was also subject to a refund calculation, but it was not a straight pro rata calculation. The institution had to refund any monies it collected in excess of the pro rata or other applicable portion to the appropriate lenders or Title IV Programs in a particular order. The standards of most state education authorities that regulate our institutes (the "SEAs") and the Accrediting Council for Independent Colleges and Schools ("ACICS") that accredits our institutes continue to impose a Refund Policy.

        The HEA and its implementing regulations now impose a limit on the amount of Title IV Program funds a withdrawing student can use to pay his or her education costs ("Return Policy"). The Return Policy permits a student to use only a pro rata portion of the Title IV Program funds that the student would otherwise be eligible to use, if the student withdraws during the first 60% of any period of enrollment. The institution must return to the appropriate lenders or Title IV Programs any Title IV Program funds that the institution receives on behalf of a withdrawing student in excess of the amount the student can use for such period of enrollment.

        The HEA's substitution of the Return Policy for its Refund Policy has, in many states, depending on when a student withdraws during an academic quarter, increased the portion of the student's education costs owed to the ITT Technical Institute upon withdrawal and/or reduced the amount of Title IV Program funds that the withdrawing student can use to pay his or her education costs. In these instances, many withdrawing students are unable to pay all of their education costs, unless the students have access to other sources of financial aid. We have arranged for unaffiliated private funding sources to offer eligible students loans that can help replace any Title IV Program funds that are returned if any of those students withdraw. We believe that other unaffiliated private funding sources would also be willing to make these types of loans available to our students, but we cannot assure you of this. If these types of loans were unavailable, we would be unable to collect a significant portion of many withdrawing students' education costs. Regardless of the availability of these types of loans, however, the incremental decrease in the amount of Title IV Program funds that certain withdrawing students can use to pay their education costs to our institutes is largely offset by the incremental increase in the education costs owed to us by withdrawing students in certain states that we have been collecting and, therefore, the Return Policy has not had, and we do not expect that it will have a material adverse effect on our financial condition, results of operations or cash flows.

        The "90/10" Rule.    Under a provision of the HEA commonly referred to as the "90/10" Rule, a for-profit institution, such as each of our campus groups, becomes ineligible to participate in Title IV Programs if, on a cash accounting basis, the institution derives more than 90% of its applicable revenues for a fiscal year from Title IV Programs. If any of our campus groups violated the ⁹⁰/10 Rule for any fiscal year, it would be ineligible to participate in Title IV Programs as of the first day of the following fiscal year and would be unable to apply to regain its eligibility until the next fiscal year. Furthermore, if one of our campus groups violated the ⁹⁰/10 Rule and became ineligible to participate in Title IV Programs but continued to disburse Title IV Program funds, the DOE would require the institution to repay all Title IV Program funds disbursed by the institution after the effective date of the loss of eligibility. For our 2001 fiscal year, none of our campus groups derived more than 73% of its revenues from Title IV Programs. For our 2001 fiscal year, the range for our campus groups was from approximately 52% to approximately 73%.

        Administrative Capability.    The HEA directs the DOE to assess the administrative capability of each institution to participate in Title IV Programs. DOE regulations require each institution to satisfy a series of separate standards that demonstrate administrative capability. Failure to satisfy any of the standards may lead the DOE to find the institution ineligible to participate in Title IV Programs or to place the institution on provisional certification as a condition of its participation. A violation of these

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requirements could also subject the institution to other penalties. See "—Compliance with Regulatory Standards and Effect of Regulatory Violations."

        One standard that applies to programs with the stated objective of preparing students for employment requires the institution to show a reasonable relationship between the length of the program and the entry-level job requirements of the relevant field of employment. Other standards provide that an institution lacks administrative capability if its FFEL/FDL cohort default rate equals or exceeds 25% for any of the three most recent federal fiscal years for which such rates have been published, or if its Perkins cohort default rate exceeds 15% for any federal award year.

        Twenty-one of our campus groups (consisting of 53 institutes) had a Perkins cohort default rate in excess of 15% for the most recent federal award year for which such rates have been published. When all of the ITT Technical Institute campus groups were recertified by the DOE to participate in Title IV Programs during December 2001 and January 2002, one of the reasons given by the DOE for placing seven of our campus groups (consisting of 13 institutes) on provisional certification was their Perkins cohort default rate. See "—Student Loan Defaults" and "—Eligibility and Certification Procedures."

        An additional standard prohibits an institution from providing any commission, bonus or other incentive payment based directly or indirectly on success in securing enrollments or financial aid to any person or entity engaged in any student recruitment, admission or financial aid awarding activity. Our employees involved in student recruitment, admissions or financial aid receive only a salary, and some have received recognition awards of minor monetary value. The DOE is currently investigating our method of compensation for employees involved in student recruitment. We cannot assure you that the DOE will not find any deficiencies in our method of compensation, because the DOE has not issued regulations to clarify its interpretation of this provision of the HEA and the DOE's interpretations of this provision have been inconsistent and generally have not been publicly disseminated. If the DOE determines that our method of compensation for employees involved in student recruitment violates this provision of the HEA, the DOE could subject us to monetary fines or penalties (including repaying a substantial portion of the Title IV Program funds that we disbursed during the last several years) or other sanctions (including a limitation, suspension or termination of our ability to participate in Title IV Programs). Any substantial restrictions on our ITT Technical Institutes' ability to participate in Title IV Programs would adversely affect our ability to enroll students, expand the number of our institutes and increase the number of the programs of study offered at our institutes.

In August 2000, the DOE advised us that, during the pendency of its investigation of our method of compensation for employees involved in student recruitment, it would not approve any application submitted by any ITT Technical Institute with respect to any change of ownership, additional location, certification of initial or continuing eligibility, or extension of course or program offerings (such as raising the level of programs offered at an institution). During December 2001 and January 2002, however, the DOE recertified all of our ITT Technical Institute campus groups to participate in Title IV Programs. In addition, as part of the recertification, the DOE approved (a) five ITT Technical Institutes as new additional locations of existing main campuses and (b) an increase in the level of program offerings from associate degree to bachelor degree at one of our campus groups. Nevertheless, we cannot assure you that the DOE will, during the pendency of its investigation, approve any further applications submitted by any ITT Technical Institute with respect to any change of ownership, additional location, certification of initial or continuing eligibility or extension of course or program offerings. See "—Additional Locations and Programs," "—Eligibility and Certification Procedures," "—Compliance with Regulatory Standards and Effect of Regulatory Violations," and "Business—Change in Control." A material adverse effect on our expansion plans, financial condition, results of operations and cash flows would result if the DOE's restrictions are not lifted prior to 2005. We cannot assure you that the DOE will lift its restrictions prior to 2005 or that the DOE will not place additional or other more severe restrictions on our ITT Technical Institutes' ability to participate in Title IV Programs.

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        The DOE's regulations require each institution to use electronic processes mandated by the DOE. Although we had to adjust some of our practices and may have to adjust some of our practices further in the future to comply fully with this requirement, we do not believe, based on how this requirement has been applied, that our financial condition will be materially affected by this standard.

        Additional Locations and Programs.    Our expansion plans assume we will be able to continue to obtain the necessary DOE, ACICS and SEA approvals to establish new institutes as additional locations of existing main campuses and to expand the program offerings at our existing institutes. From 1999 through 2001, we established six new additional locations, all of which are participating in Title IV Programs, and added 389 programs at our existing institutes.

        The HEA requires a for-profit institution to operate for two years before it can qualify to participate in Title IV Programs. If an institution that is certified to participate in Title IV Programs establishes an additional location that offers at least 50% of an entire educational program, that additional location can participate in Title IV Programs immediately upon being reported to the DOE, unless one of the following restrictions applies, in which case the DOE must approve the additional location before it can participate in Title IV Programs:

•

the institution is provisionally certified to participate in Title IV Programs (See "—Eligibility and Certification Procedures");



•

the institution receives Title IV Program funds under the DOE's reimbursement or cash monitoring payment method;



•

the institution acquired the assets of another institution that provided educational programs at that location during the preceding year and participated in Title IV Programs during that year;



•

the institution would be subject to loss of eligibility to participate in Title IV Programs, because the additional location lost its eligibility to participate in Title IV Programs as a result of high FFEL/FDL cohort default rates; or



•

the DOE previously notified the institution that it must apply for approval to establish an additional location.

In August 2000, the DOE advised us that, during the pendency of its investigation of our method of compensation for employees involved in student recruitment, the DOE would not approve any application submitted by any of our campus groups for an additional location. During December 2001 and January 2002, however, the DOE approved five ITT Technical Institutes as new additional locations of existing main campuses. See "—Administrative Capability."

        The HEA and applicable regulations permit students to use Title IV Program funds only to pay the cost associated with enrollment in an eligible program offered by an institution participating in Title IV Programs. The HEA and applicable regulations do not restrict the number or delay the introduction of educational programs that an institution may offer, but each new program must satisfy all applicable eligibility requirements. The DOE previously advised us that, during the pendency of its investigation of our method of compensation for employees involved in student recruitment, the DOE would not approve any extension of any of our campus groups' course or program offerings (such as raising the level of programs offered at the institution). In December 2001, however, the DOE approved an increase in the level of program offerings from associate degree to bachelor degree at one of our campus groups. See "—Administrative Capability."

        The ACICS accreditation criteria generally permit an institution's main campus to establish an additional location. Although the ACICS criteria may limit our ability to establish additional locations and expand the programs offered at an institute in certain circumstances, we do not believe, based on our current understanding of how the accreditation criteria will be applied, that these limitations will have a material adverse effect on our expansion plans. See "—State Authorization and Accreditation."

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        State laws and regulations generally treat each of our institutes as a separate, unaffiliated institution and do not distinguish between main campuses and additional locations. State laws and regulations generally do not limit the number of institutes that we can establish within the state or the number of programs that our institutes can offer, so long as each institute satisfies all requirements to obtain any required state authorizations. In some states, the requirements to obtain state authorization limit our ability to establish new institutes and offer new programs. The process of obtaining any required state authorizations can also delay the opening of new institutes or the offering of new programs. Based on our current understanding of how the state laws and regulations in effect in the states where we are located or anticipate establishing a new location will be applied, we do not believe that these limitations will have a material adverse effect on our expansion plans. See "—State Authorization and Accreditation."

        Eligibility and Certification Procedures.    The HEA and its implementing regulations require each institution to periodically reapply to the DOE for continued certification to participate in Title IV Programs. The DOE recertifies each institution deemed to be in compliance with the HEA and the DOE's regulations for a period of six years or less. Before that period ends, the institution must apply again for recertification. In August 2000, the DOE advised us that, during the pendency of its investigation of our method of compensation for employees involved in student recruitment, it would not approve any application submitted by any of our campus groups for recertification to participate in Title IV Programs. During December 2001 and January 2002, however, the DOE recertified all of our ITT Technical Institute campus groups to participate in Title IV Programs. See "—Administrative Capability." The current DOE certification of our ITT Technical Institute campus groups extends through June 30, 2003 for nine campus groups and through December 31, 2003 for the remaining 20 campus groups.

        The DOE may place an institution on provisional certification for a period of three years or less, if it finds that the institution does not fully satisfy all the eligibility and certification standards. If an institution successfully participates in Title IV Programs during its period of provisional certification but fails to satisfy the full certification criteria, the DOE may renew the institution's provisional certification. The DOE may withdraw an institution's provisional certification without advance notice if the DOE determines that the institution is not fulfilling all material requirements. The DOE may also more closely review an institution that is provisionally certified if it applies for approval to open a new location or make some other significant change affecting its eligibility. Provisional certification does not otherwise limit an institution's access to Title IV Program funds.

        During December 2001 and January 2002, all of our campus groups were provisionally certified to participate in Title IV Programs because of the DOE's pending investigation of our method of compensation for employees involved in student recruitment. An additional reason given by the DOE for provisionally certifying seven of our campus groups (consisting of 13 institutes) was that their Perkins cohort default rate exceeded 30%.

        Title IV Program Funds Management.    DOE regulations govern how an institution participating in Title IV Programs requests, maintains, disburses and otherwise manages Title IV Program funds. These regulations require institutions to disburse all Title IV Program funds by payment period. For our institutes, the payment period is an academic quarter. These regulations affect the timing of our receipt and disbursement of federal student loan funds and prescribe time frames within which our campus groups must notify Title IV Program fund recipients of certain information and return any undisbursed Title IV Program funds.

        Availability of Lenders and Guarantors.    For a variety of reasons, the number of lenders willing to make federally guaranteed student loans under the FFEL program to students at some for-profit institutions has declined. To date, however, the availability of lenders has not affected the ability of our students to obtain FFEL program loans.

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        During 2001, one lender made approximately 78% of all FFEL program loans received by our students. We believe that other lenders would be willing to make FFEL program loans to our students, if such loans were no longer available from our primary lender, but we cannot assure you of this. The HEA requires the establishment of lenders of last resort in every state to make loans to students at any school that cannot otherwise identify lenders willing to make FFEL program loans to its students. Using a lender of last resort may delay the receipt of FFEL program loans by our students and slightly reduce the total loan access for our students, but should not have a material adverse effect on our financial condition, results of operations or cash flows. Lenders of last resort will not provide loans under the Federal PLUS program (a FFEL program), which accounted in aggregate for 13% of our revenues in 2001, and are not required to provide unsubsidized loans under the Federal Stafford Loan program (a FFEL program), which accounted in aggregate for 24% of our revenues in 2001.

        During 2001, one student loan guaranty agency guaranteed approximately 97% of all FFEL program loans received by our students. We believe that other guaranty agencies would be willing to guarantee FFEL program loans received by our students if that guaranty agency ceased guaranteeing such loans or reduced the volume of loans guaranteed, but we cannot assure you of this. Most states have a designated guaranty agency that we believe would guarantee most, if not all, FFEL program loans received by our students in that state. In addition, the HEA's lender of last resort program provides for the guarantee of FFEL program loans made by lenders of last resort. Thus, any reduction in the volume of FFEL program loans for our students guaranteed by the institutes' primary guaranty agency should not have a material adverse effect on our financial condition, results of operations or cash flows. We do not make or guarantee any Title IV Program loans to any student attending any of our institutes.

        Compliance with Regulatory Standards and Effect of Regulatory Violations.    Our internal audit department reviews our institutes' compliance with Title IV Program requirements and typically conducts an annual compliance review of each of our institutes. The review addresses numerous compliance areas, including student tuition refunds, student academic progress, student admission, graduate employment, student attendance, student financial aid applications, implementation of prior audit recommendations and a general review of student recruiting practices relating to student presentations and the execution and completion of enrollment agreements.

        Our institutes are subject to audits and program compliance reviews by various external agencies, including the DOE, state agencies, guaranty agencies and the ACICS. The HEA and its implementing regulations also require that an institution's administration of Title IV Program funds be audited annually by an independent accounting firm. If the DOE or another regulatory agency determined that one of our institutes improperly disbursed Title IV Program funds or violated a provision of the HEA or the implementing regulations, that institute could be required to repay such funds to the DOE or the appropriate state agency or lender and could be assessed an administrative fine. The DOE could also subject the institute to heightened cash monitoring, or could transfer the institute from the advance system of receiving Title IV Program funds to the reimbursement system, under which a school must disburse its own funds to students and document the students' eligibility for Title IV Program funds before receiving such funds from the DOE. Violations of Title IV Program requirements could also subject us or our institutes to other civil and criminal penalties.

        Significant violations of Title IV Program requirements by us or any of our institutes could be the basis for a proceeding by the DOE to limit, suspend or terminate the participation of the affected institutes in Title IV Programs. If the DOE terminates an institution's participation in Title IV Programs, the institution in most circumstances must wait 18 months before requesting a reinstatement of its participation. An institution that loses its eligibility to participate in the FFEL, FDL, Pell or Perkins programs due to high cohort default rates for three consecutive years normally may not apply to resume participation in those programs for at least two federal fiscal years. An institution that loses

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its eligibility to participate in Title IV Programs due to a violation of the 90/10 Rule may not apply to resume participation in Title IV Programs for at least one year.

        There is no proceeding pending to fine any of our institutes or to limit, suspend or terminate any of our institutes' participation in Title IV Programs. The DOE is currently investigating our method of compensation for employees involved in student recruitment. If this investigation causes the DOE to substantially limit, suspend or terminate our institutes' participation in Title IV Programs or levy significant monetary fines or penalties, there would be a material adverse effect on our expansion plans, financial condition, results of operations and cash flows. If any proceeding substantially limited our institutes' participation in Title IV Programs or required the repayment of a substantial sum of Title IV Program funds that our institutes disbursed in prior years, we would be materially adversely affected, even if we could arrange or provide alternative financing sources or repay those funds. If an institute lost its eligibility to participate in Title IV Programs and we could not arrange for alternative financing sources for our students, we would probably have to close that institute. See "—Administrative Capability."

State Authorization and Accreditation

        We are subject to extensive and varying regulation in each of the 28 states in which we currently operate an institute and in eight other states in which our institutes recruit students. Each of our institutes must be authorized by the applicable SEAs to operate and grant degrees or diplomas to their students. In addition, some states require an institute to be in operation for a period of up to two years before such institute can be authorized to grant degrees. Currently, each of our institutes has received authorization from one or more SEAs.

        Institutes that confer bachelor or master degrees must, in most cases, meet additional regulatory standards. Raising the curricula of our existing institutes to the bachelor and/or master degree level requires the approval of the SEAs and the ACICS. State education laws and regulations affect our operations and may limit our ability to introduce degree programs or to obtain authorization to operate in some states. If any one of our institutes lost its state authorization, the institute would be unable to offer postsecondary education and we would be forced to close the institute. Closing one of our institutes for any reason could have a material adverse effect on our financial condition or results of operations.

        The HEA specifies a series of criteria that each recognized accrediting commission must use in reviewing institutions. For example, accrediting commissions must assess the length of each academic program offered by an institution in relation to the objectives of the degrees or diplomas offered. Further, accrediting commissions must evaluate each institution's success with respect to student achievement, as measured by rates of program completion, passing of state licensing examinations and job placement. In 2001, three of our institutes were reviewed and granted initial accreditation by the ACICS.

        State authorization and accreditation by a recognized accrediting commission are required for an institution to become and remain eligible to participate in Title IV Programs. In addition, some states require institutions operating in the state to be accredited as a condition of state authorization. All of our institutes are accredited by the ACICS, which is an accrediting commission recognized by the DOE. None of our institutes is on probation with the ACICS, but six institutes are subject to a financial review and 18 institutes are subject to an outcomes review by the ACICS. Under the ACICS criteria, an institute that is subject to a financial or outcomes review must periodically report its results in such areas to the ACICS and obtain permission from the ACICS prior to applying to add a new program of study or establish an additional location. We do not believe that these limitations will have a material adverse effect on our expansion plans.

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        The loss of accreditation by one of our existing institutes or the failure of a new institute to obtain full accreditation:

•

would make only the affected institute ineligible to participate in Title IV Programs, if the affected institute was an additional location;



•

would make the entire campus group ineligible to participate in Title IV Programs, if the affected institute was a main campus; and



•

could have a material adverse effect on our financial condition, results of operations and cash flows.

Change in Control

        The DOE, the ACICS and most of the SEAs have laws, regulations and/or criteria (collectively "Regulations") pertaining to the change in ownership and/or control (collectively "change in control") of institutions, but these Regulations do not uniformly define what constitutes a change in control. The DOE's Regulations describe some transactions that are a change in control, including the transfer of a controlling interest in the voting stock of an institution or the consolidated corporation of which the institution is a part. Under the DOE's Regulations, a change in control of a publicly traded corporation, such as ESI, occurs when: (a) there is an event that obligates the corporation to file a Current Report on Form 8-K with the Securities and Exchange Commission disclosing a change in control; or (b) a controlling shareholder of the corporation ceases to be a controlling shareholder. The DOE's Regulations define a "controlling shareholder" to: (a) be a shareholder who holds or controls at least 25% or more of the voting stock of the corporation and more shares of the voting stock than any other shareholder; and (b) exclude a shareholder whose sole ownership of the corporation's voting stock is held as a U.S. institutional investor, in mutual funds, through a profit-sharing plan or in an Employee Stock Ownership Plan. Most of the SEAs include the sale of a controlling interest of common stock in the definition of a change in control. The ACICS defines a change in control of a publicly traded corporation to include, among other things:

•

a change in 50% or more of the voting members of the corporation's board of directors in any rolling, 12-month period;



•

a change in the number of voting members of the corporation's board of directors in any rolling, 12-month period that allows a group of directors to exercise control who could not exercise control before the change;



•

the acquisition of 50% or more of the total outstanding voting shares of the corporation by any entity; or



•

any transaction that is deemed by an appropriate governmental agency to constitute a change in control.

The change in control Regulations adopted by the DOE, the ACICS and the SEAs are subject to varying interpretations as to whether a particular transaction constitutes a change in control.

        When a change in control occurs under the DOE's Regulations, an institution's eligibility to continue to participate in Title IV Programs is subject to review and the institution could lose its eligibility, with the result that the institution would no longer be able to authorize or, with limited exceptions, disburse Title IV Program funds to its students. Under the HEA and the DOE's Regulations, the DOE may provisionally certify an institution that is part of a publicly traded corporation for a temporary period following a change in control, if the institution submits a materially complete application for reinstatement within 10 business days after the institution knew or should have known, based on SEC filings, that the change in control occurred. This temporary certification enables the institution to continue to participate in Title IV Programs pending the DOE's review of its

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complete application, if such complete application is filed by the last day of the month following the month in which the institution knew or should have known, based on SEC filings, that the change in control occurred. For this purpose, a complete application must include the most recent quarterly financial statements filed with the SEC, a copy of all other SEC filings made after the close of the last fiscal year for which the institution submitted a compliance audit to the DOE, and documentation that the institution, including both the main campus and any additional locations, is authorized by the appropriate SEA or SEAs and accredited by an accrediting commission recognized by the DOE following the change in control. The DOE's reinstatement of an institution's certification to participate in Title IV Programs depends on its determination that the institution, under its new ownership and control, complies with specified DOE requirements for institutional eligibility. The time required for the DOE to make such a determination can vary but, if the institution satisfies the application criteria and time frames specified above in this paragraph, the institution will be certified on a month-to-month basis while the DOE conducts its review.

        The ACICS will not reaccredit an institution following a change in control until the institution submits an application for reaccreditation, which requires documentation that the institution has been reauthorized or continues to be authorized by the appropriate SEA or SEAs. The ACICS criteria and procedures provide that, generally within five business days after an institution documents that it has been reauthorized or continues to be authorized by the appropriate SEA or SEAs following a change in control, the ACICS will determine whether to temporarily reinstate the institution's accreditation for an undefined period to allow for the completion and review of the application.

        Many SEAs require that a change in control of an institution be approved before it occurs in order for the institution to maintain its SEA authorization. Other SEAs will only review a change in control of an institution after it occurs.

        A change in control could occur as a result of future transactions in which we or our institutes are involved, such as some corporate reorganizations and some changes in our board of directors. If a future transaction results in a change in control of ESI or our institutes, we believe that we will be able to obtain all necessary approvals from the SEAs and the ACICS. We cannot assure you, however, that all such approvals can be obtained in a timely manner that would not delay the availability of Title IV Program funds or prevent some students from receiving Title IV Program funds. We also cannot assure you that we could obtain all of the necessary approvals from the DOE. In August 2000, the DOE advised us that, during the pendency of its investigation of our method of compensation for employees involved in student recruitment, the DOE would not approve any application submitted by any of our campus groups with respect to any change in control. See "Business—Regulation of Federal Financial Aid Programs—Administrative Capability."

        A material adverse effect on our financial condition, results of operations and cash flows would result if we had a change in control and a material number of our institutes failed to timely:

•

obtain the approvals of the SEAs required prior to or following a change in control;



•

regain accreditation by the ACICS or have their accreditation temporarily continued or reinstated by the ACICS; or



•

regain eligibility to participate in Title IV Programs from the DOE or receive temporary certification to continue to participate in Title IV Programs pending further review by the DOE.

Item 2. PROPERTIES.

        We lease all of our institute facilities, except for a parking lot we own adjacent to the Houston (North), Texas institute. The average remaining lease term is approximately six years. As of December 31, 2001, we leased 82 facilities for 74 institutes. One of these leases was for an institute in its first year of operation as of December 31, 2001, four of these leases were for facilities under lease

19

where we plan to open four new institutes in 2002, and eight of these leases were for eight institutes that each utilize two separate facilities.

        We generally locate our institutes in suburban areas near major population centers. We generally house our campus facilities in modern, air conditioned buildings, which include classrooms, laboratories, student break areas and administrative offices. Our institutes have accessible parking facilities and are generally near a major highway. Our institutes typically lease facilities for a six to 13 year term. If desirable or necessary, a facility may be relocated to a new location reasonably near the existing facility at the end of the lease term.

        We lease approximately 41,100 square feet of office space in our headquarters building in Indianapolis, Indiana. As of December 31, 2001, the lease required payments of approximately $1.0 million over the remaining term of the lease, which expires in 2003.

Item 3. LEGAL PROCEEDINGS.

        We are subject to litigation in the ordinary course of our business. Among the legal actions currently pending is United States ex rel. Dan Graves and Susan Newman v. ITT Educational Services, Inc., et al. This action is a qui tam action that was filed on November 5, 1999 in the United States District Court for the Southern District of Texas by two former employees ("relators") on behalf of themselves and the federal government (the "Qui Tam Action"). The Qui Tam Action alleges, among other things, violations of the False Claims Act, 31 U.S.C. § 3730, by us, one of our employees and our independent auditor in connection with how we compensated our sales representatives. The relators seek various forms of recovery on behalf of themselves and the federal government, including: (i) treble the amount of unspecified damages sustained by the federal government; (ii) a civil penalty of up to $10,000 for each violation of the False Claims Act; and (iii) attorney's fees, costs and interest.

        A qui tam action is a civil lawsuit brought by one or more individuals (a qui tam "relator") on behalf of the federal government for an alleged submission to the federal government of a false claim for payment. A qui tam action is always filed under seal and remains under seal until the U.S. Department of Justice ("DOJ") decides whether to intervene in the litigation. Whenever a relator files a qui tam action, the DOJ typically initiates an investigation in order to determine whether to intervene in the litigation. If the DOJ intervenes, it has primary control over the litigation. If the DOJ declines to intervene, the relator may pursue the litigation on behalf of the federal government and, if successful, receives a portion of the federal government's recovery. On May 25, 2001, the DOJ declined to intervene in the Qui Tam Action. We believe that we have meritorious defenses to the Qui Tam Action and, if the action proceeds, we intend to vigorously defend ourselves against the claims.

        The DOE is currently investigating our method of compensation for employees involved in student recruitment. In August 2000, the DOE advised us that, during the pendency of its investigation, it would not approve any application submitted by any ITT Technical Institute with respect to any change of ownership, additional location, certification of initial or continuing eligibility, or extension of course or program offerings (such as raising the level of programs offered at an institution). During December 2001 and January 2002, however, the DOE recertified all of our ITT Technical Institute campus groups to participate in Title IV Programs. In addition, as part of the recertification, the DOE approved (a) five ITT Technical Institutes as new additional locations of existing main campuses and (b) an increase in the level of program offerings from associate degree to bachelor degree at one of our campus groups. Nevertheless, we cannot assure you that the DOE will, during the pendency of its investigation, approve any further applications submitted by any ITT Technical Institute with respect to any change of ownership, additional location, certification of initial or continuing eligibility or extension of course or program offerings. See "—Additional Locations and Programs," "Business—Regulation of Federal Financial Aid Programs—Eligibility and Certification Procedures," "Business—Regulation of Federal Financial Aid Programs—Compliance with Regulatory Standards and Effect of Regulatory

20

Violations," and "Business—Change in Control." A material adverse effect on our expansion plans, financial condition, results of operations and cash flows would result if the DOE's restrictions are not lifted prior to 2005. We cannot assure you that the DOE will lift its restrictions prior to 2005 or that the DOE will not place additional or other more severe restrictions on our ITT Technical Institutes' ability to participate in Title IV Programs.

        Another pending legal action is Contreras, et al. v. ITT Educational Services, Inc., et al., which was filed on March 3, 2000 (served on January 19, 2001) in the Superior Court of Santa Clara County in Santa Clara, California by five former students of the ITT Technical Institute in Santa Clara, California. The suit alleges, among other things, fraud, negligence, negligent misrepresentation, breach of oral contract, and statutory violations of the California Business and Professions Code and California Education Code by us and three of our employees who reside in California. The claims relate primarily to our marketing and recruitment practices and the quality of our services. The plaintiffs seek compensatory damages, punitive damages, exemplary damages, civil penalties, restitution on behalf of the plaintiffs and all other persons similarly situated, injunctive relief, attorney's fees and costs. On February 6, 2001, the plaintiffs filed an amended complaint in this action adding 57 plaintiffs, who are current and former students of the ITT Technical Institute in either Santa Clara, California or Hayward, California. The written enrollment agreement between each of the plaintiffs and us provides that all disputes between the parties will be resolved through binding arbitration, instead of litigation. In May 2001, the court compelled the arbitration of each plaintiff's claims in this action. We believe that we have meritorious defenses and intend to vigorously defend ourselves against the plaintiffs' claims.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

        No matters were submitted to a vote of the holders of the common stock during the fourth quarter of 2001.

21

PART II

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

        Our common stock is listed on the New York Stock Exchange ("NYSE") under the trading symbol "ESI." The prices set forth below are the high and low sale prices of our common stock during the periods indicated, as reported in the NYSE's consolidated transaction reporting system.

	High		Low
2000
First Quarter	$	19.375	$	10.750
Second Quarter		23.250		15.375
Third Quarter		28.875		17.375
Fourth Quarter		28.250		13.375
2001
First Quarter	$	33.500	$	18.500
Second Quarter		45.000		23.900
Third Quarter		45.800		25.860
Fourth Quarter		40.800		30.300

        There were approximately 200 holders of record of our common stock on February 15, 2002.

        We did not pay a cash dividend in 2000 or 2001. We do not anticipate paying any cash dividends on our common stock in the foreseeable future and we plan to retain our earnings to finance future growth. The declaration and payment of dividends on our common stock are subject to the discretion of our Board of Directors and compliance with applicable law. Our decision to pay dividends in the future will depend on general business conditions, the effect of such payment on our financial condition and other factors our Board of Directors may in the future consider to be relevant.

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Item 6. SELECTED FINANCIAL DATA.

        The following selected financial data of ESI are qualified by reference to and should be read with the Consolidated Financial Statements and Notes to Consolidated Financial Statements and other financial data included elsewhere in this report.

		Year Ended December 31,
		2001		2000			1999			1998		1997
		(In thousands, except per share and operating data)
Statement of Income Data:
Revenues		$	410,551	$	347,524		$	316,370		$	291,375	$	261,664
Cost of educational services			248,129		211,653			191,760			176,487		163,053
Student services and administrative expenses			110,816		94,156			86,953			81,522		72,388
Legal settlements			—		—			—			12,858		—
Offering, change in control and other one-time expenses			—		—			900			1,872		—
	Total costs and expenses		358,945		305,809			279,613			272,739		235,441
Operating income			51,606		41,715			36,757			18,636		26,223
Interest income, net			2,708		2,707			2,396			5,329		5,565
Income before income taxes and cumulative effect of change in accounting principle			54,314		44,422			39,153			23,965		31,788
Income taxes			20,600		16,937			14,802			10,024		12,665
Income before cumulative effect of change in accounting principle			33,714		27,485			24,351			13,941		19,123
Cumulative effect of change in accounting principle, net of tax(a)			—		(2,776	)		(823	)		—		—
Net income		$	33,714	$	24,709		$	23,528		$	13,941	$	19,123
Earnings per share(b):
	Basic	$	1.43	$	1.03		$	0.93		$	0.52	$	0.71
	Diluted	$	1.40	$	1.02		$	0.93		$	0.51	$	0.71
Other Operating Data:
EBITDA(c)		$	70,133	$	56,234		$	47,907		$	27,918	$	34,162
Capital expenditures, net		$	21,560	$	29,393		$	17,005		$	11,381	$	11,465
Number of students at end of period			30,778		27,640			26,428			25,608		24,498
Number of technical institutes at end of period			70		69			67			64		62

	At December 31,
	2001		2000		1999		1998		1997
	(In thousands)
Balance Sheet Data:
Cash, restricted cash, cash invested with ITT and marketable debt securities	$	110,232	$	70,618	$	67,961	$	119,268	$	98,689
Total current assets		134,210		92,570		89,082		138,758		112,958
Property and equipment, less accumulated depreciation		49,593		46,560		31,686		24,985		22,886
Total assets		195,399		150,896		131,002		175,571		145,914
Total current liabilities		108,393		79,926		68,622		70,241		55,946
Shareholders' equity		78,188		64,686		57,771		101,856		87,815

(a)

Cumulative effect of change in accounting principle, net of tax represents institute start-up costs in 1999 and revenue recognition in accordance with SAB 101 in 2000. Except for the selected quarterly financial data, ESI has not presented proforma results for prior fiscal years due to immateriality.

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(b)

Earnings per share data are based on historical net income and the number of shares of our common stock outstanding during each period. Earnings per share for all periods have been calculated in conformity with Statement of Financial Accounting Standards No. 128, "Earnings per Share."

(c)

EBITDA represents earnings before interest and financial charges, income taxes, depreciation and amortization and cumulative effect of change in accounting principle. We have included information concerning EBITDA (which is not a measure of financial performance under generally accepted accounting principles) because we understand that certain investors use it as one measure of an issuer's financial performance. EBITDA is not an alternative to operating income (as determined in accordance with generally accepted accounting principles), an indicator of our performance or cash flows from operating activities (as determined in accordance with generally accepted accounting principles) or a measure of liquidity.

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

The following discussion should be read with the Selected Financial Data and the Consolidated Financial Statements and Notes to Consolidated Financial Statements included elsewhere in this report.

General

        We operate 70 institutes in 28 states which provide technology-oriented postsecondary education to more than 30,000 students. We derive our revenue almost entirely from tuition, textbook sales, fees and charges paid by, or on behalf of, our students. Most students at our institutes pay a substantial portion of their tuition and other education-related expenses with funds received under various government-sponsored student financial aid programs, especially federal student financial aid programs under Title IV ("Title IV Programs") of the Higher Education Act of 1965, as amended (the "HEA"). In 2001, we indirectly derived approximately 65% of our revenues, determined on a cash accounting basis, from Title IV Programs.

        Our revenue varies based on the aggregate student population, which is influenced by the following factors:

•

the number of students attending our institutes at the beginning of a fiscal period;



•

the number of new first-time students entering and former students re-entering our institutes during a fiscal period;



•

student retention rates; and



•

general economic conditions.

        New students generally enter our institutes at the beginning of an academic quarter that begins for most programs of study in March, June, September or December. We believe that, in the absence of countervailing factors, student enrollments and retention rates tend to increase as opportunities for immediate employment for high school graduates decline and decrease as such opportunities increase. Our establishment of new institutes and the introduction of additional program offerings at our existing institutes have been significant factors in increasing the aggregate student population in recent years.

        In order to participate in Title IV Programs, a new institute must be authorized by the state in which it will operate, accredited by an accrediting commission that the U.S. Department of Education ("DOE") recognizes, and certified by the DOE to participate in Title IV Programs. The accrediting commission that accredits our institutes grants accreditation to a new institute prior to its first class start date. The DOE's certification process cannot commence until the institute receives its state authorization and accreditation. DOE certification for a new location has generally taken approximately nine months from the first class start date. The DOE is currently investigating our method of

24

compensation for employees involved in student recruitment. The HEA prohibits an institution participating in Title IV Programs from providing any commission, bonus or other incentive payment based directly or indirectly on success in securing enrollments to any person or entity engaged in any student recruitment or admission activity. We cannot assure you that the DOE will not find any deficiencies in our method of compensation, because the DOE has not issued regulations to clarify its interpretation of this provision of the HEA and the DOE's interpretations of this provision have been inconsistent and generally have not been publicly disseminated. If the DOE determines that our method of compensation for employees involved in student recruitment violates this provision of the HEA, the DOE could subject us to monetary fines or penalties (including repaying a substantial portion of the Title IV Program funds that we disbursed during the last several years) or other sanctions (including a limitation, suspension or termination of our ability to participate in Title IV Programs). Any substantial restrictions on our ITT Technical Institutes' ability to participate in Title IV Programs would adversely affect our ability to enroll students, expand the number of our institutes and increase the number of the programs of study offered at our institutes. In August 2000, the DOE advised us that, during the pendency of its investigation, it would not approve any application submitted by any ITT Technical Institute with respect to any change of ownership, additional location, certification of initial or continuing eligibility, or extension of course or program offerings (such as raising the level of programs offered at an institution). During December 2001 and January 2002, however, the DOE recertified all of our ITT Technical Institute campus groups to participate in Title IV Programs. In addition, as part of the recertification, the DOE approved (a) five ITT Technical Institutes as new additional locations of existing main campuses and (b) an increase in the level of program offerings from associate degree to bachelor degree at one of our campus groups. Nevertheless, we cannot assure you that the DOE will, during the pendency of its investigation, approve any further applications submitted by any ITT Technical Institute with respect to any change of ownership, additional location, certification of initial or continuing eligibility or extension of course or program offerings. A material adverse effect on our expansion plans, financial condition, results of operations and cash flows would result if the DOE's restrictions are not lifted prior to 2005. We cannot assure you that the DOE will lift its restrictions prior to 2005 or that the DOE will not place additional or other more severe restrictions on our ITT Technical Institutes' ability to participate in Title IV Programs.

