10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

_________________________

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2008

OR

o 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.)

13000 North Meridian Street Carmel, Indiana	46032-1404
(Address of principal executive offices)	(Zip Code)

Registrant's telephone number, including area code: (317) 706-9200

     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 o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x	Accelerated filer o
Non-accelerated filer o (Do not check if        a smaller reporting        company)	Smaller reporting company o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

38,833,443

Number of shares of Common Stock, $.01 par value, outstanding at June 30, 2008

ITT EDUCATIONAL SERVICES, INC.

Carmel, Indiana

Quarterly Report to Securities and Exchange Commission

June 30, 2008

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements.

Index

 Condensed Consolidated Balance Sheets as of June 30, 2008 and 2007 (unaudited) and
December 31, 2007

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ITT EDUCATIONAL SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
		As of
	June 30, 2008	December 31, 2007	June 30, 2007
	(unaudited)		(unaudited)
Assets
Current assets:
Cash and cash equivalents	$78,691	$7,228	$10,079
Short-term investments	170,500	303,360	290,285
Accounts receivable, net	29,198	15,132	9,930
Deferred income taxes	11,776	7,418	9,464
Prepaid expenses and other current assets	10,771	16,685	25,470
Total current assets	300,936	349,823	345,228
Property and equipment, net	162,987	153,265	151,309
Direct marketing costs, net	21,963	20,567	21,207
Other assets	18,675	17,298	11,304
Total assets	$504,561	$540,953	$529,048
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt	$--	$--	$21,429
Accounts payable	54,409	45,120	60,117
Accrued compensation and benefits	20,823	16,137	14,129
Accrued income taxes	5,443	6,028	--
Other accrued liabilities	13,198	11,512	12,110
Deferred revenue	138,338	213,127	192,392
Total current liabilities	232,211	291,924	300,177
Long-term debt	150,000	150,000	128,571
Deferred income taxes	10,818	11,754	11,855
Other liabilities	18,486	16,717	15,116
Total liabilities	411,515	470,395	455,719
Shareholders' equity:
Preferred stock, $.01 par value,
5,000,000 shares authorized, none issued	--	--	--
Common stock, $.01 par value, 300,000,000
shares authorized, 54,068,904 issued	541	541	541
Capital surplus	131,389	127,017	110,082
Retained earnings	620,901	531,363	479,372
Accumulated other comprehensive (loss)	(3,417)	(3,417)	(6,364)
Treasury stock, 15,235,461, 14,375,582
and 13,702,384 shares, at cost	(656,368)	(584,946)	(510,302)
Total shareholders' equity	93,046	70,558	73,329
Total liabilities and shareholders' equity	$504,561	$540,953	$529,048
The accompanying notes are an integral part of these condensed consolidated financial statements.

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ITT EDUCATIONAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
(unaudited)
	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2008	2007	2008	2007
Revenue	$246,411	$216,982	$481,261	$421,152
Costs and expenses:
Cost of educational services	95,183	90,581	187,208	181,351
Student services and administrative      expenses	74,910	68,725	149,036	138,018
Total costs and expenses	170,093	159,306	336,244	319,369
Operating income	76,318	57,676	145,017	101,783
Interest income	1,177	2,798	3,210	5,747
Interest (expense)	(1,057)	(2,078)	(2,576)	(4,183)
Income before provision for income       taxes	76,438	58,396	145,651	103,347
Provision for income taxes	29,307	22,538	55,888	39,892
Net income	$47,131	$35,858	$89,763	$63,455
Earnings per share:
Basic	$1.21	$0.89	$2.30	$1.56
Diluted	$1.20	$0.87	$2.28	$1.53
Weighted average shares     outstanding:
Basic	38,842	40,449	39,020	40,682
Diluted	39,167	41,110	39,339	41,350
The accompanying notes are an integral part of these condensed consolidated financial statements.

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ITT EDUCATIONAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2008	2007	2008	2007
Cash flows from operating activities:
Net income	$47,131	$35,858	$89,763	$63,455
Adjustments to reconcile net income to net           cash flows from operating activities:
Depreciation and amortization	5,763	6,099	11,257	12,740
Provision for doubtful accounts	9,685	5,349	16,618	9,990
Deferred income taxes	(3,666)	(2,945)	(5,303)	(6,551)
Excess tax benefit from stock option                    exercises	(54)	(12,224)	(87)	(23,274)
Stock-based compensation expense	1,928	1,196	4,103	3,171
Changes in operating assets and liabilities:
Restricted cash	(159)	(7)	5,858	(13)
Accounts receivable	(23,811)	(5,421)	(30,684)	(10,553)
Direct marketing costs, net	(659)	353	(1,396)	421
Accounts payable	(2,395)	3,730	9,286	12,169
Accrued income taxes	(18,626)	(5,259)	(485)	7,239
Other operating assets and liabilities	2,160	1,316	6,882	14
Deferred revenue	(65,310)	(13,378)	(74,789)	(9,770)
Net cash flows from operating activities	(48,013)	14,667	31,023	59,038
Cash flows from investing activities:
Facility expenditures and land purchases	(6,896)	(3,778)	(13,189)	(8,696)
Capital expenditures, net	(5,286)	(4,423)	(7,790)	(6,942)
Proceeds from sales and maturities of           investments	180,430	593,489	471,805	1,184,306
Purchase of investments	(138,845)	(542,314)	(338,945)	(1,279,584)
Net cash flows from investing activities	29,403	42,974	111,881	(110,916)
Cash flows from financing activities:
Excess tax benefit from stock option exercises	54	12,224	87	23,274
Proceeds from exercise of stock options	234	7,916	275	17,541
Repurchase of common stock	--	(75,714)	(71,803)	(140,763)
Net cash flows from financing activities	288	(55,574)	(71,441)	(99,948)
Net change in cash and cash equivalents	(18,322)	2,067	71,463	(151,826)
Cash and cash equivalents at beginning of period	97,013	8,012	7,228	161,905
Cash and cash equivalents at end of period	$78,691	$10,079	$78,691	$10,079
The accompanying notes are an integral part of these condensed consolidated financial statements.

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ITT EDUCATIONAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars and shares in thousands)
					Accumulated
	Common Stock		Capital	Retained	Other Comprehensive	Common Stock in Treasury
	Shares	Amount	Surplus	Earnings	Income/(Loss)	Shares	Amount	Total
Balance as of December 31, 2006	54,069	$541	$83,329	$471,848	($6,533)	(13,029)	($445,240)	$103,945
Effect of adoption of FIN No. 48				2,169				2,169
Balance as of January 1, 2007	54,069	541	83,329	474,017	(6,533)	(13,029)	(445,240)	106,114
For the six months ended June 30,    2007 (unaudited):
Net income				63,455				63,455
Other comprehensive income:
Amortization of pension loss, net    of income tax					169			169
Comprehensive income								63,624
Exercise of stock options				(58,100)		856	75,641	17,541
Tax benefit from exercise of stock          options			23,582					23,582
Stock-based compensation			3,171					3,171
Common shares repurchased						(1,530)	(140,763)	(140,763)
Issuance of shares for Directors’         compensation						1	60	60
Balance as of June 30, 2007	54,069	541	110,082	479,372	(6,364)	(13,702)	(510,302)	73,329
For the six months ended December 31,     2007 (unaudited):
Net income				88,137				88,137
Other comprehensive income:
Amortization of pension loss, net     of tax					182			182
Net actuarial pension gain					2,765			2,765
Comprehensive income								91,084
Exercise of stock options			(77)	(36,146)		458	49,684	13,461
Tax benefit from exercise of stock           options			15,006					15,006
Stock-based compensation			1,929					1,929
Common shares repurchased						(1,129)	(124,231)	(124,231)
Restricted stock cancellations and           shares tendered for taxes			77			(2)	(97)	(20)
Balance as of December 31, 2007	54,069	541	127,017	531,363	(3,417)	(14,375)	(584,946)	70,558
For the six months ended June 30, 2008     (unaudited):
Net income				89,763				89,763
Other comprehensive income								--
Comprehensive income								89,763
Exercise of stock options				(200)		7	475	275
Tax benefit from exercise of stock           options			90					90
Stock-based compensation			4,103					4,103
Common shares repurchased						(865)	(71,803)	(71,803)
Issuance of shares for Directors’           compensation				(25)		1	85	60
Restricted stock cancellations			179			(3)	(179)	--
Balance as of June 30, 2008	54,069	$541	$131,389	$620,901	($3,417)	(15,235)	($656,368)	$93,046

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

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ITT EDUCATIONAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2008

(Dollars in thousands, except per share data and unless otherwise stated)

1.      The Company and Basis of Presentation

We are a leading provider of technology-oriented postsecondary education in the United States based on revenue and student enrollment. As of June 30, 2008, we were offering master, bachelor and associate degree programs to more than 54,000 students. As of June 30, 2008, we had 102 institutes and nine learning sites located in 35 states. All of our institutes are authorized by the applicable education authorities of the states in which they operate and are accredited by an accrediting commission recognized by the U.S. Department of Education ("ED"). We have provided career-oriented education programs since 1969 under the “ITT Technical Institute” name. Our corporate headquarters are located in Carmel, Indiana.

The accompanying unaudited condensed consolidated financial statements include our wholly-owned subsidiaries' accounts and have been prepared in accordance with generally accepted accounting principles in the United States of America for interim periods and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures, including significant accounting policies, normally included in a complete presentation of financial statements prepared in accordance with those principles, rules and regulations have been omitted. The Condensed Consolidated Balance Sheet as of December 31, 2007 was derived from audited financial statements but, as presented in this report, may not include all disclosures required by accounting principles generally accepted in the United States. In the opinion of our management, the financial statements contain all adjustments necessary to fairly state our financial condition and results of operations. The interim financial information should be read in conjunction with the audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K as filed with the SEC for the year ended December 31, 2007.

As disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007, we revised the classification for losses from the sale of treasury stock. Our June 30, 2007 retained earnings balance decreased and capital surplus balance increased by $94,447 from those balances reported in our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2007 to conform to this revised classification. The revised classification did not have an effect on our total shareholders’ equity, results of operations or cash flows.

2.      Summary of Certain Accounting Policies

Accounts Receivable and Allowance for Doubtful Accounts. We extend unsecured credit to our students for tuition and fees and we record a receivable for the tuition and fees earned in excess of the payment received from or on behalf of a student. The individual student balances of these receivables are insignificant. We record an allowance for doubtful accounts with respect to accounts receivable on an institute-by-institute basis. We review the historical collection experience for each institute, consider other facts and circumstances related to an institute and record an allowance for doubtful accounts based on that review and consideration.

During the second quarter of 2008, we extended larger amounts of unsecured credit to our students due to a decrease in private education loans made to our students by third-party lenders. We categorized these receivables based on the credit profiles of our students and recorded an allowance for doubtful accounts based on our historical collection experience related to amounts owed by students with similar credit profiles.

If our collection trends were to differ significantly from our historical collection experience, we would make a corresponding adjustment to our allowance for doubtful accounts. We write off the accounts receivable due from former students when we conclude that collection is not probable.

Fair Value. In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”), which permits companies to choose to measure certain financial instruments and other items at fair value that are not currently required to be measured at fair value. SFAS No. 159 was effective for us on January 1, 2008. This pronouncement did not have any effect on our condensed consolidated financial statements, because we did not elect the fair value methodology under SFAS No. 159 for any of our financial instruments or other items that are not currently required to be measured at fair value.

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Effective January 1, 2008, we adopted SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), for financial assets and financial liabilities measured on a recurring basis. This statement defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and expands disclosures regarding fair value measurements. SFAS No. 157 applies whenever other accounting pronouncements require or permit fair value measurements for assets and liabilities.

In February 2008, the FASB issued FASB Staff Position No. 157-2 (“FSP No. 157-2”), which delays the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. We will apply this provision of SFAS No. 157 beginning on January 1, 2009. We do not expect it to have a material effect on our consolidated financial statements, because we do not have any nonfinancial assets or nonfinancial liabilities recognized or disclosed at fair value.

SFAS No. 157 defines fair value for financial reporting as the price that would be received upon the sale of an asset or paid upon the transfer of a liability in an orderly transaction between market participants at the measurement date. The fair value measurement of our financial assets utilized assumptions categorized as observable inputs under SFAS No. 157. Observable inputs are assumptions based on independent market data sources.

The following table sets forth information regarding the fair value measurement of our financial assets as of June 30, 2008:

		Fair Value Measurements at Reporting Date Using
		(Level 1)	(Level 2)	(Level 3)
Description	As of 6/30/2008	Quoted Prices in Active Markets for Identical Assets	Significant Other Observable Inputs	Significant Unobservable Inputs
Available-for-sale securities	$170,500	$170,500	$--	$--

We used quoted prices in active markets to value our available-for-sale securities.

3.      New Accounting Pronouncements

In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts – an interpretation of FASB Statement No. 60” (“SFAS No. 163”), which clarifies how FASB Statement No. 60 applies to financial guarantee insurance contracts, including the recognition and measurement of premium revenue and claim liabilities. SFAS No. 163 is effective for fiscal years beginning after December 15, 2008. We do not believe that the adoption of this pronouncement will have a material impact on our consolidated financial statements.

Also in May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”), which identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles in the United States. SFAS No. 162 will be effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board (“PCAOB”) amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles” (“AU Section 411”). The SEC has not yet approved the amendments to AU Section 411. We do not believe that the adoption of this guidance will have a material impact on our consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133” (“SFAS No. 161”), which expands the disclosure requirements for derivative instruments and hedging activities. SFAS No. 161 is effective for fiscal years beginning after November 15, 2008. We do not believe that the adoption of this pronouncement will have a material impact on our consolidated financial statements.

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In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51” (“SFAS No. 160”), which establishes accounting and reporting standards for the noncontrolling interest of a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. We do not believe that the adoption of this pronouncement will have a material impact on our consolidated financial statements.

Also in December 2007, the FASB revised and replaced SFAS No. 141, “Business Combinations,” with SFAS No. 141(R), “Business Combinations” (“SFAS No. 141(R)”), which establishes principles and requirements for how a company recognizes and measures assets, liabilities and noncontrolling interests acquired or assumed in a business combination. SFAS No. 141(R) will apply to any of our business combinations or acquisitions after December 31, 2008.

In November 2007, FASB’s Emerging Issues Task Force (“EITF”) issued EITF 07-01, “Accounting for Collaborative Arrangements” (“EITF 07-01”), which defines collaborative arrangements and establishes reporting requirements for transactions between participants in a collaborative arrangement and between participants in the arrangement and third parties. EITF 07-01 is effective for periods beginning after December 15, 2008 and applies to arrangements in existence as of the effective date. We do not believe that the adoption of this guidance will have a material impact on our consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (“SFAS No. 158”), which requires a company to measure the funded status of a defined benefit postretirement plan as of the date of the company’s year-end balance sheet. This provision of SFAS No. 158 is effective for fiscal years ending after December 15, 2008 and will be adopted by us no later than December 31, 2008. We have estimated the effect that the transition to a fiscal year-end measurement date will have on our pension amounts based on measurements determined for the prior fiscal year-end reporting. The change will be recorded in retained earnings in the fourth quarter of 2008 and will not have a material impact on our consolidated financial statements.

4.      Equity Compensation

The stock-based compensation expense and related income tax benefit recognized in our Condensed Consolidated Statements of Income in the periods indicated were as follows:

	Three Months Ended June 30,		Six Months Ended June 30,
	2008	2007	2008	2007
Stock-based compensation expense	$1,928	$1,196	$4,103	$3,171
Income tax (benefit)	($742)	($460)	($1,579)	($1,220)

We did not capitalize any stock-based compensation cost in the three or six months ended June 30, 2008 or 2007.

As of June 30, 2008, we estimated that pre-tax compensation expense for unvested stock-based compensation grants in the amount of approximately $13,298, net of estimated forfeitures, will be recognized in future periods. This expense will be recognized over the remaining service period applicable to the grantees which, on a weighted-average basis, is approximately 2.3 years.

- 8 -

The stock options granted, forfeited, exercised and expired in the period indicated were as follows:

	Six Months Ended June 30 , 2008
		Weighted		Weighted
		Average	Aggregate	Average	Aggregate
	# of	Exercise	Exercise	Remaining	Intrinsic
	Shares	Price	Price	Contractual Term	Value (1)
Outstanding at    beginning of period	1,468,993	$50.25	$73,816
Granted	177,543	$86.83	15,416
Forfeited	(3,334)	$61.19	(204)
Exercised	(7,283)	$37.76	(275)
Expired	(6,000)	$10.83	(65)
Outstanding at end of    period	1,629,919	$54.41	$88,688	5.1 years	$45,992
Exercisable at end of    period	1,271,382	$46.24	$58,790	4.6 years	$46,264

_____________________________

(1) The aggregate intrinsic value of the stock options was calculated by multiplying the number of shares subject to the options outstanding or exercisable, as applicable, by the closing market price of our common stock on June 30, 2008, and subtracting the applicable aggregate exercise price.