        Prior to January 1, 1999, we deferred certain direct costs incurred with respect to a new institute prior to the first class start ("institute start-up costs") and amortized them over the first year of operation after the first class start. Beginning January 1, 1999, we began expensing institute start-up costs as incurred. From January 1, 1997 through December 31, 2001, we opened 11 new institutes (five of which started classes in 1999 or 2000 and one of which started classes in 2001). New institutes historically incur a loss during the 24-month period after the first class start date.

        We earn tuition revenue on a weekly basis, pro rata over the length of each of four, 12-week academic quarters in each fiscal year. State regulations, accrediting commission criteria and our policies generally require us to refund a portion of the tuition and fee payments received from a student who withdraws from one of our institutes during an academic quarter. Prior to October 7, 2000, the DOE regulations also imposed refund requirements for student tuition and fees. Our statement of income recognizes immediately the amount of tuition and fees, if any, that we may retain after payment of any refund.

        In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB 101"). Effective January 1, 2000, we implemented SAB 101 and changed the method by which we recognize the laboratory and application fees charged to a student as revenue. We began recognizing those fees as revenue on a straight-line basis over the average student's program length of 24 months. Previously, we recognized the quarterly laboratory fee as revenue at the beginning of each academic quarter and the application fee as revenue when we received the fee. We recorded the cumulative effect of the change in

25

accounting as a one-time charge of $2.8 million, net of taxes, in the three months ended March 31, 2000.

        We incur expenses throughout a fiscal period in connection with the operation of our institutes. The cost of educational services includes faculty and administrative salaries, cost of books sold, occupancy costs, depreciation and amortization of equipment costs and leasehold improvements, and certain other administrative costs incurred by our institutes.

        Student services and administrative expenses include direct marketing costs (which are marketing expenses directly related to new student recruitment), indirect marketing expenses, an allowance for doubtful accounts and administrative expenses incurred at corporate headquarters. Direct marketing costs include salaries and employee benefits for recruiting representatives and direct solicitation advertising expenses. We capitalize our direct marketing costs (excluding advertising expenses) using the successful efforts method and amortize them on an accelerated basis over the average course length of 24 months commencing on the class start date. We expense as incurred our marketing costs that do not relate to the direct solicitation of potential students.

        Marketable debt securities have maturity dates in excess of 90 days at the time of purchase and we record them at their market value. We include debt securities with original maturity dates of less than 90 days in cash and cash equivalents and record such securities at cost which approximates market value. We estimate that the market risk associated with our investments in marketable debt securities can best be measured by a potential decrease in the fair value of these securities resulting from a hypothetical 10% increase in interest rates. If such a hypothetical increase in rates were to occur, the reduction in the market value of our portfolio of securities would not be material.

        In 1998, we began offering our information technology ("IT") curricula at three ITT Technical Institutes. We began offering our IT curricula at an additional 31 ITT Technical Institutes in 1999, at an additional 35 ITT institutes in 2000 and at an additional one ITT Technical Institute in the three months ended March 31, 2001. We incur a loss with respect to the IT curricula offerings at each ITT Technical Institute, until the revenue from the number of students enrolled in the IT curricula offerings at that institute is high enough to offset the costs associated with that curricula (such as salaries, equipment depreciation, rent and marketing), which typically has not occurred until the IT curricula has been offered for three or four quarters. The initial amount of capital required to offer our IT curricula at an existing ITT Technical Institute is approximately $0.2 million.

        In 2000, we began offering a computer and electronics engineering technology ("CEET") program at 34 ITT Technical Institutes and a computer drafting and design ("CDD") program at 20 ITT Technical Institutes. In 2001, we began offering the CEET program at an additional 36 ITT Technical Institutes and the CDD program at an additional 39 ITT Technical Institutes.

Variations in Quarterly Results of Operations

        Our quarterly results of operations have tended to fluctuate significantly within a fiscal year because of differences in the number of weeks of earned tuition revenue in each fiscal quarter and the timing of student matriculations. Prior to the first quarter of 2000, our first and third fiscal quarters had 13 weeks of earned tuition revenue, while our second and fourth quarters had only 11 weeks of earned tuition revenue because of two-week student vacation breaks in June and December. Commencing with the first quarter of 2000, each of our four quarters have 12 weeks of earned tuition revenue. Revenues in our third and fourth fiscal quarters generally benefit from increased student matriculations. The number of new students entering our institutes tends to be substantially higher in June (26% of all new students in 2001) and September (34% of all new students in 2001) because of the significant number of recent high school graduates entering our institutes for the academic quarters beginning in those two months. The academic schedule generally does not affect our incurrence of costs, however, and costs do not fluctuate significantly on a quarterly basis.

26

        The following table sets forth proforma revenues in each fiscal quarter of 1999 as if we had followed the SAB 101 revenue recognition guidance and reported the same number of weeks of tuition revenue during each quarter.

Quarterly Revenue
(Dollars in thousands)

Three Months Ended		2001 Actual				2000 Actual				1999 Proforma
		Amount		Percent		Amount		Percent		Amount		Percent
March 31		$	93,776	23	%	$	81,192	23	%	$	74,850	24	%
June 30			98,464	24			82,745	24			75,688	24
September 30			106,269	26			88,479	26			81,027	25
December 31			112,042	27			95,108	27			84,810	27
	Total for Year	$	410,551	100	%	$	347,524	100	%	$	316,375	100	%

Results of Operations

        The following table sets forth the percentage relationship of certain statement of income data to revenues for the periods indicated.

	Year Ended December 31,
	2001		2000		1999
Revenues	100.0	%	100.0	%	100.0	%
Cost of educational services	60.4		60.9		60.6
Student services and administrative expenses	27.0		27.1		27.5
Offering, change in control and other one-time expenses	—		—		0.3
Operating income	12.6		12.0		11.6
Interest income, net	0.6		0.8		0.8
Income before income taxes and cumulative effect of change in accounting principle	13.2	%	12.8	%	12.4	%

Year Ended December 31, 2001 Compared with Year Ended December 31, 2000

        Revenues.    Revenues increased $63.0 million, or 18.1%, to $410.5 million for the year ended December 31, 2001 from $347.5 million for the year ended December 31, 2000 primarily due to:

•

a 5% increase in tuition rates in each of September 2001 and June 2000 (10% for the IT curricula in June 2000);



•

a 4.6% increase in the total student enrollment at January 1, 2001 compared to January 1, 2000 (27,640 at January 1, 2001 compared to 26,428 at January 1, 2000);



•

a 7.2% increase in the number of first-time and re-entering students beginning classes at our institutes (29,460 in 2001 compared to 27,491 in 2000);



•

an increase in the percentage of our students who are enrolled in IT curricula, which were priced higher than our other programs; and



•

changes to our student refund policies in October 2000, which increased the amount of tuition and fee payments that we can retain when a student withdraws from one of our institutes during an academic quarter.

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        The total student enrollment on December 31, 2001 was 30,778, an increase of 11.4% compared to 27,640 on December 31, 2000.

        Cost of Educational Services.    Cost of educational services increased $36.4 million, or 17.2%, to $248.1 in 2001 from $211.7 million in 2000. The principal causes of this increase include:

•

the costs required to service the increased enrollment;



•

normal inflationary cost increases for wages, rent and other costs of services;



•

the costs associated with offering the IT curricula; and



•

the costs associated with opening new institutes (one in March 2000, one in December 2000 and one in March 2001).

        Cost of educational services as a percentage of revenues decreased to 60.4% in 2001 from 60.9% in 2000. This decrease was primarily due to completing the implementation of the IT curricula at most institutes in 2000 (one additional institute began offering the IT curricula in 2001 compared to 35 additional institutes in 2000).

        Student Services and Administrative Expenses.    Student services and administrative expenses increased $16.6 million, or 17.6%, to $110.8 in 2001 from $94.2 million in 2000. Student services and administrative expenses decreased to 27.0% of revenues in 2001 compared to 27.1% of revenues in 2000. Media advertising costs increased 22.5% in 2001, or 4.4% more than the 18.1% increase in revenues. Despite the increase in media advertising costs and an increase in bad debt expense, fixed costs at our institutes did not increase proportionately with revenues.

        Income Taxes.    Our combined effective federal and state income tax rate in 2001 was 37.9% compared to 38.1% in 2000.

Year Ended December 31, 2000 Compared with Year Ended December 31, 1999

        Revenues.    Revenues increased $31.1 million, or 9.8%, to $347.5 million for the year ended December 31, 2000 from $316.4 million for the year ended December 31, 1999 primarily due to:

•

a 5% increase in tuition rates in each of June 2000 (10% for the IT curricula) and September 1999;



•

a 3.2% increase in the total student enrollment at January 1, 2000 compared to January 1, 1999 (26,428 at January 1, 2000 compared to 25,608 at January 1, 1999); and



•

a 2.9% increase in the number of first-time and re-entering students beginning classes at our institutes (27,491 in 2000 compared to 26,716 in 1999).

        The total student enrollment on December 31, 2000 was 27,640, an increase of 4.6% compared to 26,428 on December 31, 1999.

        Cost of Educational Services.    Cost of educational services increased $19.9 million, or 10.4%, to $211.7 in 2000 from $191.8 million in 1999. The principal causes of this increase include:

•

the costs required to service the increased enrollment;



•

normal inflationary cost increases for wages, rent and other costs of services;



•

the costs associated with offering the IT curricula; and



•

increased costs at new institutes (two in January 1999, one in April 1999, one in March 2000 and one in December 2000).

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        Cost of educational services as a percentage of revenues increased to 60.9% in 2000 from 60.6% in 1999. This increase was primarily due to the costs associated with offering the IT curricula at more institutes in 2000 than in 1999 (35 additional institutes began offering the IT curricula in 2000 compared to 31 additional institutes in 1999), including salaries, equipment depreciation and rent.

        Student Services and Administrative Expenses.    Student services and administrative expenses increased $7.2 million, or 8.3%, to $94.2 million in 2000 from $87.0 million in 1999. Student services and administrative expenses decreased to 27.1% of revenues in 2000 compared to 27.5% of revenues in 1999 primarily because the percentage increase in the costs associated with the sales representatives that we employed in 2000 was less than the percentage increase in revenues in 2000. In addition, media advertising costs in the year ended December 31, 2000 were 9.6% more than in the year ended December 31, 1999, which was a slightly smaller increase than the 9.8% increase in revenues.

        One-Time Expenses.    In 1999, we incurred net one-time expenses of $0.9 million ($0.02 per share) associated with the costs of ITT Corporation's ("ITT") February 1999 public offering of our common stock (the "February 1999 Offering") and special bonus payments to employees for extraordinary services, net of amounts reimbursed by ITT. We did not incur any such expenses in 2000.

        Operating Income.    The following table sets forth our operating income (in thousands) for the year ended December 31, 2000 and 1999:

	Year Ended December 31,
	2000		1999
Operating income as reported	$	41,715	$	36,757
Offering expenses, change in control and other one-time expenses		—		900
Operating income before one-time expenses	$	41,715	$	37,657

        Income Taxes.    Our combined effective federal and state income tax rate in 2000 was 38.1% as compared to 37.8% in 1999.

        Net Income.    The following table sets forth our net income (in thousands) for the year ended December 31, 2000 and 1999:

	Year Ended December 31,
	2000		1999
Net income (as reported)	$	24,709	$	23,528
Offering expenses, change in control and other one-time expenses (after tax)		—		554
Cumulative effect of change in accounting principle (after tax)		2,776		823
Net income before one-time expenses and cumulative effect of change in accounting principle	$	27,485	$	24,905

Liquidity and Capital Resources

        In 2001, we indirectly derived approximately 65% of our revenues, determined on a cash accounting basis, from Title IV Programs. Federal regulations dictate the timing of disbursements of funds under Title IV Programs. Students must apply for a new loan for each academic year, which consists of three academic quarters. Loan funds are generally provided by lenders in three disbursements for each academic year. The first disbursement is usually received either 30 days after (in

29

the case of students commencing a program of study) or ten days before the start of the first academic quarter of a student's academic year, and the second and third disbursements are typically received ten days before the start of each subsequent quarter of a student's academic year. While the timing of loan disbursements to us is subject to a student's directions to the lender and to existing regulatory requirements regarding such disbursements, we have typically received student loan funds upon the lender's disbursement of the student loan funds.

        Simultaneous with the close of the February 1999 Offering, we repurchased 1,500,000 shares of our common stock from ITT at the per share price to the public of the shares sold in the offering, less underwriters' commissions and discounts, for an aggregate cost of $49.1 million (the "February 1999 Stock Repurchase").

        During 1999 and 2000, our Board of Directors authorized us to repurchase in aggregate up to 4,000,000 outstanding shares of our common stock in the open market or through privately negotiated transactions in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended. Subsequent to the February 1999 Stock Repurchase, we repurchased 919,000 shares of our common stock in 1999 at an average cost of $21.57 per share, or $19.8 million in total. In 2000, we repurchased 1,144,200 shares of our common stock at an average cost of $15.89 per share, or $18.2 million in total. In 2001, we repurchased 702,500 shares of our common stock at an average cost of $38.85 per share, or $27.3 million in total. All of the repurchased shares of our common stock became treasury shares upon repurchase and most of the repurchased shares continue to be held as treasury shares. As of December 31, 2001, our existing repurchase authorizations permit us to repurchase an additional 1,234,300 shares of our common stock. We may elect to repurchase additional shares of our common stock from time to time in the future, depending on market conditions and other considerations. The purpose of the stock repurchase program is to help us achieve our long-term goal of enhancing shareholder value.

        Our principal uses of cash are to pay salaries, occupancy and equipment costs, recruiting and marketing expenses, administrative expenses and taxes, including institute start-up costs for new institutes. Our net cash items (consisting of cash and cash equivalents, restricted cash and marketable debt securities) increased from $70.6 million at December 31, 2000 to $110.2 million at December 31, 2001. Excluding the $27.3 million used to repurchase 702,500 shares of our common stock and the $8.6 million we received from the exercise of options to purchase our common stock by our employees and directors, cash items increased $58.3 million in the year ended December 31, 2001. Marketable debt securities and cash equivalents ranged from a low of $26.6 million in February 2001 to a high of $110.6 million in November 2001.

        We have generated positive cash flows from operations for the past five years. Cash flows from operations in 2001 was $79.9 million (excluding the $32.5 million increase in marketable debt securities), an increase of $29.8 million from $50.1 million (excluding the $6.5 million decrease in marketable debt securities) in 2000. This increase was primarily due to higher cash flows from operations caused by the increase in income and accelerated cash collections from students associated with their use of a supplemental student loan program, called the College Advantage Loan Program ("CALP"). The CALP has been made available to our students by a private funding source since January 2000. The CALP offers eligible students and their parents loans to pay the students' cost of education that federal and state student financial aid sources do not fully cover. CALP loans are non-recourse to us and are disbursed once during each academic year at the start of the first academic quarter of the student's academic year.

        At December 31, 2001, we had positive working capital of $25.8 million. Deferred revenue, which represents the unrecognized portion of revenue received from students, increased $21.5 million to $77.2 million at December 31, 2001 from $55.7 million at December 31, 2000. This increase was

30

primarily due to the students' use of the CALP and increased tuition revenue resulting from higher tuition rates and a larger number of students.

        During 2001, we recorded a $3.0 million minimum pension liability adjustment with respect to our obligations under the ESI Pension Plan. This $3.0 million adjustment is included in accrued compensation and benefits liabilities with a corresponding $1.8 million reduction in shareholders' equity, which is net of a $1.2 million deferred tax asset.

        An institution may lose its eligibility to participate in some or all of the Title IV Programs, if the rates at which the institution's students default on federal student loans exceed specific percentages. An institution whose cohort default rate on loans under the Federal Family Education Loan ("FFEL") program and the William D. Ford Federal Direct Loan ("FDL") program is 25% or greater for three consecutive federal fiscal years loses eligibility to participate in the FFEL, FDL and Pell Grant programs for the remainder of the federal fiscal year in which the DOE determines that the institution has lost its eligibility and for the two subsequent federal fiscal years.

        None of our campus groups had a FFEL/FDL cohort default rate equal to or greater than 25% for the 1997, 1998 or 1999 federal fiscal years, the most recent years for which the DOE has published FFEL/FDL official cohort default rates. None of our campus groups had a FFEL/FDL preliminary cohort default rate equal to or greater than 25% for the 2000 federal fiscal year, which preliminary rates were issued by the DOE in February 2002.

        Prior to October 7, 2000, the HEA limited how much of a student's tuition and fees an institution could retain for a student who withdrew from the institution ("Refund Policy"). A student was only obligated for a pro rata portion of the education costs charged by the institution, if the student withdrew during the first 60% of the student's first period of enrollment. For our institutes, a period of enrollment is generally an academic quarter. A student who withdrew after the first period of enrollment was also subject to a refund calculation, but it was not a straight pro rata calculation. The institution had to refund any monies it collected in excess of the pro rata or other applicable portion to the appropriate lenders or Title IV Programs in a particular order. The standards of most of the state education authorities that regulate our institutes (the "SEAs") and the Accrediting Council for Independent Colleges and Schools ("ACICS") that accredits our institutes continue to impose a Refund Policy.

        The HEA and its implementing regulations now impose a limit on the amount of Title IV Program funds a withdrawing student can use to pay his or her education costs ("Return Policy"). The Return Policy permits a student to use only a pro rata portion of the Title IV Program funds that the student would otherwise be eligible to use, if the student withdraws during the first 60% of any period of enrollment. The institution must return to the appropriate lenders or Title IV Programs any Title IV Program funds that the institution receives on behalf of a withdrawing student in excess of the amount the student can use for such period of enrollment.

        The HEA's substitution of the Return Policy for its Refund Policy has, in many states, depending on when a student withdraws during an academic quarter, increased the portion of the student's education costs owed to the ITT Technical Institute upon withdrawal and/or reduced the amount of Title IV Program funds that the withdrawing student can use to pay his or her education costs. In these instances, withdrawing students may be unable to pay all of their education costs and we may be unable to collect a significant portion of these costs. Title IV program funds are generally paid sooner and are more collectible than payments from other sources. However, the incremental decrease in the amount of Title IV Program funds that certain withdrawing students used to pay their education costs to our institutes was largely offset by the incremental increase in the education costs owed to us by withdrawing students in certain states. Therefore, the Return Policy has not had, and we do not expect that it will have, a material adverse effect on our financial condition, results of operations or cash flows.

31

        Under a provision of the HEA commonly referred to as the "90/10" Rule, a for-profit institution, such as each of our campus groups, becomes ineligible to participate in Title IV Programs if, on a cash accounting basis, the institution derives more than 90% of its applicable revenues for a fiscal year from Title IV Programs. For our 2001 fiscal year, the range of our campus groups was from approximately 52% to approximately 73%.

        The DOE, the ACICS and most of the SEAs have laws, regulations and/or criteria (collectively, "Regulations") pertaining to the change in ownership and/or control (collectively "change in control") of institutions, but these Regulations do not uniformly define what constitutes a change in control. When a change in control occurs under the DOE's Regulations, an institution's eligibility to continue to participate in Title IV Programs is subject to review and the institution could lose its eligibility, with the result that the institution would no longer be able to authorize or, with limited exceptions, disburse Title IV Program funds to its students. The DOE may provisionally certify an institution for a temporary period following a change in control. The DOE's reinstatement of an institution's certification to participate in Title IV Programs depends on its determination that the institution, under its new ownership and control, complies with specified DOE requirements for institutional eligibility. The time required for the DOE to make such a determination can vary but, if the institution submits a materially complete application for reinstatement within 10 business days after the change in control, the institution will be certified while the DOE conducts its review.

        A change in control could occur as a result of future transactions in which we or our institutes are involved, such as some corporate reorganizations and some changes in our board of directors. A material adverse effect on our financial condition, results of operations and cash flows would result if we had a change in control and a material number of our institutes failed, in a timely manner, to be reauthorized by their SEAs, reaccredited by the ACICS or recertified by the DOE to participate in Title IV Programs.

        Our capital assets consist primarily of classroom and laboratory equipment (such as computers, electronic equipment and robotic systems), classroom and office furniture, software and leasehold improvements. We lease all of our building facilities. Capital expenditures totaled $21.6 million during 2001 and primarily included expenditures of $6.5 million for computer equipment at our institutes, $4.4 million to replace or add furniture or equipment at existing institutes, $1.6 million on leasehold improvements, $0.5 million for new ITT Technical Institutes and $5.2 million for software that was developed or purchased to enhance our current information systems. Leasehold improvements represent part of our continuing effort to maintain our existing facilities in good condition. Capital expenditures decreased by $7.8 million to $21.6 million in 2001 from $29.4 million in 2000, principally due to the $7.1 million spent in 2000 for equipment used in our Computer and Electronics Engineering Technology curriculum. To date, cash generated from operations has been sufficient to meet our capital expenditures.

        We plan to continue to upgrade and expand current facilities and equipment. We expect that 2002 capital expenditures will be approximately $20 to $25 million. The capital additions for a new institute are approximately $0.4 million and the capital expenditures for each new curriculum at an existing institute are approximately $0.3 million. We anticipate that our planned capital additions can be funded from cash flows from operations. Cash flows on a long-term basis are highly dependent upon the receipt of Title IV Program funds and the amount of funds spent on new institutes, curricula additions at existing institutes and possible acquisitions.

        We do not believe that any reduction in cash and cash equivalents or marketable debt securities that may result from its use to effect any future stock repurchases will have a material adverse effect on our expansion plans, planned capital expenditures, ability to meet any applicable regulatory financial responsibility standards, or ability to conduct normal operations.

32

Factors That May Affect Future Results

        This report contains certain forward looking statements that involve a number of risks and uncertainties. Among the factors that could cause actual results to differ materially are the following: business conditions and growth in the postsecondary education industry and in the general economy; changes in federal and state governmental regulations with respect to education and accreditation standards, or the interpretation or enforcement thereof, including, but not limited to, the level of government funding for, and our eligibility to participate in, student financial aid programs utilized by our students; the results of the investigation being conducted by the DOE which, if adversely determined, could cause the DOE to subject us to monetary fines or penalties or other sanctions (including a limitation, suspension or termination of our ability to participate in federal student financial aid programs) that could adversely affect our ability to enroll students, expand the number of our institutes and increase the number of the programs of study offered at our institutes; the results of the qui tam action brought under the False Claims Act, 31 U.S.C. § 3730, in which we are a defendant which, if adversely determined, could result in a demand for repayment of Title IV Program funds, trebled under the False Claims Act and penalties; our ability to hire and retain qualified faculty; effects of any change in our ownership resulting in a change in control, including, but not limited to, the consequences of such changes on the accreditation and federal and state regulation of the institutes; our ability to implement our growth strategies; receptivity of students and employers to our existing program offerings and new curricula; and loss of lender access to our students for student loans. We undertake no obligation to update or revise any forward-looking information, whether as a result of new information, future developments or otherwise.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

        The information required by this Item appears in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—General."

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

        The information required by this Item appears on pages F-1 through F-19 herein.

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

        Not applicable.

33

PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

        The information required by this Item concerning our directors, nominees for director, executive officers and disclosure of delinquent filers is incorporated herein by reference to ESI's definitive Proxy Statement for our 2002 Annual Meeting of Shareholders, to be filed with the SEC pursuant to Regulation 14A within 120 days after the end of our last fiscal year.

Item 11. EXECUTIVE COMPENSATION.

        The information required by this Item concerning remuneration of our officers and directors and information concerning material transactions involving such officers and directors is incorporated herein by reference to ESI's definitive Proxy Statement for our 2002 Annual Meeting of Shareholders which will be filed with the SEC pursuant to Regulation 14A within 120 days after the end of our last fiscal year.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

        The information required by this Item concerning the stock ownership of management and five percent beneficial owners is incorporated herein by reference to ESI's definitive Proxy Statement for our 2002 Annual Meeting of Shareholders which will be filed with the SEC pursuant to Regulation 14A within 120 days after the end of our last fiscal year.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

        The information required by this Item concerning certain relationships and related transactions is incorporated herein by reference to ESI's definitive Proxy Statement for our 2002 Annual Meeting of Shareholders which will be filed with the SEC pursuant to Regulation 14A within 120 days after the end of our last fiscal year.

34

PART IV

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

(a)	1.	Financial Statements:
			Page No. In This Filing
		Report of Independent Accountants	F-1
		Consolidated Statements of Income for the years ended December 31, 2001, December 31, 2000 and December 31, 1999	F-2
		Consolidated Balance Sheets as of December 31, 2001 and December 31, 2000	F-3
		Consolidated Statements of Cash Flows for the years ended December 31, 2001, December 31, 2000 and December 31, 1999	F-4
		Consolidated Statements of Shareholders' Equity for the years ended December 31, 2001, December 31, 2000 and December 31, 1999	F-5
		Notes to Consolidated Financial Statements	F-6

	2.	Financial Statement Schedules:
	Schedule II—Valuation and Qualifying Accounts of the Company for the years ended December 31, 2001, December 31, 2000 and December 31, 1999 appear on page F-18.
	3.	Quarterly Results for 2001 and 2000 (unaudited) appear on page F-19.
	4.	Exhibits:
	A list of exhibits required to be filed as part of this report is set forth in the Index to Exhibits appearing on pages S-3 through S-4, which immediately precedes such exhibits, and is incorporated herein by reference.
(b)		Reports on form 8-K
		No reports on Form 8-K were filed during the quarter ended December 31, 2001.

35

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders
of ITT Educational Services, Inc.

In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) on page 35 present fairly, in all material respects, the financial position of ITT Educational Services, Inc. and its subsidiaries at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 14(a)(2) on page 35 present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the consolidated financial statements, the Company changed its method of revenue recognition for certain fees effective January 1, 2000 and adopted AICPA Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" in 1999.

/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Indianapolis, Indiana
January 17, 2002

F-1

ITT EDUCATIONAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)

		Year Ended December 31,
		2001		2000			1999
Revenues		$	410,551	$	347,524		$	316,370
Costs and Expenses
Cost of educational services			248,129		211,653			191,760
Student services and administrative expenses			110,816		94,156			86,953
Offering, change in control and other one-time expenses			—		—			900
	Total costs and expenses		358,945		305,809			279,613
Operating income			51,606		41,715			36,757
Interest income, net			2,708		2,707			2,396
Income before income taxes and cumulative effect of change in accounting principle			54,314		44,422			39,153
Income taxes			20,600		16,937			14,802
Income before cumulative effect of change in accounting principle			33,714		27,485			24,351
Cumulative effect of change in accounting principle, net of tax (Note 2)			—		(2,776	)		(823	)
Net income		$	33,714	$	24,709		$	23,528
Earnings (loss) per common share (basic):
	Income before cumulative effect of change in accounting principle	$	1.43	$	1.14		$	0.96
	Cumulative effect of change in accounting principle, net of tax		—		(0.11	)		(0.03	)
	Net income	$	1.43	$	1.03		$	0.93
Earnings (loss) per common share (diluted):
	Income before cumulative effect of change in accounting principle	$	1.40	$	1.14		$	0.96
	Cumulative effect of change in accounting principle, net of tax		—		(0.12	)		(0.03	)
	Net income	$	1.40	$	1.02		$	0.93

The accompanying notes are an integral part of these financial statements.

F-2

ITT EDUCATIONAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)

			December 31,
			2001			2000
Assets
Current assets
	Cash and cash equivalents		$	63,702		$	56,366
	Restricted cash			5,462			5,666
	Marketable debt securities			41,068			8,586
	Accounts receivable, less allowance for doubtful accounts of $2,216 and $3,419			12,679			12,414
	Deferred and prepaid income tax			3,989			3,420
	Prepaids and other current assets			7,310			6,118
		Total current assets		134,210			92,570
Property and equipment, net				49,593			46,560
Direct marketing costs				10,520			10,094
Other assets				1,076			1,672
	Total assets		$	195,399		$	150,896
Liabilities and Shareholders' Equity
Current liabilities
	Accounts payable		$	16,007		$	16,274
	Accrued compensation and benefits			10,134			4,454
	Other accrued liabilities			5,100			3,547
	Deferred revenue			77,152			55,651
		Total current liabilities		108,393			79,926
Deferred income tax				7,235			5,056
Other liabilities				1,583			1,228
	Total liabilities			117,211			86,210
Commitments and contingent liabilities (Note 9)
Shareholders' equity
	Preferred stock, $.01 par value, 5,000,000 shares authorized, none issued or outstanding			—			—
	Common stock, $.01 par value, 150,000,000 shares authorized, 27,034,452 issued			270			270
	Capital surplus			37,355			33,938
	Retained earnings			148,602			117,115
	Accumulated comprehensive income			(1,837	)		—
	Treasury stock, 3,874,078 and 3,537,463 shares, at cost			(106,202	)		(86,637	)
		Total shareholders' equity		78,188			64,686
		Total liabilities and shareholders' equity	$	195,399		$	150,896

The accompanying notes are an integral part of these financial statements.

F-3

ITT EDUCATIONAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

				Year Ended December 31,
				2001			2000			1999
Cash flows provided by (used for) operating activities:
	Net income			$	33,714		$	24,709		$	23,528
	Adjustments to reconcile net income to net cash provided by operating activities:
		Cumulative effect of change in accounting principle			—			2,776			823
		Depreciation and amortization			18,527			14,519			11,150
		Provision for doubtful accounts			8,576			5,104			4,362
		Deferred taxes			5,597			3,091			4,311
		Increase/decrease in operating assets and liabilities:
			Marketable debt securities		(32,482	)		6,511			23,219
			Accounts receivable		(8,841	)		(5,833	)		(5,275	)
			Direct marketing costs		(426	)		(1,382	)		(797	)
			Accounts payable and accrued liabilities		1,808			(5,183	)		(7,379	)
			Prepaids and other assets		(596	)		(2,273	)		(1,056	)
			Deferred revenue		21,501			14,609			4,304
Net cash provided by (used for) operating activities					47,378			56,648			57,190
Cash flows provided by (used for) investing activities:
	Capital expenditures, net				(21,560	)		(29,393	)		(17,005	)
Net cash provided by (used for) investing activities					(21,560	)		(29,393	)		(17,005	)
Cash flows provided by (used for) financing activities:
	Purchase of treasury stock				(27,289	)		(18,181	)		(68,912	)
	Exercise of stock options				8,603			94			639
Net cash provided by (used for) financing activities					(18,686	)		(18,087	)		(68,273	)
Net increase (decrease) in cash, cash equivalents and restricted cash					7,132			9,168			(28,088	)
Cash, cash equivalents and restricted cash at beginning of period					62,032			52,864			80,952
Cash, cash equivalents and restricted cash at end of period				$	69,164		$	62,032		$	52,864
Supplemental disclosures of cash flow information:
	Cash paid during the period for:
		Income taxes		$	14,999		$	11,642		$	12,867
		Interest			353			243			174
	Non-cash financing activities:
		Issuance of treasury stock for incentive plan and board of directors' plan		$	311		$	293			—

The accompanying notes are an integral part of these financial statements.

F-4

ITT EDUCATIONAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)

			Common Stock											Accumulated Compre- hensive Income			Treasury Stock
						Capital Surplus		Retained Earnings			Compre- hensive Income
			Shares	Amount													Shares		Amount			Total
Balance as of December 31, 1998			27,011	$	270	$	32,613	$	68,973					$					$			$	101,856
Exercise of stock options			23				639																639
Purchase of treasury stock																	(2,419	)		(68,912	)		(68,912	)
Settlement of ITT intercompany matters							660																660
Net income for 1999									23,528														23,528
Balance as of December 31, 1999			27,034		270		33,912		92,501						—		(2,419	)		(68,912	)		57,771
Exercise of stock options							26										4			68			94
Purchase of treasury stock																	(1,144	)		(18,181	)		(18,181	)
Issue treasury stock for employee incentive plan									(95	)							22			388			293
Net income for 2000									24,709														24,709
Balance as of December 31, 2000			27,034		270		33,938		117,115						—		(3,537	)		(86,637	)		64,686
Exercise of stock options							3,399		(2,227	)							349			7,431			8,603
Issue treasury stock for employee incentive plan							3										14			272			275
Issue treasury stock for board of directors plan							15										2			21			36
Comprehensive income
	Net income for 2001								33,714		$	33,714											33,714
	Other comprehensive income, net of tax:
		Minimum pension liability adjustment										(1,837	)		(1,837	)							(1,837	)
	Other comprehensive income											(1,837	)
Comprehensive income											$	31,877
Purchase of treasury stock																	(702	)		(27,289	)		(27,289	)
Balance as of December 31, 2001			27,034	$	270	$	37,355	$	148,602					$	(1,837	)	(3,874	)	$	(106,202	)	$	78,188

        The accompanying notes are an integral part of these financial statements.

F-5

ITT EDUCATIONAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001, 2000, and 1999
(Dollar amounts in thousands, unless otherwise stated)

1.    Ownership and Change in Control

        From ITT Educational Services, Inc.'s ("ESI") initial public offering in 1994 until June 9, 1998, ITT Corporation ("ITT") owned 83.3% of the outstanding shares of ESI common stock. On June 9, 1998, ITT sold 13,050,000 shares of ESI's common stock held by ITT to the public (48.3% of the outstanding shares) (the "June 1998 Offering"). After the June 1998 Offering, ITT owned 35% of the outstanding shares of ESI common stock. On February 1, 1999, ITT sold 7,950,000 shares of ESI common stock held by ITT to the public (the "February 1999 Offering"). Simultaneous with the close of the February 1999 Offering, ESI repurchased 1,500,000 shares of ESI common stock from ITT at the February 1999 Offering price to the public, less underwriters' commissions and discounts, for an aggregate cost of $49,088 (the "February 1999 Stock Repurchase"). Following the February 1999 Offering and February 1999 Stock Repurchase, ITT no longer owned any shares of ESI common stock.

        In conjunction with the February 1999 Offering, ITT paid ESI $2,100 related to the settlement of various intercompany matters, of which $660 is included in capital surplus.

        During 1999 and 2000, ESI's Board of Directors authorized ESI to repurchase in aggregate up to 4,000,000 outstanding shares of ESI common stock in the open market or through privately negotiated transactions in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended. Subsequent to the February 1999 Stock Repurchase, ESI repurchased 919,000 shares of ESI common stock in 1999 at an average cost of $21.57 per share or $19,800 in total. In 2000, ESI repurchased 1,144,200 shares of ESI common stock at an average cost of $15.89 per share or $18,181 in total. In 2001, ESI repurchased 702,500 shares of ESI common stock at an average cost of $38.85 per share or $27,289 in total. All of the repurchased shares of ESI common stock became treasury shares upon repurchase. As of December 31, 2001, ESI's existing repurchase authorizations permit it to repurchase an additional 1,234,300 shares of ESI common stock. ESI may elect to repurchase additional shares of ESI common stock from time to time in the future, depending on market conditions and other considerations. The purpose of the stock repurchase program is to help ESI achieve its long-term goal of enhancing shareholder value.

2.    Summary of Accounting Principles and Policies

        Business Activities.    ESI is a leading proprietary postsecondary education system primarily offering career-focused, technical degree programs of study. At December 31, 2001, ESI operated 70 technical institutes throughout the United States. ESI maintains its corporate headquarters in Indianapolis, Indiana.

        Principles of Consolidation.    The consolidated financial statements include the accounts of ESI and its wholly-owned subsidiaries. All significant intercompany balances and transactions are eliminated in consolidation.

        Use of Estimates.    The preparation of these financial statements, in conformity with generally accepted accounting principles, includes estimates that are determined by ESI's management. Actual results may differ from estimates used.

        Cash Equivalents and Marketable Debt Securities.    Marketable debt securities are classified as trading securities and have maturity dates in excess of 90 days at the time of purchase and are recorded at their market value. Debt securities with original maturity dates of less than 90 days are included in

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cash and cash equivalents and are recorded at cost, which approximates market value. The cost of securities sold is based on the first-in, first-out method.

        Investment income for the year ended December 31, 2001, 2000, and 1999 consists of:

	Year Ended December 31,
	2001		2000			1999
Net realized gains (losses) on the sale of trading securities	$	19	$	(235	)	$	(98	)
Interest and dividend income, net		3,006		2,674			2,880
Change in net unrealized holding gain (loss)		36		314			(354	)
	$	3,061	$	2,753		$	2,428

        Property and Equipment.    ESI includes all property and equipment in the financial statements at cost. Provisions for depreciation of property and equipment have generally been made using the straight-line method for financial reporting purposes and accelerated methods for tax purposes. Estimated useful lives generally range from three to ten years for furniture and equipment and leasehold improvements. ESI applies the American Institute of Certified Public Accountants (the "AICPA") Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." Estimated useful lives generally range from three to eight years for capitalized software. Maintenance, repairs and renewals not of a capital nature are expensed as incurred. Fully depreciated assets no longer in use are removed from both the asset and accumulated depreciation accounts in the year of their retirement. Any gains or losses on dispositions are credited or charged to income, as appropriate.

        Fair Value of Financial Instruments.    The carrying amounts reported in the balance sheets for cash and cash equivalents, restricted cash, accounts receivable, accounts payable, other accrued liabilities and deferred revenue approximate fair value because of the immediate or short-term maturity of these financial instruments. Marketable debt securities are recorded at their market value.

        Recognition of Revenues.    Tuition revenues are recorded on a straight-line basis over the length of the applicable course. If a student discontinues training, the tuition revenue related to the remainder of that academic quarter is recorded with the amount of refund resulting from the application of federal, state or accreditation requirements or ESI refund policy recorded as an expense. On an individual student basis, tuition earned in excess of cash received is recorded as accounts receivable, and cash received in excess of tuition earned is recorded as deferred revenue. Textbook sales and the related cost of the textbooks are recognized at the beginning of each academic quarter with respect to students who are attending courses in which textbooks are charged separately from tuition. For those students who are attending courses in which the cost of textbooks is included in the tuition, the cost of the textbooks is amortized on a straight-line basis over the applicable course length and the deferral of book costs is recorded in prepaids and other current assets. Academic fees, which are charged only one time to students on their first day of class attendance, are recognized as revenue on a straight-line basis over the average course length of 24 months. If a student discontinues training, all unrecognized revenue relating to his or her academic fee is recognized upon the student's departure.

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        In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). ESI began following the guidance provided by SAB 101 effective January 1, 2000 and recorded a cumulative effect of change in accounting of $4,477, less $1,701 of deferred taxes. In conformity with SAB 101, ESI changed the method by which it recognizes the laboratory and application fees charged to a student as revenue. Previously, the quarterly laboratory fee was recognized as revenue at the beginning of each academic quarter and the application fee was recognized as revenue when ESI received the fee. As of January 1, 2000, application and laboratory fees are recognized as revenue on a straight-line basis over the average course length of 24 months and deferred revenue is recorded for fees collected in excess of revenue recognized. If a student discontinues training, all unrecognized revenue relating to those fees is recognized upon the student's departure.

        Effective with its first fiscal quarter of 2000, ESI began reporting 12 weeks of tuition revenue in each of its four fiscal quarters. Previously, ESI's first and third fiscal quarters each had 13 weeks of tuition revenue while the second and fourth fiscal quarters each had 11 weeks of tuition revenue. ESI elected to standardize the number of weeks of revenue reported in each fiscal quarter, because the timing of student breaks in a calendar quarter was expected to fluctuate from quarter to quarter during subsequent years. The total number of weeks of school during each year remains at 48.

        Except for the selected quarterly financial data, ESI has not presented proforma results for prior fiscal years due to immateriality.

        Advertising Costs.    ESI expenses all advertising costs as incurred.

        Direct Marketing Costs.    Direct costs incurred relating to the enrollment of new students are capitalized using the successful efforts method. Direct marketing costs include recruiting representatives' salaries, employee benefits and other direct costs less application fees. Successful efforts is the ratio of students enrolled to prospective students interviewed. Direct marketing costs are amortized on an accelerated basis over the average course length of 24 months commencing on the start date. Direct marketing costs on the balance sheet totaled $10,520 at December 31, 2001 and $10,094 at December 31, 2000, net of accumulated amortization of $9,967 at December 31, 2001 and $8,872 at December 31, 2000.

        Institute Start-Up Costs.    Deferred institute start-up costs consist of all direct costs (excluding advertising costs) incurred at a new institute from the date a lease for a technical institute facility is entered into until the first class start. Such capitalized costs are amortized on a straight-line basis over a one-year period. At December 31, 1998, deferred start-up costs included in other assets on the balance sheet totaled $1,354 net of accumulated amortization of $511. In conformity with AICPA SOP 98-5, "Reporting on the Costs of Start-Up Activities," ESI expensed the $1,354 of institute start-up costs, less $531 of deferred taxes, as a cumulative effect of a change in accounting principle in the first quarter of 1999. This new accounting requirement did not have a significant effect on 1999 income before the cumulative effect of the accounting change.

        Offering, Change in Control and Other One-Time Expenses.    In 1999, ESI incurred net one-time expenses of $900 associated with the costs of the February 1999 Offering and special bonus payments to employees for extraordinary services, net of amounts reimbursed by ITT.

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        Income Taxes.    In accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," ESI accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for expected future tax consequences of temporary differences that currently exist between the tax bases and financial reporting bases of ESI's assets and liabilities.

        Treasury Stock.    Treasury stock is accounted for under the last in, first out method.

        Earnings Per Common Share.    Earnings per common share for all periods have been calculated in conformity with SFAS No. 128, "Earnings Per Share." This data is based on historical net income and the average number of shares of ESI common stock outstanding during each period.

	Average shares outstanding for the year ended December 31,
	2001	2000	1999
	(in thousands)
Basic	23,604	24,018	25,235
Diluted	24,108	24,185	25,380

        The difference in the number of shares used to calculate basic and diluted earnings per share represents the average number of shares issued under ESI's stock option plans less shares assumed to be purchased with proceeds from the exercise of those stock options.

3.    Financial Aid Programs

        ESI participates in various federal student financial aid programs under Title IV ("Title IV Programs") of the Higher Education Act of 1965, as amended ("HEA"). Approximately 65% of ESI's 2001 revenue, determined on a cash accounting basis, was indirectly derived from funds distributed under these programs.

        ESI participates in the Federal Perkins Loan ("Perkins") program and administers on behalf of the federal government a pool of Perkins student loans which aggregated $4,601 at December 31, 2001 and $6,782 at December 31, 2000. ESI has recorded in its financial statements only its aggregate mandatory contributions to this program, which aggregated $301 at December 31, 2001 and $1,458 at December 31, 2000. In order to cover potential losses related to funds committed by ESI under the Perkins program, ESI provided $85 at December 31, 2001 and $1,016 at December 31, 2000.

        The Title IV Programs are administered by ESI in separate accounts as required by government regulation. ESI is required to administer the funds in accordance with the requirements of the HEA and DOE regulations and must use due diligence in approving and disbursing funds and servicing loans. In the event ESI does not comply with federal requirements, or if student loan default rates rise to a level considered excessive by the federal government, ESI could lose its eligibility to participate in Title IV Programs or could be required to repay funds determined to have been improperly disbursed. Management believes that it is in substantial compliance with the federal requirements.

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4.    Restricted Cash

        ESI participates in the Electronic Funds Transfer ("EFT") program through the DOE. All monies transferred to ESI via the EFT program are subject to certain holding period restrictions, generally from three to seven days, before they can be drawn into ESI's cash account. These amounts are classified as restricted cash until they are applied to the students' accounts.

5.    Property and Equipment

        Fixed assets include the following:

	December 31,
	2001			2000
Furniture and equipment	$	105,087		$	100,243
Leasehold improvements		9,667			12,505
Capitalized software		13,153			7,983
Land and land improvements		60			110
Construction in progress		—			655
		127,967			121,496
Less accumulated depreciation		(78,374	)		(74,936	)
	$	49,593		$	46,560

        Accumulated depreciation includes accumulated amortization of capitalized software of $2,325 at December 31, 2001 and $836 at December 31, 2000. Depreciation and amortization expense includes software amortization of $1,489 for the year ended December 31, 2001 and $677 for the year ended December 31, 2000.

6.    Taxes

        The provision for income taxes attributable to income before income taxes and cumulative effect of change in accounting principle includes the following:

		Year Ended December 31,
		2001		2000		1999
Current
	Federal	$	16,104	$	12,455	$	9,667
	State		1,730		1,391		824
			17,834		13,846		10,491
Deferred
	Federal		2,308		2,682		3,524
	State		458		409		787
			2,766		3,091		4,311
		$	20,600	$	16,937	$	14,802

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        Deferred tax assets (liabilities) include the following:

	December 31,
	2001			2000			1999
Direct marketing costs	$	(4,127	)	$	(3,835	)	$	(3,417	)
Capitalized software		(4,247	)		(2,716	)		(1,516	)
Deferred revenue		2,183			1,748			—
Depreciation		607			1,078			783
Deferral of book costs		(1,714	)		—			—
Minimum pension liability		1,184			—			—
Reserves and other		2,085			1,278			3,093
Net deferred tax assets (liabilities)	$	(4,029	)	$	(2,447	)	$	(1,057	)

        Differences between effective income tax rates and the statutory U.S. federal income tax rates are as follows:

	Year Ended December 31,
	2001		2000		1999
Statutory U.S. federal income tax rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal benefit	2.6	%	2.6	%	2.6	%
Non-deductible offering expenses	—		—		0.8	%
Permanent differences and other	0.3	%	0.5	%	(0.6	%)
Effective income tax rate	37.9	%	38.1	%	37.8	%

        The tax benefit associated with the exercise of non-qualified stock options reduced taxes currently payable by $2,291 in 2001 and $8 in 2000, and was recorded as an increase to capital surplus.

7.    Retirement Plans

        Employee Pension Benefits.    Effective June 9, 1998, ESI adopted a non-contributory defined benefit pension plan. This plan, commonly referred to as a cash balance plan, covers substantially all employees of ESI and provides benefits based upon annual employee earnings times established percentages of pay based on age and years of service.

        During 1999, ESI adopted the ESI Excess Pension Plan, a non-qualified, unfunded retirement plan, that covers a select group of management and provides for payment of those benefits at retirement that cannot be paid from the qualified ESI pension plan due to federal statutory limits on the amount of benefits that can be paid and compensation that can be recognized under a tax-qualified retirement plan. The practical effect of the ESI Excess Pension Plan is to provide retirement benefits to all employees on a uniform basis.

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        The following tables are based on an actuarial valuation date as of September 30 and amounts recognized in ESI's consolidated financial statements as of December 31:

        Net periodic benefit cost for the plans:

	Year Ended December 31, 2001			Year Ended December 31, 2000			Year Ended December 31, 1999
Service cost	$	4,835		$	4,316		$	4,336
Interest cost		923			531			178
Expected return on assets		(1,264	)		(630	)		(15	)
Recognized net actuarial loss/(gain)		—			—			26
Net periodic pension cost	$	4,494		$	4,217		$	4,525

        Change in benefit obligation:

	Year Ended December 31, 2001			Year Ended December 31, 2000
Projected benefit obligation at beginning of period	$	12,165		$	7,330
Service cost		4,835			4,316
Actuarial loss		1,607			146
Interest cost		923			531
Plan amendments		(795	)		—
Benefits paid		(441	)		(158	)
Projected benefit obligation at end of period		18,294			12,165
Fair value of plan assets		12,683			10,211
Funded status		(5,611	)		(1,954	)
Unrecognized net actuarial loss		4,993			935
Unrecognized prior service cost		(795	)		—
Minimum pension liability adjustment		(3,021	)		—
Accrued benefit cost	$	(4,434	)	$	(1,019	)

        Change in plan assets:

	Year Ended December 31, 2001			Year Ended December 31, 2000
Fair value of plan assets at beginning of year	$	10,211		$	2,058
Actual return on plan assets		(1,187	)		506
Employer contributions		4,100			7,805
Benefits paid		(441	)		(158	)
Fair value of plan assets at end of year	$	12,683		$	10,211

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        Weighted-average assumptions as of September 30, 2001, 2000 and 1999:

	2001		2000		1999
Discount rate at beginning of year	7.75	%	7.50	%	6.50	%
Discount rate at end of year	7.25	%	7.75	%	7.50	%
Expected return on plan assets	9.00	%	9.00	%	9.00	%
Rate of compensation increase	4.50	%	4.50	%	4.50	%

        Retirement Savings Plan.    Effective May 16, 1998, ESI adopted the ESI 401(k) Plan, a defined contribution plan, which covers substantially all employees of ESI. ESI's non-matching and matching contributions under its 401(k) plan are made in the form of shares of ESI common stock. A plan participant cannot redirect ESI's non-matching or matching contributions to other plan investment options until the participant reaches age 55.

        During 1999, ESI adopted the ESI Excess Savings Plan, a non-qualified, unfunded deferred compensation plan, which covers a select group of management. The plan provides for salary deferral of contributions that the participants are unable to make under the ESI 401(k) Plan and non-matching and matching contributions that cannot be paid under the ESI 401(k) Plan due to federal statutory limits on the amount that an employee can contribute under a defined contribution plan. The practical effect of the ESI Excess Savings Plan is to provide a savings plan to all employees on a uniform basis.

        The costs of providing the benefits under the ESI 401(k) Plan and ESI Excess Savings Plan (including certain administrative costs of the plans) were $2,572 for the year ended December 31, 2001, $2,134 for the year ended December 31, 2000, and $2,126 for the year ended December 31, 1999.

8.    Stock Option and Key Employee Incentive Plans

        ESI adopted and the stockholders approved the ITT Educational Services, Inc. 1994 Stock Option Plan ("1994 Plan") and the 1997 ITT Educational Services, Inc. Incentive Stock Plan ("1997 Plan"). During 1999, ESI established the 1999 Outside Directors Stock Option Plan ("1999 Stock Plan"), which provides for awards of non-qualified stock options to non-employee directors. ESI has adopted the disclosure only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized in the financial statements for the Plans. ESI has elected, as permitted by the standard, to continue following its intrinsic value based method of accounting for stock options consistent with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Under the intrinsic method, compensation cost for stock options is measured as the excess, if any, of the quoted market price of ESI common stock at the measurement date over the exercise price.

        Under the 1994 Plan, a maximum of 405,000 shares of ESI common stock may be issued upon exercise of options. Under the 1997 Plan, a maximum of 1.5% of the outstanding common shares may be issued each year commencing in 1997, with any unissued shares issuable in later years. Under the 1997 Plan, a maximum of 4,050,000 shares of ESI common stock may be issued upon exercise of options. Under the 1999 Stock Plan, a maximum of 250,000 shares of ESI common stock may be issued upon exercise of options. Under all Plans, the option price may not be less than 100% of the fair market value of ESI common stock on the date of grant. Under the 1994 Plan and 1997 Plan, the

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options will vest and become exercisable in three equal annual installments commencing with the first anniversary of the grant. Under the 1999 Stock Plan, the options will vest and become exercisable on the first anniversary of the grant, except that options issued during 1999 were immediately vested and exercisable. The options outstanding, granted, exercised and forfeited for the three years ended December 31, 2001 are as follows:

	2001				2000				1999
	# of Shares		Weighted Average Option Price		# of Shares		Weighted Average Option Price		# of Shares		Weighted Average Option Price
Outstanding at beginning of year	1,711,000		$	20.40	1,246,500		$	23.26	793,750		$	17.67
Granted	545,500			20.17	503,500			13.57	507,500			32.31
Exercised	(342,271	)		18.09	(4,000	)		21.68	(23,250	)		21.69
Forfeited	(31,506	)		20.30	(35,000	)		23.74	(31,500	)		29.39
Outstanding at end of year	1,882,723		$	20.76	1,711,000		$	20.40	1,246,500		$	23.26

	Exercise Price Range
	$4.44		$8.89-$13.50		$16.06-$24.25		$29.50-$44.02		Total
Options outstanding at end of year		90,000		479,473		932,250		381,000		1,882,723
Weighted average exercise price on options outstanding	$	4.44	$	13.06	$	20.75	$	34.23	$	20.76
Remaining contractual life		3.0 years		7.3 years		7.7 years		7.3 years		7.3 years
Options exercisable at end of year		90,000		179,414		441,750		232,665		943,829
Weighted average exercise price on options exercisable	$	4.44	$	12.34	$	22.21	$	34.28	$	21.61

        If compensation costs for the plans had been determined based on the fair value of the stock options at grant date consistent with SFAS No. 123, ESI's net income and earnings per share for the years ended December 31, 2001, 2000, and 1999 would have been reduced to the proforma amounts indicated below:

		December 31,
		2001		2000		1999
Proforma
	Net income	$	30,666	$	21,994	$	20,729
	Basic earnings per share		1.30		0.92		0.82
	Diluted earnings per share		1.27		0.91		0.82
As reported
	Net income	$	33,714	$	24,709	$	23,528
	Basic earnings per share		1.43		1.03		0.93
	Diluted earnings per share		1.40		1.02		0.93

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        The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions for the three years ended December 31, 2001:

	Year Ended December 31,
	2001		2000		1999
Risk free interest rates	5.1	%	6.6	%	4.9	%
Expected lives (in years)	5		5		5
Volatility	55	%	47	%	39	%
Dividend yield	None		None		None

        In January 2002, the Compensation Committee of the Board of Directors awarded additional stock options for 415,500 shares of ESI common stock. The effective date of this award was January 22, 2002 and the exercise price is $34.50.

9.    Commitments and Contingent Liabilities

        Lease Commitments.    ESI leases substantially all of its facilities under operating lease agreements. A majority of the operating leases contain renewal options that can be exercised after the initial lease term. Renewal options are generally for periods of one to five years. All operating leases will expire over the next 13 years and management expects that leases will be renewed or replaced by other leases in the normal course of business. There are no material restrictions imposed by the lease agreements, and ESI has not entered into any significant guarantees related to the leases. ESI is required to make additional payments under the operating lease terms for taxes, insurance and other operating expenses incurred during the operating lease period.

        Rent expense was $28,026 for the year ended December 31, 2001, $26,445 for the year ended December 31, 2000, and $24,360 for the year ended December 31, 1999.

        Future minimum rental payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2001 are as follows:

2002	$	27,679
2003		28,108
2004		26,414
2005		17,102
2006		13,080
Later Years		33,051
	$	145,434

        Future minimum rental payments related to equipment leases are not significant.

        Contingent Liabilities.    ESI has entered into agreements with unaffiliated, private funding sources to provide loans to students. Some of these agreements require ESI to guarantee repayment of the student loans if the students fail to pay. Outstanding loans at December 31, 2001 aggregated $2,800 under these agreements.

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        ESI has a number of pending legal and other claims arising out of the ordinary course of its business. Among the legal actions is United States ex rel. Dan Graves and Susan Newman v. ITT Educational Services, Inc., et al. This action is a qui tam action that was filed on November 5, 1999 in the United States District Court for the Southern District of Texas by two former employees ("relators") on behalf of themselves and the federal government (the "Qui Tam Action"). The Qui Tam Action alleges, among other things, violations of the False Claims Act, 31 U.S.C. § 3730, by ESI, one of its employees and its independent auditor in connection with how ESI compensated its sales representatives. The relators seek various forms of recovery on behalf of themselves and the federal government, including: (i) treble the amount of unspecified damages sustained by the federal government; (ii) a civil penalty of up to $10,000 for each violation of the False Claims Act; and (iii) attorney's fees, costs and interest.

        A qui tam action is a civil lawsuit brought by one or more individuals (a qui tam "relator") on behalf of the federal government for an alleged submission to the federal government of a false claim for payment. A qui tam action is always filed under seal and remains under seal until the U.S. Department of Justice ("DOJ") decides whether to intervene in the litigation. Whenever a relator files a qui tam action, the DOJ typically initiates an investigation in order to determine whether to intervene in the litigation. If the DOJ intervenes, it has primary control over the litigation. If the DOJ declines to intervene, the relator may pursue the litigation on behalf of the federal government and, if successful, receives a portion of the federal government's recovery. On May 25, 2001, the DOJ declined to intervene in the Qui Tam Action. ESI believes that it has meritorious defenses to the Qui Tam Action and, if the action proceeds, ESI intends to vigorously defend itself against the claims.

        The DOE is currently investigating ESI's method of compensation for employees involved in student recruitment. In August 2000, the DOE advised ESI that, during the pendency of its investigation, it would not approve any application submitted by any ITT Technical Institute with respect to any change of ownership, additional location, certification of initial or continuing eligibility, or extension of course or program offerings (such as raising the level of programs offered at an institution). During December 2001 and January 2002, however, the DOE recertified all of ESI's ITT Technical Institute campus groups to participate in Title IV Programs. In addition, as part of the recertification, the DOE approved (a) five ITT Technical Institutes as new additional locations of existing main campuses and (b) an increase in the level of program offerings from associate degree to bachelor degree at one ITT Technical Institute campus group. All of ESI's campus groups were certified on a provisional basis to participate in Title IV Programs, because of the DOE's pending investigation of ESI's method of compensation for employees involved in student recruitment. An additional reason given by the DOE for provisionally certifying seven of ESI's campus groups (consisting of 13 institutes) was that their Perkins cohort default rate exceeded 30%. If ESI had to forfeit its contributions under the Perkins program for these seven campus groups, it would amount to $73 as of December 31, 2001. The DOE may withdraw an institution's provisional certification without advance notice if the DOE determines that the institution is not fulfilling all material requirements. The DOE may also more closely review an institution that is provisionally certified if it applies for approval to open a new location or make some other significant change affecting its eligibility. Provisional certification does not otherwise limit an institution's access to Title IV Program funds.

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        Another pending legal action is Contreras, et al. v. ITT Educational Services, Inc., et al., which was filed on March 3, 2000 (served on January 19, 2001) in the Superior Court of Santa Clara County in Santa Clara, California by five former students of the ITT Technical Institute in Santa Clara, California. The suit alleges, among other things, fraud, negligence, negligent misrepresentation, breach of oral contract, and statutory violations of the California Business and Professions Code and California Education Code by ESI and three of its employees who reside in California. The claims relate primarily to ESI's marketing and recruitment practices and the quality of its services. The plaintiffs seek compensatory damages, punitive damages, exemplary damages, civil penalties, restitution on behalf of the plaintiffs and all other persons similarly situated, injunctive relief, attorney's fees and costs. On February 6, 2001, the plaintiffs filed an amended complaint in this action adding 57 plaintiffs, who are current and former students of the ITT Technical Institute in either Santa Clara, California or Hayward, California. The written enrollment agreement between each of the plaintiffs and ESI provides that all disputes between the parties will be resolved through binding arbitration, instead of litigation. In May 2001, the court compelled the arbitration of each plaintiff's claims in this action. ESI believes that it has meritorious defenses and intends to vigorously defend itself against the plaintiffs' claims.

        In the opinion of management, based on the information currently available to it, the ultimate outcome of the pending legal and other claims should not have a material adverse effect on ESI's financial condition, results of operations or cash flows.

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SCHEDULE II

ITT EDUCATIONAL SERVICES, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 2001
(In thousands)

Description	Balance at Beginning of Period		Charged to Expenses		Write- offs			Balance at End of Period
Allowance for Doubtful Accounts:
Year Ended December 31, 2001	$	3,419	$	8,576	$	(9,779	)	$	2,216
Year Ended December 31, 2000	$	2,972	$	5,104	$	(4,657	)	$	3,419
Year Ended December 31, 1999	$	2,531	$	4,362	$	(3,921	)	$	2,972
FFEL Reserve(1):
Year Ended December 31, 2001	$	1,016	$	85	$	(1,016	)	$	85
Year Ended December 31, 2000	$	980	$	36	$	—		$	1,016
Year Ended December 31, 1999	$	972	$	8	$	—		$	980

(1)

Represents Federal Family Education Loan/Perkins Loan programs.

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ITT EDUCATIONAL SERVICES, INC.
QUARTERLY RESULTS
FOR 2001 AND 2000
(In thousands, except per share data)
(unaudited)

		Three Months Ended
		March 31			June 30		Sept. 30		Dec. 31		Year
2000
Revenues		$	81,192		$	82,745	$	88,479	$	95,108	$	347,524
Cost and expenses		$	75,399		$	77,050	$	77,018	$	76,342	$	305,809
Operating income		$	5,793		$	5,695	$	11,461	$	18,766	$	41,715
Interest income, net		$	628		$	527	$	593	$	959	$	2,707
Income before cumulative effect of change in accounting principle		$	3,981		$	3,859	$	7,473	$	12,172	$	27,485
Cumulative effect of change in accounting principle, net of tax		$	(2,776	)		—		—		—	$	(2,776	)
Net income		$	1,205		$	3,859	$	7,473	$	12,172	$	24,709
Earnings per share(a)
	Basic	$	0.05		$	0.16	$	0.31	$	0.51	$	1.03
	Diluted	$	0.05		$	0.16	$	0.31	$	0.51	$	1.02
2001
Revenues		$	93,776		$	98,464	$	106,269	$	112,042	$	410,551
Cost and expenses		$	86,678		$	90,840	$	92,418	$	89,009	$	358,945
Operating income		$	7,098		$	7,624	$	13,851	$	23,033	$	51,606
Interest income, net		$	623		$	568	$	946	$	571	$	2,708
Income before cumulative effect of change in accounting principle		$	4,788		$	5,078	$	9,179	$	14,669	$	33,714
Cumulative effect of change in accounting principle, net of tax			—			—		—		—		—
Net income		$	4,788		$	5,078	$	9,179	$	14,669	$	33,714
Earnings per share
	Basic	$	0.20		$	0.21	$	0.39	$	0.63	$	1.43
	Diluted	$	0.20		$	0.21	$	0.38	$	0.61	$	1.40

(a)

Excluding the cumulative effect of the change in accounting principle for revenue recognition under SAB 101, both basic and diluted earnings per share would have been $0.16 for the quarter ended March 31, 2000 and $1.14 for the year ended December 31, 2000.

F-19

SIGNATURES

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

	ITT Educational Services, Inc.
	By:	/s/  RENE R. CHAMPAGNE
Dated: February 27, 2002		Rene R. Champagne Chairman and Chief Executive Officer

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

Signature	Title	Date
/s/  RENE R. CHAMPAGNE Rene R. Champagne	Chairman, Chief Executive Officer and Director (Principal Executive Officer)	February 27, 2002
/s/  OMER E. WADDLES Omer E. Waddles	President, Chief Operating Officer and Director (Principal Executive Officer)	February 27, 2002
/s/  GENE A. BAUGH Gene A. Baugh	Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)	February 27, 2002
/s/  RAND V. ARASKOG Rand V. Araskog	Director	February 27, 2002
/s/  JOHN E. DEAN John E. Dean	Director	February 27, 2002
/s/  JAMES D. FOWLER, JR. James D. Fowler, Jr.	Director	February 27, 2002
/s/  HARRIS N. MILLER Harris N. Miller	Director	February 27, 2002

S-1

/s/  DANIEL P. WEADOCK Daniel P. Weadock	Director	February 27, 2002
/s/  VIN WEBER Vin Weber	Director	February 27, 2002

S-2

INDEX TO EXHIBITS

Exhibit No.			Description	Page No. In This Filing
3.1	(1	)	Restated Certificate of Incorporation, as Amended to Date
3.2	(2	)	Restated By-laws, as Amended to Date
10.1	(3	)	Registration Rights Agreement between ESI and ITT
10.2	(3	)	Tax Sharing Agreement between ESI and ITT
10.3	(3	)	Intercompany Agreement between ESI and ITT
10.4	(3	)	Trade Name and Service Mark License Agreement between ESI and ITT
10.5	(3	)	Employee Benefits and Administrative Services Agreement between ESI and ITT
10.6	(3	)	Treasury Services and Credit Facilities Agreement between ESI and ITT
10.7	*(4	)	ITT Educational Services, Inc. 1994 Stock Option Plan
10.8	*(5	)	1997 ITT Educational Services, Inc. Incentive Stock Plan
10.9	(6	)	Employee Benefits Agreement between ESI and ITT
10.10	(6	)	Income Tax Sharing Agreement between ESI, ITT and Starwood Hotels & Resorts Worldwide, Inc.
10.11	(6	)	Trade Name and Service Mark License Agreement between ESI and ITT Sheraton Corporation
10.12	(7	)	Amended and Restated Registration Rights Agreement between ESI and ITT
10.13	(8	)	Stockholder Agreement between ESI and ITT
10.14	*(9	)	ESI 401(k) Plan
10.15	*(6	)	ESI Excess Savings Plan
10.16	*(10	)	ESI Pension Plan
10.17	(11	)	Stock Repurchase Agreement between ESI and ITT
10.18	(12	)	First Amendment to Trade Name and Service Mark License Agreement between ESI and ITT Sheraton Corporation
10.19	*(1	)	ESI Excess Pension Plan
10.20	*(13	)	1999 Outside Directors Stock Option Plan
10.21	*(14	)	ESI Non-Employee Directors Deferred Compensation Plan
10.22	*(15	)	ESI Executive Deferred Bonus Compensation Plan
10.23	*(16	)	First Amendment of ESI Pension Plan
10.24	(16	)	Second Amendment to Trade Name and Service Mark License Agreement between ESI and ITT Manufacturing Enterprises, Inc. (assignee of ITT Sheraton Corporation)
10.25	*(16	)	First Amendment to ESI Excess Savings Plan
10.26	*(17	)	Second Amendment of ESI Pension Plan
10.27	*(18	)	ESI Senior Executive Severance Pay Plan
10.28	*(18	)	ESI Special Senior Executive Severance Pay Plan
10.29	*		Third Amendment of ESI Pension Plan

S-3

10.30	*	Restated ESI 401(k) Plan, as Amended to Date
11		Statement re Computation of Per Share Earnings
23		Consent of PricewaterhouseCoopers LLP

*

The indicated exhibit is a management contract, compensatory plan or arrangement required to be filed by Item 601 of Regulation S-K.

(1)

The copy of this exhibit filed as the same exhibit number to ESI's 1999 second fiscal quarter report on Form 10-Q is incorporated herein by reference.

(2)

The copy of this exhibit filed as the same exhibit number to ESI's Registration Statement on Form S-8 (Registration No. 33-38883) is incorporated herein by reference.

(3)

The copy of this exhibit filed as the same exhibit number to ESI's 1994 Annual Report on Form 10-K is incorporated herein by reference.

(4)

The copy of this exhibit filed as the same exhibit number to ESI's Registration Statement on Form S-1 (Registration No. 33-78272) is incorporated herein by reference.

(5)

The copy of this exhibit filed as the same exhibit number to ESI's 1997 second fiscal quarter report on Form 10-Q is incorporated herein by reference.

(6)

The copy of this exhibit filed as the same exhibit number to ESI's 1998 second fiscal quarter report on Form 10-Q is incorporated herein by reference.

(7)

The copy of this exhibit filed as Exhibit 99.2 to Starwood Hotels & Resorts Worldwide, Inc.'s and ITT's Amendment No. 1 to Schedule 13D dated June 29, 1998 is incorporated herein by reference.

(8)

The copy of this exhibit filed as Exhibit 99.1 to Starwood Hotels & Resorts Worldwide, Inc.'s and ITT's Amendment No. 1 to Schedule 13D dated June 29, 1998 is incorporated herein by reference.

(9)

The copy of this exhibit filed as Exhibit 4.3 to ESI's Registration Statement on Form S-8 (Registration No. 333-55903) is incorporated herein by reference.

(10)

The copy of this exhibit filed as the same exhibit number to ESI's 1998 third fiscal quarter report on Form 10-Q is incorporated herein by reference.

(11)

The copy of this exhibit filed as Exhibit 99.1 to ESI's current report on Form 8-K dated December 21, 1998 is incorporated herein by reference.

(12)

The copy of this exhibit filed as the same exhibit number to ESI's 1998 Annual Report on Form 10-K is incorporated herein by reference.

(13)

The copy of this exhibit filed as Exhibit 4.3 to ESI's Registration Statement on Form S-8 (Registration No. 333-84871) is incorporated herein by reference.

(14)

The copy of this exhibit filed as the same exhibit number to ESI's 1999 third fiscal quarter report on Form 10-Q is incorporated herein by reference.

(15)

The copy of this exhibit filed as the same exhibit number to ESI's 2000 first fiscal quarter report on Form 10-Q is incorporated herein by reference.

(16)

The copy of this exhibit filed as the same exhibit number to ESI's 2000 third fiscal quarter report on Form 10-Q is incorporated herein by reference.

(17)

The copy of this exhibit filed as the same exhibit number to ESI's 2001 second fiscal quarter report on Form 10-Q is incorporated herein by reference.

(18)

The copy of this exhibit filed as the same exhibit number to ESI's 2001 third fiscal quarter report on Form 10-Q is incorporated herein by reference.

S-4

QuickLinks

PART I

Item 1. BUSINESS.
Item 2. PROPERTIES.
Item 3. LEGAL PROCEEDINGS.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

PART II

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Item 6. SELECTED FINANCIAL DATA.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Item 11. EXECUTIVE COMPENSATION.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

PART IV

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

SCHEDULE II

SIGNATURES
INDEX TO EXHIBITS

EX-10.29

                                                                   EXHIBIT 10.29

                                 THIRD AMENDMENT
                               OF ESI PENSION PLAN

              This Third Amendment of ESI Pension Plan (the "Plan") is adopted

by ITT Educational Services, Inc. (the "Employer").

                                   BACKGROUND

              A.    Effective June 9, 1998, the Employer established the Plan.

              B.    The Plan has been amended by a First and Second Amendment.

              C.    The Employer now wishes to amend the Plan further.

                                    AMENDMENT

              1.    Effective January 1, 2001, the definition of "Eligible

Employee" at Section 2.01 is amended to read as follows:

              "Eligible Employee" means an Employee other than (a) a federal
              work study student; (b) a non-resident alien; (c) a Leased
              Employee; (d) an Employee who is covered by a collective
              bargaining agreement that does not provide for Plan membership; or
              (e) an Employee accruing benefits for current service under any
              other qualified defined benefit plan or qualified defined
              contribution plan maintained by the Employer or a Related Employer
              (other than the ESI 401(k) Plan).

              2.    Effective January 1, 2001, the definition of "Year of

Benefit Service" at Section 2.01 is amended to read as follows:

              "Year of Benefit Service" means, for any Employee, a Plan Year
              during which the Employee has completed at least 1,000 Hours of
              Service. A Year of Benefit Service will always be measured in
              whole years, and any Plan Year during which an Employee has
              completed less than 1,000 Hours of Service will be disregarded in
              determining the number of the Employee's Years of Benefit Service.
              If an Employee Separates from Service and is subsequently
              reemployed by an Employer, his benefit service accrued prior to
              his Separation from Service will be restored to him immediately,
              and he will immediately begin accruing benefit service upon his
              return. For purposes of this Subsection, any benefit service with
              ITT Corporation or any of its affiliated companies that was
              credited to an Employee under the ITT Plan as of the Effective
              Date will be treated as benefit service with the Employer under
              this Plan.



              3.    Effective January 1, 2001, the definition of "Year of

Eligibility Service" is amended to read as follows:

              "Year of Eligibility Service" means an eligibility computation
              period during which an Employee completes at least 1,000 Hours of
              Service. The first eligibility computation period is the 12-month
              period beginning on the date the Employee first completes an Hour
              of Service. Thereafter, the Employee's eligibility computation
              period is the Plan Year, beginning with the first Plan Year that
              begins after the date on which the Employee's employment began. If
              an Employee Separates from Service before completing a Year of
              Eligibility Service, thereafter incurs a Break in Service, and is
              later reemployed, his eligibility computation period for the
              period after his reemployment will be recalculated as if he had
              not been previously employed. Years of Eligibility Service before
              five or more consecutive Breaks in Service will not be considered
              Years of Eligibility Service if the number of consecutive Breaks
              in Service equals or exceeds the Years of Vesting Service credited
              to the Employee and the Employee was not vested in any portion of
              his Plan benefit at the time the Breaks in Service occurred,
              unless the Employee completes a period of eligibility service with
              the Employer after the Break in Service equal to the lesser of (1)
              the number of the Employee's consecutive Breaks in Service or (2)
              10 Years of Eligibility Service.

              For purposes of this Subsection, any eligibility service with ITT
              Corporation or any of its affiliated companies that was credited
              to an Employee under the ITT Plan as of the Effective Date will be
              treated as eligibility service with the Employer under this Plan.

              4.    Effective January 1, 2001, the definition of "Year of

Vesting Service" is amended to read as follows:

              "Year of Vesting Service" means, for any Employee, a Plan Year
              during which the Employee has completed not fewer than 1,000 Hours
              of Service; provided, however, that the following shall not be
              considered Years of Vesting Service:

              (a)   For purposes of determining the vested percentage of a
                    Member's benefit that accrued before five or more
                    consecutive Breaks in Service, Years of Vesting Service
                    occurring after the Breaks in Service; and

              (b)   For purposes of determining the vested percentage of a
                    Member's benefit for a Member who is not vested in any
                    portion of his Plan benefit at the time the Breaks in
                    Service occurred, Years of Vesting Service before five or
                    more consecutive Breaks in Service, if the number of the
                    consecutive Breaks in Service equals or exceeds the Years of
                    Vesting Service credited to the Employee before the Breaks
                    in Service occurred, unless the Member

                                       -2-


                    completes a period of eligibility service with the Employer
                    after the Breaks in Service equal to the lesser of (1) the
                    number of his consecutive Breaks in Service or (2) 10 Years
                    of Eligibility Service.

              For purposes of this Subsection, any vesting service with ITT
              Corporation or any of its affiliated companies that was credited
              to an Employee under the ITT Plan as of the Effective Date will be
              treated as vesting service with the Employer under this Plan.

              5.    Effective January 1, 2001, Subsections 3.01(a) and (b) are

amended to read as follows:

              (a)   Each Eligible Employee who is not a Full-Time Employee or a
                    Regular Part-Time Employee will become a Member on the first
                    Entry Date that occurs on or after the date he has both
                    reached age 21 and has completed one Year of Eligibility
                    Service. A former Eligible Employee who has previously
                    completed one Year of Eligibility Service, but who has not
                    become a Member, will become a Member as of the first Entry
                    Date on or after he has both reached age 21 and has
                    completed an Hour of Service upon his reemployment as an
                    Eligible Employee. An Eligible Employee who becomes a Member
                    and Separates from Service will again become a Member on the
                    date he first completes an Hour of Service after his
                    reemployment as an Eligible Employee.

              (b)   Each Eligible Employee who is a Full-Time Employee or a
                    Regular Part-Time Employee will become a Member on the First
                    Entry Date that occurs on or after the date he has both
                    reached age 21 and has completed one year of Continuous
                    Service. If an Employee incurs a Severance from Service
                    before completing a year of Continuous Service, thereafter
                    incurs at least a 12-month Period of Severance and is then
                    reemployed, his Period of Severance will not be counted as
                    Continuous Service in determining the date he completes a
                    year of Continuous Service after his reemployment. If an
                    Employee incurs a Severance from Service before completing a
                    year of Continuous Service, thereafter incurs a Period of
                    Severance of less than 12 months and is then reemployed, his
                    Period of Severance will be counted as Continuous Service in
                    determining the date he completes a year of Continuous
                    Service after his reemployment. A former Eligible Employee
                    who has previously completed one year of Continuous Service,
                    but who has not become a Member, will become a Member as of
                    the first Entry Date on or after he has both reached age 21
                    and has completed an Hour of Service upon his reemployment
                    as an Eligible Employee. An Eligible Employee who becomes a
                    Member and then incurs a 12-month period of Severance will
                    again become a Member on the date he first completes an Hour
                    of Service after his reemployment as an Eligible Employee.