The following table sets forth information regarding the stock options granted and exercised in the periods indicated:

	Three Months Ended June 30,		Six Months Ended June 30,
	2008	2007	2008	2007
Shares subject to stock options     granted	15,000	74,282	177,543	231,362
Weighted average grant date fair value	$29.71	$29.92	$36.83	$29.11
Shares subject to stock options     exercised	5,583	362,316	7,283	856,083
Intrinsic value of stock options     exercised	$171	$32,177	$257	$61,400
Proceeds received from stock options     exercised	$234	$7,916	$275	$17,541
Tax benefits realized from stock     options exercised	$57	$12,388	$90	$23,582

The intrinsic value of a stock option is the difference between the fair market value of the stock and the option exercise price.

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The fair value of each stock option grant was estimated on the date of grant using the following assumptions:

	Three Months Ended June 30,		Six Months Ended June 30,
	2008	2007	2008	2007
Risk-free interest    rates	2.7%	4.5%	2.7%	4.5% - 4.8%
Expected lives (in    years)	4.0	4.7	4.0	4.7
Volatility	53%	35%	53%	35%
Dividend yield	None	None	None	None

The following table sets forth the number of shares of restricted stock and the restricted stock units ("RSUs") that were granted, forfeited and vested in the period indicated:

	Six Months Ended June 30, 2008
	# of Shares of Restricted Stock	Weighted Average Grant Date Fair Value	# of RSUs	Weighted Average Grant Date Fair Value
Unvested at beginning of    period	22,672	$61.02	58,097	$84.40
Granted	--	--	43,207	81.30
Forfeited	(2,865)	59.91	(5,038)	84.59
Vested	--	--	--	--
Unvested at end of    period	19,807	$61.18	96,266	$83.00

5.      Stock Repurchases

     As of June 30, 2008, 4,156,800 shares remained available for repurchase under the share repurchase program (the “Repurchase Program”) authorized by our Board of Directors. The terms of the Repurchase Program provide that we may repurchase shares of our common stock, from time to time depending on market conditions and other considerations, in the open market or through privately negotiated transactions in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Unless earlier terminated by our Board of Directors, the Repurchase Program will expire when we repurchase all shares authorized for repurchase thereunder.

The following table sets forth information regarding the shares of our common stock that we repurchased in the periods indicated:

	Three Months Ended June 30,		Six Months Ended June 30,
	2008	2007	2008	2007
Number of shares	--	720,000	865,000	1,529,900
Total cost	$--	$75,714	$71,803	$140,763
Average price per share	$--	$105.16	$83.01	$92.01

6.      Debt

On December 17, 2007, we entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) with a single lender to borrow up to $160,000 under two revolving credit facilities: one in the maximum principal amount of $50,000; and the other in the maximum principal amount of $110,000. We can borrow under the credit facilities on either a secured or unsecured basis. The Credit Agreement matures on July 1, 2010.

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Borrowings under the Credit Agreement bear interest at the London Interbank Offered Rate (“LIBOR”), plus an applicable margin based on our indebtedness to net worth ratio, adjusted quarterly. We pay a commitment fee of 0.15% per annum of the average daily unused amount of the credit facilities. As of June 30, 2008, the borrowings under the Credit Agreement were $150,000, all of which were secured and bore interest at a rate of 2.63% per annum. Approximately $157,950 of our investments served as collateral for the secured borrowings as of June 30, 2008.

The following table sets forth the interest expense on our borrowings under the Credit Agreement that we recognized in the periods indicated:

Three Months Ended June 30,		Six Months Ended June 30,
2008	2007	2008	2007
$1,057	$2,074	$2,524	$4,131

7.      Investments

The following table sets forth how our investments were classified on our Condensed Consolidated Balance Sheets as of the dates indicated:

	As of:
	June 30, 2008			December 31, 2007			June 30, 2007
	Available-for-Sale	Held-to-Maturity	Total	Available-for-Sale	Held-to-Maturity	Total	Available-for-Sale	Held-to-Maturity	Total
Short-term  investments	$170,500	$--	$170,500	$303,360	$--	$303,360	$290,285	$--	$290,285
Non-current  investments	--	--	--	--	--	--	- -	--	--
	$170,500	$--	$170,500	$303,360	$--	$303,360	$290,285	$--	$290,285

The following table sets forth the aggregate fair market value of our available-for-sale investments as of the dates indicated:

	As of:
	June 30, 2008	December 31, 2007	June 30, 2007
Available-for-Sale Investments:
Auction rate debt securities	$--	$130,575	$74,750
Variable rate demand notes	$170,500	$172,785	$215,535
	$170,500	$303,360	$290,285

We had no material gross unrealized holding or realized gains (losses) from our investments in auction rate securities and variable rate demand notes in the three months or six months ended June 30, 2008 and 2007. All income generated from those investments was recorded as interest income. The interest income recognized from our investments in the periods indicated was as follows:

Three Months Ended June 30,		Six Months Ended June 30,
2008	2007	2008	2007
$1,174	$2,636	$3,204	$5,579

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The following table sets forth the contractual maturities of our debt securities classified as available-for-sale as of June 30, 2008:

Contractual Maturity	Available-for-Sale
Due within five years	$ --
Due after five years through ten years	28,150
Due after ten years	142,350
	$170,500

8.      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 weighted average number of shares of our common stock outstanding during each period as set forth in the following table:

	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2008	2007	2008	2007
	(In thousands)
Shares:
Weighted average number of shares of common stock    outstanding	38,842	40,449	39,020	40,682
Shares assumed issued (less shares assumed purchased for    treasury) for stock-based compensation	325	661	319	668
Outstanding shares for diluted earnings per    share calculation	39,167	41,110	39,339	41,350

A total of 407,395 shares at June 30, 2008 and 74,336 shares at June 30, 2007 were excluded from the calculation of our diluted earnings per common share because the effect was anti-dilutive.

9.      Employee Pension Benefits

The following table sets forth the components of net periodic pension cost (benefit) of the ESI Pension Plan and ESI Excess Pension Plan for the periods indicated:

	Three Months		Six Months
	Ended June 30,		Ended June 30,
	2008	2007	2008	2007
Interest cost	$738	$769	$1,538	$1,538
Expected return on assets	(1,301)	(1,202)	(2,614)	(2,404)
Recognized net actuarial loss	--	138	--	276
Net periodic pension (benefit)	($563)	($295)	($1,076)	($590)

The benefit accruals under the ESI Pension Plan and ESI Excess Pension Plan were frozen effective March 31, 2006. As a result, no service cost or amortization of prior service cost have been included in the net periodic pension benefit.

We made no contributions to the ESI Pension Plan during the three or six months ended June 30, 2008 and 2007. We do not expect to make any contributions to the ESI Pension Plan in 2008.

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10.      Contingencies

As part of our normal operations, one of our insurers issues surety bonds for us that are required by various education authorities that regulate us. We are obligated to reimburse our insurer for any of those surety bonds that are paid by the insurer. As of June 30, 2008, the total face amount of those surety bonds was approximately $19,226.

We are also subject to various claims and contingencies in the ordinary course of our business, including those related to litigation, business transactions, employee-related matters and taxes, among others. We cannot assure you of the ultimate outcome of any litigation involving us. Any litigation alleging violations of education or consumer protection laws and/or regulations, misrepresentation, fraud or deceptive practices may also subject our affected institutes to additional regulatory scrutiny.

Guarantees. In October 2007, we entered into a risk sharing agreement (“RSA”) with an unaffiliated lender for private education loans to be provided to our students by or through that lender to help pay the students’ cost of education that student financial aid from federal, state and other sources do not cover. Under the RSA, if more than a certain percentage of the private education loans, based on dollar volume, are charged off by the lender, we guarantee the repayment of any private education loans that the lender charges off above that percentage. Our obligations under the RSA will remain in effect until all private education loans made under the RSA are paid in full or charged off by the lender. We will have the right to pursue repayment from the borrowers for those charged off private education loans under the RSA that we pay to the lender pursuant to our guarantee obligation. The RSA was terminated effective February 22, 2008, such that no private education loans have been made under the RSA after that date.

The RSA requires that we comply with certain covenants, including that we maintain certain financial ratios which are measured as of December 31 in each year. If we are not in compliance with those ratios at any measurement date, we are obligated to provide the lender with a letter of credit in an amount based on a percentage of the outstanding private education loans under the RSA that have not been paid in full or charged off from time to time.

The maximum potential future payments that we could be required to make pursuant to our guarantee obligation under the RSA are affected by:

·      the amount of the private education loans made under the RSA;

·      the fact that those loans consist of a large number of loans of individually immaterial amounts;

·      the interest and fees associated with those loans;

·      the repayment performance of those loans; and

·      when during the life of those loans they are charged off.

As a result, we are not able to estimate the undiscounted maximum potential future payments that we could be required to make under the RSA. Our recorded liability related to the RSA as of June 30, 2008 was not material.

Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

     All statements, trend analyses and other information contained in this report that are not historical facts are forward-looking statements within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995 and as defined in Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Exchange Act. Forward-looking statements are made based on our management’s current expectations and beliefs concerning future developments and their potential effects on us. You can identify those statements by the use of words such as “could,” “should,” “would,” “may,” “will,” “project,” “believe,” “anticipate,” “expect,” “plan,” “estimate,” “forecast,” “potential,” “intend,” “continue” and “contemplate,” as well as similar words and expressions. Forward-looking statements involve risks and uncertainties and do not guarantee future performance. We cannot assure you that future developments affecting us will be those anticipated by our management. Among the factors that could cause actual results to differ materially from those expressed in our forward-looking statements are the following:

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·      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 of those regulations, 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;

·      our failure to comply with the extensive education laws and regulations and accreditation standards that we are subject to;

·      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 our institutes;

·      our ability to implement our growth strategies;

·      our failure to maintain or renew required regulatory authorizations or accreditation of our institutes;

·      receptivity of students and employers to our existing program offerings and new curricula;

·      loss of access by our students to lenders for student loans;

·      our ability to collect internally funded financing from our students; and

·      our ability to successfully defend litigation and other claims brought against us.

     Readers are also directed to other risks and uncertainties discussed in other documents we file with the SEC, including, without limitation, those discussed in Item 1A. “Risk Factors.” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 filed with the SEC and those discussed in Part II, Item 1A. “Risk Factors.” of this Quarterly Report on Form 10-Q.  We undertake no obligation to update or revise any forward-looking information, whether as a result of new information, future developments or otherwise.

Overview

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

·      References in this document to “we,” “us,” “our” and “ITT/ESI” refer to ITT Educational Services, Inc. and its subsidiaries.

·      The terms “ITT Technical Institute” or “institute” (in singular or plural form) refer to an individual school owned and operated by ITT/ESI, including its learning sites, if any. The terms “institution” or “campus group” (in singular or plural form) mean a main campus and its additional locations, branch campuses and/or learning sites, if any.

This management’s discussion and analysis of financial condition and results of operations should be read in conjunction with the same titled section contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 filed with the SEC for discussion of, among other matters, the following items:

·      cash receipts from financial aid programs;

·      nature of capital additions;

·      seasonality of revenue;

·      components of income statement captions;

·      federal regulations regarding:

·      timing of receipt of funds 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”);

·      percentage of applicable revenue that may be derived from the Title IV Programs;

·      return of Title IV Program funds for withdrawn students; and

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·      default rates;

·      private loan programs;

·      investments; and

·      repurchase of shares of our common stock.

This management’s discussion and analysis of financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in conformity with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenue, expenses, and contingent assets and liabilities. Actual results may differ from those estimates and judgments under different assumptions or conditions.

Background

We are a leading provider of technology-oriented postsecondary education programs in the United States based on revenue and student enrollment. As of June 30, 2008, we were offering master, bachelor and associate degree programs to more than 54,000 students. As of June 30, 2008, we had 102 institutes and nine learning sites of those institutes located in 35 states. All of our institutes are authorized by the applicable education authorities of the states in which they operate, and are accredited by an accrediting commission recognized by the ED. We design our education programs, after consultation with employers, to help graduates prepare for careers in various fields involving their areas of study. We have provided career-oriented education programs since 1969 under the “ITT Technical Institute” name.

In the second quarter of 2008, we began operations at two new institutes. We plan to begin operations at one to three additional locations in 2008. Our overall expansion plans include:

·      operating new institutes;

·      adding learning sites to existing institutes;

·      offering a broader range of both residence and online programs at our existing institutes; and

·      increasing the number of our institutes that offer bachelor degree programs.

Critical Accounting Policies and Estimates

The preparation of our condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenue, expenses, and contingent assets and liabilities. Actual results may differ from those estimates and judgments under different assumptions or conditions. We have discussed the critical accounting policies that we believe affect our more significant estimates and judgments used in the preparation of our consolidated financial statements in the "Management's Discussion and Analysis of Financial Condition and Results of the Operations – Critical Accounting Policies and Estimates" section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 filed with the SEC. There have been no material changes to those critical accounting policies or the underlying accounting estimates or judgments, except as discussed below.

Accounts Receivable and Allowance for Doubtful Accounts. We extend unsecured credit to our students for tuition and fees and we record a receivable for the tuition and fees earned in excess of the payment received from or on behalf of a student. The individual student balances of these receivables are insignificant. We record an allowance for doubtful accounts with respect to accounts receivable on an institute-by-institute basis. We review the historical collection experience for each institute, consider other facts and circumstances related to an institute and record an allowance for doubtful accounts based on that review and consideration.

During the second quarter of 2008, we extended larger amounts of unsecured credit to our students due to a decrease in private education loans made to our students by third-party lenders. We categorized these receivables based on the credit profiles of our students and recorded an allowance for doubtful accounts based on our historical collection experience related to amounts owed by students with similar credit profiles.

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If our collection trends were to differ significantly from our historical collection experience, we would make a corresponding adjustment to our allowance for doubtful accounts. We write off the accounts receivable due from former students when we conclude that collection is not probable.

Fair Value. Effective January 1, 2008, we adopted SFAS No. 157 for financial assets and financial liabilities measured on a recurring basis. This statement defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and expands disclosures regarding fair value measurements. SFAS No. 157 applies whenever other accounting pronouncements require or permit fair value measurements for assets and liabilities.

In February 2008, the FASB issued FSP No. 157-2, which delays the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. We will apply this provision of SFAS No. 157 beginning on January 1, 2009. We do not expect it to have a material effect on our consolidated financial statements, because we do not have any nonfinancial assets or nonfinancial liabilities recognized or disclosed at fair value.

SFAS No. 157 defines fair value for financial reporting as the price that would be received upon the sale of an asset or paid upon the transfer of a liability in an orderly transaction between market participants at the measurement date. The fair value measurement of our financial assets utilized assumptions categorized as observable inputs under SFAS No. 157. Observable inputs are assumptions based on independent market data sources.

The following table sets forth information regarding the fair value measurement of our financial assets as of June 30, 2008:

		Fair Value Measurements at Reporting Date Using
		(Level 1)	(Level 2)	(Level 3)
Description	As of 6/30/2008	Quoted Prices in Active Markets for Identical Assets	Significant Other Observable Inputs	Significant Unobservable Inputs
		(In thousands)
Available-for-sale securities	$170,500	$170,500	$--	$--

We used quoted prices in active markets to value our available-for-sale securities.

New Accounting Pronouncements

In May 2008, the FASB issued SFAS No. 163, which clarifies how FASB Statement No. 60 applies to financial guarantee insurance contracts, including the recognition and measurement of premium revenue and claim liabilities. SFAS No. 163 is effective for fiscal years beginning after December 15, 2008. We do not believe that the adoption of this pronouncement will have a material impact on our consolidated financial statements.

Also in May 2008, the FASB issued SFAS No. 162, which identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles in the United States. SFAS No. 162 will be effective 60 days following the SEC’s approval of the PCAOB amendments to AU Section 411. The SEC has not yet approved the amendments to AU Section 411. We do not believe that the adoption of this guidance will have a material impact on our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, which permits companies to choose to measure certain financial instruments and other items at fair value that are not currently required to be measured at fair value. SFAS No. 159 was effective for us on January 1, 2008. This pronouncement did not have any effect on our condensed consolidated financial statements,

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because we did not elect the fair value methodology under SFAS No. 159 for any of our financial instruments or other items that are not currently required to be measured at fair value.

In March 2008, the FASB issued SFAS No. 161, which expands the disclosure requirements for derivative instruments and hedging activities. SFAS No. 161 is effective for fiscal years beginning after November 15, 2008. We do not believe that the adoption of this pronouncement will have a material impact on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, which establishes accounting and reporting standards for the noncontrolling interest of a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. We do not believe that the adoption of this pronouncement will have a material impact on our consolidated financial statements.

Also in December 2007, the FASB revised and replaced SFAS No. 141 with SFAS No. 141(R), which establishes principles and requirements for how a company recognizes and measures assets, liabilities and noncontrolling interests acquired or assumed in a business combination. SFAS No. 141(R) will apply to any of our business combinations or acquisitions after December 31, 2008.

In November 2007, FASB’s EITF issued EITF 07-01, which defines collaborative arrangements and establishes reporting requirements for transactions between participants in a collaborative arrangement and between participants in the arrangement and third parties. EITF 07-01 is effective for periods beginning after December 15, 2008 and applies to arrangements in existence as of the effective date. We do not believe that the adoption of this guidance will have a material impact on our consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158, which requires a company to measure the funded status of a defined benefit postretirement plan as of the date of the company’s year-end balance sheet. This provision of SFAS No. 158 is effective for fiscal years ending after December 15, 2008 and will be adopted by us no later than December 31, 2008. We have estimated the effect that the transition to a fiscal year-end measurement date will have on our pension amounts based on measurements determined for the prior fiscal year-end reporting. The change will be recorded in retained earnings in the fourth quarter of 2008 and will not have a material impact on our consolidated financial statements.