                                       -3-


              6.    Effective January 1, 2002, Section 6.02 is amended to read

as follows:

              SECTION 6.02. STANDARD PAY CREDITS. Subject to Section 6.03, pay
credits will be credited to a member's Cash Balance Account as follows:

              (a)   Until he Separates from Service, a Member's Cash Balance
                    Account will be credited each Plan Year with a pay credit
                    equal to a points-related percentage of the Member's
                    Compensation for that Plan Year. A Member's points for a
                    Plan Year will be equal to the sum of the Member's age and
                    Years of Benefit Service as of the last day of the Plan
                    Year. For this purpose, the Plan will count only whole years
                    of age and Years of Benefit Service and will disregard
                    periods of less than a whole year. Pay credits will be
                    allocated as of the last day of the Plan Year based on the
                    following schedule:



                                         STANDARD SCHEDULE PERCENTAGE OF
                   POINTS                          COMPENSATION
                                                   
                    1-29                               2.5
                   30-34                               2.5
                   35-39                               3.0
                   40-44                               3.5
                   45-49                               4.0
                   50-54                               4.5
                   55-59                               5.5
                   60-64                               6.5
                   65-69                               7.5
                   70-74                               9.0
                   75-79                              10.5
                    80+                               12.0


              (b)   In the event a Member Separates from Service before the last
                    day of a Plan Year, he will not receive an allocation for
                    that Plan Year if he has completed less than 1,000 Hours of
                    Service during that Plan Year. If a Member completes 1,000
                    or more Hours of Service during that Plan Year, he will
                    receive a pay credit for that Plan Year based on his age and
                    Years of Benefit Service as of the date he Separates from
                    Service and the Compensation he earned during the Plan Year
                    up to the date of his Separation from Service.

              7.    Effective January 1, 2002, Section 6.03 is amended to read

as follows:

              SECTION 6.03. TRANSITION MEMBER PAY CREDITS. If a Member is a
Transition Member, his Cash Balance Account will not be credited under Section
6.02 but his Cash Balance Account will instead be credited with pay credits
under this Section as follows:

                                       -4-


              (a)   A Transition Member's Cash Balance Account will be credited
                    each Plan Year with a pay credit equal to a points-related
                    percentage of his Compensation for that Plan Year. A
                    Transition Member's points will be determined in accordance
                    with Section 6.02. A Transition Member's pay credits will be
                    allocated as of the last day of the Plan Year based on the
                    following schedule:



                                         TRANSITION SCHEDULE PERCENTAGE OF
                   POINTS                        COMPENSATION
                                                  
                   1-54                               8.0
                   55-59                              8.0
                   60-64                              8.0
                   65-69                              8.5
                   70-74                             10.5
                   75-79                             13.0
                    80+                              16.0


              (b)   In the event a Transition Member Separates from Service
                    before the last day of a Plan Year, he will not receive an
                    allocation for that Plan Year if he has completed less than
                    1,000 Hours of Service during that Plan Year. If a
                    Transition Member completes 1,000 or more Hours of Service
                    during that Plan Year, he will receive a pay credit for the
                    Plan Year based on his age and Years of Benefit Service as
                    of the date he Separates from Service and the Compensation
                    he earned during the Plan Year up to the date of his
                    Separation from Service.

              8.    Effective January 1, 2002, Section 6.04 is amended to read

as follows:

              SECTION 6.04. INTEREST CREDITS.

              (a)   Until his Annuity Starting Date, for the balance of the
                    Member's Cash Balance Account that is attributable to
                    amounts credited as of December 31, 2001 ("Pre-2002
                    Balance"), a Member's Cash Balance Account will be credited
                    each Plan Year with an interest credit of 8% of the Member's
                    Pre-2002 Balance as of the last day of the prior Plan Year.
                    Interest credits under this Subsection will be credited as
                    of the last day of the Plan Year, except that if a Member's
                    Annuity Starting Date is other than the last day of a Plan
                    Year, the Member's interest credit for the Plan Year in
                    which his Annuity Starting Date occurs (1) will be credited
                    to his Cash Balance Account on or before his Annuity
                    Starting Date and (2) will be equal to 8%, reduced as
                    described in the following sentence, of the Member's
                    Pre-2002 Balance as of the last day of the prior Plan Year.
                    A Member's reduced interest credit will be equal to 8%
                    multiplied by a fraction, the numerator of which is the
                    number of calendar months in the

                                       -5-


                    Plan Year up to but not including the month in which his
                    Annuity Starting Date occurs and the denominator of which is
                    12.

              (b)   Until his Annuity Starting Date, for that portion of a
                    Member's Cash Balance Account that is attributable to
                    amounts credited after December 31, 2001 ("Post-2002
                    Balance"), a Member's Cash Balance Account will be credited
                    each Plan Year with an interest credit equal to the average
                    of the 30-year U.S. Treasury rates, as of March 31, June 30,
                    and September 30 of the preceding Plan Year, rounded to the
                    nearest one-tenth (1/10) of one percent (1%), multiplied by
                    the Member's Post-2002 Balance as of the last day of the
                    prior Plan Year. If no 30-year U.S. Treasury rate is issued
                    for an applicable date, the Plan will substitute the
                    applicable interest rate specified by Code paragraph
                    417(e)(3) or its interpretive regulations. The minimum rate
                    of interest credit under this Subsection will be 6% and the
                    maximum rate will be 12%. Interest credits under this
                    Subsection will be credited as of the last day of the Plan
                    Year, except that if a Member's Annuity Starting Date is
                    other than the last day of the Plan Year, the Member's
                    interest credit for the Plan Year in which his Annuity
                    Starting Date occurs (1) will be credited to his Cash
                    Balance Account on or before his Annuity Starting Date and
                    (2) will be equal to the interest credit determined in the
                    first sentence of this Subsection for the Plan Year in which
                    the Member's Annuity Starting Date occurs, reduced as
                    described in the following sentence, multiplied by the
                    Member's Post-2002 Balance as of the last day of the prior
                    Plan Year. A Member's reduced interest credit will be equal
                    to the interest rate determined in the first sentence of
                    this Subsection for the Plan Year in which the Member's
                    Annuity Starting Date occurs, multiplied by a fraction, the
                    numerator of which is the number of calendar months in the
                    Plan Year up to but not including the month in which his
                    Annuity Starting Date occurs and the denominator of which is
                    12.

              9.    Effective January 1, 2001, Section 7.01 is amended to read

as follows:

              SECTION 7.01. NORMAL RETIREMENT BENEFITS. Subject to Section 7.05,
if a Member Separates from Service on or after his Normal Retirement Date, a
benefit equal to the value of his Cash Balance Account will be paid as follows:

              (a)   If the value of the balance of the Member's Cash Balance
                    Account is $5,000 or less on the date his benefits are
                    payable, which will be as soon as administratively feasible
                    after his Separation from Service, his benefit will be paid
                    to him in a lump sum cash payment.

              (b)   If the value of the Member's Cash Balance Account is greater
                    than $5,000 on the date his benefits would be payable, which
                    will be as soon as administratively feasible after his
                    Separation from Service, his benefit will be paid as
                    follows:

                                       -6-


                    (1)    If the Member is married on his Annuity Starting
                           Date, a benefit equal to the value of his Cash
                           Balance Account will be paid to him in the form of a
                           Qualified Joint and Survivor Annuity beginning as
                           soon as administratively feasible after his
                           Separation from Service, unless he waives this form
                           of payment and elects a lump sum cash payment in
                           accordance with Paragraphs (3) and (4). A Member may
                           elect to defer payment of his benefit to the first
                           day of any month occurring after the Member's
                           Separation from Service and on or before the Member's
                           Required Beginning Date.

                    (2)    If the Member is not married on his Annuity Starting
                           Date, a benefit equal to the value of his Cash
                           Balance Account will be paid to him in the form of a
                           Life Annuity beginning as soon as administratively
                           feasible after his Separation from Service, unless he
                           waives this form of benefit and elects a lump sum
                           cash payment in accordance with Paragraphs (3) and
                           (4). A Member may elect to defer payment of his
                           benefit to the first day of any month occurring after
                           the Member's Separation from Service and on or before
                           the Member's Required Beginning Date.

                    (3)    A Member may elect to waive the Qualified Joint and
                           Survivor Annuity or the Life Annuity, whichever is
                           applicable, and elect to receive the value of his
                           Cash Balance Account in a single lump sum cash
                           payment paid as of the first day of any month
                           occurring after the Member Separates from Service and
                           on or before the Member's Required Beginning Date.

                    (4)    A Member's election of a lump sum cash payment in
                           lieu of a Qualified Joint and Survivor Annuity or
                           Life Annuity must be made in writing and received by
                           the Committee during the Applicable Election Period.
                           If the Member is married, his Spouse must consent in
                           writing to his election. The Spouse's consent must be
                           irrevocable, must be made and received by the
                           Committee during the Applicable Election Period, must
                           acknowledge the effect of the consent and election,
                           and must be witnessed by a notary public or Plan
                           representative. If the Member establishes to the
                           satisfaction of the Committee that the Spouse's
                           consent cannot be obtained because there is no Spouse
                           or the Spouse cannot be located, the Spouse's consent
                           will be deemed to have been given. If a Member is
                           legally separated from his Spouse or has been
                           abandoned by his Spouse within the meaning of local
                           law, and the Member has a court order to that effect,
                           the Spouse's consent will not be required unless a
                           Qualified Domestic Relations Order provides
                           otherwise. Any consent will be valid only with
                           respect to the Spouse who signs the consent or, in
                           the event of a deemed

                                       -7-


                           consent, the designated Spouse. If a Member's Spouse
                           is legally incompetent to give consent, the Spouse's
                           legal guardian (even if the guardian is the Member)
                           may give consent. A Member may revoke a prior
                           election at any time prior to the commencement of his
                           benefits.

              10.   Effective January 1, 2002, a new Subsection 7.01(c) will be

added to the Plan to read as follows:

              (c)   When a Member continues in employment with the Employer
                    beyond his Normal Retirement Date, benefits will not begin
                    during that continued period of employment unless required
                    under Section 7.09. The Member will be sent a notification
                    described in ss. 2530.203-3(b)(4) of the Department of Labor
                    regulations, provided that the suspension of benefits notice
                    is limited to periods of service within the context of ss.
                    2530.203-3(c) of the Department of Labor regulations.

              11.   Effective January 1, 2001, Section 7.03 is amended to read

as follows:

              SECTION 7.03. OTHER TERMINATION BENEFITS. Subject to Section 7.05,
if a Member Separates from Service for any reason other than retirement,
disability, or death, and his benefit has become vested in accordance with
Subsection 5.02(b), his benefit is to be paid as follows:

              (a)   If the present value of the balance of the Member's Cash
                    Balance Account is $5,000 or less on the date his benefits
                    are payable, which is as soon as administratively feasible
                    after his Separation from Service occurs, a benefit equal to
                    the present value of his Cash Balance Account will be paid
                    to him in a single lump sum cash payment as soon as
                    administratively feasible after the last day of the Plan
                    Year in which his Separation from Service occurs.

              (b)   If the present value of the balance of the Member's Cash
                    Balance Account exceeds $5,000 on the date his benefits are
                    payable, which is as soon as administratively feasible after
                    his Separation from Service occurs, then, subject to 7.16, a
                    benefit equal to the present value of his Cash Balance
                    Account will be paid as follows:

                    (1)    If the Member is married on his Annuity Starting
                           Date, his benefit will be paid to him in the form of
                           a Qualified Joint and Survivor Annuity beginning on
                           the first day of the month coinciding with or next
                           following the date on which he reaches age 55, unless
                           he waives this form of benefit and elects a lump sum
                           cash payment in accordance with Paragraph 3. A Member
                           may elect to defer payment of his benefit to the
                           first day of any month occurring after the Member
                           reaches age 55 and on or before the Member's Required
                           Beginning Date.

                                       -8-


                    (2)    If the Member is not married on his Annuity Starting
                           Date, a benefit equal to the present value of his
                           Cash Balance Account will be paid to him in the form
                           of a Life Annuity beginning on the first day of the
                           month coinciding with or next following the date on
                           which he reaches age 55, unless he waives this form
                           of payment and elects a lump sum cash payment. A
                           Member may elect to defer payment of his benefit to
                           the first day of any month occurring after the Member
                           reaches age 55 and on or before the Member's Required
                           Beginning Date.

                    (3)    A Member may waive the Qualified Joint and Survivor
                           Annuity or the Life Annuity, whichever is applicable,
                           and elect to receive his benefit in a single lump sum
                           cash payment paid as of the last day of any month
                           occurring after the Member reaches age 55 and on or
                           before the Member's Required Beginning Date. A
                           Member's election of an optional form of benefit must
                           comply with the requirements of Section 7.01(b)(4).

              12.   Effective January 1, 2002, a new Subsection 7.09(k) is added

to the Plan to read as follows:

              (k)   With respect to distributions under the Plan made for
                    calendar years beginning on or after January 1, 2002, the
                    Plan will apply the minimum distribution requirements of
                    Code paragraph 401(a)(9) in accordance with the regulations
                    under paragraph 401(a)(9) that were proposed on January 17,
                    2001 (the "2001 Proposed Regulations"), notwithstanding any
                    provision of the Plan to the contrary. This amendment will
                    continue in effect until the last calendar year beginning
                    before the effective date of the final regulations issued
                    under Code paragraph 401(a)(9) or such other date as may be
                    published by the Internal Revenue Service.

              13.   Effective January 1, 2001, a new Section 7.16 is added to

read as follows:

              SECTION 7.16. ANNUAL DETERMINATIONS OF CASH BALANCE ACCOUNTS. For
purposes of Sections 7.01, 7.02, 7.03 and 7.04, the determination of whether the
present value of a Member's Cash Balance Account is $5,000 or less will be made
at the time the benefit is first payable and again once each Plan Year after the
benefit is first payable. If at any time a determination is made that the
present value of a Member's Cash Balance Account is $5,000 or less, the benefit
will be paid to the Member or his or her Beneficiary in a lump sum cash payment
as soon as administratively feasible after the determination.

              14.   A new Article XV is added to the Plan to read as follows:

                                       -9-


                                   ARTICLE XV
                        AMENDMENT TO THE PLAN FOR EGTRRA

              SECTION 15.01. ADOPTION AND EFFECTIVE DATE OF AMENDMENT. This
Article of the Plan is adopted to reflect certain provisions of the Economic
Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA"). This Article is
intended as good faith compliance with the requirements of EGTRRA and is to be
construed in accordance with EGTRRA and guidance issued thereunder. Except as
otherwise provided, this Article will be effective as of the first day of the
first Plan Year beginning after December 31, 2001.

              SECTION 15.02. SUPERSESSION OF INCONSISTENT PROVISIONS. This
Article will supersede the provisions of the Plan to the extent those provisions
are inconsistent with the provisions of this Article.

              SECTION 15.03. LIMITATIONS ON BENEFITS.

              (a)   EFFECTIVE DATE. This Section will be effective for
                    limitation years ending after December 31, 2001.

              (b)   EFFECT ON MEMBERS. Benefit increases resulting from the
                    increase in the limitations of Code subsection 415(b) will
                    be provided to all Employees participating in the Plan who
                    have one Hour of Service on or after January 1, 2002.

              (c)   DEFINITIONS.

                    (1)    DEFINED BENEFIT DOLLAR LIMITATION. The "defined
                           benefit dollar limitation" is $160,000, as adjusted,
                           effective January 1 of each year, under Code
                           subsection 415(d) in such manner as the Secretary
                           prescribes, and payable in the form of a Life
                           Annuity. A limitation as adjusted under Code
                           subsection 415(d) applies to limitation years ending
                           with or within the calendar year for which the
                           adjustment applies.

                    (2)    MAXIMUM PERMISSIBLE BENEFIT. The "maximum permissible
                           benefit" is the lesser of the defined benefit dollar
                           limitation or the defined benefit compensation
                           limitation (both adjusted where required, as provided
                           in (A) and, if applicable, in (B) or (C) below).

                           (A)     If the Member has fewer than 10 years of
                                   participation in the Plan, the defined
                                   benefit dollar limitation will be multiplied
                                   by a fraction, (i) the numerator of which is
                                   the number of years (or part thereof) of
                                   participation in the Plan and (ii) the
                                   denominator of which is 10. In the case of a
                                   Member who has fewer than 10 Years of Benefit
                                   Service with the Employer, the defined
                                   benefit compensation limitation will be
                                   multiplied by a fraction, (i) the numerator

                                      -10-


                                   of which is the number of Years (or part
                                   thereof) of Benefit Service with the Employer
                                   and (ii) the denominator of which is 10.

                           (B)     If the benefit of a Member begins prior to
                                   age 62, the defined benefit dollar limitation
                                   applicable to the Member at such earlier age
                                   is an annual benefit payable in the form of a
                                   Life Annuity beginning at the earlier age
                                   that is the actuarial equivalent of the
                                   defined benefit dollar limitation applicable
                                   to the Member at age 62 (adjusted under (A)
                                   above, if required). The defined benefit
                                   dollar limitation applicable at an age prior
                                   to age 62 is determined as the lesser of (i)
                                   the actuarial equivalent (at such age) of the
                                   defined benefit dollar limitation computed
                                   using the interest rate and mortality table
                                   (or other tabular factor) specified in the
                                   definitions of "Actuarial Equivalent" and
                                   "Applicable Percentage" at Section 2.01 of
                                   the Plan and (ii) the actuarial equivalent
                                   (at such age) of the defined benefit dollar
                                   limitation computed using a 5 percent
                                   interest rate and the applicable mortality
                                   table as defined in the definitions of
                                   "Actuarial Equivalent" at Section 2.01 of the
                                   Plan. Any decrease in the defined benefit
                                   dollar limitation determined in accordance
                                   with this Paragraph (B) will not reflect a
                                   mortality decrement if benefits are not
                                   forfeited upon the death of the Member. If
                                   any benefits are forfeited upon death, the
                                   full mortality decrement is taken into
                                   account.

                           (C)     If the benefit of a Member begins after the
                                   Member attains age 65, the defined benefit
                                   dollar limitation applicable to the Member at
                                   the later age is the annual benefit payable
                                   in the form of a Life Annuity beginning at
                                   the later age that is actuarially equivalent
                                   to the defined benefit dollar limitation
                                   applicable to the Member at age 65 (adjusted
                                   under (A) above, if required). The actuarial
                                   equivalent of the defined benefit dollar
                                   limitation applicable at an age after age 65
                                   is determined as (i) the lesser of the
                                   actuarial equivalent (at such age) of the
                                   defined benefit dollar limitation computed
                                   using the interest rate and mortality table
                                   (or other tabular factor) specified in the
                                   definitions of "Actuarial Equivalent" and
                                   "Applicable Percentage" at Section 2.01 of
                                   the Plan and (ii) the actuarial equivalent
                                   (at such age) of the defined benefit dollar
                                   limitation computed using a 5 percent
                                   interest rate assumption and the applicable
                                   mortality table as defined in the definition
                                   of "Actuarial Equivalent" at Section 2.01 of
                                   the Plan. For

                                      -11-


                                   these purposes, mortality between age 65 and
                                   the age at which benefits commence will be
                                   ignored.

              SECTION 15.04.  INCREASE IN COMPENSATION LIMIT.

              (a)   INCREASE IN LIMIT. The annual Compensation of each Member
         taken into account in determining benefit accruals in any Plan Year
         beginning after December 31, 2001, will not exceed $200,000. For
         purposes of determining Compensation and benefit accruals in a Plan
         Year beginning after December 31, 2001, Compensation for any prior
         determination period will be limited to $150,000 for any Plan Year
         beginning in 1996 or earlier; $160,000 for any Plan Year beginning in
         1997, 1998, or 1999; and $170,000 for any Plan Year beginning in 2000
         or 2001.

              (b)   COST-OF-LIVING ADJUSTMENT. The $200,000 limit on annual
         Compensation in Paragraph (a) will be adjusted for cost-of-living
         increases in accordance with Code subparagraph 401(a)(17)(B). The
         cost-of-living adjustment in effect for a calendar year applies to
         annual Compensation for the Plan Year that begins with or within such
         calendar year.

              SECTION 15.05. MODIFICATION OF TOP-HEAVY RULES.

              (a)   EFFECTIVE DATE. This Section will apply for purposes of
         determining whether the Plan is a Top-Heavy Plan under Code subsection
         416(g) for Plan Years beginning after December 31, 2001, and whether
         the Plan satisfies the minimum benefits requirements of Code subsection
         416(g) for such years. This Section amends Article XIII of the Plan.

              (b)   DETERMINATION OF TOP-HEAVY STATUS.

                    (1)    KEY EMPLOYEE. "Key Employee" means any Employee or
                           former Employee (including any deceased Employee) who
                           at any time during the Plan Year that includes the
                           Determination Date was an officer of the Employer
                           having annual Compensation greater than $130,000 (as
                           adjusted under Code paragraph 416(i)(1) for Plan
                           Years beginning after December 31, 2002), a 5-percent
                           owner of the Employer, or a 1-percent owner of the
                           Employer having annual Compensation of more than
                           $150,000. For this purpose, annual Compensation means
                           compensation within the meaning of Code paragraph
                           415(c)(3). The determination of who is a key employee
                           will be made in accordance with Code paragraph
                           416(i)(1) and the applicable regulations and other
                           guidance of general applicability issued thereunder.

                    (2)    DETERMINATION OF PRESENT VALUES AND AMOUNTS. This
                           Paragraph (2) will apply for purposes of determining
                           the present values of accrued benefits and the
                           amounts of account balances of Employees as of the
                           Determination Date.

                                      -12-


                           (A)     DISTRIBUTIONS DURING YEAR ENDING ON THE
                                   DETERMINATION DATE. The present values of
                                   accrued benefits and the amounts of account
                                   balances of an Employee as of the
                                   Determination Date will be increased by the
                                   distributions made with respect to the
                                   Employee under the Plan and any plan
                                   aggregated with the Plan under Code paragraph
                                   416(g)(2) during the 1-year period ending on
                                   the Determination Date. The preceding
                                   sentence will also apply to distributions
                                   under a terminated plan which, had it not
                                   been terminated, would have been aggregated
                                   with the Plan under Code clause
                                   416(g)(2)(A)(i). In the case of a
                                   distribution made for a reason other than
                                   Separation from Service, death, or
                                   Disability, this provision will be applied by
                                   substituting a 5-year period for the 1-year
                                   period.

                           (B)     EMPLOYEES NOT PERFORMING SERVICES DURING YEAR
                                   ENDING ON THE DETERMINATION DATE. The accrued
                                   benefits and accounts of any individual who
                                   has not performed services for the Employer
                                   during the 1-year period ending on the
                                   Determination Date will not be taken into
                                   account.

                           (C)     MINIMUM BENEFITS. For purposes of satisfying
                                   the minimum benefit requirements of Code
                                   paragraph 416(c)(1) and the Plan, in
                                   determining years of service with the
                                   Employer, any service with the Employer will
                                   be disregarded to the extent that such
                                   service occurs during a Plan Year when the
                                   Plan benefits (within the meaning of Code
                                   subsection 410(b)) no Key Employee or former
                                   Key Employee.

              SECTION 15.06. DIRECT ROLLOVERS OF PLAN DISTRIBUTIONS.

              (a)   EFFECTIVE DATE. This Section will apply to distributions
         made after December 31, 2001.

              (b)   MODIFICATION OF DEFINITION OF ELIGIBLE RETIREMENT PLAN. For
         purposes of the direct rollover provisions in Section 7.14 of the Plan,
         an Eligible Retirement Plan also means an annuity contract described in
         Code subsection 403(b) and an eligible plan under Code subsection
         457(b), which is maintained by a state, political subdivision of a
         state, or any agency or instrumentality of a state or political
         subdivision of a state and which agrees to separately account for
         amounts transferred into such plan from this Plan. The definition of
         Eligible Retirement Plan will also apply in the case of a distribution
         to a surviving Spouse, or to a Spouse or former Spouse who is the
         alternate payee under a Qualified Domestic Relations Order.

                                      -13-


              This Third Amendment of ESI Pension Plan is executed by its duly

authorized officers this 7th day of February , 2001.

                                                  ITT EDUCATIONAL SERVICES, INC.

                                                  By: /s/ Jenny Yonce
                                                     ---------------------------
                                                           (Signature)

                                                       Jenny Yonce
                                                     --------------------------
                                                           (Printed)

                                                      Mgr. Benefits & HRIS
                                                     --------------------------
                                                           (Title)

ATTEST:

  /s/ Jill Bradley
- ---------------------------------
(Signature)

 Jill Bradley
- ---------------------------------
(Printed)

 Retirement Specialist
- ---------------------------------
(Title)

                                      -14-

EX-10.30

                                                                   Exhibit 10.30








                                 ESI 401(k) PLAN



                                 ESI 401(k) PLAN

                                TABLE OF CONTENTS



                                                                                                                PAGE
                                                                                                              
ARTICLE ONE  INTRODUCTION AND PURPOSE.............................................................................1

ARTICLE TWO  DEFINITIONS..........................................................................................1

ARTICLE THREE  MEMBERSHIP....................................................................................... 13
         3.1      Membership.....................................................................................13
         3.2      Rehired Member.................................................................................14
         3.3      Transferred Members............................................................................14
         3.4      Termination of Membership......................................................................14

ARTICLE FOUR  MEMBER CONTRIBUTIONS...............................................................................14
         4.1      Member Pre-Tax Savings.........................................................................14
         4.2      Change in Contributions........................................................................17
         4.3      Suspension and Resumption of Member Pre-Tax Savings............................................17
         4.4      No After-Tax Contributions.....................................................................17
         4.5      Vesting of Member's and Deferred Member's Contributions........................................17
         4.6      Rollover Contributions.........................................................................17
         4.7      Contributions During Period of Military Leave..................................................18

ARTICLE FIVE  COMPANY CONTRIBUTIONS..............................................................................18
         5.1      Matching Company Contributions.................................................................18
         5.2      Retirement Contributions.......................................................................19
         5.3      Mode of Payment and Valuation of ESI Stock Contributed.........................................19
         5.4      Vesting........................................................................................20
         5.5      Forfeitures....................................................................................21

ARTICLE SIX   LIMITATIONS ON CONTRIBUTIONS.......................................................................21
         6.1      Actual Deferral Percentage Test................................................................21
         6.2      Actual Contribution Percentage Test............................................................23
         6.3      Aggregate Contribution Limitation..............................................................24
         6.4      Additional Discrimination Testing Provisions...................................................24
         6.5      Maximum Annual Additions.......................................................................25

ARTICLE SEVEN   INVESTMENT OF CONTRIBUTIONS......................................................................27
         7.1      Investment Funds...............................................................................27
         7.2      Investment of Contributions....................................................................27
         7.3      Change in Future Contribution Investment Election..............................................28
         7.4      Redistribution of Accounts Among the Funds.....................................................28
         7.5      Investment Option at Age 55....................................................................28
         7.6      Voting of ESI Stock............................................................................29
         7.7      Limitations Imposed by Contract................................................................29
         7.8      Responsibility for Investments.................................................................29


                                       -i-


                                                                                                              
ARTICLE EIGHT   CREDITS TO MEMBERS' ACCOUNTS, VALUATION, AND ALLOCATION OF ASSETS................................30
         8.1      Pre-Tax Savings and Rollover Contributions.....................................................30
         8.2      Matching Company Contributions.................................................................30
         8.3      Retirement Contributions.......................................................................30
         8.4      Credits to Members' Accounts...................................................................30
         8.5      Valuation of Assets............................................................................30
         8.6      Allocation of Assets...........................................................................30
         8.7      Annual Statements..............................................................................30
         8.8      Valuation Dates................................................................................30

ARTICLE NINE  WITHDRAWALS PRIOR TO TERMINATION OF  EMPLOYMENT....................................................31
         9.1      General Conditions for Withdrawals.............................................................31
         9.2      Non-Hardship Withdrawal Prior to Age 59 1/2....................................................31
         9.3      Hardship Withdrawal Prior to Age 59 1/2........................................................31
         9.4      Withdrawals After age 59 1/2...................................................................33
         9.5      Ordering of Withdrawals........................................................................33
         9.6      Death After Withdrawal Election................................................................33
         9.7      Direct Rollover................................................................................34
         9.8      Retirement Contribution Account................................................................34

ARTICLE TEN   LOANS..............................................................................................34
         10.1     General Conditions for Loans...................................................................34
         10.2     Amounts Available for Loans....................................................................34
         10.3     Account Ordering for Loans.....................................................................35
         10.4     Interest Rate for Loans........................................................................35
         10.5     Term and Repayment of Loan.....................................................................35
         10.6     Frequency of Loan Requests.....................................................................36
         10.7     Prepayment of Loans............................................................................36
         10.8     Outstanding Loan Balance at Termination of Employment..........................................36
         10.9     Loan Default During Employment.................................................................36
         10.10    Incorporation by Reference.....................................................................36
         10.11    Death after Loan Application...................................................................36
         10.12    Military Leave.................................................................................36

ARTICLE ELEVEN  DISTRIBUTIONS....................................................................................37
         11.1     Commencement of Payments.......................................................................37
         11.2     Forms and Methods of Distribution..............................................................38
         11.3     Small Benefits.................................................................................40
         11.4     Death of Beneficiary...........................................................................40
         11.5     Proof of Death and Right of Beneficiary or Other Person........................................40
         11.6     Restoration of Prior Forfeiture................................................................40
         11.7     Direct Rollover of Certain Distributions.......................................................41
         11.8     Elective Transfers From Plan...................................................................42
         11.9     Elective Transfer to Plan......................................................................43
         11.10    Waiver of Notice Period........................................................................43

ARTICLE TWELVE  MANAGEMENT OF FUNDS..............................................................................44
         12.1     ESI Employee Benefit Plan Administration and Investment Committee..............................44



                                      -ii-


                                                                                                              
         12.2     Trust Fund.....................................................................................44
         12.3     Reports to Members and Deferred Members........................................................44
         12.4     Fiscal Year....................................................................................45

ARTICLE THIRTEEN   ADMINISTRATION OF PLAN........................................................................45
         13.1     Appointment of Committee.......................................................................45
         13.2     Powers of Committee............................................................................45
         13.3     Committee Action...............................................................................46
         13.4     Compensation...................................................................................46
         13.5     Committee Liability............................................................................46

ARTICLE FOURTEEN   AMENDMENT AND TERMINATION.....................................................................47
         14.1     Amendment......................................................................................47
         14.2     Termination of Plan............................................................................47
         14.3     Distribution of Accounts Upon a Sale of Assets or a Sale of a Subsidiary.......................48
         14.4     Merger or Consolidation of Plan................................................................48
         14.5     Transfer from ITT Plan.........................................................................48

ARTICLE FIFTEEN   TENDER OFFER...................................................................................49
         15.1     Applicability..................................................................................49
         15.2     Instructions to Trustee........................................................................49
         15.3     Trustee Action on Member Instructions..........................................................49
         15.4     Action With Respect to Members Not Instructing the Trustee or not Issuing Valid Instructions...49
         15.5     Investment of Plan Assets after Tender Offer...................................................50

ARTICLE SIXTEEN   GENERAL AND ADMINISTRATIVE PROVISIONS..........................................................50
         16.1     Relief from Liability..........................................................................50
         16.2     Payment of Expenses............................................................................50
         16.3     Source of Payment..............................................................................50
         16.4     Inalienability of Benefits.....................................................................51
         16.5     Prevention of Escheat..........................................................................51
         16.6     Return of Contributions........................................................................51
         16.7     Facility of Payment............................................................................52
         16.8     Information....................................................................................52
         16.9     Exclusive Benefit Rule.........................................................................52
         16.10    No Right to Employment.........................................................................52
         16.11    Uniform Action.................................................................................52
         16.12    Headings.......................................................................................53
         16.13    Construction...................................................................................53

ARTICLE SEVENTEEN  TOP-HEAVY PROVISIONS..........................................................................53
         17.1     Definitions....................................................................................53
         17.2     Determination of Top-Heavy Status..............................................................53
         17.3     Minimum Requirements...........................................................................54

ARTICLE EIGHTEEN  AMENDMENT OF THE PLAN FOR EGTRRA...............................................................54
         18.1     Adoption and Effective Date of Amendment.......................................................54
         18.2     Supersession of Inconsistent Provisions........................................................54



                                      -iii-


                                                                                                              
         18.3     Limitation on Contributions....................................................................54
         18.4     Increase in Compensation Limit.................................................................55
         18.5     Modification of Top-Heavy Rules................................................................55
         18.6     Direct Rollovers of Plan Distributions.........................................................56
         18.7     Rollovers From Other Plans.....................................................................57
         18.8     Rollovers Disregarded in Involuntary Cash-Outs.................................................57
         18.9     Repeal of Multiple Use Test....................................................................58
         18.10    Elective Deferrals:  Contribution Limitation...................................................58
         18.11    Catch-Up Contributions.........................................................................58
         18.12    Suspension Period Following Hardship Distribution..............................................58
         18.13    Distribution Upon Severance from Employment....................................................58



                                      -iv-


                                 ESI 401(k) PLAN

                                   ARTICLE ONE
                            INTRODUCTION AND PURPOSE

The name of this Plan is the ESI 401(k) Plan (the "Plan"). The Plan is a
continuation and complete restatement of the Plan originally established
effective May 16, 1998. Except as otherwise provided in the Plan, the effective
date of the Plan, as restated, is May 16, 1998. The Plan was established to
benefit employees of ITT Educational Services, Inc. ("ESI"). Benefits under the
Plan are comprised of benefits accrued under the Plan and benefits transferred
from the ITT 401(k) Retirement Savings Plan (the "ITT Plan") to the Plan.

Participation in the Plan is available, as set forth in this Plan, to eligible
employees of ESI and of such associated companies of ESI as may become
participating companies under the Plan.

The Plan is a defined contribution plan under the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), and as such, is subject to the
provisions of Titles I, II, and III, but not Title IV, of ERISA. Titles I, II,
and III of ERISA include requirements for covered plans governing reporting,
disclosure, participation, vesting, fiduciary responsibility, and enforcement.
Title IV provides for plan termination insurance by the Federal government's
Pension Benefit Guaranty Corporation. This insurance does not apply to defined
contribution plans such as this Plan.

PURPOSE OF THE PLAN:

The Plan is designed to:

- -        supplement retirement income by encouraging employees to save on a
         regular and long-term basis;

- -        provide employees with ownership of ESI securities;

- -        provide additional financial resources for emergencies and financial
         hardships; and

- -        provide employees additional incentives to continue their careers with
         ESI.

The Company may make contributions without regard to the existence or the amount
of current and accumulated earnings and profits. Notwithstanding the foregoing,
however, this Plan is designed to qualify as a profit sharing plan for all
purposes of the Code.

                                   ARTICLE TWO
                                   DEFINITIONS

2.1      "ACCOUNTS" shall mean, with respect to any Member or Deferred Member,
         his or her Pre-Tax Investment Account, his or her After-Tax Investment
         Account, his or her Rollover Account, his or her Matching Contribution
         Account, his or her Retirement Contribution Account, his or her ESOP
         Account, and his or her ITT Floor Contribution Account.

2.2      "ACTUAL CONTRIBUTION PERCENTAGE" shall mean, with respect to a
         specified group of Employees referred to in Sections 6.2 and 6.3, the
         average of the ratios, calculated



         separately for each Employee in that group, of (a) the Matching Company
         Contributions made for a Plan Year (excluding any Matching Company
         Contributions forfeited under the provisions of Sections 4.1 and 6.1),
         to (b) the Employee's Statutory Compensation for that Plan Year
         provided that, upon the direction of the Plan Committee, Statutory
         Compensation for a Plan Year shall only be counted if received during
         the period an Employee is a Member. The Actual Contribution Percentage
         shall be computed to the nearest one one-hundredth of one percent.

2.3      "ACTUAL DEFERRAL PERCENTAGE" shall mean, with respect to a specified
         group of Employees referred to in Sections 6.1 and 6.3, the average of
         the ratios, calculated separately for each Employee in that group, of
         (a) the sum of the Pre-Tax Savings made on the Employee's behalf for a
         Plan Year (including Pre-Tax Savings returned to a Highly-Compensated
         Employee under Section 4.1(c) and Pre-Tax Savings returned to any
         Employee pursuant to Section 4.1(d), (b) the Employee's Statutory
         Compensation for that Plan Year. Upon the direction of the Committee,
         Statutory Compensation for a Plan Year shall only be counted if
         received during the period an Employee is a Member. Such Actual
         Deferral Percentage shall be computed to the nearest one one-hundredth
         of one percent of the Employee's Statutory Compensation.

2.4      "ADJUSTMENT FACTOR" shall mean the cost-of-living adjustment factor
         prescribed by the Secretary of the Treasury under Section 415(d) of the
         Code for calendar years beginning on or after January 1, 1988, and
         applied to such items and in such manner as the Secretary shall
         provide.

2.5      "ANNUAL DOLLAR LIMIT" shall mean $150,000, as adjusted by the Secretary
         of the Treasury to reflect cost of living adjustments in accordance
         with Section 401(a)(17)(B) of the Code.

2.6      "ASSOCIATED COMPANY" shall mean any subsidiary or other affiliate of
         ESI that is (a) a component member of a controlled group of
         corporations (as defined in Section 414(b) of the Code) that includes
         ESI as a component member, (ii) any trade or business under common
         control (as defined in Section 414(c) of the Code) with ESI, (iii) any
         organization (whether or not incorporated) that is a member of an
         affiliated service group (as defined in Section 414(m) of the Code)
         that includes ESI, or (iv) any other entity required to be aggregated
         with ESI pursuant to regulations under Section 414(o) of the Code.
         Notwithstanding the foregoing, for purposes of the preceding sentence
         and Section 6.5 of the Plan, the definitions of Section 414(b) and (c)
         of the Code shall be modified as provided in Section 415(h) of the
         Code.

2.7      "AFTER-TAX INVESTMENT ACCOUNT" shall mean that portion of the Trust
         Fund that, with respect to any Member or Deferred Member, is
         attributable to (i) basic and supplemental after-tax contributions made
         to the ITT Plan prior to October 1, 1996, and transferred to the Trust
         Fund pursuant to Section 14.5, (ii) any amounts transferred from the
         ITT Plan to the Trust Fund attributable to any after-tax contributions
         made by the Member or Deferred Member to a qualified Plan and
         transferred to the ITT Plan pursuant to a Prior Plan Transfer, and
         (iii) any investment earnings and gains or losses on any of the
         aforementioned amounts.

                                       -2-


2.8      "BASIC PRE-TAX SAVINGS" shall mean the contributions made on a Member's
         behalf that are credited to his Pre-Tax Investment Account in
         accordance with Section 4.1(a)(iv)(1).

2.9      "BENEFICIARY" shall mean the beneficiary or beneficiaries designated
         from time to time by the Member or Deferred Member, on a form made
         available by the Committee for such purpose, to receive, in the event
         of the Member's or Deferred Member's death, the value of his or her
         Accounts at the time of his or her death. Except as hereinafter
         provided, in the case of a Member or Deferred Member who is married,
         the sole Beneficiary shall be the Member's or Deferred Member's spouse
         unless the spouse consents in writing on a form witnessed by a notary
         public to the designation of another person as Beneficiary. In the case
         of a Member or Deferred Member who incurs a divorce under applicable
         state law, the Member's or Deferred Member's designation of Beneficiary
         shall remain valid unless otherwise provided in a Qualified Domestic
         Relations Order or unless the Member or Deferred Member changes his or
         her Beneficiary or is subsequently remarried.

         If no valid beneficiary designation is in effect at the time of death
         of the Member, or if no person, persons, or entity so designated
         survives the Member, the Member's surviving spouse, if any, shall be
         the Beneficiary; otherwise the Beneficiary shall be the personal
         representative of the estate of the Member.

2.10     "BOARD OF DIRECTORS" shall mean the Board of Directors of ESI or of any
         successor to ESI by merger, purchase or otherwise.

2.11     "BREAK IN SERVICE" shall mean an event that shall occur as of the
         Member's Severance Date, if he or she is not reemployed by the Company
         or an Associated Company within one year after his or her Severance
         Date. However, if an Employee is absent from work immediately following
         his or her active employment, irrespective of whether the Employee's
         employment is terminated, because of a Parental Leave, or a FMLA Leave,
         a Break in Service shall occur only if the Member does not return to
         work within two years of his or her Severance Date. A Break in Service
         shall not occur during an approved leave of absence or during a period
         of military service that is included in the Employee's Service pursuant
         to Section 2.57. Notwithstanding the foregoing, solely for purposes of
         determining service for eligibility purposes, a Break in Service of one
         year shall occur if an employee who is employed on a temporary or less
         than full time basis does not complete more than 500 Hours of Service
         in the 12 month period beginning on the date on which he or she first
         completes an Hour of Service or any Plan Year beginning thereafter.

2.12     "CODE" means the Internal Revenue Code of 1986, as amended from time to
         time, and interpretive regulations. References to any section of the
         Code shall include any successor provision thereto.

2.13     "COMMITTEE" shall mean the committee established hereunder for the
         purposes of administering the Plan as provided in Article 13.

2.14     "COMPANY" shall mean:

                                       -3-


         (a)   ESI and any other entity succeeding to the business of ESI that
               assumes the obligations of the Company as specified in the Plan,
               with respect to its employees; and

         (b)   any Participating Employer with respect to its Employees.

         When used herein, the term Company shall collectively include ESI and
         any Participating Employer.

2.15     "COMPANY MATCHING CONTRIBUTION ACCOUNT" shall mean that portion of the
         Trust Fund that, with respect to any Member or Deferred Member, is
         attributable to (i) any Matching Company Contributions made on his or
         her behalf under this Plan, (ii) any amounts attributable to matching
         contributions made on his or her behalf and transferred to the Trust
         Fund from the ITT Plan, and (iii) any investment earnings and gains or
         losses on any of the aforementioned amounts.

2.16     "CONTINUOUS SERVICE" shall mean the aggregate period of time during
         which the employment relationship exists between an Employee and ESI or
         an Associated Company, determined as follows:

         (a)   The period of time beginning on the date an Employee first
               performs an Hour of Service and ending on the Employee's
               Severance from Service date.

         (b)   Any Period of Severance by reason of a quit, discharge or
               retirement, of less than 12 months; provided, however, that if an
               Employee is absent from service for a reason other than a quit,
               discharge, or retirement and subsequently incurs a Severance from
               Service as a result of a quit, discharge, or retirement, the
               Period of Severance shall be credited only if the Employee
               returns to ESI's or the Associated Company's service on or before
               the first anniversary of the date the Employee was first absent
               from service.

         (c)   Any period of time beginning on the date the Employee first
               performs an Hour of Service after a Period of Severance and
               ending on the date the Employee again incurs a Severance from
               Service.

         (d)   For purposes of aggregating periods of Continuous Service, 12
               months of completed service shall equal one year of Continuous
               Service, and 30 days of completed service shall equal one month
               of Continuous Service.

2.17     "DEFERRED MEMBER" shall mean (i) a Member who has terminated employment
         with the Company and all Associated Companies and whose Vested Share
         will be deferred in accordance with Section 11.1, (ii) the spouse
         Beneficiary of a deceased Member or Deferred Member, or (iii) an
         alternate payee designated as such pursuant to a Qualified Domestic
         Relations Order.

2.18     "DISABILITY" shall mean, with respect to a Member, the total disability
         of the Member that would result in the Member qualifying for benefits
         under the LTD Plan had the Member been a participant in the LTD Plan.
         If a Member participates in the LTD Plan, then he or she shall be
         deemed totally disabled as determined by the insurance company

                                       -4-


         that administers the LTD Plan. If a Member does not participate in the
         LTD Plan, then he or she shall be deemed to be totally disabled if he
         or she would have been deemed totally disabled had he or she
         participated in the LTD Plan, as determined by the Committee. For
         purposes of this Plan, the effective date of disability shall be the
         later of the date of disability as defined in the LTD Plan or the date
         on which the applicable insurance company or Committee issues its
         determination of total disability.

2.19     "EFFECTIVE DATE" shall mean May 16, 1998.

2.20     "EMPLOYEE" shall mean an employee of the Company who is classified as a
         U.S. salaried payroll employee of the Company, who is paid from a
         payroll maintained in the continental United States, and who receives
         regular and stated compensation, other than a pension or a retainer. An
         Employee shall also mean a Non-U.S. Citizen Employee. However, except
         as the Board of Directors or the Committee, pursuant to authority
         delegated to it by the Board of Directors, may otherwise provide on a
         basis uniformly applicable to all persons similarly situated, and,
         except as specified in Section 2.39, no person shall be an Employee for
         purposes of the Plan:

         (a)   who is covered for current service under a non-U.S. pension or
               savings plan of the Company or any Associated Company, or any
               other plan specified by the Board of Directors from time to time;

         (b)   whose terms and conditions of employment are determined by a
               collective bargaining agreement with the Company that does not
               make this Plan applicable to him or her;

         (c)   who is a "leased employee";

         (d)   who is a non-resident alien employed by the Company and who does
               not receive earned income that constitutes income from sources
               within the United States;

         (e)   who is classified as an "independent contractor" or "consultant"
               by the Company, regardless of his or her classification by the
               IRS for tax withholding purposes;

         (f)   effective for Plan Years ending before January 1, 2000, who is a
               college work study student; or

         (g)   effective January 1, 2000, who is a federal work study student.

         For purposes of (c) a "leased employee" is any person who performs
         services for another person, the "recipient," but who is not an
         employee of the recipient if (1) the services are provided pursuant to
         an agreement between the recipient and any other person, (2) the person
         has performed the services for the recipient (or for the recipient and
         related persons) on a substantially full-time basis for a period of at
         least one year, and (3) the services are performed under the primary
         direction and control of the recipient. A leased employee will not be
         considered an employee of the recipient if (1) the employee is covered
         by a money purchase pension plan providing a non-integrated employer
         contribution rate of at least 10% of Statutory Compensation, immediate
         participation, and

                                       -5-


         full and immediate vesting and (2) leased employees do not constitute
         more than 20% of the recipient's non-highly compensated workforce.

2.21     "ENROLLMENT DATE" shall mean the first day of the first payroll period
         coincident with or next following the Effective Date with respect to a
         Member described in Section 3.1(a) or the first day of the first
         payroll period of the first complete month following the date a Member
         completes the eligibility requirements described in Section 3.1(b).

2.22     "ERISA" shall mean the Employee Retirement Income Security Act of 1974,
         as amended, and interpretive regulations.

2.23     "ESI" shall mean ITT Educational Services, Inc., a Delaware corporation

2.24     "ESI STOCK" shall mean common stock of ESI.

2.25     "ESOP ACCOUNT" shall mean that portion of the Trust Fund that, with
         respect to any Member or Deferred Member, is attributable to
         allocations made under the employee stock ownership plan portion of the
         Pre-Distribution ITT Plan.

2.26     "FMLA LEAVE" shall mean an Employee's absence from work to care for a
         spouse or an immediate family member with a serious illness or for the
         Employee's own illness pursuant to the Family and Medical Leave Act of
         1993, as amended, and interpretive regulations.

2.27     "FUND" shall mean each separate investment fund in which contributions
         to the Plan are invested in accordance with Article Seven.

2.28     "HARDSHIP" shall mean an immediate and heavy financial need that is
         determined by the Committee to satisfy all of the conditions specified
         in Section 9.3(c) and (d).

2.29     "HIGHLY-COMPENSATED EMPLOYEE" shall mean:

         (a)   With respect to a Plan Year, any employee of the Company or an
               Associated Company (whether or not eligible for membership in the
               Plan) who

               (i)   was a five percent owner for that Plan Year or the prior
                     Plan Year, or

               (ii)  for the preceding Plan Year received Statutory Compensation
                     in excess of $80,000 multiplied by the Adjustment Factor.

         (b)   Notwithstanding the foregoing, employees who are nonresident
               aliens and who receive no earned income from the Company or an
               Associated Company that constitutes income from sources within
               the United States shall be disregarded for all purposes of this
               Section 2.29.

         (c)   The provisions of this Section shall be further subject to such
               additional requirements as described in Section 414(q) of the
               Code and its applicable regulations, which shall override any
               aspects of this Section inconsistent therewith.

                                       -6-


2.30     "HOUR OF SERVICE" shall mean, with respect to any applicable
         computation period,

         (a)   each hour for which the employee is paid or entitled to payment
               for the performance of duties for the Company or an Associated
               Company,

         (b)   each hour for which an employee is paid or entitled to payment by
               the Company or an Associated Company on account of a period
               during which no duties are performed, whether or not the
               employment relationship has terminated, due to vacation, holiday,
               illness, incapacity (including disability), layoff, jury duty,
               military duty or leave of absence, but not more than 501 hours
               for any single continuous period;

         (c)   each hour for which back pay, irrespective of mitigation of
               damages, is either awarded or agreed to by the Company or an
               Associated Company, excluding any hour credited under (a) or (b),
               which shall be credited to the computation period or periods to
               which the award, agreement, or payment pertains, rather than to
               the computation period in which the award, agreement, or payment
               is made; and

         (d)   solely for purposes of determining whether an employee has
               incurred a Break in Service, each hour for which the employee
               would normally be credited under paragraph (a) or (b) during a
               Parental Leave or FMLA Leave. However, the number of hours
               credited under this paragraph (d) during a Parental Leave shall
               not exceed 501 hours in any single continuous period,

               No hours shall be credited on account of any period during which
               the employee performs no duties and receives payment solely for
               the purpose of complying with unemployment compensation, workers'
               compensation or disability insurance laws. The Hours of Service
               credited shall be determined as required by Title 29 of the Code
               of Federal Regulations, Section 2530.200b-2.

2.31     "ITT FLOOR CONTRIBUTION ACCOUNT" shall mean that portion of the Trust
         Fund that, with respect to any Member or Deferred Member, is
         attributable to (i) any employer contributions other than matching
         contributions made to the ITT Plan before October 1, 1996, and
         transferred to the Trust Fund pursuant to Section 14.5; (ii) any
         amounts transferred from the ITT Plan to the Trust Fund attributable to
         certain employer contributions other than matching contributions made
         on his or her behalf and transferred to the ITT Plan pursuant to a
         Prior Plan Transfer; and (iii) any investment earnings and gains or
         losses on any of the aforementioned amounts.

2.32     "ITT PLAN" shall mean the ITT 401(k) Retirement Savings Plan, formerly
         known as the ITT Corporation Investment and Savings Plan for Salaried
         Employees.

2.33     "LTD PLAN" shall mean the ESI Long-Term Disability Plan.

2.34     "MATCHING COMPANY CONTRIBUTIONS" shall mean a contribution made
         pursuant to Section 5.1.

2.35     "MEMBER" shall mean (1) any person who has become a Member as provided
         in Article Three, and (2) for purposes of Sections 2.52, 2.53 and 4.6,
         and Article X, any

                                       -7-


         other person who has made a Rollover Contribution pursuant to Section
         4.6(a)(i) but has not yet met the eligibility requirements for
         membership.

2.36     "NON-HIGHLY-COMPENSATED EMPLOYEE" means for any Plan Year an employee
         of the Company or an Associated Company who is not a Highly-Compensated
         Employee for that Plan Year.

2.37     "NON-U.S. CITIZEN EMPLOYEE" shall mean any person who is classified as
         a salaried corporate payroll Employee by the Company and who is:

         (a)   not a citizen of the United States,

         (b)   paid from a payroll maintained in the continental United States,
               and

         (c)   employed by the Company in a permanent position (as distinguished
               from a temporary assignment) in the continental United States,
               even though such person may be covered under a retirement plan of
               the Company other than those enumerated in Section 2.19(a),
               provided that upon such person's reassignment outside the
               continental U.S., the participation under this Plan of such
               person shall cease.

2.38     "OFFERING DATE" shall mean the date of the underwritten public offering
         by ESI pursuant to a registration statement on Form S-3 filed with the
         Securities Exchange Commission on February 13, 1998.

2.39     "PARENTAL LEAVE" shall mean an Employee's absence from work because of
         the Employee's pregnancy, the birth of the Employee's child, the
         placement of a child with the Employee in connection with the adoption
         of that child by the Employee, or for purposes of caring for that child
         for a period beginning immediately following that birth or placement.

2.40     "PARTICIPATING EMPLOYER" shall mean, in addition to ESI, any Associated
         Employer that has, by appropriate written action of the Board of
         Directors or by a designated officer of ESI pursuant to authorization
         delegated to him or her by the Board of Directors, has been designated
         as a Participating Employer, and the board of directors of any such
         subsidiary or affiliated company shall have taken appropriate action to
         adopt the Plan.

         To the extent that the Board of Directors or designated officer of ESI,
         as appropriate, shall have authorized and established in writing the
         basis for recognition under the Plan of service with a predecessor
         corporation(s), if any, reference in this Plan to service with a
         Participating Employer shall include service with the predecessor
         corporation(s) of the Participating Employer, provided that all or part
         of the business and assets of any such corporation shall have been
         acquired by ESI or by a Participating Employer.

2.41     "PERIOD OF SEVERANCE" shall mean a period of time that begins on the
         Severance from Service date and ends on the date on which an Employee
         again performs an Hour of Service.

2.42     "PLAN" shall mean the ESI 401(k) Plan, set forth herein or as amended
         from time to time.

                                       -8-


2.43     "PLAN YEAR" shall mean the calendar year.

2.44     "PRE-DISTRIBUTION ITT" shall mean ITT Corporation (a Delaware
         corporation), as constituted.

2.45     "PRE-DISTRIBUTION ITT PLAN" shall mean the ITT Corporation Investment
         and Savings Plan for Salaried Employees, as in effect on the date
         immediately preceding the effective date of the ITT Plan.

2.46     "PRE-TAX INVESTMENT ACCOUNT" shall mean that portion of the Trust Fund
         that, with respect to any Member or Deferred Member, is attributable to
         (i) Basic Pre-Tax Savings, (ii) Supplemental Pre-Tax Savings, (iii) any
         amounts attributable to any pre-tax contributions made on his or her
         behalf to a qualified plan and transferred to the Trust Fund from the
         ITT Plan pursuant to Section 14.5, and (iv) earnings and gains or
         losses on any of the aforementioned amounts.

2.47     "PRE-TAX SAVINGS" shall mean those contributions made on a Member's
         behalf pursuant to Section 4.1.

2.48     "PRIOR PLAN TRANSFER" shall mean that portion of the After-Tax
         Investment Account, Pre-Tax Investment Account, Company Matching
         Contribution Account, Company Retirement Account, ITT Floor
         Contribution Account, or Rollover Account of any Member or Deferred
         Member that is attributable to amounts transferred on his or her behalf
         to the ITT Plan from the trust of another qualified profit sharing or
         other defined contribution plan.

2.49     "QUALIFIED DOMESTIC RELATIONS ORDER" shall mean a qualified domestic
         relations order as defined in Code Section 414(p).

2.50     "RETIREMENT CONTRIBUTION ACCOUNT" shall mean that portion of the Trust
         Fund that, with respect to any Member or Deferred Member is
         attributable to (i) any Floor Contributions (ii) any contributions and
         investment earnings thereon to the extent such amounts were
         attributable to company contributions other than matching contributions
         made on his or her behalf on or after October 1, 1996, and transferred
         to the Trust Fund from the ITT Plan pursuant to Section 14.5, and (iii)
         any investment earnings and gains or losses on any of the
         aforementioned amounts.

2.51     "RETIREMENT CONTRIBUTIONS" shall mean a contribution made pursuant to
         Section 5.2.

2.52     "ROLLOVER ACCOUNT" shall mean that portion of the Trust Fund that, with
         respect to any Member or Deferred Member, is attributable to (i)
         Rollover Contributions, (ii) any rollover contributions and investment
         earnings thereon transferred to the Trust Fund from the ITT Plan, and
         (iii) any investment earnings and gains or losses on any of the
         aforementioned amounts.

2.53     "ROLLOVER CONTRIBUTIONS" shall mean those contributions made by an
         Employee or a Member pursuant to Section 4.6.

                                       -9-


2.54     "SALARY" shall mean, with respect to an Employee for a Plan Year
         beginning on or after January 1, 2001, the Employee's wages, salaries,
         fees for professional services, and other amounts received for personal
         services actually rendered in the course of employment with the Company
         to the extent that the amounts are included in gross income, but
         excluding bonuses (other than retention bonuses). "Salary" specifically
         includes retention bonuses and lump sum vacation pay, and specifically
         excludes curriculum development pay, settlement agreement pay, lieu of
         notice pay, and severance pay. "Salary" also includes amounts
         contributed by the Company pursuant to a salary reduction agreement
         that are not includible in the gross income of the Member under section
         125, 457, 402(h), 403(b), or 402(e)(3) of the Code, and Employee
         contributions described in section 414(h)(2) of the Code that are
         treated as Employer contributions. Salary does not include, whether or
         not included in gross income, reimbursements or other expense
         allowances, fringe benefits (cash and non-cash), moving expenses
         (including settling in allowances), nonqualified deferred compensation,
         welfare benefits, or amounts realized from the exercise of a
         nonqualified stock option, or when restricted stock (or property) held
         by an employee either becomes freely transferable or is no longer
         subject to a substantial risk of forfeiture. "Salary" shall mean, with
         respect to an Employee for a Plan Year beginning prior to January 1,
         2001, the basic cash remuneration paid to the Employee for services
         rendered to the Company, determined prior to any reduction pursuant to
         Section 4.1 or pursuant to a cafeteria plan under Section 125 of the
         Code, plus certain commissions, overtime, sick pay, vacation pay,
         holiday pay, jury duty pay, and shift differentials, but excluding any
         compensation deferred under a deferred compensation plan, bonuses, and
         all other forms of special pay except to the extent otherwise deemed
         "salary" for purposes of the Plan under such nondiscriminatory rules as
         are adopted by the Committee or the Board of Directors with respect to
         all Members. Salary shall not exceed the Annual Dollar Limit for any
         Plan Year.

2.55     "SEVERANCE DATE" shall mean the date an Employee is considered by the
         Company to have severed his or her employment with the Company and all
         Associated Companies as defined pursuant to the provisions of Section
         2.57.

2.56     "SEVERANCE FROM SERVICE" occurs on the earlier of the following two
         dates:

         (a)   The date the Employee quits, is discharged, retires or dies; or

         (b)   The later of:

               (i)   the first anniversary of the first day the Employee is
                     absent from the service of ESI or an Associated Company for
                     a reason not enumerated in paragraph (a);

               (ii)  the expiration of an authorized leave of absence, provided
                     the Employee does not return to the service of ESI or an
                     Associated Company following the expiration of the leave of
                     absence;

               (iii) in the case of an absence due to maternity or paternity
                     leave for reason of the birth of a child of the Employee,
                     the placement of a child with the Employee in connection
                     with the adoption of the child by the Employee,

                                      -10-


                     or the caring for a child for a period immediately
                     following birth or placement, the second anniversary of the
                     date the absence commences; or

               (iv)  any period of military service in the Armed Forces of the
                     United States required to be credited by law; provided,
                     however, that the Employee does not return to the service
                     of ESI or an Associated Company within the period the
                     Employee's reemployment rights are protected by law.

2.57     "SERVICE" shall mean the period of elapsed time beginning on the date
         an Employee commences employment with the Company or any Associated
         Company or predecessor company, subsidiary, or affiliate of ESI, and
         ending on his or her most recent Severance Date, which shall be the
         earlier of (a) the date he or she quits, is discharged, retires, or
         dies or (b) the first anniversary of the date on which he or she is
         first absent from service, with or without pay, for any reason such as
         vacation, sickness, disability, layoff, or leave of absence. If an
         Employee terminates employment and is later reemployed within 12 months
         of the earlier of (i) his or her date of termination or (ii) the first
         day of an absence from service immediately preceding his or her date of
         termination, the period of Service between his or her Severance Date
         and his or her reemployment date shall be included in his or her
         Service. With respect to service for purposes of the vesting schedule
         in Section 5.4, if an Employee terminates and is later reemployed after
         incurring a Break in Service, his or her period of Service prior to his
         or her Break in Service shall be included in his or her Service.

         Under the circumstances hereinafter stated and upon such conditions as
         the Committee shall determine on a basis uniformly applicable to all
         Employees similarly situated, the period of Service of an Employee
         shall be deemed not to be interrupted by an absence of the type
         hereinafter stated, and the period of such absence shall be included in
         determining the length of an Employee's Service:

               (i)    if a leave of absence has been authorized by the Company
                      or any Associated Company, for the period of such
                      authorized leave of absence only; or

               (ii)   if an Employee enters service in the armed forces of the
                      United States and if the Employee's right to reemployment
                      is protected by the Selective Service Act or any similar
                      law then in effect and if the Employee returns to regular
                      employment within the period during which the right to
                      reemployment is protected by any such law.

         Notwithstanding the foregoing, the period of an Employee's employment
         rendered prior to the Effective Date that was recognized or would have
         been recognized under the ITT Plan as in effect on the Effective Date
         as eligibility service or vesting service shall be recognized as
         service under this Plan for purposes of vesting and eligibility
         purposes, whichever is applicable.

         Notwithstanding the foregoing, for purposes of eligibility for
         membership in the Plan provided in Article Three, an Employee whose
         employment with the Company or an Associated Company is on a temporary
         or less than full-time basis shall be credited with a year of Service
         if he or she completes at least 1,000 Hours of Service in a twelve

                                      -11-


         consecutive month period of employment measured from the date on which
         the Employee's Service commences or from the beginning of any
         subsequent Plan Year. After such an Employee has become a Member of the
         Plan as provided in Article Three, Service for purposes of meeting the
         requirements for vesting shall be determined in accordance with the
         preceding paragraphs of this Section 2.57.

         Notwithstanding any Plan provision to the contrary, in the case of any
         person who is a leased employee, as defined in Code Section 414(n),
         before or after a period of service as an Employee, the entire period
         during which he or she has performed services for the Company or an
         Associated Company as a leased Employee shall be counted as service as
         an employee for all purposes of the Plan except that he or she shall
         not by reason of that status become a Member of the Plan.

2.58     "STATUTORY COMPENSATION" shall mean the wages, salaries, and other
         amounts paid in respect of an employee for services actually rendered
         to the Company or an Associated Company, including by way of example,
         overtime, bonuses, and commissions, but excluding deferred
         compensation, stock options and other distributions that receive
         special tax benefits under the Code. For purposes of determining
         Highly-Compensated Employees under Section 2.29, key employees under
         Section 17.1, and minimum benefits under Section 17.3, Statutory
         Compensation shall include Pre-Tax Savings and amounts contributed on a
         Member's behalf on a salary reduction basis that are not includible in
         the gross income of the employee under Section 125, 402(h), 132(f)(4),
         457 or 403(b) of the Code. For all other purposes, Statutory
         Compensation shall also include the amounts referred to in the
         preceding sentence, unless the Committee directs otherwise for a
         particular Plan Year. Statutory Compensation shall not exceed the
         Annual Dollar Limit, provided that the Annual Dollar Limit shall not be
         applied in determining Highly-Compensated Employees under Section 2.29.

2.59     "SUPPLEMENTAL PRE-TAX SAVINGS" shall mean the contributions made on a
         Member's behalf that are credited to his or her Pre-Tax Investment
         Account in accordance with Section 4.1(a)(iv)(2).

2.60     "TERMINATION OF EMPLOYMENT" shall mean separation from employment with
         the Company and all Associated Companies, as determined by the Company,
         for any reason, including, but not limited to, retirement, death,
         Disability, resignation, or dismissal; provided, however, that a
         transfer in employment between the Company and any Associated Company
         shall not be deemed to be Termination of Employment. With respect to
         any leave of absence and any period of service in the armed forces of
         the United States, Section 2.57 shall govern.

2.61     "TRUST FUND" shall mean the aggregate funds held by the Trustee under
         the trust agreement or agreements established for the purposes of this
         Plan and consisting of the Funds as described in Article Seven.

2.62     "TRUSTEE" shall mean the Trustee or Trustees at any time acting as such
         under the trust agreement or agreements established for the purposes of
         this Plan.

                                      -12-


2.63     "VALUATION DATE" shall mean the date or dates in each calendar month on
         which any valuation is made, as determined under Committee procedures
         established pursuant to Section 8.8.

2.64     "VESTED SHARE" shall mean, with respect to a Member or Deferred Member,
         that portion of his or her Accounts vested in accordance with the terms
         of Sections 4.5 and 5.4.

                                  ARTICLE THREE
                                   MEMBERSHIP

3.1      MEMBERSHIP.

         (a)   Each Employee who is a member or deferred member under the ITT
               Plan on the Effective Date shall become a Member or Deferred
               Member, whichever is applicable, under the Plan on the Effective
               Date.

         (b)   Every other Employee shall become a Member as of the first
               Enrollment Date following the date in which he or she has
               completed a year of Service, provided he or she is then an
               Employee.

         (c)   Effective with respect to each Employee who completes an Hour of
               Service on or after January 1, 2002, but who has not become a
               Member pursuant to Section 3.1(a) or (b) before January 1, 2002,
               the Employee shall become a Member as of the first day of the
               month following the date he or she has completed three months of
               Continuous Service. If an Employee incurs a Severance from
               Service before completing three months of Continuous Service,
               thereafter incurs at least a 12-month Period of Severance and is
               then reemployed, his Period of Severance will not be counted as
               Continuous Service in determining the date he completes three
               months of Continuous Service after his reemployment. If an
               Employee incurs a Severance from Service before completing three
               months of Continuous Service, thereafter incurs a Period of
               Severance of less than 12 months and is then reemployed, his
               Period of Severance will be counted as Continuous Service in
               determining the date he completes three months of Continuous
               Service after his reemployment. A former Employee who has
               previously completed three months of Continuous Service but who
               has not become a Member will become a Member as of the first day
               of the month on or after the date he has completed an Hour of
               Service upon his reemployment. An Employee who becomes a Member
               and incurs a 12-month Period of Severance will again become a
               Member on the date he first completes an Hour of Service after
               his reemployment. Notwithstanding the preceding provisions, the
               period of an Employee's employment prior to January 1, 2002 that
               was recognized as eligibility service under the terms of the Plan
               then in effect will be recognized as eligibility service on
               January 1, 2002. Recognition of service will be in accordance
               with the transition rules set forth in Treasury Regulation
               section 1.410(a)-7.

         (d)   Notwithstanding Sections 3.1(a), (b) and (c), if, due to an
               error, a non-Highly-Compensated Employee begins membership in the
               Plan on a date before the date prescribed in Sections 3.1(a), (b)
               or (c), whichever is applicable ("early date"), the Employee will
               become a Member as of the early date. Each Employee who

                                      -13-

               becomes a Member on an early date shall be identified in Schedule
               A to the Plan. Schedule A, as amended from time to time, is a
               part of the Plan.

3.2      REHIRED MEMBER. Any rehired Employee who at the time of his or her
         Termination of Employment was a Member of this Plan will again become a
         Member as soon as practicable after the Employee's reemployment date
         but no later than the first day of the first payroll period of the
         first complete month following the date of the Employee's rehire (his
         or her "reenrollment date").

         Such a rehired Employee shall once again become a Member hereunder
         entitled to Floor Contributions under Section 5.2 as of his or her
         reenrollment date and shall be eligible to have Pre-Tax Savings made on
         his or her behalf pursuant to the provisions of Section 4.1 as soon as
         administratively practicable following his or her reenrollment date.

3.3      TRANSFERRED MEMBERS.

         (a)   Notwithstanding any Plan provision to the contrary, a Member who
               remains in the employ of the Company or an Associated Company but
               ceases to be an Employee shall continue to be a Member of the
               Plan but shall not be eligible to receive allocations of Pre-Tax
               Savings, Matching Contributions, or Retirement Contributions
               while his employment status is other than as an Employee.

         (b)   An individual who transfers from the status of an employee
               ineligible for Plan membership to an Employee eligible for
               membership shall become a Member on the later of (i) on the first
               Enrollment Date following the month in which he or she completes
               the requirements set forth in Section 3.1(b), or (ii) as soon as
               practicable after the date the individual becomes an Employee,
               but no later than the first day of the first payroll period of
               the first complete month following the date he or she becomes an
               Employee (his or her "reenrollment date").

3.4      TERMINATION OF MEMBERSHIP. A Member's membership shall terminate on
         his or her Severance Date. A Deferred Member's membership shall
         terminate when all benefits to which he or she is entitled under the
         Plan are distributed to him or her.

                                  ARTICLE FOUR
                              MEMBER CONTRIBUTIONS

4.1      MEMBER PRE-TAX SAVINGS

         (a)   (i)   Except as otherwise provided in Section 3.3, each Member
                     shall have his or her Salary reduced by 2%, and that amount
                     shall be contributed on his or her behalf to the Plan by
                     the Company as Pre-Tax Savings until and unless the Member
                     elects in accordance with the procedures and within the
                     time period prescribed by the Committee, to receive that
                     Salary directly from the Company in cash. This reduction in
                     Salary shall commence as soon as administratively
                     practicable following (1) the Member's Enrollment Date or
                     (2) the Member's reenrollment date, as defined in Article
                     Three, and shall be applied to Salary that could have been
                     subsequently received by the Member. With respect to Salary
                     for

                                      -14-


                     Plan Years beginning prior to January 1, 2002, the Member
                     may elect, subject to the provisions of paragraphs (b)
                     through (d) below, to increase the reduction of his or her
                     subsequent Salary, in increments of 1%, up to a total of
                     16%, and have that amount contributed on his or her behalf
                     to the Plan by the Company as Pre-Tax Savings. With respect
                     to Salary for Plan Years beginning on or after January 1,
                     2002, the Member may elect, subject to the provisions of
                     paragraphs (b) through (d) below, to increase or decrease
                     the reduction of his or her subsequent Salary, in
                     increments of 1%, down to a total of 1%, or up to an
                     unlimited total percent, and have that amount contributed
                     on his or her behalf to the Plan by the Company as Pre-Tax
                     Savings. An election shall be effective with the first
                     payroll period on or after the date as of which the
                     election is to apply or as soon as administratively
                     practicable thereafter.

               (ii)  Prior to January 1, 2002, a Member who elects to receive
                     the 2% of Salary described in the above paragraph (i)
                     directly from the Company in cash, may elect at a later
                     date, subject to the provisions of paragraphs (b) and (d)
                     below, to have his or her subsequent Salary reduced by at
                     least 2%, but no more than 16%, in increments of 1%, and
                     have that amount contributed to the Plan by the Company
                     that employs the Member. Effective January 1, 2002, a
                     Member who elects to receive the 2% of Salary described in
                     the above paragraph (i) directly from the Company in cash,
                     may elect at a later date, subject to the provisions of
                     paragraphs (b) and (d) below, to have his or her subsequent
                     Salary reduced by at least 1%, or up to an unlimited total
                     percent, in increments of 1%, and have that amount
                     contributed to the Plan by the Company that employs the
                     Member. The election shall be effective with the first
                     payroll period on or after the date as of which the
                     election is to apply or as soon as administratively
                     practicable thereafter.

               (iii) From time to time and in order to comply with Section
                     401(k)(3) of the Code, the Committee may impose a
                     limitation on the extent to which a Member who is a
                     Highly-Compensated Employee may reduce his or her Salary in
                     accordance with this Section, based on the Committee's
                     reasonable projection of savings rates of Members who are
                     not Highly-Compensated Employees.

               (iv)  A Member's Pre-Tax Savings shall consist of the following.

                     (1)  Basic Pre-Tax Savings - Contributions under this
                          Section that are not in excess of 5% of the Member's
                          Salary for the payroll processing period for which the
                          contributions are made shall be known as Basic Pre-Tax
                          Savings and shall be credited to his or her Pre-Tax
                          Investment Account; and

                     (2)  Supplemental Pre-Tax Savings - Contributions under
                          this Section, that are in excess of the maximum
                          allowed under the preceding subparagraph (1) shall be
                          known as Supplemental Pre-Tax Savings and shall be
                          credited to a Member's Pre-Tax Investment Account.

                                      -15-


                          Supplemental Pre-Tax Savings may also include amounts
                          credited on a Member's behalf under the ITT Plan and
                          transferred to this Plan pursuant to Section 14.5.

         Any Pre-Tax Savings shall be paid to the Trustee as soon as practicable
         but no later than the 15th business day of the month following the
         month in which the amounts would otherwise have been payable to the
         Member in cash.

         (b)   In no event shall the Member's Pre-Tax Savings and similar
               contributions made on his or her behalf by the Company or an
               Associated Company to all plans, contracts, or arrangements
               subject to the provisions of Section 401(a)(30) of the Code in
               any calendar year exceed $7,000 multiplied by the Adjustment
               Factor. If a Member's Pre-Tax Savings in a calendar year reach
               that dollar limitation, his or her election of Pre-Tax Savings
               for the remainder of the calendar year will be canceled. As of
               the first payroll period of the calendar year following that
               cancellation, the Member's election of Pre-Tax Savings shall
               again become effective in accordance with his or her previous
               election.

         (c)   In the event that the sum of the Pre-Tax Savings and similar
               contributions to any other qualified defined contribution plan
               maintained by the Company or an Associated Company exceeds the
               dollar limitation in Section 4.1(b) for any calendar year, the
               Member shall be deemed to have elected a return of Pre-Tax
               Savings in excess of that limit ("excess deferrals") from this
               Plan. The excess deferrals, together with investment income,
               shall be returned to the Member no later than the April 15
               following the end of the calendar year in which the excess
               deferrals were made. The amount of excess deferrals to be
               returned for any calendar year shall be reduced by any Pre-Tax
               Savings previously returned to the Member under Section 6.1 for
               that calendar year. In the event any Pre-Tax Savings returned
               under this paragraph (c) were matched by Matching Company
               Contributions under Section 5.1, those Matching Company
               Contributions, together with investment income, shall be
               forfeited and used to reduce Company contributions.

         (d)   If a Member makes tax-deferred contributions under another
               qualified defined contribution plan maintained by an employer
               other than the Company or an Associated Company for any calendar
               year and those contributions when added to his or her Pre-Tax
               Savings exceed the dollar limitation under Section 4.1(b) for
               that calendar year, the Member may allocate all or a portion of
               those excess deferrals to this Plan. In that event, the excess
               deferrals, together with investment income, shall be returned to
               the Member no later than the April 15 following the end of the
               calendar year in which the excess deferrals were made. However,
               the Plan shall not be required to return excess deferrals unless
               the Member notifies the Plan Committee, in writing, by March 1 of
               that following calendar year, of the amount of the excess
               deferrals allocated to this Plan. The amount of any such excess
               deferrals to be returned for any calendar year shall be reduced
               by any Pre-Tax Savings previously returned to the Member under
               Section 6.1 for that calendar year. In the event any Pre-Tax
               Savings returned under this paragraph (d) were matched by
               Matching Company Contributions under Section 5.1, those

                                      -16-


               Matching Company Contributions, together with investment income,
               shall be forfeited and used to reduce Company contributions.

4.2      CHANGE IN CONTRIBUTIONS. The percentage of Salary designated under
         Section 4.1 shall automatically apply to increases and decreases in a
         Member's Salary. A Member may elect to change the rate of his or her
         Salary reduction in accordance with the administrative procedures and
         within the time period prescribed by the Committee. The change shall be
         effective as of the first payroll period of the month following the
         expiration of the notice period or as soon as administratively
         practicable thereafter.