Results of Operations

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

	Three Months Ended		Six Months Ended
	June 30,		June 30,
	2008	2007	2008	2007
Revenue	100.0%	100.0%	100.0%	100.0%
Cost of educational services	38.6%	41.7%	38.9%	43.0%
Student services and administrative    expenses	30.4%	31.7%	31.0%	32.8%
Operating income	31.0%	26.6%	30.1%	24.2%
Interest income, net	0.0%	0.3%	0.1%	0.3%
Income before provision for income    taxes	31.0%	26.9%	30.2%	24.5%

The following table sets forth our total student enrollment as of the dates indicated:

	2008		2007
	Total Student Enrollment	Increase Over Prior Year	Total Student Enrollment	Increase Over Prior Year
Total Student
Enrollment as of:
March 31	54,194	9.9%	49,295	12.4%
June 30	54,793	12.1%	48,873	11.0%
September 30	Not applicable	Not applicable	53,675	11.5%
December 31	Not applicable	Not applicable	53,027	13.1%

Total student enrollment includes all new and continuing students. A continuing student is any student who, in the academic quarter being measured, is enrolled in a program of study at an ITT Technical Institute and was enrolled in the same program at any ITT Technical Institute at the end of the immediately preceding academic quarter. A new student is any student who, in the academic quarter being measured, enrolls in and begins attending any program of study at an ITT Technical Institute:

·      for the first time at that institute;

·      after graduating in a prior academic quarter from a different program of study at that institute; or

·      after having withdrawn or been terminated from a program of study at that institute.

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The following table sets forth our new student enrollment in the periods indicated:

	2008		2007
New Student Enrollment	New	Increase	New	Increase
in the Three	Student	Over	Student	Over
Months Ended:	Enrollment	Prior Year	Enrollment	Prior Year
March 31	13,844	8.7%	12,738	13.1%
June 30	14,751	22.5%	12,043	3.2%
September 30	Not applicable	Not applicable	18,270	8.8%
December 31	Not applicable	Not applicable	11,542	13.1%
Total for the year	Not applicable	Not applicable	54,593	9.3%

We generally organize the academic schedule for programs of study offered at our institutes on the basis of four 12-week academic quarters in a calendar year that typically begin in early March, mid-June, early September and late November or early December. To measure the persistence of our students, the number of continuing students in any academic quarter is divided by the total student enrollment in the immediately preceding academic quarter.

The following table sets forth the rates of our students’ persistence for the periods indicated:

	Student Persistence for the Three Months Ended:
Year	March 31	June 30	September 30	December 31
2006	75.8%	73.7%	71.2%	76.2%
2007	78.0%	74.7%	72.4%	77.3%
2008	76.1%	73.9%	Not applicable	Not applicable

Changes that we made to how we deliver certain program courses, primarily those courses taught either entirely or partially online over the Internet, have impacted our students’ persistence over the past several years.  Student retention is typically lower in the courses that we teach online over the Internet compared to the courses that we teach in residence on campus.  Our students’ persistence decreased as a result of teaching certain courses online over the Internet.  In the second quarter of 2006, we began modifying the academic qualifications for students to take online courses, which led to year-over-year improvements in persistence in each quarter of 2007 as compared to 2006.  The decrease in the student persistence rate in the first quarter of 2008 compared to the same period in 2007 was primarily due to a change in our 2008 academic calendar, which eliminated a break in classes in the first quarter of 2008 compared to the first quarter of 2007.  We believe that this change in the academic calendar resulted in approximately 500 additional student withdrawals occurring in the first quarter of 2008 than would have occurred if we had not changed the academic calendar. The decrease in the student persistence rate in the three months ended June 30, 2008 compared to the same period in 2007 was primarily due to a higher number of students who graduated at the end of the March 2008 academic quarter compared to the end of the March 2007 academic quarter.

Three Months Ended June 30, 2008 Compared with Three Months Ended June 30, 2007. Revenue increased $29.4 million, or 13.6%, to $246.4 million in the three months ended June 30, 2008 compared to $217.0 million in the three months ended June 30, 2007, primarily due to:

·      a 9.9% increase in total student enrollment at March 31, 2008 compared to March 31, 2007; and

·      a 5.0% increase in tuition rates in March 2008.

The increase in revenue was partially offset by a 80 basis point reduction in our students’ persistence to 73.9% for the three months ended June 30, 2008 compared to 74.7% for the three months ended June 30, 2007.

The increase in student enrollment was primarily due to:

·      student enrollment growth in programs of study and at locations that were in existence prior to 2007;

·      new programs of study offered by our institutes; and

·      operating new institutes.

Cost of educational services increased $4.6 million, or 5.1%, to $95.2 million in the three months ended June 30, 2008 compared to $90.6 million in the three months ended June 30, 2007, primarily due to:

·      increased costs associated with operating new institutes and learning sites; and

·      the costs required to service the increased total student enrollment.

The increase in cost of educational services was partially offset by:

·      greater efficiencies in the operation of our institutes; and

·      decreased costs associated with decreased sales of laptop computers.

Cost of educational services as a percentage of revenue decreased 310 basis points to 38.6% in the three months ended June 30, 2008 compared to 41.7% in the three months ended June 30, 2007, primarily due to greater efficiencies in the operation of our

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institutes. The decrease in cost of educational services as a percentage of revenue was partially offset by the costs associated with operating new institutes and learning sites.

Student services and administrative expenses increased $6.2 million, or 9.0%, to $74.9 million in the three months ended June 30, 2008 compared to $68.7 million in the three months ended June 30, 2007. The principal causes of this increase included:

·      an increase in bad debt expense associated with increases in internally funded student financing; and

·      an increase in compensation and benefit costs associated with a greater number of employees.

Student services and administrative expenses decreased to 30.4% of revenue in the three months ended June 30, 2008 compared to 31.7% of revenue in the three months ended June 30, 2007, primarily due to media advertising costs increasing at a lower rate than the increase in revenue. The decrease in student services and administrative expenses as a percentage of revenue was partially offset by an increase in bad debt expense. Bad debt expense as a percentage of revenue increased to 3.9% in the three months ended June 30, 2008, compared to 2.5% in the three months ended June 30, 2007. We believe that our bad debt expense as a percentage of revenue could increase further during the remainder of 2008, primarily due to increases in internally funded student financing.

Operating income increased $18.6 million, or 32.3%, to $76.3 million in the three months ended June 30, 2008 compared to $57.7 million in the three months ended June 30, 2007. The operating margin increased to 31.0% in the three months ended June 30, 2008 compared to 26.6% in the three months ended June 30, 2007.

Interest income decreased $1.6 million, or 57.9%, to $1.2 million in the three months ended June 30, 2008 compared to $2.8 million in the three months ended June 30, 2007, primarily due to a decrease in investment returns in the overall market and a more conservative investment strategy. Interest expense decreased $1.0 million, or 49.1%, to $1.1 million in the three months ended June 30, 2008 compared to $2.1 million in the three months ended June 30, 2007, primarily due to a decrease in the effective interest rate on our revolving credit facilities.

Our combined federal and state effective income tax rate was 38.3% in the three months ended June 30, 2008 compared to 38.6% in the three months ended June 30, 2007.

Six Months Ended June 30, 2008 Compared with Six Months Ended June 30, 2007. Revenue increased $60.1 million, or 14.3%, to $481.3 million in the six months ended June 30, 2008 compared to $421.2 million in the six months ended June 30, 2007, primarily due to:

·      a 9.9% increase in total student enrollment at March 31, 2008 compared to March 31, 2007;

·      a 5.0% increase in tuition rates in March 2008 and March 2007; and

·      a 13.1% increase in total student enrollment at December 31, 2007 compared to December 31, 2006 .

The increase in student enrollment was primarily due to:

·      student enrollment growth in programs of study and at locations that were in existence prior to 2007;

·      new programs of study offered by our institutes; and

·      operating new institutes.

Cost of educational services increased $5.9 million, or 3.2%, to $187.2 million in the six months ended June 30, 2008 compared to $181.4 million in the six months ended June 30, 2007, primarily due to:

·      increased costs associated with operating new institutes; and

·      the costs required to service the increased total student enrollment.

The increase in cost of educational services was partially offset by:

·      greater efficiencies in the operation of our institutes;

·      lower amortization expense due to certain assets being fully amortized in 2007; and

·      decreased costs associated with decreased sales of laptop computers.

Cost of educational services as a percentage of revenue decreased 410 basis points to 38.9% in the six months ended June 30, 2008 from 43.0% in the six months ended June 30, 2007, primarily due to greater efficiencies in the operation of our institutes and decreased costs associated with decreased sales of laptop computers. The decrease in cost of educational services as a percentage of revenue was partially offset by the costs associated with operating new institutes and learning sites.

Student services and administrative expenses increased $11.0 million, or 8.0%, to $149.0 million in the six months ended June 30, 2008 compared to $138.0 million in the six months ended June 30, 2007. The principal causes of this increase included:

·      an increase in bad debt expense associated with increases in internally funded student financing;

·      an increase in compensation and benefit costs associated with a greater number of employees; and

·      an increase in media advertising expenditures.

Student services and administrative expenses decreased to 31.0% of revenue in the six months ended June 30, 2008 compared to 32.8% of revenue in the six months ended June 30, 2007, primarily due to media advertising costs increasing at a lower rate than

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the increase in revenue. The decrease in student services and administrative expenses as a percentage of revenue was partially offset by an increase in bad debt expense. Bad debt expense as a percentage of revenue increased to 3.5% in the six months ended June 30, 2008, compared to 2.4% in the six months ended June 30, 2007.

Operating income increased $43.2 million, or 42.5%, to $145.0 million in the six months ended June 30, 2008 compared to $101.8 million in the six months ended June 30, 2007. The operating margin increased to 30.1% of revenue in the six months ended June 30, 2008 compared to 24.2% in the six months ended June 30, 2007.

Interest income decreased $2.5 million, or 44.1%, to $3.2 million in the six months ended June 30, 2008 compared to $5.7 million in the six months ended June 30, 2007, primarily due to a decrease in investment returns in the overall market and a more conservative investment strategy. Interest expense decreased $1.6 million, or 38.4%, to $2.6 million in the six months ended June 30, 2008 compared to $4.2 million in the six months ended June 30, 2007, primarily due to a decrease in the effective interest rate on our revolving credit facilities.

Our combined federal and state effective income tax rate was 38.4% in the six months ended June 30, 2008 compared to 38.6% in the six months ended June 30, 2007.

Financial Condition, Liquidity and Capital Resources

Cash and cash equivalents were $78.7 million as of June 30, 2008 compared to $7.2 million as of December 31, 2007 and $10.1 million as of June 30, 2007. We also had short-term investments of $170.5 million as of June 30, 2008 compared to $303.4 million as of December 31, 2007 and $290.3 million as of June 30, 2007. The increase in our cash and cash equivalents and the decrease in our short-term investments as of June 30, 2008 compared to December 31, 2007 and June 30, 2007, were primarily due to the execution of a revised investment strategy focused on liquidity in response to uncertainty in the capital markets. In total, our cash and cash equivalents and short-term investments were $249.2 million as of June 30, 2008 compared to $310.6 million as of December 31, 2007 and $300.4 million as of June 30, 2007. The decrease in the total amount of cash and cash equivalents and short-term investments as of June 30, 2008 was primarily due to a decrease in funds received from private education loans made to our students by third-party lenders and delays in the receipt of certain Title IV Program loan funds from new lenders related to the configuration of information systems.

We are required to recognize the funded status of our defined benefit postretirement plans on our balance sheet. As of June 30, 2008, the balance recognized for the ESI Pension Plan, a non-contributory defined benefit pension plan commonly referred to as a cash balance plan, was an asset of $15.9 million and the balance recognized for the ESI Excess Pension Plan, a nonqualified, unfunded retirement plan, was a liability of $1.9 million.

We do not expect to make any contribution to the ESI Pension Plan in 2008.

Operations.Cash used in operating activities was $48.0 million in the three months ended June 30, 2008 compared to cash generated from operating activities of $14.7 million in the three months ended June 30, 2007. The $62.7 million decrease in operating cash flow was primarily due to:

·      a decrease in funds received from private education loans made to our students by third-party lenders;

·      delays in the receipt of certain Title IV Program loan funds from new lenders related to the configuration of information systems; and

·      higher income tax payments primarily resulting from lower tax benefits from the exercise of stock options.

The decrease in operating cash flow was partially offset by an increase in operating income.

Cash from operating activities decreased $28.0 million to $31.0 million in the six months ended June 30, 2008 compared to $59.0 million in the six months ended June 30, 2007, primarily due to:

·      a decrease in funds received from private education loans made to our students by third-party lenders;

·      delays in the receipt of certain Title IV Program loan funds from new lenders related to the configuration of information systems; and

·      higher income tax payments primarily resulting from lower tax benefits from the exercise of stock options.

The decrease in cash from operating activities was partially offset by an increase in operating income and the timing of payroll payments. See “—Student Financing Update” below for a discussion of the impact on our liquidity and cash flows from operations as a result of increases in internally funded student financing.

Accounts receivable less allowance for doubtful accounts was $29.2 million as of June 30, 2008 compared to $9.9 million as of June 30, 2007. Days sales outstanding was 10.8 days at June 30, 2008 and 4.2 days at June 30, 2007. Both increases were primarily due to increases in internally funded student financing and delays in the receipt of certain Title IV Program loan funds from new lenders related to the configuration of information systems. We believe that our days sales outstanding could increase further during the remainder of 2008, primarily due to increases in internally funded student financing.

In May 2008, the U.S. Congress enacted the Ensuring Continued Access to Student Loans Act of 2008 (the “Continued Access Act”) which, among other things, increased the annual and total amount of certain loans that students can receive under the Title IV Programs. We believe that the increase in certain Title IV Program loan funds under the Continued Access Act will result in a reduction in individual balances of the accounts receivable owed to us by our students in the remainder of 2008.

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Investing.In the three months ended June 30, 2008, we spent $3.0 million to purchase a facility we had been leasing and $3.9 million to renovate, expand or construct buildings at 10 of our locations, compared to $3.8 million for similar expenditures at six facilities in the three months ended June 30, 2007. In the six months ended June 30, 2008, we spent $1.5 million to purchase a parcel of land on which we are building a facility and $11.7 million to purchase, renovate, expand or construct buildings at 15 of our locations compared to $8.7 million for similar expenditures at nine facilities in the six months ended June 30, 2007. We do not currently intend to purchase any additional properties or facilities during the remainder of 2008.

Capital expenditures, excluding facility and land purchases and facility construction, totaled:

·      $5.3 million in the three months ended June 30 , 2008 compared to $4.4 million in the three months ended June 30, 2007; and

·      $7.8 million in the six months ended June 30, 2008 compared to $6.9 million in the six months ended June 30, 2007.

These expenditures consisted primarily of classroom and laboratory equipment (such as computers and electronic equipment), classroom and office furniture, software and leasehold improvements. We plan to continue to upgrade and expand current facilities and equipment throughout the remainder of 2008. Cash generated from operations is expected to be sufficient to fund our capital expenditure requirements.

Financing.On December 17, 2007, we entered into the Credit Agreement to borrow up to $160.0 million under two revolving credit facilities: one in the maximum principal amount of $50.0 million; and the other in the maximum principal amount of $110.0 million. The borrowings under the Credit Agreement were used to allow us to continue repurchasing shares of our common stock while maintaining compliance with certain financial ratios required by the ED, the state education authorities that regulate our institutes and the accrediting agency that accredits our institutes.

Both lines of credit under the Credit Agreement mature on July 1, 2010. The borrowings under each line of credit may be secured or unsecured at our election, provided that we have not defaulted under the Credit Agreement, in which case, any borrowings made on a secured basis must remain secured. Investments held in a pledged account serve as the collateral for any secured borrowings under the Credit Agreement.

Borrowings under the Credit Agreement bear interest at LIBOR plus an applicable margin based on our indebtedness to net worth ratio, adjusted quarterly. We pay a commitment fee of 0.15% per annum of the average daily unused amount of the credit facilities. As of June 30, 2008, the borrowings under the Credit Agreement were $150.0 million, all of which were secured, and bore interest at a rate of 2.63% per annum. Approximately $158.0 million of our investments served as collateral for the secured borrowings as of June 30, 2008.

The availability of borrowings under the Credit Agreement is subject to our ability at the time of borrowing to satisfy certain specified conditions. These conditions include the absence of default by us, as defined in the Credit Agreement, and that certain representations and warranties contained in the Credit Agreement continue to be true and accurate. We are also required to maintain a certain maximum leverage ratio and a minimum ratio of cash and investments to outstanding indebtedness at the end of each of our fiscal quarters. We were in compliance with those ratio requirements as of June 30, 2008.

Our Board of Directors has authorized us to repurchase shares of our common stock in the open market or through privately negotiated transactions in accordance with Rule 10b-18 of the Exchange Act under the Repurchase Program. The following table sets forth information regarding our share repurchase activity in the periods indicated:

	Three Months Ended June 30,		Six Months Ended June 30,
	2008	2007	2008	2007
	(Dollars in thousands, except per share data)
Number of shares	--	720,000	865,000	1,529,900
Total cost	$--	$75,714	$71,803	$140,763
Average price per share	$--	$105.16	$83.01	$92.01

The shares that remained available for repurchase under the Repurchase Program were 4,156,800 as of June 30, 2008. We may repurchase additional shares of our common stock under the Repurchase Program, from time to time, in the future depending on market conditions and other considerations.

We believe that cash generated from operations and our investments will be adequate to satisfy our working capital and capital expenditure requirements for the foreseeable future. We also believe that any reduction in cash and cash equivalents or investments that may result from their use to provide student financing, purchase facilities, construct facilities or repurchase shares of our common stock will not 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.

Student Financing Update. We continue to work with new lenders for them to provide private education loans to our students. The tighter credit markets, along with the time required to integrate third-party lenders, has resulted in us providing increased internally funded financing to our students. We intend to maintain our current admission standards and to continue providing internally funded financing to our students who fail to qualify for private education loans made by third-party lenders.

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We may also enter into additional risk sharing or other guarantee arrangements with third-party lenders in order to help our students qualify for private education loans from those third-party lenders.

We indirectly derived approximately 29% of our revenue in 2007, and approximately 34% of our revenue in 2006, from private education loan programs.  Primarily as a result of the Continued Access Act and its increases in the level of certain Title IV Program loans, we anticipate a decline in the percentage of our revenue that we indirectly derive from private education loans made to our students, including internally funded student financing, in 2008. Although we cannot quantify with certainty the effect that the increases in those Title IV Program loans will have on the amount of our revenue that is derived from private education loans made to our students, we believe that the percentage of our revenue that we indirectly derive from private education loans, including internally funded student financing, in 2008 could be in the range of 12% to 13%. We are still in the early stages of data collection and experience with new third-party lenders of private education loans to our students and, therefore, we are not yet able to predict with certainty the portion of our revenue in 2008 that will be derived from private education loans made by third-party lenders or the portion that will be internally funded by us.

The increased internally funded financing that we are providing to our students could further negatively impact our liquidity and exposes us to new and greater credit risk. Internally funded financing provides for payments to us by our students over an extended term, which could have a material adverse effect on our cash flows from operations in 2008. In addition, we have the risk of collection with respect to our internally funded financing, which could continue to cause us to increase our allowance for doubtful accounts in 2008 compared to prior year periods and result in an increase in our bad debt expense as a percentage of revenue in 2008 compared to prior year periods. We believe that our bad debt expense as a percentage of revenue for the full year of 2008 could exceed the historical range of 1% to 3%. Increases in our bad debt expense in 2008 could continue to result in increased student services and administrative expenses in 2008 compared to prior year periods.

Further, increases in internally funded financing will continue to increase our accounts receivable and our days sales outstanding in 2008 compared to prior year periods. We believe that our days sales outstanding in 2008 could exceed the historical range of six to eight days.

In our experience so far in 2008, lenders have continued to make Title IV Program loans to our students. We have, however, prepared our institutes in the event that our students need to access the William D. Ford Federal Direct Loan Program for Title IV Program loans in the future.

Contractual Obligations

The following table sets forth our specified contractual obligations as of June 30, 2008:

	Payments Due by Period
		Less than	1-3	3-5	More than
Contractual Obligations	Total	1 Year	Years	Years	5 Years
	(In thousands)
Operating lease    obligations	$142,091	$34,032	$54,062	$34,437	$19,560
Long-term debt,    including    scheduled interest    payments	$157,888	$3,944	$153,944	$--	$--
Total	$299,979	$37,976	$208,006	$34,437	$19,560

The long-term debt represents our revolving credit facilities under the Credit Agreement and assumes that the amounts outstanding under the facilities as of June 30, 2008 will be outstanding at all times through the date of maturity. The amounts shown include the principal payments that will be due upon maturity as well as interest payments. Interest payments have been calculated based on their scheduled payment dates using the interest rate charged on our borrowings as of June 30, 2008.

Off-Balance Sheet Arrangements

As of June 30, 2008, we leased our non-owned 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 15 years and management believes that:

·      those leases will be renewed or replaced by other leases in the normal course of business;

·      we may purchase the facilities represented by those leases; or

·      we may purchase or build other replacement facilities.

There are no material restrictions imposed by the lease agreements, and we have not entered into any significant guarantees related to the leases. We are required to make additional payments under the terms of certain operating leases for taxes, insurance and other operating expenses incurred during the operating lease period.

As part of our normal course of operations, one of our insurers issues surety bonds for us that are required by various education authorities that regulate us. We are obligated to reimburse our insurer for any of those surety bonds that are paid by the insurer. As of June 30, 2008, the total face amount of those surety bonds was approximately $19.2 million.

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In October 2007, we entered into the RSA with an unaffiliated lender for private education loans to be provided to our students by or through that lender to help pay the students’ cost of education that student financial aid from federal, state and other sources do not cover. Under the RSA, if more than a certain percentage of the private education loans, based on dollar volume, are charged off by the lender, we guarantee the repayment of any private education loans that the lender charges off above that percentage. The RSA was terminated effective February 22, 2008, such that no private education loans have been made under the RSA after that date. Our recorded liability related to the RSA as of June 30, 2008 was not material. Based on the prior repayment history of our students with respect to private education loans, we do not believe that our guarantee obligation under the RSA will have a material adverse effect on our financial condition, results of operations or cash flows. See Note 10 of the Notes to Condensed Consolidated Financial Statements for further discussion of the RSA.

Item 3.      Quantitative and Qualitative Disclosures about Market Risk.

In the normal course of our business, we are subject to fluctuations in interest rates that could impact the return on our investments and the cost of our financing activities. Our primary interest rate risk exposure results from changes in short-term interest rates and the LIBOR.

Our investments consist primarily of variable rate demand notes. We estimate that the market risk associated with these investments can best be measured by a potential decrease in the fair value of these investments 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 marketable securities would not be material.

Changes in the LIBOR would affect the borrowing costs associated with our revolving credit facilities. We estimate that the market risk can best be measured by a hypothetical 100 basis point increase in the LIBOR. If such a hypothetical increase in the LIBOR were to occur, the effect on results from operations and cash flow would not have been material for the three and six months ended June 30, 2008.

Item 4.     Controls and Procedures.

(a)     Evaluation of Disclosure Controls and Procedures.

We are responsible for establishing and maintaining disclosure controls and procedures (“DCP”) that are designed to ensure that information required to be disclosed by us in the reports filed by us under the Exchange Act is: (a) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and (b) accumulated and communicated to our management, including our principal executive and principal financial officers, to allow timely decisions regarding required disclosures. In designing and evaluating our DCP, we recognize that any controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving the desired control objectives, and that our management’s duties require it to make its best judgment regarding the design of our DCP. As of the end of our second fiscal quarter of 2008, we conducted an evaluation, under the supervision (and with the participation) of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our DCP pursuant to Rule 13a-15 of the Exchange Act. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our DCP were effective.

(b)      Changes in Internal Control Over Financial Reporting.

     There were no changes in our internal control over financial reporting that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings.

We are subject to various claims and contingencies in the ordinary course of our business, including those related to litigation, business transactions, employee-related matters and taxes, among others. We cannot assure you of the ultimate outcome of any litigation involving us. Any litigation alleging violations of education or consumer protection laws and/or regulations, misrepresentation, fraud or deceptive practices may also subject our affected institutes to additional regulatory scrutiny.

Item 1A.      Risk Factors.

You should carefully consider the risks and uncertainties we describe in both our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 and our Quarterly Reports on Form 10-Q, including this Report, before deciding to invest in, or retain, shares of our common stock. These are not the only risks and uncertainties that we face. Additional risks and uncertainties that we do not currently know about, we currently believe are immaterial or we have not predicted may also harm our business operations or adversely affect us. If any of these risks or uncertainties actually occurs, our business, financial condition, results of operations or cash flows could be materially adversely affected.  Except as set forth below, there have been no material changes from the risk factors discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007:

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Action by the U.S. Congress to revise the laws governing the federal student financial aid programs or reduce funding for those programs could reduce our student population and increase our costs of operation. Political and budgetary concerns significantly affect Title IV Programs. The U.S. Congress enacted the HEA to be reauthorized approximately every six years, which last occurred in 1998. In addition, the U.S. Congress can change the laws affecting Title IV Programs in the annual federal appropriations bills and other laws it enacts between the HEA reauthorizations. From 2004through July 2008, the U.S. Congress temporarily extended most of the provisions of the HEA, pending completion of the formal reauthorization process, and also enacted other laws affecting Title IV Programs. Significantly, in 2007 the U.S. Congress enacted the College Cost Reduction and Access Act, which made significant changes to the Title IV Programs, including:

·      increasing the amount of funding that individual students can receive in Pell grants;

·      reducing the interest rate that students must pay on certain loans made under the Federal Family Education Loan (“FFEL”) program;

·      revising aspects of the calculation of a student’s need for need-based Title IV Program funding; and

·      reducing the federal government’s subsidies and other payments to lenders who make FFEL loans to students.

In addition, in May 2008, the U.S. Congress enacted the Continued Access Act, which, among other things:

·      increased the annual and total amount of certain loans that students can receive under the Title IV Programs;

·      expanded student eligibility for, and potentially increased the amount of funds available to fund grants under, certain Title IV Programs;

·      expanded parent eligibility and created payment deferment options for parent loans under the Title IV Programs; and

·      authorized the ED to purchase certain Title IV Program loans from lenders until July 1, 2009.

We believe that most of those changes to the Title IV Programs will positively impact our students’ ability to fund their educational expenses. The reduction in subsidies and other payments to lenders, however, has resulted in those lenders altering the terms of certain Title IV Program loans that they offer in ways that are not beneficial to our student and parent borrowers. For example, the lenders have reduced or eliminated borrower benefits on Title IV Program loans and, in some cases, ceased to make Title IV Program loans to students at certain institutions or at all. In our experience so far in 2008, however, those changes in borrower benefits have not resulted in a decrease in our student population, and lenders have continued to make Title IV Program loans to our students.

     Although the Continued Access Act was intended to encourage third-party lenders to continue to provide, or to begin to again provide, Title IV Program loans, we cannot assure you that it will have its intended effect or that our students will be able to continue to obtain Title IV Program loans from third-party lenders. All of our institutes are prepared to participate in the William D. Ford Federal Direct Loan Program (the “Direct Loan Program”) in the event our students are unable to obtain Title IV Program loans from third-party lenders. As a result, we do not believe that our students’ loss of access to Title IV Program loans from third-party lenders would have a material adverse effect on our cash flows, financial condition or operations.

In June 2008, the U.S. Congress passed legislation that expands veterans’ education benefits (the “New GI Bill”). Under the New GI Bill, depending on the length of the veteran’s active duty service, a qualifying veteran can receive education benefits of:

·      up to the cost of in-state tuition at the most expensive public college in the veteran’s state;

·      a monthly housing stipend based on a college’s location;

·      up to $1,000 annually for textbooks; and

·      federal matching dollars for any additional grants awarded to the veteran by a college that charges higher tuition than the most expensive public college in the veteran’s state.

The expanded education benefits are scheduled to begin in August 2009 and apply to all members of the military who have served at least 90 days of qualified active duty after September 10, 2001. Qualifying veterans may also transfer their education benefits under the New GI Bill to their spouses or dependent children. Qualifying veterans will have up to 15 years after they leave active duty to use their education benefits. We believe that the expanded education benefits under the New GI Bill will positively impact the ability of our students who are qualifying veterans to pay their education expenses and encourage qualifying veterans to pursue an ITT Technical Institute education.

We believe that, in the remainder of 2008, the U.S. Congress will either complete its reauthorization of the HEA or further extend the provisions of the HEA. Numerous changes to the HEA are likely to result from any further reauthorization and, possibly, from any other laws that may be passed, but at this time we cannot predict all of the changes that the U.S. Congress will ultimately make. Since a significant percentage of our revenue is 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, results of operations and cash flows.

If one or more of our institutes lost its eligibility to participate in Title IV Programs, or if the U.S. Congress significantly reduced the amount of available Title IV Program funding, we would try to arrange or provide alternative sources of financial aid for the students at the affected institutes. We cannot assure you that one or more private organizations would be willing to provide

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loans to students attending those institutes or that the interest rate and other terms of those 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 on terms that are less favorable to us than our current guarantee obligation, 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 modify 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.

One or more of our institutes may have to post a letter of credit or be subject to other sanctions if it does not correctly calculate and return within the required time frame Title IV Program funds for, or refund monies paid by or on behalf of, students who withdraw before completing their program of study. The HEA and its implementing regulations impose limits on the amount of Title IV Program funds withdrawing students can use to pay their education costs (the “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. For our institutes, a period of enrollment is generally an academic quarter. The institution must calculate and return to the appropriate lenders or the ED 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 institution must return those unearned funds in a timely manner which is generally within 45 days of the date the institution determined that the student had withdrawn. If the unearned funds are not properly calculated and timely returned, we may have to post a letter of credit in favor of the ED or be otherwise sanctioned by the ED. An institution is required to post a letter of credit with the ED in an amount equal to 25% of the total dollar amount of unearned Title IV Program funds that the institution was required to return with respect to withdrawn students during its most recently completed fiscal year, if the institution is found in an audit or program review to have untimely returned unearned Title IV Program funds with respect to 5% or more of the students in the audit or program review sample of withdrawn students, in either of its two most recently completed fiscal years. No audit or review has found that any of our institutes was violating the ED’s standard on the timely return of unearned Title IV Program funds. The requirement to post a letter of credit or other sanctions by the ED could increase our cost of regulatory compliance and adversely affect our results of operations.

     The standards of most of the state education and professional licensing authorities (collectively, the “SAs”) and the Accrediting Council for Independent Colleges and Schools, the accrediting commission that accredits our institutes, limit a student’s obligation to an institution for tuition and fees, if a student withdraws from the institution (the “Refund Policy”). The specific standards vary among the SAs. Depending on when during an academic quarter a student withdraws and the applicable Refund Policy, in many instances the student remains obligated to the ITT Technical Institute for some or all of the student’s education costs that were paid by the Title IV Program funds returned under the Return Policy. 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 cannot assure you that all of our affected students would be able to qualify for these types of loans. If these types of loans were unavailable, we could be unable to collect a significant portion of many withdrawing students’ education costs that would have been paid by the Title IV Program funds that were returned, which, in the aggregate, could have a material adverse effect on our results of operations and cash flows.

If the lenders who provide private loans to our students were to end or reduce their programs and we were unable to timely identify alternative lenders for our students, our students’ ability to finance their education could be adversely affected, our receivables could increase and our student population could decrease. In 2007, we indirectly derived approximately 29% of our revenue from unaffiliated, private loan programs that were made available to eligible students at our institutes to help fund a portion of the students’ cost of education. The vast majority of these private student loan programs were offered by one lender. In February 2008, our agreement with that lender was terminated. Although we have made arrangements with other unaffiliated lenders for them to provide private loans to our qualified students, those lenders have different and more stringent loan underwriting standards than the previous lender, which adversely affects the ability of some of our students to obtain private loans. In addition, those lenders are not contractually bound to continue offering private loans to our students and could terminate their private student loan programs at any time. If those lenders ended their private student loan programs or reduced the volume of loans made under the programs and we were unable to timely identify other lenders to make private loans to our students and their parents on similar terms, our students’ ability to finance their education could be adversely affected, our receivables could increase and our student population could decrease, which could have a material adverse effect on our financial condition, results of operations and cash flows.

If we experience losses in excess of the amounts that we have reserved with respect to the significant amount of internally funded student financing that we have provided to our students, it could have a material adverse effect on our financial condition and results of operations. We offer a variety of payment plans to help students pay the portion of their cost of education that is not covered by financial aid or other funds. These balances are unsecured and not typically guaranteed. These balances have increased as a result of the number of our students who do not qualify for private student loans from third parties due

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to their prior credit history, and they could become more significant in the future. Increases in internally funded student financing adversely affect our cash flows and expose us to greater credit risk. Although we have reserved for estimated losses related to unpaid student balances, losses in excess of the amount we have reserved for bad debts could have a material adverse effect on our financial condition and results of operations.

High interest rates and tightening of the credit markets could adversely affect our ability to attract and retain students and could increase our risk exposure. Since much of the financing our students receive is tied to floating interest rates, higher interest rates cause a corresponding increase in the cost to our existing and prospective students of financing their education, which could result in a reduction in the number of students attending our institutes and in our revenue. Higher interest rates could also contribute to higher default rates with respect to our students’ repayment of Title IV Program and private student loans. High default rates may, in turn, adversely impact our eligibility to participate in Title IV Programs, trigger our recourse obligations with respect to private student loans guaranteed by us and/or negatively affect the willingness of private lenders to make private loan programs available to our students, which could result in a reduction in the number of students attending our institutes and could have a material adverse effect on our financial condition, results of operations and cash flows.

In addition, the tighter credit markets have caused lenders to alter the terms of private student loans that they offer in ways that are not beneficial to our student and parent borrowers. For example, the lenders have:

  ·      made changes to the terms and pricing of their private student loans that are less favorable to borrowers;

  ·      reduced or eliminated borrower benefits on private student loans; and

  ·      become more selective in originating private student loans, which has adversely impacted the ability of borrowers with little or poor credit history to borrow the necessary funds to pay their cost of education.