4.3      SUSPENSION AND RESUMPTION OF MEMBER PRE-TAX SAVINGS.

         (a)   A Member may suspend his or her deferrals under Section 4.1 at
               any time in accordance with the administrative procedures and
               within the time period prescribed by the Committee. The
               suspension will become effective as of the later of the
               immediately succeeding payroll period or as soon as
               administratively practicable following the date notice is
               received by the Committee.

         (b)   A Member who suspends his or her savings in accordance with
               paragraph (a) may resume his or her deferrals under Section 4.1,
               in accordance with the administrative procedures and within the
               time period prescribed by the Committee, as of the first payroll
               period following the expiration of the notice period or as soon
               as administratively practicable thereafter.

4.4      NO AFTER-TAX CONTRIBUTIONS. No after-tax contributions shall be
         required or permitted under the Plan. After-tax contributions made or
         held under the ITT Plan and transferred to this Plan pursuant to
         Section 14.5 shall be held in the Member's or Deferred Member's
         After-Tax Investment Account.

4.5      VESTING OF MEMBER'S AND DEFERRED MEMBER'S CONTRIBUTIONS. Each Member's
         and Deferred Member's Pre-Tax Investment Account and After-Tax
         Investment Account shall at all times be fully vested.

4.6      ROLLOVER CONTRIBUTIONS.

         (a)   (i)   With the permission of the Committee and without regard to
                     any limitations on contributions set forth in this Article
                     Four, the Plan may receive from a Member, or an Employee
                     who has not yet met the eligibility requirements for
                     membership, in cash, any amount previously received (or
                     deemed to be received) by him or her from another qualified
                     plan.

               (ii)  If a Member terminates employment and is subsequently
                     rehired by the Company, with the permission of the
                     Committee, the Plan may receive from the Member any amount
                     previously received (or deem to be received) by him or her
                     from this Plan as a result of his or her termination of
                     employment.

                                      -17-


               (iii) The Plan may receive such amounts either directly from the
                     Member or Employee or from an individual retirement account
                     or a qualified plan in the form of a direct rollover.

         (b)   Notwithstanding the foregoing, the Plan shall not accept any
               amount unless the amount is eligible to be rolled over to a
               qualified trust in accordance with applicable law, and the Member
               or Employee provides evidence satisfactory to the Committee that
               the amount qualifies for rollover treatment. Unless received by
               the Plan in the form of a direct rollover, the Rollover
               Contribution must be paid to the Trustee on or before the 60th
               day after the day it was received by the Member or Employee.

         (c)   A Member's and Deferred Member's Rollover Account shall at all
               times be fully vested.

4.7      CONTRIBUTIONS DURING PERIOD OF MILITARY LEAVE.

         (a)   Notwithstanding any provision of this Plan to the contrary,
               contributions and service credit with respect to qualified
               military service will be provided in accordance with Section
               414(u) of the Code.

         (b)   Without regard to any limitations on contributions set forth in
               this Plan, a Member who is credited with Service because of a
               period of service in the uniformed services of the United States
               may elect to contribute to the Plan the Pre-Tax Savings that
               could have been contributed to the Plan in accordance with the
               provisions of the Plan had he or she remained continuously
               employed by the Company throughout that period of absence
               ("make-up contributions"). The amount of make-up contributions
               shall be determined on the basis of the Member's Salary in effect
               immediately prior to the period of absence and the terms of the
               Plan at that time. Any Pre-Tax Savings so determined shall be
               limited as provided in Sections 4.1 and 5.1 with respect to the
               Plan Year or Plan Years to which the contributions relate rather
               than the Plan Year or Plan Years in which payment is made. Any
               payment to the Plan described in this paragraph shall be made
               during the period, beginning with the date of reemployment, the
               duration of which is the lesser of three times the period of
               absence or five (5) years. Earnings (or losses) on make-up
               contributions shall be credited commencing with the date the
               make-up contribution is made in accordance with the provisions of
               Articles 3 and 4.

         (c)   All contributions under this Section 4.7 are considered "annual
               additions," as defined in Section 415(c)(2) of the Code and shall
               be limited in accordance with the provisions of Section 6.5 with
               respect to the Plan Year or Plan Years to which the contributions
               relate rather than the Plan Year in which payment is made.

                                  ARTICLE FIVE
                              COMPANY CONTRIBUTIONS

5.1      MATCHING COMPANY CONTRIBUTIONS. The Company shall contribute to the
         Plan on behalf of each of its Members who elects to make Basic Pre-Tax
         Savings, a Matching

                                      -18-


         Company Contribution each payroll processing period. Effective for
         payroll processing periods prior to January 1, 2002, the Matching
         Company Contribution amount is equal to 50 percent of the first 5
         percent of the Member's Salary contributed to the Plan as Basic Pre-Tax
         Savings on behalf of the Member during each payroll processing period.
         Effective for payroll processing periods on or after January 1, 2002,
         the Matching Company Contribution amount is equal to 100 percent of the
         first 1 percent, and 50 percent of the next 4 percent, of the Member's
         Salary contributed to the Plan as Basic Pre-Tax Savings on behalf of
         the Member during each payroll processing period. In no event, however,
         shall the Matching Company Contributions pursuant to this Section
         exceed 2.5 percent, or effective January 1, 2002, 3.0 percent of the
         Member's Salary while a Member with respect to any Plan Year. The
         Matching Company Contributions with respect to a Member shall be paid
         into the Trust Fund and credited to the Member's Company Matching
         Contribution Account as soon as practicable. No Matching Company
         Contributions shall be made with respect to a Member's Supplemental
         Pre-Tax Savings. Notwithstanding the foregoing, Matching Company
         Contributions shall not be made in respect of a Member's Basic Pre-Tax
         Savings that are made during a suspension period following a withdrawal
         prior to Termination of Employment as provided in Sections 9.2 or 9.3.
         Matching Company Contributions are made expressly conditional on the
         Plan satisfying the provisions of Section 4.1, 6.1, 6.2, and 6.3. If
         any portion of the Basic Pre-Tax Savings to which the Matching Company
         Contribution relates is returned to the Member under Section 4.1, 6.1,
         or 6.3, the corresponding Matching Company Contribution shall be
         forfeited, and if the amount of the Matching Company Contribution is
         deemed an excess aggregate contribution under Section 6.2 or 6.3, the
         amount shall be forfeited in accordance with that Section.

5.2      RETIREMENT CONTRIBUTIONS. Effective January 1, 2002, Retirement
         Contributions shall be eliminated. For payroll processing periods prior
         to January 1, 2002, except as otherwise provided in Section 3.3, each
         payroll processing period, the Company shall contribute to the Trust
         Fund, with respect to each Member, a Retirement Contribution in an
         amount equal to 1% of the Member's Salary for the corresponding payroll
         processing period. Retirement Contributions shall be credited to the
         Member's Retirement Contribution Account and paid to the Trustee as
         soon as practicable.

5.3      MODE OF PAYMENT AND VALUATION OF ESI STOCK CONTRIBUTED.

         (a)   Company contributions under Sections 5.1 and 5.2 shall be made as
               the Company shall determine, in cash or in ESI Stock, including
               treasury shares or newly issued shares of ESI Stock previously
               authorized but unissued.

         (b)   Company contributions made in cash shall be used to acquire ESI
               Stock. However, the Trustee in its discretion, may hold such
               amounts in cash consistent with its obligations as Trustee, as it
               deems advisable in accordance with the provisions of the trust
               agreement. In the case of Company contributions made in cash, the
               Trustee may purchase ESI Stock from the Company or any other
               source, and the stock may be treasury shares or newly issued
               shares of ESI Stock previously authorized but unissued; provided,
               however, that in no event shall a commission be charged with
               respect to a purchase of ESI Stock from the Company.

                                      -19-


         (c)   For the purpose of determining the value of ESI Stock under the
               Plan, in the event the stock is traded on a national securities
               exchange, the stock shall be valued at the average of the highest
               and lowest quoted selling price of ESI Stock on the New York
               Stock Exchange composite tape on the day the stock is delivered
               to the Trustee, provided that at least one sale of the stock took
               place on the exchange on that date, but if there was no sale on
               that date, then on the basis of the average of the highest and
               lowest quoted price on the nearest day before the delivery date
               upon which at least one sale of the stock took place on the
               exchange. In the event that ESI Stock is not traded on a national
               securities exchange, the shares shall be valued in good faith by
               an independent appraiser selected by the Trustee and meeting
               requirements similar to those in the regulations prescribed under
               Section 170(a)(1) of the Code.

5.4      VESTING. A Member who does not complete an Hour of Service on or after
         January 1, 2002 shall be vested in, and have a nonforfeitable right to,
         his or her Company Matching Contribution Account in accordance with the
         following schedule:



                                                             NONFORFEITABLE
                    YEARS OF SERVICE                           PERCENTAGE
                                                               
                    Less than 1 year                                0%
                 1 but less than 2 years                           20%
                 2 but less than 3 years                           40%
                 3 but less than 4 years                           60%
                 4 but less than 5 years                           80%
                     5 or more years                              100%


         A Member who completes an Hour of Service on or after January 1, 2002
         shall be vested in, and have a nonforfeitable right to, his or her
         Company Matching Contribution Account in accordance with the preceding
         schedule, or the following schedule, whichever results in the greater
         nonforfeitable percentage for the Member:



                                                             NONFORFEITABLE
                  YEARS OF SERVICE                             PERCENTAGE
                                                               
                 Less than 3 years                                 0%
                 3 or more years                                  100%


         Notwithstanding the foregoing schedules, a Member shall immediately be
         fully vested in his or her Company Matching Contribution Account if,
         while employed by the Company or an Associated Company, the Member
         dies, incurs a Disability, or attains age 65, or in the event of Plan
         termination or complete discontinuance of Company contributions.

         A Member who shall have performed services for Pre-Distribution ITT at
         any time between June 30, 1995 and December 19, 1995, shall be fully
         vested in the balance (determined at the later date), of his or her
         ESOP Account and his or her Company Matching Contribution Account,
         except with respect to the portion of his or her Company

                                      -20-


         Matching Contribution Account that is attributable to matching
         contributions made for periods after the date immediately preceding
         December 19, 1995.

         In the case of a Member or Deferred Member who shall not have performed
         services for Pre-Distribution ITT between June 30, 1995 and December
         19, 1995, balances in his or her ESOP Account and Company Matching
         Contribution Account that were forfeited under Section 5.5(a) of the
         Pre-Distribution ITT Plan shall remain forfeited, except to the extent
         restored pursuant to Section 11.6 of this Plan on account of subsequent
         employment with the Company or an Associated Company.

         Each Member and Deferred Member shall, at all times, be fully vested in
         his or her Retirement Contribution Account and his or her ITT Floor
         Contribution Account.

5.5      FORFEITURES.

         (a)   In the event of Termination of Employment of a Member, the
               portion of the Member's Company Matching Contribution Account in
               which he or she is not vested in accordance with Section 5.4
               shall not be forfeited until the Member has a Break in Service of
               five years or receives a distribution of the entire Vested Share
               of his or her Accounts, if earlier. However, if he or she is
               reemployed by the Company or Associated Company prior to the
               expiration of a period of Break in Service of five years, the
               provisions of Section 11.6 shall apply. If the amount of the
               Vested Share of a Member's Company Matching Contribution Account
               at the time of his or her Termination of Employment is zero, the
               Member shall be deemed to have received a distribution of that
               zero vested benefit.

         (b)   As soon as practicable after an event giving rise to a forfeiture
               has occurred, the amount of any forfeiture under the foregoing
               subdivision of this Section 5.5, reduced by any forfeited amounts
               restored to a Member's Accounts, shall be applied to reduce
               future Company contributions under the Plan and/or to pay Plan
               expenses pursuant to the provisions of Section 16.2.

         (c)   In the event of the termination of the Plan, any forfeitures not
               previously applied in accordance with the foregoing provisions of
               this Section shall be credited proportionately to the Accounts of
               all Members as provided in Section 14.2(b).

                                   ARTICLE SIX
                          LIMITATIONS ON CONTRIBUTIONS

6.1      ACTUAL DEFERRAL PERCENTAGE TEST.

         (a)   With respect to each Plan Year, the Actual Deferral Percentage
               for that Plan Year for Highly-Compensated Employees who are
               Members for that Plan Year shall not exceed the Actual Deferral
               Percentage for the preceding Plan Year for all
               Non-Highly-Compensated Employees who are Members for the
               preceding Plan Year multiplied by 1.25. If the Actual Deferral
               Percentage for those Highly-Compensated Employees does not meet
               the foregoing test, the Actual Deferral Percentage for such
               Highly-Compensated Employees for that Plan Year may not exceed
               the Actual Deferral Percentage for the preceding Plan Year for
               all Non-

                                      -21-


               Highly-Compensated Employees who are Members for the
               preceding Plan Year by more than two percentage points, and the
               Actual Deferral Percentage for those Highly-Compensated Employees
               for the Plan Year may not be more than 2.0 times the Actual
               Deferral Percentage for the preceding Plan Year for all
               Non-Highly-Compensated Employees who are Members for the
               preceding Plan Year (or such lesser amount as the Committee shall
               determine to satisfy the provisions of Section 6.3).
               Notwithstanding the foregoing, the Committee may elect to use the
               Actual Deferral Percentage for Non-Highly-Compensated Employees
               for the Plan Year being tested rather than the preceding Plan
               Year, provided that the election with respect to a Plan Year once
               made may not be changed, except as provided by the Secretary of
               the Treasury.

               If the Committee determines that the foregoing limitation has
               been exceeded in any Plan Year, the following provisions shall
               apply:

               The actual deferral ratio of the Highly-Compensated Employee with
               the highest actual deferral ratio shall be reduced to the extent
               necessary to meet the Actual Deferral Percentage test or to cause
               that ratio to equal the actual deferral ratio of the
               Highly-Compensated Employee with the next highest ratio. This
               process will be repeated until the Actual Deferral Percentage
               test is passed. Each ratio shall be rounded to the nearest one
               one-hundredth of 1% of the Member's Statutory Compensation. The
               amount of Pre-Tax Savings Contributions made by each
               Highly-Compensated Employee in excess of the amount permitted
               under his or her revised deferral ratio shall be added together.
               This total dollar amount of excess contributions ("excess
               contributions") shall then be allocated to some or all
               Highly-Compensated Employees by reducing the Pre-Tax Savings of
               the Highly-Compensated Employee with the highest dollar amount of
               Pre-Tax Savings by the lesser of (i) the amount required to cause
               that Employee's Pre-Tax Savings to equal the dollar amount of the
               Pre-Tax Savings of the Highly-Compensated Employee with the next
               highest dollar amount, or (ii) an amount equal to the total
               excess contributions. This procedure is repeated until all excess
               contributions are allocated. The amount of excess contributions
               allocated to a Highly-Compensated Employee (adjusted to reflect
               earnings or losses attributable thereto) shall be distributed to
               him or her in accordance with the provisions of paragraph (c).

         (b)   The Committee may implement rules limiting the Pre-Tax Savings
               that may be made on behalf of some or all Highly-Compensated
               Employees so that the limitation under this Section 6.1 is
               satisfied.

         (c)   Pre-Tax Savings subject to reduction under this Section, together
               with investment income thereon, ("excess contributions") shall be
               paid to the Member before the close of the Plan Year following
               the Plan Year in which the excess contributions were made and, to
               the extent practicable, within 2 1/2 months of the close of the
               Plan Year in which the excess contributions were made. However,
               any excess contributions for any Plan Year shall be reduced by
               any Pre-Tax Savings previously returned to the Member under
               Section 4.1 for that Plan Year. In the event any Pre-Tax Savings
               returned under this Section 6.1 were matched by Matching Company
               Contributions, the corresponding Matching Company

                                      -22-


               Contributions, with investment income thereon, shall be forfeited
               and used to reduce Company contributions.

6.2      ACTUAL CONTRIBUTION PERCENTAGE TEST.

         (a)   With respect to each Plan Year, the Actual Contribution
               Percentage for that Plan Year for Highly-Compensated Employees
               who are Members for that Plan Year shall not exceed the Actual
               Contribution Percentage for the preceding Plan Year for all
               Non-Highly-Compensated Employees who were Members for the
               preceding Plan Year multiplied by 1.25. If the Actual
               Contribution Percentage for a Plan Year for those
               Highly-Compensated Employees does not meet the foregoing test,
               the Actual Contribution Percentage for the Highly-Compensated
               Employees for the Plan Year may not exceed the Actual
               Contribution Percentage for the preceding Plan Year for all
               Non-Highly-Compensated Employees who were Members for the
               preceding Plan Year by more than two percentage points, and the
               Contribution Percentage for those Highly-Compensated Employees
               for the Plan Year may not be more than 2.0 times the Actual
               Contribution Percentage for the preceding Plan Year for all
               Non-Highly-Compensated Employees who were Members for the
               preceding Plan Year (or such lesser amount as the Committee shall
               determine to satisfy the provisions of Section 6.3).
               Notwithstanding the foregoing, the Plan Committee may elect to
               use the Actual Contribution Percentage for Non-Highly-Compensated
               Employees for the Plan Year being tested rather than the
               preceding Plan Year, provided that the election once made with
               respect to a Plan Year may not be changed, except as provided by
               the Secretary of the Treasury.

               If the Committee determines that the limitation under this
               Section 6.2 has been exceeded in any Plan Year, the following
               provisions shall apply:

               (i)   The actual contribution ratio of the Highly-Compensated
                     Employee with the highest actual contribution ratio shall
                     be reduced to the extent necessary to meet the Actual
                     Contribution Percentage test or to cause that ratio to
                     equal the actual contribution ratio of the
                     Highly-Compensated Employee with the next highest actual
                     contribution ratio. This process will be repeated until the
                     Actual Contribution Percentage test is passed. Each ratio
                     shall be rounded to the nearest one one-hundredth of 1% of
                     a Member's Statutory Compensation. The amount of Matching
                     Company Contributions made by or on behalf of each
                     Highly-Compensated Employee in excess of the amount
                     permitted under his revised actual contribution ratio shall
                     be added together. This total dollar amount of excess
                     contributions ("excess aggregate contributions") shall then
                     be allocated to some or all Highly-Compensated Employees in
                     accordance with the provisions of subparagraph (ii) of this
                     paragraph (a).

               (ii)  The Matching Company Contributions of the
                     Highly-Compensated Employee with the highest dollar amount
                     of those contributions shall be reduced by the lesser of
                     (i) the amount required to cause that Employee's Matching
                     Company Contributions to equal the dollar amount of those
                     contributions of the Highly-Compensated Employee with the
                     next highest

                                      -23-


                     dollar amount of those contributions, or (ii) an amount
                     equal to the total excess aggregate contributions. This
                     procedure is repeated until all excess aggregate
                     contributions are allocated. The amount of excess aggregate
                     contributions allocated to each Highly-Compensated
                     Employee, (adjusted to reflect earnings or losses
                     attributable thereto), shall be distributed or forfeited in
                     accordance with the provisions of paragraph (b) below.

         (b)   To the extent contributions must be paid or returned to a Member
               under paragraph (a) above, so much of the Matching Company
               Contributions, together with investment income thereon, as shall
               be necessary to equal the balance of the excess aggregate
               contributions shall be reduced with the vested Matching Company
               Contributions being paid to the Member and the Matching Company
               Contributions that are forfeitable under the Plan being forfeited
               and applied to reduce Company contributions.

         (c)   Any repayment or forfeiture of excess aggregate contributions
               shall be made before the close of the Plan Year following the
               Plan Year for which the excess aggregate contributions were made
               and, to the extent practicable, any repayment or forfeiture shall
               be made within 2 1/2 months of the close of the Plan Year in
               which the excess aggregate contributions were made.

6.3      AGGREGATE CONTRIBUTION LIMITATION. Notwithstanding the provisions of
         Sections 6.1 and 6.2, in no event shall the sum of the Actual Deferral
         Percentage of the group of eligible Highly-Compensated Employees and
         the Actual Contribution Percentage of that group, after applying the
         provisions of Sections 6.1 and 6.2, exceed the "aggregate limit" as
         provided in Section 401(m)(9) of the Code and the regulations issued
         thereunder. In the event the aggregate limit is exceeded for any Plan
         Year, the Actual Contribution Percentages of the Highly-Compensated
         Employees shall be reduced to the extent necessary to satisfy the
         aggregate limit in accordance with the procedure set forth in Section
         6.2.

6.4      ADDITIONAL DISCRIMINATION TESTING PROVISIONS.

         (a)   If any Highly-Compensated Employee is a member of another
               qualified plan of the Company or an Associated Company, other
               than an employee stock ownership plan described in Section
               4975(e)(7) of the Code or any other qualified plan that must be
               mandatorily disaggregated under Section 410(b) of the Code, under
               which pre-tax contributions or matching contributions are made on
               behalf of the Highly-Compensated Employee, the Committee shall
               implement rules, which shall be uniformly applicable to all
               employees similarly situated, to take into account all such
               contributions for the Highly-Compensated Employee under all such
               plans in applying the limitations of Sections 6.1, 6.2, and 6.3.
               If any other such qualified plan has a plan year other than the
               Plan Year, the contributions to be taken into account in applying
               the limitations of Sections 6.1, 6.2, and 6.3 will be those made
               in the plan years ending with or within the same calendar year.

         (b)   In the event that this Plan is aggregated with one or more other
               plans to satisfy the requirements of Sections 401(a)(4) and
               410(b) of the Code (other than

                                      -24-


               for purposes of the average benefit percentage test) or if one or
               more other plans is aggregated with this Plan to satisfy the
               requirements of Sections 401(a)(4) and 410(b) of the Code, then
               the provisions of Sections 6.1, 6.2, and 6.3 shall be applied by
               determining the Actual Deferral Percentage and Actual
               Contribution Percentage of employees as if all such plans were a
               single plan. If this Plan is permissively aggregated with any
               other plan or plans for purposes of satisfying the provisions of
               Section 401(k)(3) of the Code, the aggregated plans must also
               satisfy the provisions of Sections 401(a)(4) and 410(b) of the
               Code as though they were a single plan. Plans may be aggregated
               under this paragraph (c) only if they have the same plan year.

         (c)   The Committee may elect to use Pre-Tax Savings or Retirement
               Contributions to satisfy the tests described in Sections 6.2 and
               6.3, provided that the test described in Section 6.1 is met prior
               to that election, and continues to be met following the Company's
               election to shift the application of those Pre-Tax Savings or
               Retirement Contributions from Section 6.1 to Section 6.2.

         (d)   The Company may authorize that special "qualified nonelective
               contributions" shall be made for a Plan Year, which shall be
               allocated in such amounts and to such Members, who are not Highly
               Compensated Employees, as the Committee shall determine. The
               Committee shall establish such separate accounts as may be
               necessary. Qualified nonelective contributions shall be 100%
               nonforfeitable when made, and any earnings credited on any
               qualified nonelective contributions shall not be available for
               withdrawal prior to a Member's Termination of Employment.
               Qualified nonelective contributions made for the Plan Year may be
               used to satisfy the tests described in Sections 6.1, 6.2 and 6.3,
               where necessary.

6.5      MAXIMUM ANNUAL ADDITIONS

         (a)   Notwithstanding any other provision of the Plan, except as
               otherwise provided in this Section 6.5(a), the annual addition to
               a Member's Accounts for any Plan Year, which shall be considered
               the limitation year for purposes of Section 415 of the Code, when
               added to the Member's annual addition for that Plan Year under
               any other qualified defined contribution plan of the Company or
               Associated Company, shall not exceed an amount that is equal to
               the lesser of (i) 25% of his or her aggregate remuneration for
               the year or (ii) $30,000, as adjusted to reflect increases in the
               limitation pursuant to Code subsection 415(d).

         (b)   For purposes of this Section 6.5, the "annual addition" to a
               Member's Accounts under this Plan for any Plan Year shall be the
               sum of (i) the total contributions, including Pre-Tax Savings,
               made on the Member's behalf by the Company and all Associated
               Companies for the Plan Year, (ii) all Member contributions
               (exclusive of any Rollover Contributions) for the Plan Year, and
               (iii) the amount of any forfeiture that is credited to the
               Member's Account for the Plan Year pursuant to Section 5.5(c).

         (c)   If the annual additions to a Member's Accounts for any Plan Year,
               prior to the application of the limitations set forth in
               paragraph (a) above, exceeds that limitation due to a reasonable
               error in estimating a Member's annual

                                      -25-


               compensation or in determining the amount of Pre-Tax Savings that
               may be made with respect to a Member under Section 415 of the
               Code, or as the result of the allocation of forfeitures, the
               amount of contributions credited to the Member's Accounts in that
               Plan Year shall be adjusted to the extent necessary to satisfy
               that limitation, in accordance with the following order of
               priority:

               (i)   The Member's Supplemental Pre-Tax Savings under Section 3.1
                     shall be reduced to the extent necessary. The amount of the
                     reduction shall be returned to the Member, together with
                     earnings on the contributions to be returned.

               (ii)  The Member's Basic Pre-Tax Savings and corresponding
                     Matching Company Contributions shall be reduced to the
                     extent necessary. The amount of the reduction attributable
                     to the Member's Basic Pre-Tax Savings shall be returned to
                     the Member, together with any earnings on those
                     contributions to be returned, and the amount attributable
                     to Matching Company Contributions shall be forfeited and
                     used to reduce subsequent contributions payable by the
                     Company.

               (iii) The Member's Retirement Contributions under Section 5.2 to
                     the extent necessary shall be held unallocated in a
                     suspense account and shall be used to reduce future Company
                     contributions for all remaining Members in the next
                     limitation year. If a suspense account is in existence at
                     any time during a limitation year, it will not participate
                     in the allocation of the investment gains and losses of the
                     Trust Fund and all assets in the suspense account must be
                     allocated to Members before any contributions may be made
                     for that Plan Year.

         Any Pre-Tax Savings returned to a Member under this subparagraph (c)
         shall be disregarded in applying the dollar limitation on Pre-Tax
         Savings under Section 4.1 and in performing the Actual Deferral
         Percentage test under Section 6.1.

         (d)   In the event that any Member of this Plan is a participant in any
               other defined contribution plan (whether or not terminated)
               maintained by the Company or any Associated Company, the total
               amount of annual additions to the Member's Accounts under all
               such defined contribution plans shall not exceed the limitations
               set forth in this Section 6.5. If it is determined that as a
               result of the limitations set forth in this subparagraph (d), the
               annual additions to the Member's Accounts must be reduced:

               (i)   first, the annual additions to the Member's Accounts under
                     the other defined contribution plans shall be reduced to
                     the extent necessary and to the extent permitted by law so
                     that the limitations described in Section 6.5(a) are not
                     exceeded; and

               (ii)  second, if after application of clause (i) the annual
                     additions to the Member's Accounts are still in excess of
                     the permissible amount, the annual additions to the
                     Member's Accounts under this Plan shall be reduced.

                                      -26-


         With respect to Plan Years commencing prior to January 1, 2000, in the
         event that any Member of the Plan is also a participant in any defined
         benefit plan maintained by the Company or any Associated Company, it is
         intended that the benefits under the defined benefit plan shall be
         reduced prior to the application of the limitations contained in
         Section 6.5(a) to the annual additions to the Member's Accounts under
         this Plan, to the extent necessary to satisfy the requirements of
         Section 415(e) of the Code.

         (e)   For purposes of this Section, the term "remuneration" with
               respect to any Member shall mean the wages, salaries, and other
               amounts paid in respect of the Member by the Company or an
               Associated Company for personal services actually rendered, and
               shall include amounts contributed by the Company or an Associated
               Company pursuant to a salary reduction agreement that are not
               includible in gross income of the employee under Sections 125,
               402(g)(3), or 457 of the Code, but shall exclude deferred
               compensation.

                                  ARTICLE SEVEN
                           INVESTMENT OF CONTRIBUTIONS

7.1      INVESTMENT FUNDS.

         (a)   Contributions to the Plan and amounts transferred to the Plan
               from the ITT Plan shall be invested in one or more Funds, as
               authorized by the Committee, which from time to time may include
               such guaranteed investment contract funds, bond funds, balanced
               funds, equity index funds, growth equity funds, international
               stock funds, company stock funds (including an ESI Stock Fund),
               and other funds as the Committee elects to offer. A Fund selected
               by the Committee shall be communicated to Members and Deferred
               Members in a timely fashion.

         (b)   In any Fund, the Trustee in its sole discretion temporarily may
               hold cash or make short-term investments in obligations of the
               United States Government, commercial paper, or an interim
               investment fund for tax-qualified employee benefit plans
               established by the Trustee, unless otherwise provided by
               applicable law, or other investments of a short-term nature.

         (c)   Dividends, interest, and other distributions received on the
               assets held by the Trustee in respect to each of the Funds shall
               be reinvested in the respective Fund.

7.2      INVESTMENT OF CONTRIBUTIONS. Contributions under the Plan shall be
         invested by the Trustee as follows:

         (a)   Matching Company Contributions and Retirement Contributions shall
               be invested entirely in the ESI Stock Fund, except when a Member
               who has attained age 55 elects otherwise pursuant to Section 7.5.

         (b)   Matching Company Contributions made before the Effective Date
               under the ITT Plan (or a predecessor to the ITT Plan) shall be
               invested entirely in the ESI Stock Fund, except when a Member who
               has attained age 55 elects otherwise pursuant to Section 7.5.

                                      -27-


         (c)   A Member's or Deferred Member's or Employee's Pre-Tax Savings
               Account, After-Tax Savings Account, and Rollover Account shall be
               invested, in multiples of 1%, in any one or more of the Funds as
               designated by the Member or Deferred Member pursuant to rules and
               procedures established by the Committee.

         (d)   A Member's or Deferred Member's ITT Floor Contribution Account
               and amounts transferred from the ITT Plan and credited to a
               Member's or Deferred Member's Retirement Contribution Account
               shall be invested in the ESI Stock Fund, except to the extent a
               Member who has attained age 55 elects otherwise pursuant to
               Section 7.5.

7.3      CHANGE IN FUTURE CONTRIBUTION INVESTMENT ELECTION. A Member (or an
         Employee who made a Rollover Contribution prior to meeting the
         eligibility requirements for membership, with respect to future
         Rollover Contributions) may change his or her investment election with
         respect to future contributions made by or on his or her behalf at any
         time within the limitations set forth in Section 7.2. Such a change
         shall be made in 1% multiples, in accordance with the administrative
         procedures and within the time period prescribed by the Committee and
         shall be effective as soon as practicable thereafter.

7.4      REDISTRIBUTION OF ACCOUNTS AMONG THE FUNDS

         (a)   A Member or Deferred Member (or Beneficiary in the event of the
               death of a Member or Deferred Member) may elect at any time to
               reallocate on any Valuation Date all or part, in multiples of 1%,
               of his or her Pre-Tax Investment Account and, if applicable, his
               or her After-Tax Investment Account and Rollover Account among
               the Funds. An Employee who has made a Rollover Contribution prior
               to meeting the eligibility requirements for membership may elect
               at any time to reallocate on any Valuation Date all or part, in
               multiples of 1%, of his or her Rollover Account among the Funds.
               Reallocations shall be made in accordance with the administrative
               procedures and within the time period prescribed by the Committee
               and shall be effective as soon as practicable thereafter.

7.5      INVESTMENT OPTION AT AGE 55. In accordance with the administrative
         procedures prescribed by the Committee, and except as otherwise
         provided in Section 7.2 above, any Member or Deferred Member who has
         attained age 55 (or Beneficiary in the event of the death of a Member
         or Deferred Member who had or would have attained age 55 at the time of
         the election) shall have the option to elect the following:

         (a)   to reallocate on any Valuation Date to any one or more of the
               Funds, in multiples of 1%, all or part of his or her previously
               credited Company Matching Contribution Account, Retirement
               Contribution Account, or ESOP Account; and

         (b)   to have any future Matching Company Contributions and Retirement
               Contributions invested in any one or more of the Funds other than
               the ITT Corporation Stock Fund or the ITT Destinations Stock
               Fund, in multiples of 1%.

         If a Member is age 55 or older when he or she joins the Plan or becomes
         a Member, he or she may have all or part of the Matching Company
         Contributions and Retirement

                                      -28-


         Contributions made pursuant to Sections 5.1 and 5.2 on his or her
         behalf invested in any one or more of the Funds in multiples of 1%.

         Such changes shall be made in accordance with the administrative
         procedures and within the time period prescribed by the Committee and
         shall be effective as soon as practicable thereafter and shall be
         separate from the elections made pursuant to Section 7.2(c) or 7.4.

7.6      VOTING OF ESI STOCK. Each Member and Employee is, for the purposes of
         this Section 7.6, hereby designated a named fiduciary within the
         meaning of Section 402(a)(2) of ERISA with respect to the shares of ESI
         Stock allocated to his or her Accounts. Each Member, Deferred Member,
         and Employee (or Beneficiary in the event of the death of the Member,
         Deferred Member or Employee) may direct the Trustee as to the manner in
         which the ESI Stock allocated to his or her Accounts is to be voted.
         Before each annual or special meeting of shareholders of ESI, there
         shall be sent to each Member, Deferred Member, Beneficiary, and
         Employee who has made a Rollover Contribution a copy of the proxy
         solicitation material for the meeting, together with a form requesting
         instructions to the Trustee on how to vote the ESI Stock allocated to
         the Member's, Deferred Member's, Employee's, or Beneficiary's Accounts.
         Upon receipt of the instructions, the Trustee shall vote the shares as
         instructed. In lieu of voting fractional shares as instructed by
         Members, Deferred Members, Employees, or Beneficiaries, the Trustee may
         vote the combined fractional shares of ESI Stock to the extent possible
         to reflect the directions of Members, Deferred Members, Employees, or
         Beneficiaries with allocated fractional shares of each class of stock.
         Except as otherwise provided in Article Seventeen, the Trustee shall
         vote, or abstain from voting, shares of ESI Stock allocated to Accounts
         under the Plan but for which the Trustee received no valid voting
         instructions in the manner determined by the Trustee, in its
         discretion. Instructions to the Trustee shall be in the form and
         pursuant to the procedures prescribed by the Committee.

         Any instructions received by the Trustee from Members, Deferred
         Members, Employees, and Beneficiaries regarding the voting of ESI Stock
         shall be confidential and shall not be divulged by the Trustee to the
         Company or to any director, officer, employee, or agent of the Company,
         it being the intent of this provision of Section 7.6 to ensure that the
         Company (and its directors, officers, employees, and agents) cannot
         determine the voting instructions given by any Member, Deferred Member,
         Employee, or Beneficiary.

7.7      LIMITATIONS IMPOSED BY CONTRACT. Notwithstanding anything in this
         Article to the contrary, any contributions invested in a fund of
         guaranteed investment contracts shall be subject to any and all terms
         of those contracts, including any limitations placed on the exercise of
         any rights otherwise granted to a Member under any other provisions of
         this Plan with respect to those contributions.

7.8      RESPONSIBILITY FOR INVESTMENTS. Each Member, Deferred Member, or
         Employee (or Beneficiary in the event of the death of a Member,
         Deferred Member, or Employee) is solely responsible for selection of
         his or her investment options made pursuant to Section 7.3, 7.4, or
         7.5. The Trustee, the Committee, the Company, and the officers,
         supervisors, and other employees of the Company are not empowered to
         advise a Member or Deferred Member as to the manner in which his or her
         Accounts shall be invested. The fact that a Fund is available to
         Members or Deferred Members (or Employees who have made a

                                      -29-


         Rollover Contribution prior to meeting the eligibility requirements for
         membership) for investment under the Plan shall not be construed as a
         recommendation for investment in the Fund.

                                  ARTICLE EIGHT
                  CREDITS TO MEMBERS' ACCOUNTS, VALUATION, AND
                              ALLOCATION OF ASSETS

8.1      PRE-TAX SAVINGS AND ROLLOVER CONTRIBUTIONS. Pre-Tax Savings made on
         behalf of a Member, and Rollover Contributions contributed by a Member
         or an Employee, shall be allocated to the Pre-Tax Investment Account or
         Rollover Account of that Member or Employee as appropriate, as soon as
         practicable after those contributions are transferred to the Trust
         Fund.

8.2      MATCHING COMPANY CONTRIBUTIONS. Matching Company Contributions made on
         behalf of a Member shall be allocated to the Company Matching
         Contribution Account of the Member, as soon as practicable after those
         contributions are made to the Trust Fund.

8.3      RETIREMENT CONTRIBUTIONS. Retirement Contributions made for a Member
         shall be allocated to the Retirement Contribution Account of the
         Member, as soon as practicable after those contributions are made to
         the Trust Fund.

8.4      CREDITS TO MEMBERS' ACCOUNTS. At each Valuation Date on which the Plan
         is in effect and operation, the amount of each Member's credit in each
         of the Funds shall be expressed and credited in dollars of
         contributions by the Member and Company contributions and ESI Stock
         allocated to a Member's Accounts for that payroll processing period.
         For the purposes of Section 7.6 and Article Fifteen, a Member's
         interest in the ESI Stock Fund shall be converted into shares of ESI
         Stock at any time of determination by dividing the value of all shares
         of ESI Stock in the ESI Stock Fund by the value of that Member's
         interest in the ESI Stock Fund at the time. The resulting number of
         shares of ESI Stock shall be deemed allocated to the Member.

8.5      VALUATION OF ASSETS. On each Valuation Date, the Trustee shall
         determine the total fair market value of all assets then held by it in
         each Fund.

8.6      ALLOCATION OF ASSETS. On each Valuation Date when the value of all
         assets in each Fund has been determined pursuant to Section 8.5, the
         Trustee shall determine the gain or loss in the value of the assets in
         each of the Funds. The gain or loss shall be allocated pro rata by Fund
         to the balances credited to the Accounts of all Members and Deferred
         Members immediately prior to the Valuation Date, not including new
         contributions to that Fund on the Valuation Date for that Valuation
         Date.