As a result of those adverse effects on our students’ ability to finance their cost of education, our receivables could increase and/or our student population could decrease, which could have a material adverse effect on our financial condition, results of operations and cash flows. Further, the credit market tightening could cause lenders to seek additional guarantees from us related to private student loans, which would increase our exposure to credit risk.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

The following table sets forth information regarding purchases made by us of shares of our common stock on a monthly basis in the three months ended June 30, 2008:

	Issuer Purchases of Equity Securities
	Period	Total Number of Shares Purchased	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1)
April 1, 2008 through April 30, 2008		--	$--	--	4,156,800
May 1, 2008 through May 31, 2008		--	--	--	4,156,800
June 1, 2008 through June 30 , 2008		--	--	--	4,156,800
	Total	--	$--	--

_____________________________

(1)      Our Board of Directors has authorized us to repurchase the following number of shares of our common stock pursuant to the Repurchase Program:

Number of Shares	Board Authorization Date
2,000,000	April 1999
2,000,000	April 2000
5,000,000	October 2002
5,000,000	April 2006
5,000,000	April 2007

The shares that remained available for repurchase under the Repurchase Program were 4,156,800 as of June 30, 2008. The terms of the Repurchase Program provide that we may repurchase shares of our common stock, from time to time depending on market conditions and other considerations, in the open market or through privately negotiated transactions in accordance with Rule 10b-18 of the Exchange Act. Unless earlier terminated by our Board of Directors, the Repurchase Program will expire when we repurchase all shares authorized for repurchase thereunder.

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Item 4.     Submission of Matters to a Vote of Security Holders.

     During the second quarter of fiscal year 2008, our 2008 Annual Meeting of Shareholders was held on May 6, 2008 to:

·      elect three directors; and

·      ratify the appointment of PricewaterhouseCoopers LLP (“PWC”) by the Audit Committee of our Board of Directors to serve as our independent registered public accounting firm for our fiscal year ending December 31, 2008.

     At our 2008 Annual Meeting of Shareholders, our shareholders elected the following persons to serve as directors in the second class of our Board of Directors, each to hold office for the term of three years and until his successor is elected and has qualified:

Second Class - Term expiring at 2011 Annual Meeting

1.      John E. Dean

2.      James D. Fowler, Jr.

3.      Vin Weber

The final results of the vote taken at our 2008 Annual Meeting of Shareholders for the director nominees are as follows:

            Percentage of                                                                    Percentage of

                 Votes For               Votes Cast For Votes Withheld Votes Cast Withheld

John E. Dean                               33,526,761                           99.15%                              288,728                                     0.85%

James D. Fowler, Jr.                    33,525,485                           99.14%                              290,004                                     0.86%

Vin Weber                                    33,526,681                           99.15%                              288,808                                     0.85%

The directors who continued in office after our 2008 Annual Meeting of Shareholders are as follows:

First Class - Term expiring at 2010 Annual Meeting

1.      John F. Cozzi

2.      Kevin M. Modany

3.      Thomas I. Morgan (resigned from our Board of Directors on June 16, 2008)

Second Class - Term expiring at 2011 Annual Meeting

1.      John E. Dean

2.      James D. Fowler, Jr.

3.      Vin Weber

Third Class - Term expiring at 2009 Annual Meeting

1.      Joanna T. Lau

2.      Samuel L. Odle

3.      John A. Yena

At our 2008 Annual Meeting of Shareholders, our shareholders ratified the appointment of PWC to serve as our independent registered public accounting firm for our fiscal year ending December 31, 2008. The final results of the vote taken at that meeting ratifying the appointment of PWC are as follows:

Percentage of Shares          

Represented in Person                                                                       Broker

Votes For or By Proxy Voting For Votes Against Nonvotes Abstentions

33,650,659                99.51%                                  158,552                                  0                                 6,278

Item 5.     Other Information.

On July 21, 2008, our Board of Directors approved and adopted amended and restated By-laws, effective on that date. The amendments to Article II, Section 8 and Article III, Section 2 clarify that the advance notice provisions apply to all nominations for director and proposals for other business that a shareholder intends to bring before a meeting of our shareholders. The amendments to those sections also require any shareholder who provides advance notice of a shareholder nomination or other proposal to provide additional information to us as part of that notice. The amendment to Article VII, Section 6 clarifies that the contract right with respect to indemnification and advancement of expenses provided by the By-laws to our directors, officers, employees and agents becomes vested at the time that person begins to serve in that position. The amendments to the By-laws also include the correction of a small number of minor typographical errors.

The full text of our By-laws, as amended and restated, is being filed as Exhibit 3.2 to this Form 10-Q and is incorporated herein by reference.

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Item 6.     Exhibits.

A list of exhibits required to be filed as part of this report is set forth in the Index to Exhibits, which immediately precedes the exhibits, and is incorporated herein by reference.

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SIGNATURES

     Pursuant to the requirements 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.

Date: July 24, 2008

By: /s/ Daniel M. Fitzpatrick

                  Daniel M. Fitzpatrick

      Senior Vice President, Chief Financial Officer

(Duly Authorized Officer, Principal Financial Officer

             and Principal Accounting Officer)

INDEX TO EXHIBITS

Exhibit
No.	Description

3.1	Restated Certificate of Incorporation, as Amended to Date (incorporated herein by reference from the same exhibit number to ITT/ESI’s 2005 second fiscal quarter report on Form 10-Q)
3.2	Restated By-Laws, as Amended to Date
10.14	Restated ESI 401(k) Plan
10.23	First Amendment to ESI Excess Pension Plan, 2008 Restatement
31.1	Chief Executive Officer’s Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934
31.2	Chief Financial Officer’s Certification Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934
32.1	Chief Executive Officer’s Certification Pursuant to 18 U.S.C. Section 1350
32.2	Chief Financial Officer’s Certification Pursuant to 18 U.S.C. Section 1350

EX-10

Exhibit 10.14

ESI 401(k) PLAN

2006 Restatement

ESI 401(k) PLAN

TABLE OF CONTENTS

Page

ARTICLE I	INTRODUCTION AND PURPOSE	1
ARTICLE II	DEFINITIONS	1
ARTICLE III	MEMBERSHIP	13
3.1	Membership	13
3.2	Rehired Member	14
3.3	Transferred Members	14
3.4	Termination of Membership	14
ARTICLE IV	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	18
4.6	Rollover Contributions	18
4.7	Contributions During Period of Military Leave	19
ARTICLE V	COMPANY CONTRIBUTIONS	19
5.1	Matching Company Contributions	19
5.2	Retirement Contributions	20
5.3	Mode of Payment and Valuation of ESI Stock Contributed	20
5.4	Vesting	21
5.5	Forfeitures	22
ARTICLE VI	LIMITATIONS ON CONTRIBUTIONS	22
6.1	Actual Deferral Percentage Test	22
6.2	Actual Contribution Percentage Test	23
6.3	Additional Discrimination Testing Provisions	25
6.4	Maximum Annual Additions	26
ARTICLE VII	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	Voting of ESI Stock	28
7.6	Limitations Imposed by Contract	29
7.7	Responsibility for Investments	29

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ARTICLE VIII	CREDITS TO MEMBERS' ACCOUNTS, VALUATION, AND ALLOCATION OF ASSETS	29
8.1	Pre-Tax Savings and Rollover Contributions	29
8.2	Matching Company Contributions	29
8.3	Retirement Contributions	29
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 IX	WITHDRAWALS PRIOR TO TERMINATION OF EMPLOYMENT	30
9.1	General Conditions for Withdrawals	30
9.2	Non-Hardship Withdrawal Prior to Age 59½	31
9.3	Hardship Withdrawal Prior to Age 59½	31
9.4	Withdrawals After Age 59½	33
9.5	Ordering of Withdrawals	33
9.6	Death After Withdrawal Election	33
9.7	Direct Rollover	33
9.8	Retirement Contribution Account	34
ARTICLE X	LOANS	34
10.1	General Conditions for Loans	34
10.2	Amounts Available for Loans	34
10.3	Account Ordering for Loans	34
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 XI	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	41
11.5	Proof of Death and Right of Beneficiary or Other Person	41
11.6	Restoration of Prior Forfeiture	41
11.7	Direct Rollover of Certain Distributions	41
11.8	Waiver of Notice Period	42
11.9	Determination of Nonforfeitable Account Balance	43

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ARTICLE XII	MANAGEMENT OF FUNDS	44
12.1	ESI Employee Benefit Plan Administration and Investment Committee	44
12.2	Trust Fund	44
12.3	Reports to Members and Deferred Members	44
12.4	Fiscal Year	44
ARTICLE XIII	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 XIV	AMENDMENT AND TERMINATION	47
14.1	Amendment	47
14.2	Termination of Plan	47
14.3	Merger or Consolidation of Plan	48
14.4	Transfer from ITT Plan	48
ARTICLE XV	TENDER OFFER	48
15.1	Applicability	48
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	49
ARTICLE XVI	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	50
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	52
16.13	Construction	53
ARTICLE XVII	TOP-HEAVY PROVISIONS	53
17.1	Definitions	53
17.2	Determination of Top-Heavy Status	53
17.3	Minimum Requirements	54

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ARTICLE XVIII	MINIMUM DISTRIBUTION REQUIREMENTS	54
18.1	General Rules	54
18.2	Time and Manner of Distribution	54
18.3	Required Minimum Distributions During Member’s Lifetime	55
18.4	Required Minimum Distributions After Member’s Death	56
18.5	Election to Use Five-Year Rule	57
18.6	Definitions	57

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ESI 401(k) PLAN

ARTICLE I

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 January 1, 2006. 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 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 II

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 Section 6.2, 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 Section 6.1, 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 $200,000, 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 6.4 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 14.4, (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

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Plan Transfer, and (iii) any investment earnings and gains or losses on any of the aforementioned amounts.

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 XIII.

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2.14 "Company" shall mean:

(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.

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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 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

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services are performed under the primary direction or 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 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 VII.

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.

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(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.

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 14.4; (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.

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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 III, and (2) for purposes of Sections 2.52, 2.53 and 4.6, and Article X, any 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

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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.

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 14.4, 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 14.4, 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.

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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.

2.54 "Salary" shall mean, with respect to an Employee for a Plan Year, 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, short term disability 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 not exceed the Annual Dollar Limit.

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,

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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 III, an Employee whose employment with the Company or an

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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 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 III, 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, maximum annual addition under Section 6.4, 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 or maximum annual additions under Section 6.4.

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, dismissal or severance from employment; 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 VII.

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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.

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 III

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 § 1.410(a)-7.

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(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 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) 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 IV

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

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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 III, and shall be applied to Salary that could have been subsequently received by the Member. 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. Effective May 16, 2008, a Member also may elect, subject to the provisions of paragraph (b) through (d) below and in accordance with procedures prescribed by the Committee, to automatically increase the reduction of his or her subsequent Salary annually, in increments of 1%, over a period of one or more years, specifying the month in which each annual increase shall be effective and the amount of each annual increase, and have that amount contributed on his or her behalf to the Plan by the Company as Pre-Tax Savings. Elections specified to be effective in a particular month shall be effective with the first payroll period of that month. A Member may cancel his or her election to automatically and annually increase the reduction of his or her subsequent Salary at any time.

(ii) 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 who is eligible to reduce his or her Salary in accordance with this Section for a Plan Year and who has attained age 50 before the close of his taxable year beginning in that 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

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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.

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

(A) 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

(B) 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. 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 14.4.

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 the applicable dollar amount under Code Section 402(g)(1)(B), other than as provided at Section 4.1(a)(iv). Except as provided at Section 4.1(a)(iv), 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

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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 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 14.4 shall be held in the Member's or Deferred Member's After-Tax Investment Account.

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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) With the permission of the Committee and without regard to any limitations on contributions set forth in this Article IV, the Plan will accept Member rollover contributions and/or direct rollovers of distributions as described below.

(i) The Plan will accept a direct rollover of an eligible rollover distribution from:

(A) A qualified plan described in Section 401(a) or 403(a) of the Code, excluding after-tax employee contributions.

(B) An annuity contract described in Section 403(b) of the Code, excluding after-tax employee contributions.

(C) 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.

(ii) The Plan will accept a Member contribution of an eligible rollover distribution from:

(A) A qualified plan described in Section 401(a) or 403(a) of the Code.

(B) An annuity contract described in Section 403(b) of the Code.

(C) 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.

(iii) 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.

(b) 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.

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(c) 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.

(d) 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 III and IV.

(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 6.4 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 V

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 Company Contribution each payroll processing period. 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

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on behalf of the Member during each payroll processing period. In no event, however, shall the Matching Company Contributions pursuant to this Section exceed 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 or catch-up contributions described in Section 4.1(a)(iv). 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 and 6.2. 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 or 6.1, 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, 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 Section 5.1 shall be made in cash.

(b) Company contributions made in cash shall be invested in accordance with Section 7.2.

(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.

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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:

Years of Service	Nonforfeitable 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 following schedule, except that if the Member also completed an Hour of Service before January 1, 2002, the Member 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:

Years of Service	Nonforfeitable 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 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.

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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 VI

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 that Plan Year for all Non-Highly-Compensated Employees who are Members for that 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 that Plan Year for all Non-Highly-Compensated Employees who are Members for that 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 that Plan Year for all Non-Highly-Compensated Employees who are Members for that Plan Year.

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

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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 2½ 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 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 that Plan Year for all Non-Highly-Compensated Employees who were Members for that 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 that Plan Year for all Non-Highly-Compensated Employees who were Members for that Plan

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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 that Plan Year for all Non-Highly-Compensated Employees who were Members for that Plan Year.

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 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

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or forfeiture shall be made within 2½ months of the close of the Plan Year in which the excess aggregate contributions were made.

6.3 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 and 6.2. 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 and 6.2 will be those made in the same year as the Plan 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 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 and 6.2 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 (b) only if they have the same plan year.

(c) The Committee may elect to use Pre-Tax Savings or Retirement Contributions to satisfy the test described in Section 6.2, 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 and 6.2, where necessary, but may not exceed the amount described in Treasury Regulation §1.401(k)-2(a)(6)(iv) or §1.401(m)–2(a)(6)(v).

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(e) For purposes of calculating investment income under Sections 6.1 and 6.2, investment income earned on amounts within 7 days of the return or forfeiture of those amounts may be disregarded.

6.4 Maximum Annual Additions.

(a) Notwithstanding any other provision of the Plan, except as otherwise provided in Section 4.1(a)(iv) and this Section 6.4(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) 100% of his Statutory Compensation for the year or (ii) $40,000, as adjusted for increases in the cost of living under Section 415(d) of the Code. The limit referred to in (i) 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.

(b) For purposes of this Section 6.4, 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) 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 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.

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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 6.4. 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 6.4(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.

ARTICLE VII

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 made by or on behalf of a Member (or an Employee who made a Rollover Contribution prior to meeting the eligibility requirements for membership), including Matching Company Contributions

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made on behalf of a Member, shall be invested, in multiples of 1%, in any one or more of the Funds as designated by the Member (or Employee) pursuant to rules and procedures established by the Committee, except that, effective March 19, 2004, new contributions shall not be invested in the ESI Stock Fund.

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 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 Matching Contribution Account and, if applicable, his or her Retirement Contribution Account, After-Tax Investment Account, Rollover Account, and ESOP Account, among the Funds, other than the ESI Stock Fund. 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, other than the ESI Stock Fund. A Member, Deferred Member, Beneficiary, or Employee may cause all or part of his or her Accounts that are invested in the ESI Stock Fund to be transferred to another Fund, but he or she may not cause any part of any Account to be transferred into the ESI Stock Fund on or after March 19, 2004. Reallocations made pursuant to this Section shall be made in accordance with the administrative procedures and within the time limits prescribed by the Committee and shall be effective as soon as practicable thereafter.

7.5 Voting of ESI Stock. Each Member and Employee is, for the purposes of this Section 7.5, 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 XVII, the Trustee shall vote, or abstain from voting, shares of ESI

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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 7.5 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.

7.6 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.

7.7 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 the selection of his or her investment options made pursuant to Section 7.2, 7.3, or 7.4. 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 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 VIII

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.

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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 7.5 and Article XV, 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 purposes. Valuation Dates need not be the same for all purposes. The Funds shall be revalued on each business day.

ARTICLE IX

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 IX, 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.

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9.2 Non-Hardship Withdrawal Prior to Age 59½. A Member who has not yet reached age 59½ 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 59½.

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

(i) 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;

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

(iii) 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 (as defined in Section 152 of the Code and, for taxable years beginning on or after January 1, 2005, without regard to Section 152(b)(1), (b)(2) and (d)(1)(B) of the Code);

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(iv) 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;

(v) payments for burial or funeral expenses for the Member's deceased parent, spouse, children or dependents (as defined in Section 152 of the Code without regard to Section 152(d)(1)(B));

(vi) expenses for the repair of damage to the Member's principal residence that would qualify for a casualty deduction under Section 165 of the Code (determined without regard to whether the loss exceeds 10% of adjusted gross income); or

(vii) 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 six 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 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

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and welfare benefit plans or the mandatory employee contribution portion of a defined benefit plan.

9.4 Withdrawals After age 59½. A Member who has reached age 59½ 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.

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

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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 X

LOANS

10.1 General Conditions for Loans. Subject to the restrictions set forth in the following provisions of this Article X, 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.

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

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(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:

(a) 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;

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

(c) 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.

(d) 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;

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

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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 59½, 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 59½, 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 IX. 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, 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

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Termination of Employment and requests a distribution pursuant to Article XI, the loan shall be canceled, and the outstanding loan balance shall be distributed pursuant to Article XI.

ARTICLE XI

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 70½, 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 received before May 16, 2008, a Member or Deferred Member whose Vested Share exceeds $1,000 (as determined under Section 11.9) 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. In lieu of a distribution as described in paragraph (a) above received after May 15, 2008, a Member or Deferred Member whose Vested Share exceeds $5,000 (as determined under Section 11.9) 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. However, a Member or Deferred Member whose Vested Share does not exceed $1,000 (as determined under Section 11.9) before May 16, 2008 or $5,000 (as determined under Section 11.9) after May 15, 2008 shall receive distribution of his or her Vested Share as described in Section 11.3.

(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 $1,000 (as determined under Section 11.9) or, effective May 16, 2008, exceeds $5,000 (as determined under Section 11.9) 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 70½ 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 70½. If a Member attains age 70½ after January 1, 1997, but before January 1, 1999, distribution of the Vested Share of

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his Accounts shall begin by April of the calendar year following the calendar year in which the Member attains age 70½ 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 70 ½ pursuant to this paragraph (d) shall be made no less frequently than annually, and once payment has commenced, the Member may 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 70½. Notwithstanding the foregoing, a Member who attains 70½ 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 70½ 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.

11.2 Forms and Methods of Distribution.

(a) With respect to a Termination of Employment occurring before May 16, 2008, 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. With respect to a Termination of Employment occurring after May 15, 2008, after Termination of Employment occurs, and as soon as practicable following application by the Member, Deferred Member or Beneficiary whose Vested Share exceeds $5,000 (as determined under Section 11.9) as of the Valuation Date corresponding to his or her application, distribution under the Plan shall be made in a lump sum, unless

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an election is made by a Member or Deferred Member pursuant to paragraph (b) below.

(b) With respect to distributions occurring before May 16, 2008, a Member or Deferred Member whose Vested Share, as of the Valuation Date corresponding to his or her application for distribution, exceeds $1,000 (as determined under Section 11.9) but does not exceed $5,000 (as determined under Section 11.9), 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 a lump sum payment. With respect to distributions occurring after May 15, 2008, a Member or Deferred Member whose Vested Share, as of the Valuation Date corresponding to his or her application for distribution, exceeds $5,000 (as determined under Section 11.9), 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:

(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.

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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.

(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 XI, 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 does not exceed $1,000 (as determined under Section 11.9). The lump sum payment shall automatically be made as soon as administratively practicable following the Member's Termination of Employment. Effective May 16, 2008, the amount "$5,000" shall be substituted for the amount "$1,000" in the first sentence of this Section and, if the value of the Member's Vested Share as of the time the benefits are distributed exceeds $1,000 (as determined under Section 11.9), but not $5,000 (as determined under Section 11.9) and the Member does not elect to receive his or her distribution in cash, with federal income taxes withheld, in accordance with the administrative procedures and within the time period prescribed by the Committee, his or her distribution will be transferred, automatically, in a direct rollover to an individual retirement account (IRA) established with an IRA provider designated by the Committee.

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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 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 IX or this Article XI 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:

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(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 hardship distribution and (v) any other distribution that is not an eligible rollover distribution under the Code or regulations thereunder. 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.

(c) "Eligible retirement plan" means any of the following that accepts an eligible rollover distribution: 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, a qualified plan described in Section 401(a) of the Code; 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. However, the portion of an eligible rollover distribution consisting of after-tax employee contributions that are not includible in gross income may be transferred only to an individual retirement account or annuity described in Section 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.

(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 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 (as determined under Section 11.9), an election by the Member or Deferred Member to receive a distribution

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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:

(a) 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

(b) 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:

(a) 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;

(b) 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;

(c) 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;

(d) the Member’s or Deferred Member's annuity starting date is after the date the notice is provided; and

(e) payment does not commence less than seven days following the day after the notice is received by the Member or Deferred Member.

11.9 Determination of Nonforfeitable Account Balance. For purposes of determining whether a Member's nonforfeitable account balance exceeds $1,000 under this Article and Section 16.4, the value of a Member's nonforfeitable account balance shall be determined with 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. For purposes of determining whether a Member's nonforfeitable account balance exceeds $5,000 under this Article and Section 16.4 of the Plan, the value of a Member's nonforfeitable account balance shall be determined without regard to that portion of the

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account balance that is attributable to rollover distributions (and earnings allocable thereto), as described in the first sentence of this Section.

ARTICLE XII

MANAGEMENT OF FUNDS

12.1 ESI Employee Benefit Plan Administration andInvestmentCommittee. 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.

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.

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ARTICLE XIII

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 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.

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(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.

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ARTICLE XIV

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

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(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.

14.3 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.

14.4 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.

(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 XV

TENDER OFFER

15.1 Applicability. Notwithstanding any other Plan provision to the contrary, the provisions of this Article XV 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

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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 XV. Each Member is, for all purposes of this Article XV, 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 XV, 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 XV. The proceeds of a disposition directed by a Member, Deferred Member, or Beneficiary from his or her Accounts under this Article XV 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 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

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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 XVI

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.

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,

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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 $1,000 (as determined under Section 11.9) 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 $1,000 (as determined under Section 11.9), 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 X, or (iii) the Member's attainment of age 50. Effective May 16, 2008, the amount "$5,000" shall be substituted for the amount "$1,000" in this Section.

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 therefore 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 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.

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(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.

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.

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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 XVII

TOP-HEAVY PROVISIONS

17.1 Definitions. The following definitions apply to the terms used in this Section and will be applied in accordance with Section 416 of the Code:

(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 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 Statutory Compensation greater than $130,000 (as adjusted under Section 416(i)(1) of the Code), a 5-percent owner of the Company, or a 1-percent owner of the Company having annual Statutory Compensation of more than $150,000;

(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 VIII 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 account balances under the Plan will be combined with the account balances or the

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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. The accrued benefits and account balances of any Member who has not performed services for the Company during the one-year period ending on the applicable determination date shall not be taken into account. Distributions made with respect to a Member under the Plan during the one-year period ending on the applicable determination date shall be taken into account for purposes of determining the top-heavy ratio. 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 severance from employment, death, or disability, this provision shall be applied by substituting five-year period for one-year period.

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 XVIII

MINIMUM DISTRIBUTION REQUIREMENTS

18.1 General Rules. The requirements of this Article will take precedence over any inconsistent provision of the Plan. All distributions required under this Article will be determined and made in accordance with the Treasury Regulations under Code Section 401(a)(9).

18.2 Time and Manner of Distribution.

(a) Required Beginning Date. The Member's entire interest will be distributed, or begin to be distributed, to the Member no later than the Member's required beginning date.

(b) Death of Member Before Distributions Begin. Unless the Member or Beneficiary elects to apply the Five-Year Rule as provided in Section 18.5, if the Member dies before distributions begin, the Member's entire interest will be distributed, or begin to be distributed, no later than as follows:

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(i) If the Member's surviving spouse is the Member's sole designated Beneficiary, then distributions to the surviving spouse will begin by December 31 of the calendar year immediately following the calendar year in which the Member died, or by December 31 of the calendar year in which the Member would have attained age 70½, if later.

(ii) If the Member's surviving spouse is not the Member's sole designated Beneficiary, then distributions to the Beneficiary will begin by December 31 of the calendar year immediately following the calendar year in which the Member died.

(iii) If there is no designated Beneficiary as of September 30 of the year following the year of the Member's death, the Member's entire interest will be distributed by December 31 of the calendar year containing the fifth anniversary of the Member's death.

(iv) If the Member's surviving spouse is the Member's sole designated Beneficiary and the surviving spouse dies after the Member but before distributions to the surviving spouse begin, this paragraph (b), other than paragraph (b)(i), will apply as if the surviving spouse were the Member.

For purposes of this Section 18.2(b) and Section 18.4, unless Section 18.2(b)(iv) applies, distributions are considered to begin on the Member's required beginning date. If Section 18.2(b)(iv) applies, distributions are considered to begin on the date distributions are required to begin to the surviving spouse under Section 18.2(b)(i). If distributions under an annuity purchased from an insurance company irrevocably commence to the Member before the Member's required beginning date (or to the Member's surviving spouse before the date distributions are required to begin to the surviving spouse under Section 18.2(b)(i)), the date distributions are considered to begin is the date distributions actually commence.

(c) Forms of Distribution. Unless the Member's interest is distributed in the form of an annuity purchased from an insurance company or in a single sum on or before the required beginning date, as of the first distribution calendar year, distributions will be made in accordance with Sections 18.3 and 18.4. If the Member's interest is distributed in the form of an annuity purchased from an insurance company, distributions thereunder will be made in accordance with the requirements of Code Section 401(a)(9) and the Treasury Regulations.

18.3 Required Minimum Distributions During Member's Lifetime.

(a) Amount of Required Minimum Distribution For Each Distribution Calendar Year. During the Member's lifetime, the minimum amount that will be distributed for each distribution calendar year is the lesser of:

(i) The quotient obtained by dividing the Member's Account balance by the distribution period in the Uniform Lifetime Table set forth in Section

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1.401(a)(9)-9 of the Treasury Regulations, using the Member's age as of the Member's birthday in the distribution calendar year; or

(ii) If the Member's sole designated Beneficiary for the distribution calendar year is the Member's spouse, the quotient obtained by dividing the Member's Account balance by the number in the Joint and Last Survivor Table set forth in Section 1.401(a)(9)-9 of the Treasury Regulations, using the Member's and spouse's attained ages as of the Member's and spouse's birthdays in the distribution calendar year.

(b) Lifetime Required Minimum Distributions Continue Through Year of Member's Death. Required minimum distributions will be determined under this Section 18.3 beginning with the first distribution calendar year and up to and including the distribution calendar year that includes the Member's date of death.

18.4 Required Minimum Distributions After Member's Death.

(a) Death On or After Date Distributions Begin.

(i) Member Survived by Designated Beneficiary. If the Member dies on or after the date distributions begin and there is a designated Beneficiary, the minimum amount that will be distributed for each distribution calendar year after the year of the Member's death is the quotient obtained by dividing the Member's Account balance by the longer of the remaining life expectancy of the Member or the remaining life expectancy of the Member's designated Beneficiary, determined as follows:

(A) The Member's remaining life expectancy is calculated using the age of the Member in the year of death, reduced by one for each subsequent year.

(B) If the Member's surviving spouse is the Member's sole designated Beneficiary, the remaining life expectancy of the surviving spouse is calculated for each distribution calendar year after the year of the Member's death using the surviving spouse's age as of the spouse's birthday in that year. For distribution calendar years after the year of the surviving spouse's death, the remaining life expectancy of the surviving spouse is calculated using the age of the surviving spouse as of the spouse's birthday in the calendar year of the spouse's death, reduced by one for each subsequent calendar year.

(C) If the Member's surviving spouse is not the Member's sole designated Beneficiary, the Beneficiary's remaining life expectancy is calculated using the age of the Beneficiary in the year following the year of the Member's death, reduced by one for each subsequent year.

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(ii) No Designated Beneficiary. If the Member dies on or after the date distributions begin and there is no designated Beneficiary as of September 30 of the year after the year of the Member's death, the minimum amount that will be distributed for each distribution calendar year after the year of the Member's death is the quotient obtained by dividing the Member's Account balance by the Member's remaining life expectancy calculated using the age of the Member in the year of death, reduced by one for each subsequent year.

(b) Death Before Date Distributions Begin. Unless the Member or Beneficiary elects to apply the Five-Year Rule as provided in Section 18.5, if the Member dies before distributions begin, the Member's entire interest will be distributed, or begin to be distributed, no later than as follows:

(i) Member Survived by Designated Beneficiary. If the Member dies before the date distributions begin and there is a designated Beneficiary, the minimum amount that will be distributed for each distribution calendar year after the year of the Member's death is the quotient obtained by dividing the Member's Account balance by the remaining life expectancy of the Member's designated Beneficiary, determined as provided in paragraph (a).

(ii) No Designated Beneficiary. If the Member dies before the date distributions begin and there is no designated Beneficiary as of September 30 of the year following the year of the Member's death, distribution of the Member's entire interest will be completed by December 31 of the calendar year containing the fifth anniversary of the Member's death.

(iii) Death of Surviving Spouse Before Distributions to Surviving Spouse Are Required to Begin. If the Member dies before the date distributions begin, the Member's surviving spouse is the Member's sole designated Beneficiary, and the surviving spouse dies before distributions are required to begin to the surviving spouse under Section 18.2(b)(i), this paragraph (b) will apply as if the surviving spouse were the Member.

18.5 Election to Use Five-Year Rule. A Member or Beneficiary may elect to apply the Five-Year Rule or the life expectancy rule of Sections 18.2(b) or 18.4(b). The Member's or Beneficiary's election must be made no later than the earlier of September 30 of the calendar year in which distribution would be required to begin under Section 18.2(b), or by September 30 of the calendar year which contains the fifth anniversary of the Member's (or, if applicable, surviving spouse's) death.

18.6 Definitions.

(a) Designated Beneficiary. A "designated Beneficiary" is an individual who is designated as the Beneficiary under Section 2.9 of the Plan and is the designated Beneficiary under Code Section 401(a)(9) and Treasury Regulation 1.401(a)(9)-4.

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(b) Distribution Calendar Year. A "distribution calendar year" is the calendar year for which a minimum distribution is required. For distributions beginning before the Member's death, the first distribution calendar year is the calendar year immediately preceding the calendar year which contains the Member's required beginning date. For distributions beginning after the Member's death, the first distribution calendar year is the calendar year in which distributions are required to begin under Section 18.2(b). The required minimum distribution for the Member's first distribution calendar year will be made on or before the Member's required beginning date. The required minimum distribution for other distribution calendar years, including the required minimum distribution for the distribution calendar year in which the Member's required beginning date occurs, will be made on or before December 31 of that distribution calendar year.

(c) Five-Year Rule. The "Five-Year Rule" requires that a Member's entire interest be distributed by December 31 of the calendar year containing the fifth anniversary of the Member's death.

(d) Life Expectancy. "Life expectancy" is the life expectancy computed by use of the Single Life Table in Treasury Regulation 1.401(a)(9)-9.

(e) Member. For purposes of Article XVIII of the Plan, the term "Member" includes any Member and, where applicable, any Deferred Member.

(f) Member's Account Balance. A Member's "Account balance" is the Account balance as of the last Valuation Date in the calendar year immediately preceding the distribution calendar year (valuation calendar year) increased by the amount of any contributions made and allocated or forfeitures allocated to the Account balance as of dates in the valuation calendar year after the Valuation Date and decreased by distributions made in the valuation calendar year after the Valuation Date. The Account balance for the valuation calendar year includes any amounts rolled over or transferred to the Plan either in the valuation calendar year or in the distribution calendar year if distributed or transferred in the valuation calendar year.

(g) Required Beginning Date. "Required beginning date" is the first day of April following the calendar year in which occurs the later of (i) the date the Member attains age 70½, or (ii) the date the Member terminates employment.

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This ESI 401(k) Plan, as restated effective January 1, 2006, is executed on behalf of ITT Educational Services, Inc. by its duly authorized officer as of the 24 day of June, 2008.

ITT EDUCATIONAL SERVICES, INC.

By /s/ Nina Esbin

Signature

Nina Esbin

Printed Name

Sr. VP, Human Resources

Office

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EX-3

Exhibit 3.2

ITT EDUCATIONAL SERVICES, INC.