8.7      ANNUAL STATEMENTS. At least once a year, each Member and Deferred
         Member shall be furnished with a statement setting forth the value of
         his or her Accounts and the vested portion of his or her Accounts.

8.8      VALUATION DATES. The Committee shall establish procedures for
         determining the Valuation Dates that shall apply for withdrawals,
         distributions, or other relevant

                                      -30-


         purposes. Valuation Dates need not be the same for all purposes. The
         Funds shall be revalued on each business day.

                                  ARTICLE NINE
                 WITHDRAWALS PRIOR TO TERMINATION OF EMPLOYMENT

9.1      GENERAL CONDITIONS FOR WITHDRAWALS. Subject to the restrictions set
         forth below, at any time before Termination of Employment, a Member may
         request a withdrawal from his or her Accounts in accordance with the
         administrative procedures and within the time period prescribed by the
         Committee. Any such withdrawal shall be payable only in cash and shall
         be in accordance with the conditions of Section 9.2, 9.3, or 9.4. All
         withdrawals (other than hardship withdrawals) shall be a minimum of
         $500. No more than two withdrawal requests of any kind, including
         hardship, shall be permitted each calendar year. For purposes of this
         Article Nine, a Member's Accounts shall be valued as of the applicable
         Valuation Date. Amounts to be withdrawn and distributed to Members will
         not participate in the investment experience of the Plan after that
         Valuation Date. Withdrawn amounts generally shall be paid as soon as
         practicable following the Valuation Date. If a Member has Accounts in
         more than one Fund, the amount withdrawn shall be prorated among the
         Funds based on their respective values.

9.2      NON-HARDSHIP WITHDRAWAL PRIOR TO AGE 59 1/2. A Member who has not yet
         reached age 59 1/2 as of the date of his or her withdrawal request may
         elect, subject to Section 9.1, to withdraw from his or her Accounts in
         the following order:

         (a)   all or part of his or her After-Tax Investment Account;

         (b)   all or part of his or her Rollover Account:

         (c)   all or part of his or her ESOP Account;

         (d)   all or part of his or her ITT Floor Contributions Account;

         (e)   all or part of his or her Company Matching Contribution Account
               attributable to vested amounts contributed to (1) the
               Pre-Distribution ITT Plan before 1990 or (2) the ITT Plan prior
               to October 1, 1996.

9.3      HARDSHIP WITHDRAWAL PRIOR TO AGE 59 1/2.

         (a)   A Member who has withdrawn the total amount available for
               withdrawal under Section 9.2 may, subject to Section 9.1, elect
               to withdraw all or part of his or her Pre-Tax Savings made on his
               or her behalf under this Plan or under the ITT Plan and
               transferred to his or her Pre-Tax Investment Account, and
               earnings credited on that Account prior to January 1, 1989 under
               the Pre-Distribution ITT Plan, upon furnishing proof of Hardship
               satisfactory to the Committee.

         (b)   A Member shall be considered to have incurred a Hardship if, and
               only if, he or she meets the requirements of paragraphs (c) and
               (d) below.

         (c)   As a condition for Hardship, the Member must have an immediate
               and heavy need to draw upon his or her Pre-Tax Investment
               Account. The Committee shall

                                      -31-


               presume the existence of an immediate and heavy need if the
               requested withdrawal is on account of any of the following:

               (A)   expenses for medical care described in Section 213(d) of
                     the Code previously incurred by the Member, his or her
                     spouse or any of his or her dependents (as defined in
                     Section 152 of the Code) or necessary for those persons to
                     obtain that medical care, to the extent those expenses are
                     not paid or reimbursed by insurance;

               (B)   costs directly related to the purchase of a principal
                     residence of the Member (excluding mortgage payments);

               (C)   payment of tuition and related educational fees, including
                     room and board expenses, for the next 12 months of
                     post-secondary education of the Member, or his or her
                     spouse or dependents;

               (D)   payment of amounts necessary to prevent eviction of the
                     Member from his or her principal residence or to avoid
                     foreclosure on the mortgage of his or her principal
                     residence; or

               (E)   the inability of the Member to meet such other expenses,
                     debts, or other obligations recognized by the Internal
                     Revenue Service as giving rise to immediate and heavy
                     financial need for purposes of Section 401(k) of the Code.

         The amount of withdrawal may not exceed the amount of the immediate and
         heavy financial need of the Member, including any amounts necessary to
         pay any federal, state, or local income taxes on the amount withdrawn
         and any amounts necessary to pay any penalties reasonably anticipated
         to result from the distribution.

         In evaluating the relevant facts and circumstances, the Committee and
         any delegate thereof shall act in a nondiscriminatory fashion and shall
         treat uniformly those Members who are similarly situated. The Member
         shall furnish to the Committee or its delegate such supporting
         documents as the Committee or its delegate may request in accordance
         with uniform and nondiscriminatory rules prescribed by the Committee.

         (d)   As a condition for Hardship, the Member must demonstrate that the
               requested withdrawal is necessary to satisfy the financial need
               described in paragraph (c). The Committee shall deem the Member
               to have demonstrated such necessity, provided all of the
               following requirements are met: (A) the Member has obtained all
               distributions, other than distributions available only on account
               of hardship, and all nontaxable loans currently available under
               the Plan and all other plans of the Company and Associated
               Companies; (B) the Member is prohibited from making Pre-Tax
               Savings to the Plan and all other plans of the Company and
               Associated Companies under the terms of those plans or by means
               of an otherwise legally enforceable agreement for at least 12
               months after receipt of the distribution; and (C) the limitation
               described in Section 4.1(b) under all plans of the Company and
               Associated Companies for the calendar year following the year in
               which the withdrawal is made must be reduced by the Member's
               elective

                                      -32-


               deferrals made in the calendar year of the distribution for
               Hardship. For purposes of clause (B), "all other plans of the
               Company and Associated Companies" shall include stock option
               plans, stock purchase plans, qualified and non-qualified deferred
               compensation plans, and such other plans as may be designated
               under regulations issued under Section 401(k) of the Code, but
               shall not include health and welfare benefit plans or the
               mandatory employee contribution portion of a defined benefit
               plan.

9.4      WITHDRAWALS AFTER AGE 59 1/2. A Member who has reached age 59 1/2 as of
         the date of his or her withdrawal request may elect, subject to Section
         9.1, to withdraw from his or her Accounts in the following order:

         (a)   the total amount available for withdrawal under Section 9.2,

         (b)   all or part of his or her Company Matching Contribution Account,
               and

         (c)   all or part of his or her Pre-Tax Investment Account.

9.5      ORDERING OF WITHDRAWALS. For purposes of processing a withdrawal, basic
         after-tax savings made by a Member under the ITT Plan, and investment
         earnings and gains thereon, and supplemental after-tax savings made by
         a Member under the ITT Plan, and investment earnings and gains thereon,
         shall constitute a separate contract (Contract II), and all remaining
         amounts in the Plan with respect to a Member shall constitute another
         contract (Contract I), for purposes of Section 72(e) of the Code. The
         Committee shall maintain records of withdrawals, contributions,
         earnings, and other additions and subtractions attributable to each
         separate contract and shall credit or charge the appropriate contract,
         and adjust the non-taxable basis of each contract, for transactions
         properly allocable to that contract.

         For purposes of processing a withdrawal under Section 9.2(a)(i), the
         withdrawals will be deducted from the Member's Accounts in Contract I
         and Contract II in the following order: (i) the value of the Member's
         After-Tax Investment Account in Contract I attributable to supplemental
         after-tax savings, (ii) the value of the Member's After-Tax Investment
         Account in Contract II attributable to supplemental after-tax savings,
         (iii) the value of the Member's After-Tax Investment Account in
         Contract I attributable to basic after-tax savings and (iv) the value
         of the Member's After-Tax Investment Account in Contract II
         attributable to basic after-tax savings.

9.6      DEATH AFTER WITHDRAWAL ELECTION. If a Member elects a withdrawal and
         dies after the issuance of the check(s) comprising the withdrawal but
         prior to negotiation of the check(s), then any unpaid portion of the
         withdrawal as represented by the non-negotiated check(s) shall be paid
         to his or her estate. If more than one check comprises a withdrawal and
         the Member negotiates the first check but dies prior to the issuance of
         the subsequent check, then the subsequent check shall be paid to his or
         her estate. If a Member elects a withdrawal and dies prior to the
         issuance of any check(s) comprising the withdrawal, then the withdrawal
         election shall be voided. For purposes of this Section 9.6, the
         issuance of a check shall occur on the earlier of the date of issuance
         shown on the check or the withdrawal Valuation Date.

                                      -33-


9.7      DIRECT ROLLOVER. Certain withdrawals or portions thereof paid pursuant
         to this Article Nine may be "eligible rollover distributions" as
         defined and discussed in Section 11.7 and are governed thereby.

9.8      RETIREMENT CONTRIBUTION ACCOUNT. A Member's Retirement Contribution
         Account is not available for distribution or withdrawal prior to a
         Member's Termination of Employment.

                                   ARTICLE TEN
                                      LOANS

10.1     GENERAL CONDITIONS FOR LOANS. Subject to the restrictions set forth in
         the following provisions of this Article Ten, at any time before
         Termination of Employment, a Member who is an employee of the Company
         or an Associated Company may request a loan from his or her Accounts in
         accordance with the administrative procedures and within the time
         period prescribed by the Committee. By filing the loan request forms,
         the Member:

         (a)   specifies the amount and the term of the loan,

         (b)   agrees to the annual percentage rate of interest,

         (c)   agrees to the finance charge,

         (d)   promises to repay the loan, and

         (e)   authorizes the Company to make regular payroll deductions to
               repay the loan.

         The amount of the loan is to be transferred from the Funds in which the
         Member's Accounts are invested to a special "Loan Fund" for the Member
         under the Plan. The Loan Fund consists solely of the amount transferred
         to the Loan Fund and is invested solely in the loan made to the Member.
         The amount transferred to the Loan Fund shall be pledged as security
         for the loan. Payments of principal on the loan will reduce the amount
         held in the Member's Loan Fund. Those payments, together with the
         attendant interest payment, will be reinvested in the Funds in
         accordance with the Member's then effective investment election.

10.2     AMOUNTS AVAILABLE FOR LOANS. An eligible Member may request a loan in
         any specified whole dollar amount that, when added to the outstanding
         balance of any other loans to the Member from this Plan or any other
         qualified plan of the Company or an Associated Company, may not exceed
         the lesser of (a) 50% of the Member's Vested Share, or (b) $50,000
         reduced by the excess, if any of (i) the highest outstanding balance of
         loans during the one year period ending on the day before the loan is
         made over (ii) the outstanding balance of loans to the Member from such
         plans on the date on which the loan is made. For purposes of
         determining amounts available for loans, as described in the foregoing
         provisions of this Section 10.2, a Member's Vested Share shall be
         determined based on the latest information available to the Committee
         at the time he or she files his or her loan request with the Committee.

                                      -34-


10.3     ACCOUNT ORDERING FOR LOANS. For purposes of processing a loan, the
         amount of the loan will be deducted from the Member's Accounts in the
         following order:

         (a)   Retirement Contribution Account

         (b)   Pre-Tax Investment Account;

         (c)   Company Matching Contribution Account;

         (d)   ITT Floor Contribution Account

         (e)   ESOP Account;

         (f)   Rollover Account;

         (g)   After-Tax Account.

         A loan is deducted from a Member's Accounts as of the applicable
         Valuation Date. Amounts so deducted and distributed to a Member as a
         Plan loan will not participate in the investment experience of the Plan
         except as those amounts are repaid to the Member's Accounts.

10.4     INTEREST RATE FOR LOANS. The Committee shall establish and communicate
         to Members a reasonable rate of interest for loans commensurate with
         the interest rates charged by persons in the business of lending money
         for loans that would be made under similar circumstances, as determined
         by the Committee, which interest rate shall remain in effect for the
         term of the loan.

10.5     TERM AND REPAYMENT OF LOAN. In addition to such rules and regulations
         as the Committee may adopt, all loans shall comply with the following
         terms and conditions:

               (i)   An application for a loan by a Member shall be made in
                     writing to the Committee in the manner prescribed by the
                     Committee, whose action in approving or disapproving the
                     application shall be final;

               (ii)  Each loan shall be evidenced by a promissory note payable
                     to the Plan;

               (iii) The period of repayment for any loan shall be arrived at by
                     mutual agreement between the Committee and the Member, but
                     that period shall not exceed five years unless the loan is
                     to be used in conjunction with the purchase of the
                     principal residence of the Member.

               (iv)  Payments of principal and interest will be made by payroll
                     deductions, or in a manner agreed to by the Member and the
                     Committee, in substantially level amounts, but no less
                     frequently than quarterly, in an amount sufficient to
                     amortize the loan over the repayment period;

               (v)   Repayment of the loan is made to the Member's Accounts from
                     which the loan amount was deducted in inverse order to the
                     Account ordering

                                      -35-


                     described in Section 10.3. Repayments are invested in the
                     Member's Accounts in accordance with his or her current
                     investment election.

10.6     FREQUENCY OF LOAN REQUESTS. A Member may have only one loan outstanding
         at any time. Unless the Committee determines otherwise on a basis
         uniformly applicable to all persons similarly situated, a Member who
         fully repays a loan may not apply for another loan until one month
         following the effective date of the final repayment. Effective January
         1, 2002, a Member who fully repays a loan may apply for another loan
         immediately after the effective date of the final repayment.

10.7     PREPAYMENT OF LOANS. A Member may prepay the entire outstanding balance
         of a loan, with interest to date of repayment, in the manner and under
         the procedures established by the Committee. No partial prepayments
         shall be permitted.

10.8     OUTSTANDING LOAN BALANCE AT TERMINATION OF EMPLOYMENT. In addition to
         such rules and regulations as the Committee shall adopt, upon the
         Member's Termination of Employment, the outstanding balance of any loan
         shall become due and payable. If the Member does not elect to prepay
         within the time period prescribed by the Committee, the outstanding
         loan balance and any accrued interest shall be treated as a taxable
         distribution.

10.9     LOAN DEFAULT DURING EMPLOYMENT. Under certain circumstances, including,
         but not limited to, the Member's failure to make repayment or the
         bankruptcy of the Member, the Committee may declare a Member's loan to
         be in default. In the event default is declared for a Member who has
         not reached age 59 1/2, the outstanding balance shall become due and
         payable, and the outstanding loan balance and any accrued interest
         shall be deemed a taxable distribution. In the event default is
         declared for a Member who has reached age 59 1/2, the outstanding loan
         balance and any accrued interest shall be treated as a withdrawal prior
         to Termination of Employment subject to the provisions of Article Nine.
         A Member who has defaulted on a loan shall be prohibited from applying
         for any future loans.

10.10    INCORPORATION BY REFERENCE. Any additional rules or restrictions as may
         be necessary to implement and administer Plan loans shall be
         established by the Committee in written guidelines and shall be
         communicated to Members who apply for loans. The written guidelines are
         hereby incorporated into the Plan by reference, and pursuant to Section
         13.2(b), the Committee is hereby authorized to make such revisions to
         these guidelines as it deems necessary or appropriate on the advice of
         counsel.

10.11    DEATH AFTER LOAN APPLICATION. If a Member applies for a loan and dies
         after a check for the loan amount has been issued but prior to
         negotiation of the check, then the loan shall be paid to his or her
         estate. If a Member applies for a loan and dies before the check for
         the loan amount is issued, then the loan application shall be voided.
         For purposes of this Section 10.11, the check will be deemed to have
         been issued on the earlier of the date of issuance shown on the check
         or the loan Valuation Date.

10.12    MILITARY LEAVE. Notwithstanding any Plan provisions to the contrary, in
         the event a Member enters the uniformed services of the United States
         and retains reemployment rights under the law, repayment of a loan
         shall be suspended during the period of leave,

                                      -36-


         and the period of repayments shall be extended by the number of months
         of the period of service in the uniformed services; provided, however,
         if the Member incurs a Termination of Employment and requests a
         distribution pursuant to Article Eleven, the loan shall be canceled,
         and the outstanding loan balance shall be distributed pursuant to
         Article Eleven.

                                 ARTICLE ELEVEN
                                  DISTRIBUTIONS

11.1     COMMENCEMENT OF PAYMENTS.

         (a)   Except as otherwise provided in this Article, distribution of the
               Vested Share of a Member's Accounts shall commence as soon as
               administratively practicable following the later of (i) the
               Member's Termination of Employment or (ii) the date the Member
               attains age 70 1/2, but not later than 60 days after the close of
               the Plan Year in which the later of (i) or (ii) occurs.

         (b)   In lieu of a distribution as described in paragraph (a) above, a
               Member or Deferred Member whose Vested Share exceeds $5,000, may,
               in accordance with procedures prescribed by the Committee, elect
               to have the distribution of his or her Vested Share commence as
               of any Valuation Date coincident with or following his or her
               Termination of Employment that is before the date described in
               paragraph (a) above.

         (c)   In the case of the death of a Member or Deferred Member before
               payment of his or her Accounts commences, the Vested Share of his
               or her Accounts shall be distributed to his or her Beneficiary as
               soon as administratively practicable following the Member's or
               Deferred Member's date of death. Notwithstanding the foregoing,
               the Beneficiary of a Member or Deferred Member whose Vested Share
               of his or her Accounts, as of the Valuation Date coincident with
               or next following the Member's or Deferred Member's date of
               death, exceeds $5,000 may elect to defer receipt of the Member's
               or Deferred Member's Vested Share for a period not to exceed 12
               months from the Member's or Deferred Member's date of death.

         (d)   A Member who attained age 70 1/2 before January 1, 1997 must
               commence distribution of his or her Vested Share by no later than
               the April 1 following the year in which he or she attained age 70
               1/2. If a Member attains age 70 1/2 after January 1, 1997, but
               before January 1, 1999, distribution of the Vested Share of his
               Accounts shall begin by April of the calendar year following the
               calendar year in which the Member attains age 70 1/2 unless the
               Member elects to defer commencement of his Plan benefits until a
               date no later than April of the calendar year following the
               calendar year in which the Member's Termination of Employment
               occurs. A Member described in this paragraph (d) may elect that
               his or her Vested Share be paid under the payment method
               described in Section 11.2(b)(i) below, if permissible under the
               terms of that payment method, or in an immediate lump sum.
               Payment of the Vested Share of a Member who has attained age
               701/2 pursuant to this paragraph (d) shall be made no less
               frequently than annually, and once payment has commenced, the
               Member may

                                      -37-


               not elect an alternate method for payment of his or her
               Vested Share while the Member is still an Employee.

         (e)   A Deferred Member or a Member who is a "5-percent owner" as
               defined in Code Section 414(q)(1) must commence distribution of
               his or her Vested Share by no later than the April 1 following
               the year in which he or she attains age 70 1/2. Notwithstanding
               the foregoing, a Member who attains 70 1/2 on or after January 1,
               1996, and who is not a "5-percent owner" may elect to receive
               payments while in Service. In either case, the Member may elect
               that his or her Vested Share be paid in accordance with options
               (i) or (ii) below:

               (i)   one lump sum payment on or before the April 1 of the
                     calendar year following the calendar year in which he or
                     she attains age 70 1/2 equal to his or her entire Vested
                     Share and annual lump sum payments thereafter of amounts
                     accrued during each calendar year; or

               (ii)  payments in annual installments over a period designated by
                     the Member not to exceed 20 years. In the event that the
                     Member dies before all installments have been paid, the
                     remaining balance of his or her Vested Share shall be paid
                     in an immediate cash lump sum to his or her Beneficiary.

               Once payment has commenced, the Member may not elect an alternate
               method for payment, except as otherwise provided in Section 11.2.

         (f)   With respect to distributions under the Plan made for Plan Years
               beginning on or after January 1, 2002, the Plan will apply the
               minimum distribution requirements of Code paragraph 401(a)(9) in
               accordance with the regulations under that paragraph that were
               proposed on January 17, 2001, notwithstanding any provision of
               the Plan to the contrary. This provision will continue in effect
               until the end of the last calendar year beginning before the
               effective date of final regulations under paragraph 401(a)(9) or
               such other date as may be specified in guidance published by the
               Internal Revenue Service.

11.2     FORMS AND METHODS OF DISTRIBUTION.

         (a)   After Termination of Employment occurs, and as soon as
               practicable following application by the Member, Deferred Member
               or Beneficiary, distribution under the Plan shall be made in a
               lump sum, unless an election is made by a Member or Deferred
               Member pursuant to paragraph (b) below.

         (b)   A Member or Deferred Member whose Vested Share, as of the
               Valuation Date corresponding to his or her application for
               distribution, exceeds $5,000 may elect, in accordance with the
               administrative procedures and within the time period prescribed
               by the Committee, to receive his or her Vested Share in one of
               the following optional forms:

                                      -38-


               (i)   payments in approximately equal monthly or annual cash
                     installments over a period, designated by the Member or
                     Deferred Member, not to exceed 20 years, or

               (ii)  with respect to elections made that result in annuity
                     starting dates that occur before April 1, 2002, the
                     purchase of a nonforfeitable fixed annuity, provided that
                     if the Member or Deferred Member is married, the benefit
                     shall be in the form of a qualified joint and survivor
                     annuity. For these purposes, a qualified joint and survivor
                     annuity is a monthly annuity for the life of the Member,
                     with monthly payments continuing after the Member's death
                     to the Member's surviving spouse in a monthly amount equal
                     to 50% of the monthly amount the Member received during his
                     or her lifetime. The Member or Deferred Member may elect,
                     during the 90-day period preceding his or her annuity
                     starting date, not to take the qualified joint and survivor
                     annuity and to take instead another form of annuity,
                     provided that he or she obtains his or her spouse's
                     written, notarized consent. Elections under clause (ii)
                     shall be subject to receipt by the Committee of the
                     Member's or Deferred Member's written spousal consent to
                     that election. The spousal consent must be witnessed by a
                     notary public and must acknowledge the effect on the spouse
                     of the Member's or Deferred Member's election. The
                     Committee shall furnish each Member or Deferred Member no
                     less than 30 days nor more than 90 days before the benefit
                     commencement date a written explanation of the qualified
                     joint and survivor annuity in accordance with applicable
                     law. A Member or Deferred Member may revoke his or her
                     election and make a new election from time to time and at
                     any time during the aforesaid election period. If the
                     annuity form selected is not a qualified joint and survivor
                     annuity with the Member's or Deferred Member's spouse as
                     the Beneficiary, the annuity payable to the Member or
                     Deferred Member and thereafter to his Beneficiary shall be
                     subject to the incidental death benefit rule as described
                     in Section 401(a)(9)(G) of the Code and its applicable
                     regulations.

         In the event that the Member or Deferred Member elects installments and
         dies before all installments have been paid, the remaining balance of
         his or her Vested Share shall be paid in an immediate cash lump sum to
         his or her Beneficiary; provided, however the Beneficiary may elect in
         accordance with the administrative procedures and within such time
         period as the Committee shall prescribe to continue payment of the
         deceased Member's or Deferred Member's Account pursuant to the same
         method of distribution elected by the Member or the Deferred Member.

         Any Member or Deferred Member who elects annual or monthly installment
         payments may, at any time thereafter, elect by filing a request with
         the Committee to receive in a lump sum the remaining value of any
         unpaid installments.

         (c)   Alternative methods of distribution may apply to that portion of
               a Member's or a Deferred Member's Accounts attributable to a
               Prior Plan Transfer.

                                      -39-


         (d)   If a Member or a Deferred Member dies before his or her benefits
               commence, the Vested Share of his or her Accounts shall be paid
               to his or her Beneficiary in a lump sum. However, if a Member or
               a Deferred Member who has elected an annuity under Section
               11.2(a)(ii) dies before his or her benefit commences, and his or
               her spouse is his or her Beneficiary, payment shall be made to
               the spouse in the form of a life annuity unless the spouse elects
               a lump sum.

         (e)   All distributions shall be made in cash; provided, however, that
               a Member, Deferred Member, or Beneficiary may elect to receive a
               distribution from the ESI Stock Fund in ESI Stock, with any
               fractional interest in a share of ESI Stock paid in cash.

         (f)   Notwithstanding any other provision of this Article Eleven, all
               distributions from the Plan shall conform to the regulations
               issued under Section 401(a)(9) of the Code, including the
               incidental death benefit provisions of Section 401(a)(9)(G) of
               the Code. Further, those regulations shall override any Plan
               provision that is inconsistent with Section 401(a)(9) of the
               Code.

11.3     SMALL BENEFITS. Notwithstanding any provision of the Plan to the
         contrary, a lump sum payment shall be made in lieu of all vested
         benefits if the value of the Vested Share of the Member's Accounts as
         of the time the benefits are distributed amounts to $5,000 or less. The
         lump sum payment shall automatically be made as soon as
         administratively practicable following the Member's Termination of
         Employment.

11.4     DEATH OF BENEFICIARY. Upon the death of a Beneficiary with Accounts
         remaining in the Plan, the remaining value of all such Accounts shall
         be paid in a lump sum distribution as soon as practicable to the
         Beneficiary, if any, selected by the deceased Beneficiary, or if no
         Beneficiary has been named by the deceased Beneficiary, the remaining
         value of all such Accounts shall be paid in a lump sum distribution as
         soon as practicable to the estate of the deceased Beneficiary.

11.5     PROOF OF DEATH AND RIGHT OF BENEFICIARY OR OTHER PERSON. The Committee
         may require and rely on such proof of death and such evidence of the
         right of any Beneficiary or other person to receive the undistributed
         value of the Accounts of a deceased Member, Deferred Member, or
         Beneficiary as the Committee deems proper, and the Committee's
         determination of death and of the right of a Beneficiary or other
         person to receive payment shall be conclusive. Payment to any
         Beneficiary shall be final and fully satisfy and discharge the
         obligation of the Plan with respect to any and all Accounts of a
         deceased Member or deceased Deferred Member. In the event of a dispute
         regarding the account of a deceased Member or Deferred Member, the
         Committee may make a final determination or initiate or participate in
         any action or proceeding as may be necessary or appropriate to
         determine any Beneficiary under the Plan. During the pendency of any
         action or proceeding, the Committee may deposit an amount equal to the
         disputed payment with the court, and such deposit shall relieve the
         Plan of all of its obligation with respect to any such disputed
         Accounts.

11.6     RESTORATION OF PRIOR FORFEITURE. If a Member's employment is terminated
         otherwise than by retirement or Disability, and as a result of the
         termination an amount to his or her credit is forfeited in accordance
         with the provisions of Section 5.5, that amount shall be

                                      -40-


         subsequently restored to his or her Accounts, provided he or she is
         reemployed by the Company or an Associated Company prior to the
         expiration of a Break in Service of five years, and, after giving any
         prior written notice required by the Committee, he or she repays to the
         Trust Fund an amount in cash equal to the full amounts of his or her
         Pre-Tax Investment Account attributable to Basic Pre-Tax contributions,
         his or her vested Company Matching Contribution Account, Retirement
         Contribution Account, ITT Floor Contribution Account, and his or her
         ESOP Account distributed to him or her from the Trust Fund on account
         of his or her Termination of Employment. (At his or her option, the
         Member may repay the amount of his or her Pre-Tax Investment Account
         attributable to Supplemental Pre-Tax Savings and Rollover Account.) The
         repayment must be made within five years of the date he or she is
         reemployed by the Company or an Associated Company and shall be made in
         one lump sum. Repaid amounts shall be invested in the Funds in
         accordance with Member's then current investment election.

11.7     DIRECT ROLLOVER OF CERTAIN DISTRIBUTIONS. Notwithstanding any other
         provision of this Plan, with respect to any withdrawal or distribution
         from this Plan pursuant to Article Nine or this Article Eleven that is
         determined by the Committee to be an "eligible rollover distribution,"
         the distributee may elect, at the time and in a manner prescribed by
         the Committee for that purpose, to have the Plan make a "direct
         rollover" of all or part of the withdrawal or distribution to an
         "eligible retirement plan" that accepts such rollovers. The following
         definitions apply to the terms used in this Section 11.7:

         (a)   "Distributee" means a Member or Deferred Member. In addition, the
               Member's or Deferred Member's spouse Beneficiary and the Member's
               or Deferred Member's spouse or former spouse who is the alternate
               payee under a Qualified Domestic Relations Order, are
               distributees with regard to the interest of the spouse or former
               spouse.

         (b)   "Eligible rollover distribution" is any withdrawal or
               distribution of all or any portion of a Member's or Deferred
               Member's Vested Share owing to the credit of a distributee,
               except that the following distributions shall not be eligible
               rollover distributions: (i) any distribution that is one of a
               series of substantially equal periodic payments made for the life
               or life expectancy of the distributee, or for a specified period
               of ten years or more, (ii) any distribution required under
               Section 401(a)(9) of the Code, (iii) the portion of a
               distribution not includible in gross income, (iv) any other
               distribution that is not an eligible rollover distribution under
               the Code or regulations thereunder and (v) effective January 1,
               1999, any hardship distribution described in Code subclause
               401(k)(2)(B)(i)(IV).

         (c)   "Eligible retirement plan" means an individual retirement account
               described in Section 408(a) of the Code, an individual retirement
               annuity described in Section 408(b) of the Code, an annuity plan
               described in Section 403(a) of the Code, or a qualified plan
               described in Section 401(a) of the Code that accepts the eligible
               rollover distribution. However, in the case of an eligible
               rollover distribution to the spouse Beneficiary of the Member or
               Deferred Member, an eligible retirement plan is an individual
               retirement account or individual retirement annuity only.

                                      -41-


         (d)   "Direct rollover" means a payment by the Plan directly to the
               eligible retirement plan specified by the distributee.

         In the event that the provisions of this Section 11.7 or any part
         thereof cease to be required by law as a result of subsequent
         legislation or otherwise, this Section 11.7 or applicable part thereof
         shall be of no further force or effect without necessity of further
         amendment of the Plan.

11.8     ELECTIVE TRANSFERS FROM PLAN. Notwithstanding any other provision of
         this Plan, a distribution from this Plan pursuant to Article Nine or
         this Article Eleven that is payable proximate to, and solely on account
         of, either a disposition of assets or a subsidiary, as described in
         Code Section 401(k)(10), shall be eligible for an elective transfer to
         a transferee employee plan as set forth herein.

         (a)   Elective Transfer. An elective transfer of a Member's benefits
               between this Plan and another qualified plan maintained by a
               transferee shall be available only if the transfer meets the
               requirements of Code Section 414(1) and each of the following
               requirements have been met:

               (i)   Voluntary Election

                     (A)  Member Election. The transfer must have been
                          conditioned upon a voluntary, fully informed election
                          by the Member to transfer that Member's Accounts to
                          the transferee plan.

                     (B)  Benefit Retention Alternative. In making the voluntary
                          election provided for in this Section, the Member
                          shall have had the option of retaining the Member's
                          Account benefits (including all optional forms of
                          benefit) under this Plan.

                     (C)  Spousal Election. If Code Sections 401(a)(11) and 417
                          otherwise apply to the Account, the spousal consent
                          requirements of that section must have been met with
                          respect to the transfer of benefits.

                     (D)  Notice Requirement. The notice requirement under Code
                          Section 417, if applicable, must have been met with
                          respect to the Member and spousal transfer election.

               (ii)  Distributability of Benefits. The Member whose Account is
                     transferred must have been eligible, under the terms of
                     Article Ten and this Article Eleven, to receive an
                     immediate distribution from the Plan.

               (iii) Amount of Benefit Transferred. The amount of the benefit
                     transferred must have equaled the entire nonforfeitable
                     Account balance under the Plan of the Member whose benefit
                     is being transferred.

               (iv)  Benefit Under the Transferee Plan. The Member must have
                     been fully vested in the transferred benefit in the
                     transferee plan.

                                      -42-


         (b)   Status of Elective Transfer as Distribution. The transfer of
               benefits pursuant to the elective transfer rules of this Section
               11.8 generally is to be treated as a distribution of a Member's
               accrued benefit under the Plan. However, the transfer is not to
               be treated as a distribution for purposes of the minimum
               distribution requirements of Section 401(a)(9).

11.9     ELECTIVE TRANSFER TO PLAN. With the permission of the Committee, the
         Plan shall accept elective transfers from plans qualified under Code
         Section 401(a) that result from an acquisition of assets or a
         subsidiary by the Company, within the meaning of Code Section
         401(k)(10), provided that the elective transfer meets the requirements
         of Code Section 414(1) and Treasury Regulation 1.411(d)(4), Q&A-3(b).

11.10    WAIVER OF NOTICE PERIOD. Except as provided in the following sentence,
         if the value of the Vested Share of a Member's Accounts exceeds $5,000,
         an election by the Member or Deferred Member to receive a distribution
         shall not be valid unless the written election is made (a) after the
         Member has received the notice required under Section 1.411(a)-11(c) of
         the Income Tax Regulations and (b) within a reasonable time before the
         effective date of the commencement of the distribution as prescribed by
         those regulations. If a distribution is one to which Sections
         401(a)(11) and 417 of the Code do not apply, the distribution may
         commence less than 30 days after the notice required under Section
         1.411(a)-11(c) of the Income Tax Regulations is given, provided that:

               (i)   the Committee clearly informs the Member or Deferred Member
                     that he or she has a right to a period of at least 30 days
                     after receiving the notice to consider the decision of
                     whether or not to elect a distribution (and, if applicable,
                     a particular distribution option), and

               (ii)  the Member or Deferred Member, after receiving the notice
                     under Sections 411 and 417, affirmatively elects a
                     distribution.

         If the distribution is one to which Sections 401(a)(11) and 417 of the
         Code do apply, a Member may, after receiving the notice required under
         Sections 411 and 417 of the Code, affirmatively elect to have his or
         her benefit commence sooner than 30 days following his or her receipt
         of the required notice, provided all of the following requirements are
         met:

               (i)   the Committee clearly informs the Member that he or she has
                     a period of at least 30 days after receiving the notice to
                     decide when to have distribution of his or her benefit
                     begin, and if applicable, to choose a particular optional
                     form of payment;

               (ii)  the Member or Deferred Member affirmatively elects a date
                     for benefits to begin, and, if applicable, an optional form
                     of payment, after receiving the notice;

               (iii) the Member or Deferred Member is permitted to revoke his or
                     her election until the later of his or her annuity starting
                     date or seven days following the day he or she received the
                     notice;

                                      -43-


               (iv)  the Member's or Deferred Member's annuity starting date is
                     after the date the notice is provided; and

               (v)   payment does not commence less than seven days following
                     the day after the notice is received by the Member or
                     Deferred Member.

                                 ARTICLE TWELVE
                               MANAGEMENT OF FUNDS

12.1     ESI EMPLOYEE BENEFIT PLAN ADMINISTRATION AND INVESTMENT COMMITTEE. The
         ESI Employee Benefit Plan Administration and Investment Committee, as
         appointed pursuant to Section 13.1, shall be responsible, except as
         otherwise herein expressly provided, for the management of the assets
         of the Plan.

         The Committee is designated a named fiduciary of the Plan within the
         meaning of Section 402(a) of ERISA and shall have the authority,
         powers, and responsibilities delegated and allocated to it from time to
         time by resolutions of the Board of Directors, including, but not by
         way of limitation, the authority to establish one or more trusts for
         the Plan pursuant to trust instrument(s) approved or authorized by the
         Committee and subject to the provisions of the trust instrument(s) to:

         (a)   provide, consistent with the provisions of the Plan, direction to
               the Trustee thereunder, which may involve but need not be limited
               to direction of investment of Plan assets and the establishment
               of investment criteria, and

         (b)   appoint and provide for use of investment advisors and investment
               managers (within the meaning of Section 3(38)) of ERISA.

         In discharging its responsibility, the Committee shall evaluate and
         monitor the investment performances of the Trustee and investment
         managers, if any.

12.2     TRUST FUND. All the funds of the Plan shall be held by a Trustee
         appointed from time to time by the Committee in one or more trusts
         under a trust instrument or instruments approved or authorized by the
         Committee for use in providing the benefits of the Plan; provided that
         no part of the corpus or income of the Trust Fund shall be used for, or
         diverted to, purposes other than for the exclusive benefit of Members,
         Deferred Members, and Beneficiaries.

12.3     REPORTS TO MEMBERS AND DEFERRED MEMBERS. Each quarter, at a time to be
         determined by the Committee, each Member and Deferred Member shall be
         furnished a written statement setting forth the value of each of his or
         her Accounts, together with a statement of the amounts contributed to
         each such Account by himself or herself and by the Company on his or
         her behalf and the vested amount of the Company Matching Contribution
         Account or the earliest time a portion of the Company Matching
         Contribution Account will become vested.

                                      -44-


12.4     FISCAL YEAR. The fiscal year of the Plan and the Trust shall end on
         December 31 of each year or at such other date as may be designated by
         the Committee.

                                ARTICLE THIRTEEN
                             ADMINISTRATION OF PLAN

13.1     APPOINTMENT OF COMMITTEE. From time to time, the Board of Directors or
         an officer of ESI to whom authority has been delegated by the Board of
         Directors shall appoint not less than five persons to serve as the ESI
         Employee Benefit Plan Administration and Investment Committee during
         the pleasure of the appointing Board of Directors or officer and shall
         designate a chairman of the Committee from among the members and a
         secretary who may be, but need not be, one of the members of the
         Committee. Any person so appointed may resign at any time by delivering
         his or her written resignation to the secretary of ESI and the chairman
         or secretary of the Committee. Notwithstanding any vacancies, the
         Committee may act so long as there are at least three members of the
         Committee.