BY-LAWS

As Amended and Restated July 21, 2008

TABLE OF CONTENTS

Page

ARTICLE I	OFFICES	1
SECTION 1	Registered Office	1
SECTION 2	Other Offices	1
SECTION 3	Change of Location	1
ARTICLE II	MEETINGS OF STOCKHOLDERS	1
SECTION 1	Place of Meetings	1
SECTION 2	Annual Meeting	1
SECTION 3	Special Meetings	1
SECTION 4	Notice of Meetings	2
SECTION 5	Quorum	2
SECTION 6	Voting of Stock	2
SECTION 7	List of Stockholders	2
SECTION 8	Stockholder Business and Nominations	3
SECTION 9	Proxies	7
SECTION 10	Inspectors	7
SECTION 11	No Written Consent	7
SECTION 12	Conduct of Meetings	7
ARTICLE III	DIRECTORS	7
SECTION 1	Number	7
SECTION 2	Nominations	8
SECTION 3	Duties and Powers	8
SECTION 4	Place of Meeting	8
SECTION 5	Annual Meeting	8
SECTION 6	Regular Meetings	8
SECTION 7	Special Meetings	8
SECTION 8	Notice of Meetings	8
SECTION 9	Quorum and Voting	8
SECTION 10	Action Without a Meeting	9
SECTION 11	Participation by Remote Communications	9
SECTION 12	Books	9
SECTION 13	Compensation	9
SECTION 14	Vacancies	9
SECTION 15	Removal	10
SECTION 16	Organization	10
SECTION 17	Standing Committees	10
SECTION 18	Other Committees	10
SECTION 19	Resignation	11

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ARTICLE IV	OFFICERS	11
SECTION 1	General	11
SECTION 2	Election	11
SECTION 3	Other Officers	11
SECTION 4	Chairman of the Board	11
SECTION 5	Chief Executive Officer	11
SECTION 6	President	12
SECTION 7	Vice President	12
SECTION 8	Secretary and Assistant Secretaries	12
SECTION 9	Chief Financial Officer	12
SECTION 10	Treasurer and Assistant Treasurers	13
ARTICLE V	CAPITAL STOCK	13
SECTION 1	Form and Signature	13
SECTION 2	Lost, Stolen or Destroyed Certificates	13
SECTION 3	Transfer of Shares	13
SECTION 4	Registered Stockholders	14
SECTION 5	Regulations	14
SECTION 6	Record Date	14
ARTICLE VI	NOTICES	14
SECTION 1	Notices	14
SECTION 2	Waiver of Notice	15
ARTICLE VII	INDEMNIFICATION	15
SECTION 1	Nature of Indemnity	15
SECTION 2	Successful Defense	16
SECTION 3	Determination That Indemnification Is Proper	16
SECTION 4	Advance Payment of Expenses	17
SECTION 5	Procedure for Indemnification of Directors and Officers	17
SECTION 6	Survival; Preservation of Other Rights	18
SECTION 7	Insurance	18
SECTION 8	Severability	18
ARTICLE VIII	GENERAL PROVISIONS; DIVIDENDS	18
SECTION 1	Dividends	18
SECTION 2	Checks	19
SECTION 3	Fiscal Year	19
SECTION 4	Seal	19
SECTION 5	General and Special Bank Accounts	19
SECTION 6	Loans	19
SECTION 7	Execution of Documents	19
ARTICLE IX	AMENDMENTS OF BY-LAWS	20
ARTICLE X	CONSTRUCTION	20

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ITT EDUCATIONAL SERVICES, INC.

(a Delaware Corporation)

BY-LAWS

ARTICLE I

OFFICES

SECTION 1. Registered Office. The registered office of ITT Educational Services, Inc. (the "Corporation") in the State of Delaware and the name of the registered agent at such address shall be as specified in the Corporation's Amended and Restated Certificate of Incorporation, or as subsequently changed as specified in the most recent certificate of change filed pursuant to law.

SECTION 2. Other Offices. The Corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors (the "Board") may from time to time determine or the business of the Corporation may require.

SECTION 3. Change of Location. In the manner permitted by law, the Board or the Corporation's registered agent may change the address of the Corporation's registered office in the State of Delaware and the Board may make, revoke or change the designation of the registered agent.

ARTICLE II

MEETINGS OF STOCKHOLDERS

SECTION 1. Place of Meetings. All meetings of stockholders for the election of directors and for the transaction of such other business as may properly come before the meeting shall be held at such place, either within or without the State of Delaware, as may be fixed from time to time by the Board and stated in the notice of the meeting or in a waiver of notice thereof. In lieu of holding a meeting of stockholders at a designated place, the Board, in its sole discretion, may determine that any meeting of stockholders may be held solely by means of remote communication.

SECTION 2. Annual Meeting. Annual meetings of stockholders, at which they shall elect by a plurality vote a Board and transact such other business as may properly be brought before the meeting, shall be held on such date and at such time as shall be designated from time to time by the Board and stated in the notice of meeting or in a waiver thereof.

SECTION 3. Special Meetings. Special meetings of the stockholders for any purpose may be held at such time as shall be stated in the notice of the meeting or in a waiver of notice thereof. Special meetings of stockholders may be called at any time, for any purpose or purposes, by the Chairman of the Board, the Chief Executive Officer or a majority of the Board.

SECTION 4. Notice of Meetings. Except as otherwise expressly required by law, written or printed notice of each annual and special meeting of stockholders stating the place, if any, date and time of the meeting, the means of remote communications, if any, by which stockholders and proxy holders may be deemed to be present in person and vote at such meeting, and, in the case of a special meeting of the stockholders, the purpose or purposes thereof and the person or persons by whom or at whose direction such meeting has been called, shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting, by or at the direction of the Chief Executive Officer, or the Secretary, or the officer or persons calling the meeting to each stockholder of record entitled to vote at such meeting. Notice shall be provided in accordance with Article VI of these By-laws. Notice may be given to stockholders sharing an address in the manner and to the extent permitted by applicable law.

SECTION 5. Quorum. The holders of a majority of the shares of stock issued and outstanding and entitled to vote, represented in person or by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the Amended and Restated Certificate of Incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the chair of the meeting or the stockholders present in person or represented by proxy shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented by proxy. At such adjourned meeting at which a quorum shall be present or represented any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting in accordance with these By-laws.

SECTION 6. Voting of Stock. Except as is otherwise required by law, the Amended and Restated Certificate of Incorporation or these By-laws, each holder of record of shares of stock of the Corporation having voting powers shall be entitled, at each meeting of the stockholders, to one vote for every share of such stock standing in his or her name on the record of stockholders of the Corporation and, if a quorum is present and unless otherwise required by the Amended and Restated Certificate of Incorporation, the affirmative vote of a majority of the shares of stock represented at the meeting shall be the act of the stockholders, except that directors shall be elected by a plurality of votes properly cast.

SECTION 7. List of Stockholders. At least ten (10) days before each meeting of stockholders, the Secretary or agent having charge of the stock transfer book shall make a complete list of the stockholders entitled to vote at such meeting, arranged in alphabetical order, with the address of each and the number of shares held by each. Such list shall be subject to inspection by any stockholder for a period of ten (10) days prior to such meeting, for any purpose related to the meeting, at the principal office of the Corporation at any time during usual business hours or on a reasonably accessible electronic network. Such list shall be produced and kept open at the time and place of meeting, or if the meeting is to be held solely by means of remote

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communication then on a reasonably accessible electronic network, and shall be subject to the inspection of any stockholder during the whole time of the meeting.

SECTION 8. Stockholder Business and Nominations.

(a)  Annual Meetings of Stockholders. (i)  Nominations of persons for election to the Board of Directors and the proposal of other business to be considered by the stockholders may be made at an annual meeting of stockholders (A) pursuant to the Corporation’s notice of meeting under Section 4, (B) by or at the direction of the Board of Directors, or (C) by any stockholder of the Corporation who (1) was a stockholder of record at the time of giving of notice provided for in this Section 8 and is a stockholder of record at the time of the annual meeting, (2) is entitled to vote at the meeting, and (3) complies with the notice procedures set forth in this Section 8 as to such business or nomination; and clause (C) shall be the exclusive means for a stockholder to make nominations or submit other business (other than proposals for other business properly brought under Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and included in the Corporation’s notice of meeting) before an annual meeting of stockholders.

(ii)  For any nominations or any other business to be properly brought before an annual meeting by a stockholder pursuant to clause (C) of paragraph (a)(i) of this Section 8, the stockholder must have given timely notice thereof in writing to the Secretary and such other business must otherwise be a proper matter for stockholder action. To be timely, a stockholder’s notice shall be delivered to or mailed and received by the Secretary at the principal executive offices of the Corporation not earlier than the close of business on the 120^th calendar day and not later than the close of business on the 90^th calendar day prior to the first anniversary of the preceding year’s annual meeting; provided, however, that in the event that the date of the annual meeting is more than 30 calendar days before or more than 60 calendar days after such anniversary date, then notice by the stockholder to be timely must be so delivered or received not earlier than the close of business on the 120^th calendar day prior to the date of such annual meeting and not later than the close of business on the later of the 90^th calendar day prior to the date of such annual meeting or the 10^th calendar day following the day on which public announcement of the date of such meeting is first made by the Corporation. In no event shall any adjournment or postponement of an annual meeting or the public announcement thereof commence a new time period (or extend any time period) for the giving of a stockholder’s notice as described above. To be in proper form, a stockholder’s notice (whether given pursuant to this paragraph (a)(ii) or paragraph (b)) to the Secretary must set forth:

(A) as to each person whom the stockholder proposes to nominate for election or reelection as a director, (1) all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Exchange Act (including such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected), and (2) information relating to any agreement, arrangement or understanding, including a voting commitment, or any

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relationship, including financial transactions and compensation, between such person and the stockholder or any Stockholder Associated Person (as defined in Section 8(c)(ii) below); provided, that the Corporation may also require any proposed nominee to furnish such other information as the Corporation may reasonably require to determine the eligibility of such proposed nominee to serve as a director;

(B) as to any business, other than the nomination of a director or directors, that the stockholder proposes to bring before the meeting, (1) a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest of such stockholder and any Stockholder Associated Person in such business, (2) a description of all agreements, arrangements and understandings between such stockholder and any Stockholder Associated Person and any other person or persons (including their names) in connection with the proposal of such business by such stockholder, and (3) if the proposal or business is to be included in the Corporation’s proxy statement, the text of the proposal or business (including the text of any resolutions proposed for consideration and in the event that such business includes a proposal to amend these By-laws, the language of the proposed amendment); and

(C) as to the stockholder giving the notice and any Stockholder Associated Person, (1) the name and address of such stockholder, as they appear on the Corporation’s stock ledger, and the name and address, if different, of such Stockholder Associated Person, (2) the class, series and number of all shares of stock of the Corporation which are held of record or are beneficially owned by such stockholder and by such Stockholder Associated Person, (3) the nominee holder for, and the number of, shares owned beneficially but not of record by such stockholder and by such Stockholder Associated Person, (4) any derivative position, including without limitation any option, warrant, convertible security, stock appreciation right, or similar right with an exercise or conversion privilege or a settlement payment or mechanism at a price related to any class or series of shares of the Corporation or with a value derived in whole or in part from the value of any class or series of shares of the Corporation, directly or indirectly held or beneficially held by such stockholder and such Stockholder Associated Person, and whether and the extent to which any hedging, equity swap or other transaction or series of transactions has been entered into by or on behalf of, or any other agreement, arrangement or understanding (including any short position or interest or any borrowing or lending of shares of stock) has been made by, such stockholder or such Stockholder Associated Person with respect to any shares of stock of the Corporation, or whether such stockholder or Stockholder Associated Person has an economic interest in the Corporation not reported as record or beneficial ownership, (5) any proxy, contract, arrangement, understanding or relationship pursuant to which such stockholder or Stockholder Associated Person has a right to vote any shares of stock of the Corporation, (6) any rights to dividends on the shares of the Corporation owned beneficially by such stockholder or Stockholder Associated Person that are separated or separable from the underlying shares of the Corporation, (7) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to

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appear in person or through a qualified representative at the meeting to propose such nomination or business, and (8) a representation whether such stockholder or Stockholder Associated Person intends or is part of a group which intends (x) to deliver a proxy statement and/or form of proxy to holders of at least the percentage of the Corporation’s outstanding capital stock required to elect the nominee or to approve or adopt the proposal and/or (y) otherwise to solicit proxies from stockholders in support of such nomination or proposal, and the information called for by this paragraph (ii)(C) shall be supplemented by such stockholder and Stockholder Associated Person not later than 10 days after the record date for the meeting to disclose such information as of the record date.

(iii) Notwithstanding anything in the second sentence of paragraph (a)(ii) of this Section 8 to the contrary, in the event that the number of directors to be elected to the Board of Directors at an annual meeting is increased and there is no public announcement by the Corporation naming all of the nominees for director or specifying the size of the increased Board of Directors at least 100 calendar days prior to the first anniversary of the preceding year’s annual meeting, a stockholder’s notice required by this Section 8 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the 10^th calendar day following the day on which such public announcement is first made by the Corporation.

(b) Special Meetings of Stockholders. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation’s notice of meeting under Section 4. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation’s notice of meeting (i) by or at the direction of the Board of Directors or (ii) provided that the Board of Directors has determined that directors shall be elected at such meeting, by any stockholder of the Corporation who (A) was a stockholder of record at the time of giving of notice provided for in this Section 8 and is a stockholder of record at the time of the special meeting, (B) is entitled to vote at the meeting, and (C) complies with the notice procedures set forth in this Section 8 as to such nomination; and clause (ii) shall be the exclusive means for a stockholder to make nominations before a special meeting of stockholders. In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder may nominate a person or persons (as the case may be), for election to such position(s) as specified in the Corporation’s notice of meeting, if the stockholder’s notice required by paragraph (a)(ii) of this Section 8 with respect to any nomination shall be delivered to or mailed and received by the Secretary at the principal executive offices of the Corporation not earlier than the close of business on the 120^th calendar day prior to the date of such special meeting and not later than the close of business on the later of the 90^th calendar day prior to the date of such special meeting or the 10^th calendar day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall any adjournment or postponement of a special meeting or the public announcement

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thereof commence a new time period (or extend any time period) for the giving of a stockholder’s notice as described above.

(c) General. (i) Only such persons who are nominated in accordance with the procedures set forth in this Section 8 shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 8. Except as otherwise provided by law, the Amended and Restated Certificate of Incorporation or these By-laws, the chairman of the meeting shall have the power and duty to determine whether a nomination was made, or any business proposed to be brought before the meeting was proposed, in accordance with the procedures set forth in this Section 8 (including whether the stockholder or any Stockholder Associated Person solicited (or is part of a group which solicited) or did not so solicit, as the case may be, proxies in support of such stockholder’s nominee or proposal in compliance with such stockholder’s representation as required by clause (a)(ii)(C)(8) of this Section 8) and, if any proposed nomination or proposed business is not in compliance with this Section 8, to declare that such defective nomination or proposal shall be disregarded. Notwithstanding the foregoing provisions of this Section 8, if the stockholder (or a qualified representative of the stockholder) does not appear at the annual or special meeting of stockholders of the Corporation to present a nomination or proposal, such nomination or proposed business shall be disregarded, notwithstanding that proxies in respect of such vote may have been received by the Corporation.

(ii)  For purposes of these By-laws, (A) “public announcement” shall mean disclosure in a press release reported by a national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act; and (B) “Stockholder Associated Person” of any stockholder shall mean (1) any person or entity controlling, controlled by or under common control with, directly or indirectly, or acting in concert with, such stockholder, (2) any beneficial owner of shares of stock of the Corporation owned of record or beneficially by such stockholder, and (3) any person or entity controlling, controlled by or under common control with a Stockholder Associated Person as defined in the foregoing clauses (B)(1) or (B)(2).

(iii)  Notwithstanding the foregoing provisions of this Section 8, a stockholder seeking to include a nomination or other business in a proxy statement prepared by the Corporation shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder; provided, however, that any references in these By-laws to the Exchange Act or the rules promulgated thereunder are not intended to and shall not limit the requirements applicable to nominations or proposals as to any other business to be considered pursuant to paragraphs (a)(i)(C) or (b) of this Section 8. Nothing in this Section 8 shall be deemed to affect any rights (A) of stockholders to request inclusion of proposals in the Corporation’s proxy statement pursuant to Rule 14a-8 under the Exchange Act, or (B) of the holders of any series of preferred stock of the Corporation if and to the extent provided for under law, the Amended and Restated Certificate of Incorporation or these By-laws.

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SECTION 9. Proxies. At all meetings of stockholders, a stockholder may vote by proxy authorized by an instrument in writing or by an electronic transmission permitted by the laws of the State of Delaware by the stockholder or his duly authorized attorney-in-fact.

SECTION 10. Inspectors. The Board may, in advance of any meeting of stockholders, appoint one or more inspectors to act at such meeting or any adjournment thereof. If an inspector or inspectors are not appointed, the person presiding at the meeting may appoint one or more inspectors. Each inspector, if any, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his ability. The inspectors shall determine the number of shares of stock outstanding and the voting power of each, the number of shares represented at the meeting, the existence of a quorum, the validity and the fact of proxies, and shall receive votes, ballots or consents herein, determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the result, and do such other acts as are proper to conduct the election or vote with fairness to all stockholders. On request of the person presiding at the meeting, the inspector or inspectors shall make a report in writing of any challenge, request or matter determined by them and shall execute a certificate of any fact found by them. No director or candidate for the office of director shall act as an inspector on an election of directors. Inspectors need not be stockholders.

SECTION 11. No Written Consent. No action shall be taken by the stockholders of the Corporation except at an annual or special meeting of stockholders.

SECTION 12. Conduct of Meetings. The Chairman of the Board shall preside at all meetings of the stockholders. If the Chairman has not been elected or is not present, then the Chief Executive Officer shall preside. The Secretary of the Corporation, or in his absence, an Assistant Secretary, if any, shall act as Secretary of every meeting, but if neither the Secretary nor the Assistant Secretary is present, the Chairman or the Chief Executive Officer (as the case may be) shall appoint a secretary of the meeting.

ARTICLE III

DIRECTORS

SECTION 1. Number. The Board shall consist of at least three (3), but no more than twenty (20) directors, as shall be fixed from time to time by the affirmative vote of a majority of the entire Board of Directors; provided, however, that no decrease in the number comprising the entire Board made pursuant to this Section 1 shall shorten the term of any incumbent director. As provided by ARTICLE V of the Amended and Restated Certificate of Incorporation, the directors shall be divided into three classes and the number of directors in each such class shall be as set forth therein. Unless otherwise provided by the Amended and Restated Certificate of Incorporation, successors to each class of directors shall be elected for a three-year term at the annual meeting for the year in which the term of such class of directors expires and each such director elected shall hold office for a term continuing until the annual meeting held in

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the third year following the year of his or her election and until his or her successor is duly elected and qualified or until his or her resignation, death or removal; provided, that in the event of failure to hold such an annual meeting or to hold such election at such meeting, the election of directors may be held at any special meeting of the stockholders called for that purpose.