13.2     POWERS OF COMMITTEE.

         (a)   The Committee is designated a named fiduciary within the meaning
               of Section 402(a) of the ERISA, and shall have authority and
               responsibility for general supervision of the administration of
               the Plan. For purposes of the regulations under Section 404(c) of
               ERISA, the Committee shall be the designated fiduciary
               responsible for safeguarding the confidentiality of all
               information relating to the purchase, sale and holding of
               employer securities and the exercise of shareholder rights
               appurtenant thereto. In addition, for purposes of avoiding any
               situation for undue employer influence in the exercise of any
               shareholder rights, the Committee shall appoint an independent
               fiduciary, who shall not be affiliated with any sponsor of the
               Plan, to ensure the maintenance of confidentiality pursuant to
               the regulations under Section 404(c) of ERISA.

         (b)   The Committee shall establish such policies, rules, and
               regulations as it may deem necessary to carry out the provisions
               of the Plan and transactions of its business, including, without
               limitation, such rules and regulations that may become necessary
               with respect to loans and any defaults thereof.

         (c)   Except as to matters that are required by law to be determined or
               performed by the Board of Directors, or that from time to time
               the Board may reserve to itself or allocate or delegate to
               officers of ESI or to another committee, the Committee shall
               determine with discretionary authority any question arising in
               the administration, interpretation, and application of the Plan,
               including the right to remedy possible ambiguities,
               inconsistencies, or commissions. Such determinations shall be
               final, conclusive, and binding on all parties affected thereby.

         (d)   The Committee shall have the right to exercise powers reserved to
               the Board of Directors hereunder to the extent that the right to
               exercise those powers may from time to time be allocated or
               delegated to the Committee by the Board of Directors

                                      -45-


               and to such further extent that, in the judgment of the
               Committee, the exercise of such powers does not involve any
               material cost to the Company.

         (e)   The Committee may retain counsel, employ agents, and provide for
               such clerical, accounting, and other services as it may require
               in carrying out the provisions of the Plan.

         (f)   The Committee may appoint from its number such committees with
               such powers as it shall determine and may authorize one or more
               of its number or any agent to execute or deliver any instrument
               or make any payment on its behalf.

         (g)   The Committee may delegate to an administrator the responsibility
               of administering and operating the details of the Plan in
               accordance with the provisions of the Plan and any policies that,
               from time to time, may be established by the Committee.

13.3     COMMITTEE ACTION. Action by the Committee may be taken by majority vote
         at a meeting upon such notice, or upon waiver of notice, and at such
         time and place as it may determine from time to time; or action may be
         taken by written consent of a majority of the members without a meeting
         with the same effect for all purposes as if assented to at a meeting.

13.4     COMPENSATION. No member of the Committee shall receive any compensation
         for his or her services as such and, except as required by law, no bond
         or other security shall be required of him or her in such capacity in
         any jurisdiction.

13.5     COMMITTEE LIABILITY. The members of the Committee shall use that degree
         of care, skill, prudence, and diligence in carrying out their duties
         that a prudent man, acting in a like capacity and familiar with such
         matters, would use in his or her conduct of a similar situation. A
         member of the Committee shall not be liable for the breach of fiduciary
         responsibility of another fiduciary unless:

         (a)   he or she participates knowingly in, or knowingly undertakes to
               conceal, an act or omission of the fiduciary, knowing that the
               act or omission is a breach; or

         (b)   by his or her failure to discharge his or her duties solely in
               the interest of the Members and other persons entitled to
               benefits under the Plan, for the exclusive purpose of providing
               benefits and defraying reasonable expenses of administering the
               Plan not met by the Company, he or she has enabled the other
               fiduciary to commit a breach; or

         (c)   he or she has knowledge of a breach by the other fiduciary and
               does not make reasonable efforts to remedy the breach; or

         (d)   the Committee improperly allocates responsibilities among its
               members or to others and he or she fails prudently to review such
               allocation.

                                      -46-


                                ARTICLE FOURTEEN
                            AMENDMENT AND TERMINATION

14.1     AMENDMENT. The Board of Directors or its delegate reserves the right at
         any time and from time to time, and retroactively if deemed necessary
         or appropriate to conform with governmental regulations or other
         policies, to modify or amend in whole or in part any or all of the
         provisions of the Plan; provided that no such modification or amendment
         (i) shall make it possible for any part of the funds of the Plan to be
         used for, or diverted to, purposes other than for the exclusive benefit
         of Members, Deferred Members, and Beneficiaries; or (ii) shall increase
         the duties of the Trustee without its consent thereto in writing.
         Except as may be required to conform with governmental regulations, no
         such amendment shall adversely affect the rights of any Member or
         Deferred Member with respect to contributions made on his or her behalf
         prior to the date of the amendment.

14.2     TERMINATION OF PLAN.

         (a)   The Plan is entirely voluntary on the part of the Company. The
               Board of Directors reserves the right at any time to terminate
               the Plan, the trust agreement, and the trust hereunder, or to
               suspend, reduce, or partially or completely discontinue
               contributions to the Plan. In the event of a termination or
               partial termination of the Plan or complete discontinuance of
               contributions, the interests of Members and Deferred Members
               shall automatically become nonforfeitable.

         (b)   In the event of a termination or partial termination or complete
               discontinuance, any forfeitures not previously applied in
               accordance with Section 5.5 shall be credited ratably to the
               Accounts of all Members and Deferred Members in proportion to the
               amounts of Matching Company Contributions made pursuant to
               Section 5.1 credited during the current calendar year or, if no
               Matching Company Contributions have been made during the current
               calendar year, then in proportion to the Matching Company
               Contributions during the last previous calendar year during which
               Matching Company Contributions were made.

         (c)   Upon termination of the Plan, Pre-Tax Savings, with earnings
               thereon, shall be distributed to Members only if (i) neither the
               Company nor an Associated Company establishes or maintains a
               successor defined contribution plan, and (ii) payment is made to
               the Members in the form of a lump sum distribution (as defined in
               Section 402(d)(4) of the Code, without regard to clauses (i)
               through (iv) of subparagraph (A), subparagraph (B), or
               subparagraph (F) thereof). For purposes of this paragraph, a
               "successor defined contribution plan" is a defined contribution
               plan (other than an employee stock ownership plan as defined in
               Section 4975(e)(7) of the Code ("ESOP") or a simplified employee
               pension as defined in Section 408(k) of the Code ("SEP")) that
               exists at the time the Plan is terminated or within the 12 month
               period beginning on the date all assets are distributed. However,
               in no event shall a defined contribution plan be deemed a
               successor plan if fewer than 2% of the employees who are eligible
               to participate in the Plan at the time of its termination are or
               were eligible to participate under another defined contribution
               plan of the Company or an Associated Company (other than an ESOP
               or a SEP) at any time during the period beginning 12 months
               before and ending 12 months after the date of the Plan's
               termination.

                                      -47-


14.3     DISTRIBUTION OF ACCOUNTS UPON A SALE OF ASSETS OR A SALE OF A
         SUBSIDIARY. Upon the disposition by the Company of at least 85% of the
         assets (within the meaning of Section 409(d)(2) of the Code) used by
         the Company in a trade or business or upon the disposition by the
         Company of its interest in a subsidiary (within the meaning of Section
         409(d)(3) of the Code), Pre-Tax Savings, with earnings thereon, may be
         distributed to those Members who continue in employment with the
         employer acquiring such assets or with the sold subsidiary, provided
         that (a) the Company maintains the Plan after the disposition, (b) the
         buyer does not adopt the Plan or otherwise become a participating
         employer in the Plan and does not accept any transfer of assets or
         liabilities from the Plan to a plan it maintains in a transaction
         subject to Section 414(l)(1) of the Code, and (c) payment is made to
         the Member in the form of a lump sum distribution (as defined in
         Section 402(d)(4) of the Code, without regard to clauses (i) through
         (iv) of subparagraph (A), subparagraph (B), or subparagraph (F)
         thereof).

14.4     MERGER OR CONSOLIDATION OF PLAN. The Plan may not be merged or
         consolidated with, nor may its assets or liabilities be transferred to,
         any other plan unless each Member, Deferred Member, or Beneficiary
         under the Plan would, if the resulting plan were then terminated,
         receive a benefit immediately after the merger, consolidation, or
         transfer that is equal to or greater than the benefit he or she would
         have been entitled to receive immediately before the merger,
         consolidation, or transfer if the Plan had then terminated.

14.5     TRANSFER FROM ITT PLAN. On the Offering Date, the Trustee shall accept
         from the trustee of the ITT Plan a transfer of the assets of the ITT
         Plan attributable to the accounts in that plan of individuals who are
         Employees as of the Effective Date. Amounts received with respect to a
         Member or Deferred Member from the ITT Plan shall be credited under the
         Plan as follows:

         (a)   Amounts credited to a Member's or Deferred Member's pre-tax
               investment account in the ITT Plan shall be credited to his or
               her Pre-Tax Investment Account.

         (b)   Amounts credited to a Member's or Deferred Member's after-tax
               investment account in the ITT Plan shall be credited to his or
               her ITT After-Tax Investment Account.

         (c)   Amounts credited to a Member's or Deferred Member's ITT Floor
               Contribution Account in the ITT Plan shall be credited to his or
               her ITT Floor Contribution Account.

         (d)   Amounts credited to a Member's or Deferred Member's rollover
               account in the ITT Plan shall be credited to his or her Rollover
               Account.

         (e)   Amounts credited to a Member's or Deferred Member's ESOP account
               in the ITT Plan shall be credited to his or her ESOP Account.

         (f)   Amounts credited to a Member's or Deferred Member's company
               retirement contribution account in the ITT Plan shall be credited
               to his or her Retirement Contribution Account.

                                      -48-


         (g)   Amounts credited to a Member's or Deferred Member's company
               matching contribution account in the ITT Plan shall be credited
               to his or her Company Matching Contribution Account.

                                ARTICLE FIFTEEN
                                  TENDER OFFER

15.1     APPLICABILITY. Notwithstanding any other Plan provision to the
         contrary, the provisions of this Article Fifteen shall apply in the
         event any person, either alone or in conjunction with others, makes a
         tender offer, or exchange offer or otherwise offers to purchase or
         solicits an offer to sell to that person 10% or more of the outstanding
         shares of a class of ESI Stock held by a Trustee (herein jointly and
         severally referred to as a "tender offer"). As to any tender offer,
         each Member and Deferred Member (or Beneficiary in the event of the
         death of the Member or Deferred Member) shall have the right to
         determine confidentially whether shares held subject to the Plan will
         be tendered.

15.2     INSTRUCTIONS TO TRUSTEE. In the event a tender offer for ESI Stock is
         commenced, the Committee, promptly after receiving notice of the
         commencement of the tender offer, shall transfer certain of its
         recordkeeping functions to an independent recordkeeper. The functions
         so transferred shall be those necessary to preserve the confidentiality
         of any directions given by the Members and Deferred Members (or
         Beneficiary in the event of the death of the Member or Deferred Member)
         in connection with the tender offer. A Trustee may not take any action
         in response to a tender offer except as otherwise provided in this
         Article Fifteen. Each Member is, for all purposes of this Article
         Fifteen, hereby designated a named fiduciary within the meaning of
         Section 402(a)(2) of ERISA, with respect to the shares of ESI Stock
         allocated to his or her Accounts. Each Member and Deferred Member (or
         Beneficiary in the event of the death of the Member or Deferred Member)
         may direct the Trustee to sell, offer to sell, exchange, or otherwise
         dispose of the ESI Stock allocated to any such individual's Accounts in
         accordance with the provisions, conditions, and terms of the tender
         offer and the provisions of this Article Fifteen, provided, however,
         that such directions shall be confidential and shall not be divulged by
         the Trustee or independent recordkeeper to the Company or to any
         director, officer, employee, or agent of the Company, it being the
         intent of this provision of Section 15.2 to ensure that the Company
         (and its directors, officers, employees, and agents) cannot determine
         the direction given by any Member, Deferred Member, or Beneficiary. The
         instructions shall be in the form and shall be filed in the manner and
         at the time prescribed by the Trustee.

15.3     TRUSTEE ACTION ON MEMBER INSTRUCTIONS. The Trustee shall sell, offer to
         sell, exchange, or otherwise dispose of the ESI Stock allocated to a
         Member's, Deferred Member's, or Beneficiary's Accounts with respect to
         which it has received directions to do so under this Article Fifteen.
         The proceeds of a disposition directed by a Member, Deferred Member, or
         Beneficiary from his or her Accounts under this Article Fifteen shall
         be allocated to the individual's Accounts and be governed by the
         provisions of Section 15.5 or other applicable provisions of the Plan
         and the trust agreements established under the Plan.

15.4     ACTION WITH RESPECT TO MEMBERS NOT INSTRUCTING THE TRUSTEE OR NOT
         ISSUING VALID INSTRUCTIONS. To the extent that Members, Deferred
         Members, and Beneficiaries do not issue valid directions to the Trustee
         to sell, offer to sell, exchange, or otherwise dispose

                                      -49-


         of the ESI Stock allocated to their Accounts, those individuals shall
         be deemed to have directed the Trustee that such shares remain invested
         in ESI Stock subject to all provisions of the Plan, including Section
         15.5.

15.5     INVESTMENT OF PLAN ASSETS AFTER TENDER OFFER. To the extent possible,
         the proceeds of a disposition of ESI Stock in an individual's Accounts
         shall be reinvested in ESI Stock by the Trustee as expeditiously as
         possible in the exercise of the Trustee's fiduciary responsibility and
         shall otherwise be held by the Trustee subject to the provisions of the
         trust agreement and the Plan. In the event that ESI Stock is no longer
         available to be acquired following a tender offer, the Company may
         direct the substitution of new employer securities for the ESI Stock or
         for the proceeds of any disposition of ESI Stock. Pending the
         substitution of new employer securities or the termination of the Plan
         and trust, the Trust Fund shall be invested in such securities as the
         Trustee shall determine; provided, however, that, pending such
         investment, the Trustee shall invest the cash proceeds in short-term
         securities issued by the United States of America or any agency or
         instrumentality thereof or any other investments of a short-term
         nature, including corporate obligations or participations therein and
         interim collective or common investment funds.

                                ARTICLE SIXTEEN
                      GENERAL AND ADMINISTRATIVE PROVISIONS

16.1     RELIEF FROM LIABILITY. Except with respect to amounts invested in the
         ESI Stock Fund, the Plan is intended to constitute a Plan as described
         in Section 404(c) of ERISA and Title 29 of the Code of Federal
         Regulations Section 2550.404c-1. The Plan fiduciaries are relieved of
         any liability for any losses that are the direct and necessary result
         of investment instructions given by any Member, Deferred Member, or
         Beneficiary.

16.2     PAYMENT OF EXPENSES.

         (a)   Direct charges and expenses arising out of the purchase or sale
               of securities and taxes levied on or measured by such
               transactions, and any investment management fees, with respect to
               any Fund, may be paid in whole or in part by the Company. Any
               such charges, expenses, taxes and fees not paid by the Company
               shall be paid from the Fund with respect to which they are
               incurred.

         (b)   Expenses incurred in conjunction with Plan administration,
               including, but not limited to, investment management, Trustee,
               recordkeeping, and audit fees shall be paid from the assets held
               by the Trust Fund to the extent such expenses are not paid
               directly by the Company.

16.3     SOURCE OF PAYMENT. Benefits under the Plan shall be payable only out of
         the Trust Fund, and the Company shall not have any legal obligation,
         responsibility, or liability to make any direct payment of benefits
         under the Plan. Neither the Company nor the Trustee guarantees the
         Trust Fund against any loss or depreciation or guarantees the payment
         of any benefit under the Plan. No person shall have any rights under
         the Plan with respect to the Trust Fund, or against the Company, except
         as specifically provided for the Plan.

                                      -50-


16.4     INALIENABILITY OF BENEFITS.

         (a)   Except as specifically provided in the Plan or as applicable law
               may otherwise require or as may be required under the terms of a
               Qualified Domestic Relations Order, no benefit under the Plan
               shall be subject in any manner to anticipation, alienation, sale,
               transfer, assignment, pledge, encumbrance, or charge, and any
               attempts to do so shall be void, and no Plan benefit shall be in
               any manner liable for or subject to debts, contracts,
               liabilities, engagements, or torts of the person entitled to the
               benefit. In the event that the Committee finds that any Member,
               Deferred Member, or Beneficiary who is or may become entitled to
               benefits hereunder has become bankrupt or that any attempt has
               been made to anticipate, alienate, sell, transfer, assign,
               pledge, encumber, or charge any of his or her benefits under the
               Plan, except as specifically provided in the Plan or as otherwise
               required by applicable law, then the benefit shall cease and
               terminate, and in that event the Committee shall hold or apply
               the same to or for the benefit of the Member, Deferred Member, or
               Beneficiary who is or may become entitled to benefits hereunder,
               his or her spouse, children, parents or other relatives, or any
               of them.

         (b)   Notwithstanding the foregoing, payment shall be made in
               accordance with the provisions of a Qualified Domestic Relations
               Order.

         Notwithstanding anything herein to the contrary, if the amount payable
         to an alternate payee under a Qualified Domestic Relations Order is
         $5,000 or less, the amount shall be paid in one lump sum as soon as
         practicable following the qualification of the order. If the amount
         exceeds $5,000, it may be paid as soon as practicable following the
         qualification of the order if the Qualified Domestic Relations Order so
         provides and the alternate payee consents thereto; otherwise it may not
         be payable before the earliest of (i) the Member's Termination of
         Employment, (ii) the time the amount could be withdrawn under Article
         Ten, or (iii) the Member's attainment of age 50.

16.5     PREVENTION OF ESCHEAT. If the Committee cannot ascertain the
         whereabouts of any person to whom a payment is due under the Plan, the
         Committee may, no earlier than three years from the date the payment is
         due, mail a notice of the due and owing payment to the last known
         address of the person, as shown on the records of the Committee or the
         Company. If the person has not made written claim for the benefit
         within three months of the date of the mailing, the Committee may, if
         it so elects and upon receiving advice from counsel to the Plan, direct
         that the payment and all remaining payments otherwise due such person
         be canceled on the records of the Plan and the amount thereof applied
         to reduce the contributions to the Company. Upon the cancellation, the
         Plan and the Trust shall have no further liability therefor except
         that, in the event the person or his beneficiary later notifies the
         Committee of his or her whereabouts and requests the payment or
         payments due to him under the Plan, the amount so applied shall be paid
         to him or her in accordance with the provisions of the Plan.

16.6     RETURN OF CONTRIBUTIONS.

         (a)   If all or part of the Company's deductions for contributions to
               the Plan are disallowed by the Internal Revenue Service, the
               portion of the contributions to

                                      -51-


               which that disallowance applies shall be returned to the Company
               without interest but reduced by any investment loss attributable
               to those contributions, provided that the contribution is
               returned within one year after the disallowance of deduction. For
               this purpose, all contributions made by the Employer are
               expressly declared to be conditioned upon their deductibility
               under Section 404 of the Code.

         (b)   The Company may recover without interest the amount of its
               contributions to the Plan made on account of a mistake of fact,
               reduced by any investment loss attributable to those
               contributions, if recovery is made within one year after the date
               of those contributions.

         (c)   In the event that Pre-Tax Savings made under Section 4.1 are
               returned to the Company in accordance with the provisions of this
               Section 16.6, the elections to reduce Salary that were made by
               Members on whose behalf those contributions were made shall be
               void retroactively to the beginning of the period for which those
               contributions were made. The Pre-Tax Savings so returned shall be
               distributed in cash to those Members for whom those contributions
               were made.

16.7     FACILITY OF PAYMENT. If the Committee shall find that a Member or other
         person entitled to a benefit is unable to care for his or her affairs
         because of illness or accident or is a minor, the Committee may direct
         that any benefit due him or her, unless claim shall have been made for
         the benefit by a duly appointed legal representative, be paid to his or
         her spouse, a child, a parent or other relative, or to a person with
         whom he or she resides. Any payment so made shall be a complete
         discharge of the liabilities of the Plan for that benefit.

16.8     INFORMATION. Each Member, Deferred Member, Beneficiary, or other person
         entitled to a benefit, before any benefit shall be payable to him or
         her or on his or her account under the Plan, shall file with the
         Committee the information that it shall require to establish his or her
         rights and benefits under the Plan.

16.9     EXCLUSIVE BENEFIT RULE. Except as otherwise provided in the Plan, no
         part of the corpus or income of the funds of the Plan shall be used
         for, or diverted to, purposes other than for the exclusive benefit of
         Members and other persons entitled to benefits under the Plan and
         paying the expenses of the Plan not paid directly by the Company. No
         person shall have any interest in, or right to, any part of the
         earnings of the funds of the Plan, or any right in, or to, any part of
         the assets held under the Plan, except as and to the extent expressly
         provided in the Plan.

16.10    NO RIGHT TO EMPLOYMENT. Nothing herein contained nor any action taken
         under the provisions hereof shall be construed as giving any Employee
         or Member the right to be retained in the employ of the Company.

16.11    UNIFORM ACTION. Action by the Committee shall be uniform in nature as
         applied to all persons similarly situated, and no such action shall be
         taken that will discriminate in favor of any Members who are
         Highly-Compensated Employees.

                                      -52-


16.12    HEADINGS. The headings of the sections in this Plan are placed herein
         for convenience of reference and in the case of any conflict, the text
         of the Plan rather than the headings, shall control.

16.13    CONSTRUCTION. The Plan shall be construed, regulated and administered
         in accordance with the internal laws of the state of Indiana, subject
         to the provisions of applicable federal laws.

                               ARTICLE SEVENTEEN
                              TOP-HEAVY PROVISIONS

17.1     DEFINITIONS. The following definitions apply to the terms used in this
         Section:

         (a)   "applicable determination date" means the last day of the later
               of the first Plan Year or the preceding Plan Year;

         (b)   "top-heavy ratio" means the ratio of (A) the value of the
               aggregate of the Accounts under the Plan for key employees to (B)
               the value of the aggregate of the Accounts under the Plan for all
               key employees and non-key employees;

         (c)   "key employee" means an employee who is in a category of
               employees determined in accordance with the provisions of
               Sections 416(i)(1) and (5) of the Code and any regulations
               thereunder, and where applicable, on the basis of the Employee's
               Statutory Compensation from the Company or an Associated Company;

         (d)   "non-key employee" means any Employee who is not a key employee;

         (e)   "applicable Valuation Date" means the Valuation Date coincident
               with or immediately preceding the last day of the first Plan Year
               or the preceding Plan Year, whichever is applicable;

         (f)   "required aggregation group" means any other qualified plan(s) of
               the Company or an Associated Company in which there are members
               who are key employees or that enable(s) the Plan to meet the
               requirements of Section 401(a)(4) or 410 of the Code; and

         (g)   "permissive aggregation group" means each plan in the required
               aggregation group and any other qualified plan(s) of the Company
               or an Associated Company in which all members are non-key
               employees, if the resulting aggregation group continues to meet
               the requirements of Sections 401(a)(4) and 410 of the Code.

17.2     DETERMINATION OF TOP-HEAVY STATUS. For purposes of this Section, the
         Plan shall be "top-heavy" with respect to any Plan Year if as of the
         applicable determination date the top-heavy ratio exceeds 60 percent.
         The top-heavy ratio shall be determined as of the applicable Valuation
         Date in accordance with Sections 416(g)(3) and (4) of the Code and
         Article Eight of this Plan, and shall take into account any
         contributions made after the applicable Valuation Date but before the
         last day of the Plan Year in which the applicable Valuation Date
         occurs. For purposes of determining whether the Plan is top-heavy, the

                                      -53-


         account balances under the Plan will be combined with the account
         balances or the present value of accrued benefits under each other plan
         in the required aggregation group and, in the Company's discretion, may
         be combined with the account balances or the present value of accrued
         benefits under any other qualified plan in the permissive aggregation
         group. Distributions made with respect to a Member under the Plan
         during the five-year period ending on the applicable determination date
         shall be taken into account for purposes of determining the top-heavy
         ratio; distributions under plans that terminated within that five-year
         period shall also be taken into account, if any such plan contained key
         employees and therefore would have been part of the required
         aggregation group.

17.3     MINIMUM REQUIREMENTS. For any Plan Year with respect to which the Plan
         is top-heavy, an additional Company contribution shall be allocated on
         behalf of each Member (or each Employee eligible to become a Member)
         who is not a "key employee," and who has not separated from service as
         of the last day of the Plan Year, to the extent that the amounts
         allocated to his or her Accounts as a result of contributions made on
         his or her behalf under Sections 5.1 and 5.2 for the Plan Year would
         otherwise be less than 3 percent of his or her Statutory Compensation.
         However, if the greatest percentage of Statutory Compensation
         contributed on behalf of a "key employee" under Section 4.1 or
         allocated to his or her Accounts as a result of contributions made
         pursuant to Section 5.1 for the Plan Year would be less than 3%, that
         lesser percentage shall be substituted for "3%" in the preceding
         sentence. Notwithstanding the foregoing provisions of this Section
         17.3, no minimum contribution shall be made with respect to a Member if
         the required minimum benefit under Section 416(c)(1) of the Code is
         provided by the ESI Pension Plan.

                                ARTICLE EIGHTEEN
                        AMENDMENT OF THE PLAN FOR EGTRRA

18.1     ADOPTION AND EFFECTIVE DATE OF AMENDMENT. This Article of the Plan is
         adopted to reflect certain provisions of the Economic Growth and Tax
         Relief Reconciliation Act of 2001 (EGTRRA). This Article is intended as
         good faith compliance with the requirements of EGTRRA and is to be
         construed in accordance with EGTRRA and guidance issued under it.
         Except as otherwise provided, this Article shall be effective as of the
         first day of the first Plan Year beginning after December 31, 2001.

18.2     SUPERSESSION OF INCONSISTENT PROVISIONS. This Article shall supersede
         the provisions of the Plan to the extent those provisions are
         inconsistent with the provisions of this Article.

18.3     LIMITATION ON CONTRIBUTIONS.

         (a)   This Section shall be effective for limitation years beginning
               after December 31, 2001.

         (b)   Except to the extent permitted under Section 18.11 and Section
               414(v) of the Code, the annual addition that may be contributed
               or allocated to a Member's Accounts under the Plan for any
               limitation year shall not exceed the lesser of:

                                      -54-


               (i)   $40,000, as adjusted for increases in the cost-of-living
                     under Section 415(d) of the Code, or

               (ii)  100 percent of the Member's compensation, within the
                     meaning of Section 415(c) of the Code for the limitation
                     year.

         The compensation limit referred to in (ii) shall not apply to any
         contribution for medical benefits after separation from service (within
         the meaning of Sections 401(h) or 419A(f)(2) of the Code), which is
         otherwise treated as an annual addition.

18.4     INCREASE IN COMPENSATION LIMIT. The annual compensation of each Member
         taken into account in determining allocations for any Plan Year
         beginning after December 31, 2001, shall not exceed $200,000, as
         adjusted for cost-of-living increases in accordance with Section
         401(a)(17)(B) of the Code. Annual compensation means compensation
         during the Plan Year or such other consecutive 12-month period over
         which compensation is otherwise determined under the Plan (the
         determination period). The cost-of-living adjustment in effect for a
         calendar year applies to annual compensation for the determination
         period that begins with or within such calendar year.

18.5     MODIFICATION OF TOP-HEAVY RULES.

         (a)   This Section shall apply for purposes of determining whether the
               Plan is a top-heavy Plan under Section 416(g) of the Code for
               Plan Years beginning after December 31, 2001, and whether the
               Plan satisfies the minimum benefits requirements of Section
               416(c) of the Code for such years. This Section amends Article
               Seventeen of the Plan.

         (b)   In determining the Plan's top-heavy status, the following rules
               shall apply:

               (i)   "Key employee" means any Employee or former Employee
                     (including any deceased Employee) who at any time during
                     the Plan Year that includes the determination date was an
                     officer of the Company having annual compensation greater
                     than $130,000 (as adjusted under Section 416(i)(1) of the
                     Code for Plan Years beginning after December 31, 2002), a
                     5-percent owner of the Company, or a 1-percent owner of the
                     Company having annual compensation of more than $150,000.
                     For this purpose, annual compensation means compensation
                     within the meaning of Section 415(c)(3) of the Code. The
                     determination of who is a key employee will be made in
                     accordance with Section 416(i)(1) of the Code and the
                     applicable regulations and other guidance of general
                     applicability issued hereunder.

               (ii)  This paragraph (ii) shall apply for purposes of determining
                     the present values of accrued benefits and the amounts of
                     account balances of Employees as of the determination date.

                     (A)  The present values of accrued benefits and the amounts
                          of Account balances of an Employee as of the
                          determination date shall be increased by the
                          distributions made with respect to the Employee

                                      -55-


                          under the Plan and any plan aggregated with the Plan
                          under Section 416(g)(2) of the Code during the 1-year
                          period ending on the determination date. The preceding
                          sentence shall also apply to distributions under a
                          terminated plan which, had it not terminated, would
                          have been aggregated with the Plan under Section
                          416(g)(2)(A)(i) of the Code. In the case of a
                          distribution made for a reason other than separation
                          from service, death, or disability, this provision
                          shall be applied by substituting 5-year period for
                          1-year period.

                     (B)  The accrued benefits and accounts of any individual
                          who has not performed services for the employer during
                          the 1-year period ending on the determination date
                          shall not be taken into account.

         (c)   In determining minimum benefits under the Plan, the following
               rules shall apply:

               (i)   Company matching contributions shall be taken into account
                     for purposes of satisfying the minimum contribution
                     requirements of Section 416(c)(2) of the Code and the Plan.
                     The preceding sentence shall apply with respect to matching
                     contributions under the Plan or, if the Plan provides that
                     the minimum contribution requirement shall be met in
                     another plan, such other plan. Company matching
                     contributions that are used to satisfy the minimum
                     contribution requirements shall be treated as matching
                     contributions for purposes of the actual contribution
                     percentage test and other requirements of Section 401(m) of
                     the Code.

               (ii)  Pursuant to Section 17.3, no minimum contribution shall be
                     made with respect to a Member if the required minimum
                     benefit under Section 416(c)(1) of the Code is provided by
                     the ESI Pension Plan.

18.6     DIRECT ROLLOVERS OF PLAN DISTRIBUTIONS.

         (a)   This Section shall apply to distributions made after December 31,
               2001.

         (b)   For purposes of the direct rollover provisions in Section 11.7 of
               the Plan, an eligible retirement plan shall also mean an annuity
               contract described in Section 403(b) of the Code and an eligible
               plan under Section 457(b) of the Code, which is maintained by a
               state, political subdivision of a state, or any agency or
               instrumentality of a state or political subdivision of a state
               and which agrees to separately account for amounts transferred
               into such plan from this Plan. The definition of eligible
               retirement plan shall also apply in the case of a distribution to
               a surviving spouse, or to a spouse or former spouse who is the
               alternate payee under a Qualified Domestic Relations Order.

         (c)   For purposes of the direct rollover provisions in Section 11.7 of
               the Plan, any amount that is distributed on account of hardship
               shall not be an eligible rollover distribution and the
               distributee may not elect to have any portion of such
               distribution paid directly to an eligible retirement plan.

                                      -56-


         (d)   For purposes of the direct rollover provisions in Section 11.7 of
               the Plan, a portion of a distribution shall not fail to be an
               eligible rollover distribution merely because the portion
               consists of after-tax employee contributions that are not
               includible in gross income. However, such portion may be
               transferred only to an individual retirement account or annuity
               described in Sections 408(a) or (b) of the Code, or to a
               qualified defined contribution plan described in Section 401(a)
               or 403(a) of the Code that agrees to separately account for
               amounts so transferred, including separately accounting for the
               portion of such distribution that is includible in gross income
               and the portion of such distribution that is not so includible.

18.7     ROLLOVERS FROM OTHER PLANS. The Plan will accept Member rollover
         contributions and/or direct rollovers of distributions made after
         December 31, 2001, as directed below.

         (a)   The Plan will accept a direct rollover of an eligible rollover
               distribution from:

               (i)   A qualified plan described in Section 401(a) or 403(a) of
                     the Code, excluding after-tax employee contributions.

               (ii)  An annuity contract described in Section 403(b) of the
                     Code, excluding after-tax employee contributions.

               (iii) An eligible plan under Section 457(b) of the Code, which is
                     maintained by a state, political subdivision of a state, or
                     any agency or instrumentality of a state or political
                     subdivision of a state.

         (b)    The Plan will accept a Member contribution of an eligible
                rollover distribution from:

               (i)   A qualified plan described in Section 401(a) or 403(a) of
                     the Code.

               (ii)  An annuity contract described in Section 403(b) of the
                     Code.

               (iii) An eligible plan under Section 457(b) of the Code, which is
                     maintained by a state, political subdivision of a state, or
                     any agency or instrumentality of a state or political
                     subdivision of a state.

         (c)   The Plan will accept a Member rollover contribution of the
               portion of a distribution from an individual retirement account
               or annuity described in Section 408(a) or 408(b) of the Code that
               is eligible to be rolled over and would otherwise be includible
               in gross income.

         (d)   Rollovers from other plans under this Section shall be effective
               January 1, 2002.

18.8     ROLLOVERS DISREGARDED IN INVOLUNTARY CASH-OUTS.

         (a)   This Section shall apply to distributions made after December 31,
               2001 with respect to Members who separated from service at any
               time.

                                      -57-


         (b)   For purposes of Sections 11.1(b), 11.1(c), 11.2(b), 11.3, 11.10
               and 16.4 of the Plan, the value of a Member's nonforfeitable
               account balance shall be determined without regard to that
               portion of the account balance that is attributable to rollover
               distributions (and earnings allocable thereto) within the meaning
               of Sections 402(c), 403(a)(4), 403(b)(8), 408(d)(3)(A)(ii), and
               457(e)(16) of the Code. If the value of the Participant's
               nonforfeitable account balance as so determined is $5,000 or
               less, the Plan shall immediately distribute the Participant's
               entire nonforfeitable account balance.

18.9     REPEAL OF MULTIPLE USE TEST. The multiple use test described in
         Treasury Regulation section 1.401(m)-2 and Section 6.3 of the Plan
         shall not apply for Plan Years beginning after December 31, 2001.

18.10    ELECTIVE DEFERRALS: CONTRIBUTION LIMITATION. No Member shall be
         permitted to have elective deferrals made under this Plan, or any other
         qualified plan maintained by the employer during any taxable year, in
         excess of the dollar limitation contained in Section 402(g) of the Code
         in effect for such taxable year, except to the extent permitted under
         Section 18.11 and Section 414(v) of the Code.

18.11    CATCH-UP CONTRIBUTIONS. All Employees who are eligible to make elective
         deferrals under this Plan and who have attained age 50 before the close
         of the Plan Year shall be eligible to make catch-up contributions in
         accordance with, and subject to the limitations of, Section 414(v) of
         the Code. Such catch-up contributions shall not be taken into account
         for purposes of the provisions of the Plan implementing the required
         limitations of Sections 402(g) and 415 of the Code. The Plan shall not
         be treated as failing to satisfy the provisions of the Plan
         implementing the requirements of Sections 401(k)(3), 401(k)(11),
         401(k)(12), 410(b), or 416 of the Code, as applicable, by reason of the
         making of such catch-up contributions. Catch-up contributions shall
         apply to contributions after December 31, 2001. The Company shall not
         make a Matching Company Contribution with respect to any catch-up
         contributions.

18.12    SUSPENSION PERIOD FOLLOWING HARDSHIP DISTRIBUTION. A Member who
         receives a distribution of elective deferrals after December 31, 2001,
         on account of hardship shall be prohibited from making elective
         deferrals and employee contributions under this and all other plans of
         the employer for 6 months after receipt of the distribution. A
         Participant who receives a distribution of elective deferrals in
         calendar year 2001 on account of hardship shall be prohibited from
         making elective deferrals and employee contributions under this and all
         other plans of the employer for the period specified in the provisions
         of the Plan relating to suspension of elective deferrals that were in
         effect prior to this amendment.

18.13    DISTRIBUTION UPON SEVERANCE FROM EMPLOYMENT.

         (a)   This Section shall apply for distributions and severances from
               employment occurring after January 1, 2002.

         (b)   A Member's elective deferrals, qualified nonelective
               contributions, qualified matching contributions, and earnings
               attributable to these contributions shall be distributed on
               account of the Member's severance from employment. However,

                                      -58-


               such a distribution shall be subject to the other provisions of
               the Plan regarding distributions, other than provisions that
               require a separation from service before such amounts may be
               distributed.

This ESI 401(k) Plan, as restated effective May 16, 1998, is executed on behalf
of ITT Educational Services, Inc. by its duly authorized officer as of the 21
day of December , 2001.

                                                  ITT EDUCATIONAL SERVICES, INC.

                                                  By  /s/ Jenny Yonce
                                                      --------------------------
                                                      Signature


                                                        Jenny Yonce
                                                      --------------------------
                                                      Printed Name


                                                        Mgr., Benefits & HRIS
                                                      --------------------------
                                                      Office

                                      -59-

EX-11

                                                                      Exhibit 11

                         ITT EDUCATIONAL SERVICES, INC.
               COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)



                                                2001         2000         1999
                                              --------     --------     --------
                                                               
Net income                                    $ 33,714     $ 24,709     $ 23,528
                                              ========     ========     ========

Shares:
   Weighted average number of shares
      of common stock outstanding               23,604       24,018       25,235

Shares assumed issued
   (less shares assumed purchased
   for treasury) on stock options                  504          167          145
                                              --------     --------     --------

Outstanding shares for diluted
   earnings per share calculation               24,108       24,185       25,380
                                              ========     ========     ========

Earnings per common share:
     Basic                                    $   1.43     $   1.03     $   0.93
     Diluted                                  $   1.40     $   1.02     $   0.93

EX-23

                                                                      EXHIBIT 23

                       CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No.'s 33-80435, 333-38883, 333-55903, 333-56493,
333-84871 and 333-73280) of ITT Educational Services, Inc. of our report dated
January 17, 2002 relating to the financial statements and financial statement
schedules, which appears in this Form 10-K.

/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Indianapolis, Indiana
February 26, 2002