SECTION 2. Nominations. Nominations of persons for election as directors may be made only in accordance with Article II, Section 8 of these By-laws.

SECTION 3. Duties and Powers. The business affairs of the Corporation shall be managed by its Board which may exercise all such powers of the Corporation including all such lawful acts and things as are not by statute or by the Amended and Restated Certificate of Incorporation or by these By-laws directed or required to be exercised or done by the stockholders.

SECTION 4. Place of Meeting. Meetings of the Board, regular or special, may be held either within or without the State of Delaware.

SECTION 5. Annual Meeting. The first meeting of each newly elected Board shall be held immediately following the annual meeting of stockholders, and no notice of such meeting to the newly elected directors shall be necessary in order to legally constitute the meeting, provided a quorum shall be present, or the newly elected directors may meet at such time and place as shall be fixed by the consent in writing of all of the directors.

SECTION 6. Regular Meetings. Regular meetings of the Board may be held upon such notice, or without notice, and at such time and at such place as shall from time to time be determined by the Board.

SECTION 7. Special Meetings. Special meetings of the Board may be called by the Chairman of the Board, if one shall have been elected, the Chief Executive Officer of the Corporation or by a majority of the entire Board.

SECTION 8. Notice of Meetings. Notice of each special meeting of the Board (and of each regular meeting for which notice shall be required) shall be given by the Secretary or an Assistant Secretary at least twenty-four (24) hours before the time at which such meeting is to be held, and shall state the place, if any, date and time of the meeting, and the means of remote communications, if any, by which the directors may be deemed to be present in person and vote at such meeting. Except as otherwise required by the By-laws, neither the business to be transacted at, nor the business or the purpose of, any regular or special meeting of the Board need be specified in the notice or waiver of notice of such meeting. Notice of such meeting shall be provided in accordance with Article VI of these By-laws.

SECTION 9. Quorum and Voting. A majority of the directors then in office shall constitute a quorum for the transaction of business unless a greater number is required by law or by the Amended and Restated Certificate of Incorporation. The act of a majority of the directors

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present at any meeting at which a quorum is present shall be the act of the Board, unless the act of a greater number is required by statute or by the Amended and Restated Certificate of Incorporation. If a quorum shall not be present at any meeting of the Board, the directors present thereat may adjourn the meeting to another time and place. Notice of the time and place of any adjourned meeting shall be given to all of the directors unless such time and place were announced at the meeting at which the adjournment was taken, in which case such notice shall only be given to the directors who were not present thereat. At such adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally called. The directors shall act only as a Board and an individual director shall have no authority to act except through the Board.

SECTION 10. Action Without a Meeting. Any action required or permitted to be taken by the Board, or by a committee of the Board, may be taken without a meeting if all the members of the Board or committee, as the case may be, consent in writing or by electronic transmission, and the writing or writings or electronic transmission or transmissions setting forth actions so taken are filed with the minutes of the proceedings of the Board or committee, as the case may be.

SECTION 11. Participation by Remote Communications. One or more members of the Board, or any committee designated by the Board, may participate in a meeting of such Board, or committee of the Board, by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in the meeting pursuant to this Section shall constitute presence in person at the meeting.

SECTION 12. Books. The directors may keep the books of the Corporation, except as such are required by law to be kept within the state, outside of the State of Delaware, at such place or places as they may from time to time determine.

SECTION 13. Compensation. The Board, by the affirmative vote of a majority of the directors then in office, and irrespective of any personal interest of any of its members, shall have authority to establish reasonable compensation of all directors for services to the Corporation as directors, officers or otherwise.

SECTION 14. Vacancies. Newly created directorships resulting from any increase in the authorized number of directors and any vacancies on the Board resulting from death, resignation, disqualification, removal from office, retirement or other cause shall be filled solely by the affirmative vote of the remaining directors then in office, even though less than a quorum, or by the sole remaining director, and each director so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of the class to which he or she has been elected expires and until such director's successor shall have been duly elected and qualified.

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SECTION 15. Removal. Any director may be removed from office with cause, by an affirmative vote of the holders of a majority of the combined voting power of the then outstanding shares of stock entitled to vote generally in the election of directors, voting together as a single class. Any director may be removed from office with cause by the affirmative vote of a majority of the members of the Board, other than the director who is subject to a removal vote.

SECTION 16. Organization. The Board may appoint one of its members as Chairman of the Board. The Chairman of the Board (or if there be no Chairman or in his or her absence, the Chief Executive Officer) shall preside over all meetings of the Board and stockholders.

SECTION 17. Standing Committees. By resolution adopted by a majority of the entire Board and based on the recommendations of the Nominating and Corporate Governance Committee, the Board shall elect, from among its members, individuals to serve on the Standing Committees established hereunder. Each Standing Committee shall be comprised of such number of Directors, not less than three, as shall be elected to such Committee, provided that no officer or employee of the Corporation shall be eligible to serve on any of the Standing Committees. Each Committee shall keep a record of all its proceedings and report the same to the Board. One-third of the members of a Committee, but not less than two, shall constitute a quorum, and the act of a majority of the members of a Committee present at any meeting at which a quorum is present shall be the act of the Committee. Each Committee shall meet at the call of its chairperson or any two of its members. The chairpersons of the various Committees shall preside, when present, at all meetings of such Committees, and shall have such powers and perform such duties as the Board may from time to time prescribe. The Standing Committees of the Board, and functions of each, are as follows:

(a) Audit Committee. The Audit Committee will perform the duties and functions set forth in the Charter of the Audit Committee as adopted by the Board of Directors.

(b) Compensation Committee. The Compensation Committee will perform the duties and functions set forth in the Charter of the Compensation Committee as adopted by the Board of Directors.

(c) Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee will perform the duties and functions set forth in the Charter of the Nominating and Corporate Governance Committee as adopted by the Board of Directors.

SECTION 18. Other Committees. By resolution passed by a majority of the entire Board, the Board may also appoint from among its members such other Committees, Standing or otherwise, as it may from time to time deem desirable and may delegate to such Committees such powers of the Board as it may consider appropriate, consistent with the laws of Delaware, the Amended and Restated Certificate of Incorporation and these By-laws.

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SECTION 19. Resignation. Any director may resign at any time by sending a written notice of such resignation to the principal executive officer of the Corporation addressed to the Chief Executive Officer, Secretary or the Chairman of the Board. Unless otherwise specified therein such resignation shall take effect upon receipt thereof by the Chairman of the Board, the Chief Executive Officer or the Secretary.

ARTICLE IV

OFFICERS

SECTION 1. General. The officers of the Corporation shall be chosen by the Board and may be a Chairman of the Board, Chief Executive Officer, President, Vice President, Secretary, Chief Financial Officer and Treasurer and as otherwise required by law. Any two or more offices may be held by the same person.

SECTION 2. Election. The Board at its first meeting after each annual meeting and from time to time, as vacancies occur, shall elect officers, none of whom need be a member of the Board, who shall exercise such powers and perform such duties as shall be set forth in these By-laws and as determined from time to time by the Board; and all officers of the Corporation shall hold office until their successors are chosen and qualified, or until their earlier resignation or removal. Any officer elected by the Board may be removed with or without cause at any time by the Chairman, Chief Executive Officer, President or a majority of the Board. Any vacancy occurring in any office of the Corporation shall be filled by the Board. The salaries of all officers of the Corporation shall be fixed by the Board.

SECTION 3. Other Officers. The Board may appoint such other officers and agents as it shall deem necessary who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board.

SECTION 4. Chairman of the Board. The Chairman of the Board, if any, shall preside at all meetings of the Board of Directors and of the stockholders at which he or she shall be present and shall have and may exercise such powers as may, from time to time, be assigned to him or her by the Board or as may be provided by these By-laws or by law.

SECTION 5. Chief Executive Officer. The Chief Executive Officer shall be the chief executive and principal policymaking officer of the Corporation. Subject to the authority of the Board of Directors, he or she shall formulate the major policies to be pursued in the administration of the Corporation's affairs. The Chief Executive Officer shall have general direction of the business of the Corporation, and shall authorize the other officers of the Corporation to exercise such powers as he or she, in his or her discretion, may deem to be in the best interest of the Corporation. He or she shall study and make reports and recommendations to the Board of Directors with respect to major problems and activities of the Corporation and shall see that the established policies are placed into effect and carried out. He or she shall see that all orders and resolutions of the Board are carried into effect and shall do and perform such other

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duties as may from time to time be assigned to him or her by the Board. In the absence of the Chairman of the Board, the Chief Executive Officer shall preside at meetings of the stockholders and, if a Director, at meetings of the Board of Directors.

SECTION 6. President. Subject to the provisions of Sections 4 and 5, the President shall exercise the powers and perform the duties which ordinarily appertain to such office and shall manage and operate the business and affairs of the Corporation in conformity with the policies established by the Board of Directors and the Chief Executive Officer, or as may be provided for in these By-Laws. In connection with the performance of his or her duties, he or she shall keep the Chairman of the Board and the Chief Executive Officer fully informed as to all phases of the Corporation's activities. In the absence of the Chairman of the Board and the Chief Executive Officer, the President shall preside at meetings of the stockholders and, if a Director, at meetings of the Board of Directors.

SECTION 7. Vice President. The Vice President, or if there shall be more than one, the Vice Presidents in the order determined by the Board, shall, in the absence or disability of the Chief Executive Officer and President, perform the duties and have such other powers as the Board may from time to time prescribe.

SECTION 8. Secretary and Assistant Secretaries. The Secretary shall attend all meetings of the Board and all meetings of the stockholders and record all the proceedings of the meetings of the Corporation and of the Board in a book to be kept for that purpose and shall perform like duties for the standing committees when required. He or she shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board in accordance with the By-laws and as required by law, and shall perform such other duties as may be prescribed by the Board, Chief Executive Officer or President, under whose supervision he or she shall be. He or she shall have custody of the records and corporate seal of the Corporation and he or she, or an Assistant Secretary, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by his or her signature or by the signature of such Assistant Secretary. The Board may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing by his or her signature. The Assistant Secretary, or if there be more than one, the Assistant Secretaries in the order determined by the Board, shall, in the absence or disability of the Secretary, perform the duties and exercise the powers of the Secretary and shall perform such other duties and have such other powers as the Board may from time to time prescribe.

SECTION 9. Chief Financial Officer. The Chief Financial Officer shall be the chief financial officer of the Corporation and shall perform all of the duties customary to that office. He or she shall be responsible for all of the Corporation's financial affairs, subject to the supervision and direction of the Chief Executive Officer and President, and shall have and perform such further powers and duties as the Board of Directors may, from time to time, prescribe and as the Chief Executive Officer or President may, from time to time, delegate to him or her.

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SECTION 10. Treasurer and Assistant Treasurers. The Treasurer shall perform all of the duties customary to that office and shall be responsible for maintaining the Corporation's accounting books and records and preparing its financial statements, subject to the supervision and direction of the Chief Financial Officer and other superior officers within the Corporation. The Assistant Treasurer, or if there be more than one, the Assistant Treasurers in the order determined by the Board, shall, in the absence or disability of the Treasurer, perform the duties and exercise the powers of the Treasurer and shall perform such other duties and have such other powers as the Board may from time to time prescribe.

ARTICLE V

CAPITAL STOCK

SECTION 1. Form and Signature. The shares of the Corporation may be represented by certificates or may be uncertificated, as provided under the laws of the State of Delaware. Every holder of stock represented by certificates shall be entitled to have a certificate signed by, or in the name of the Corporation by, the Chief Executive Officer, President or a Vice President and the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer of the Corporation, and may be sealed with the seal of the Corporation or a facsimile thereof. Each certificate representing shares shall state upon its face (a) that the Corporation is formed under the laws of the State of Delaware, (b) the name of the person(s) to whom it is issued, (c) the number of shares which such certificate represents and (d) the par value, if any, of each share represented by such certificate. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were such officer, transfer agent or registrar on the date of issue.

SECTION 2. Lost, Stolen or Destroyed Certificates. The Corporation may issue a new certificate of stock or uncertificated shares in place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the Corporation and/or the Board may require the owner of such lost, stolen or destroyed certificate, or his or her legal representatives, to make an affidavit of that fact and/or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation on account of the alleged loss, theft or destruction of any such certificate or issuance of any such new certificate or uncertificated shares. Anything herein to the contrary notwithstanding, the Board, in its absolute discretion, may refuse to issue any such new certificate or uncertificated shares, except pursuant to legal proceedings under the laws of the State of Delaware.

SECTION 3. Transfer of Shares. Upon surrender to the Corporation or the transfer agent of the Corporation, if any, of a certificate representing shares of stock duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, and, in the event that the certificate refers to any agreement restricting transfer of the shares which it represents, proper evidence of compliance with such agreement, the Corporation will

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issue a new certificate or evidence of the issuance of uncertificated shares to the person entitled thereto, cancel the old certificate and record the transaction upon the books of the Corporation. Upon the receipt by the Corporation or the transfer agent of the Corporation, if any, of proper transfer instructions from the registered owner of uncertificated shares or proper evidence of succession, assignment or authority to transfer, and, in the event that the stock records of the Corporation indicate that there is an agreement restricting transfer of the shares, proper evidence of compliance with such agreement, such uncertificated shares shall be cancelled, issuance of new equivalent uncertificated shares or certificated shares shall be made to the person entitled thereto and the transaction shall be recorded upon the books of the Corporation.

SECTION 4. Registered Stockholders. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owners of shares, and shall not be bound to recognize any equitable or legal claim or claims to or interest in such shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of the State of Delaware.

SECTION 5. Regulations. Except as otherwise provided by law, the Board may make such additional rules and regulations, not inconsistent with the By-laws, as it may deem expedient concerning the issue, transfer and registration of the securities of the Corporation. The Board may appoint, or authorize any officer or officers to appoint, one or more transfer agents and one or more registrars and may require all certificates for shares of capital stock to bear the signature or signatures of any of them.

SECTION 6. Record Date. For the purpose of determining stockholders entitled to notice of, or to vote at, any meeting of stockholders or any adjournment thereof, or for the purpose of determining stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitlements to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board may fix, in advance, a record date. Such date shall not be more than sixty (60) nor less than ten (10) days before the date of any such meeting, nor more than sixty (60) days prior to any other action.

ARTICLE VI

NOTICES

SECTION 1. Notices. Whenever, under the provisions of law or of the Corporation's Amended and Restated Certificate of Incorporation or of these By-laws, notice is required to be given to any stockholder, such notice may be given (a) in writing by depositing the same in the United States mail, postage prepaid, directed to the stockholder at such stockholder’s address as it appears on the records of the Corporation, or (b) by a form of electronic transmission consented to by the stockholder to whom the notice is given in accordance with applicable law. All notices given to stockholders by mail, as above provided, shall be deemed to

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have been given as at the time of mailing. All notices given to stockholders by a form of electronic transmission, as above provided, shall be deemed to have been given: (1) if by facsimile, when directed to a number at which the stockholder has consented to receive notice; (2) if by electronic mail, when directed to an electronic mail address at which the stockholder has consented to receive notice; (3) if by a posting on an electronic network together with separate notice to the stockholder of such specific posting, upon the later of (A) such posting and (B) the giving of such separate notice; and (4) if by any other form of electronic transmission, when directed to the stockholder.

Whenever, under the provisions of law or of the Corporation’s Amended and Restated Certificate of Incorporation or of these By-laws, notice is required to be given to any director, such notice may be given personally, by telephone, by mail, by express delivery service, or by electronic transmission, in each case to the address provided by the director to the Corporation. All notices given to directors (i) personally or by telephone, shall be deemed to have been given when received; (ii) by mail, shall be deemed to have been given two (2) days after depositing the same in the United States mail, postage prepaid; (iii) by express delivery service, shall be deemed to have been given on the date shown on the confirmation of delivery issued by the delivery service; and (iv) by a form of electronic transmission, shall be deemed to have been given when directed to the electronic mail address, facsimile number, or other location provided by the director to the Corporation.

For purposes of these By-laws, “electronic transmission” means any form of communication, not directly involving the physical transmission of paper, that creates a record that may be retained, retrieved and reviewed by a recipient thereof, and that may be directly reproduced in paper form by such a recipient through an automated process.

SECTION 2. Waiver of Notice. Whenever a notice is required to be given by any provision of law or under the provisions of the Amended and Restated Certificate of Incorporation or these By-laws, a waiver thereof in writing signed by the person or persons entitled to such notice, or a waiver by electronic transmission by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. In addition, attendance of a person at a meeting in person or by proxy without protesting at the beginning of the meeting, the lack of notice thereof to him or her, shall be conclusively deemed to be a waiver of notice of such meeting.

ARTICLE VII

INDEMNIFICATION

SECTION 1. Nature of Indemnity. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he or she is or was or has agreed to become a director or officer of the Corporation, or is or was serving or has agreed to serve at the request of the Corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, including an

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employee benefit plan, or by reason of any action alleged to have been taken or omitted in such capacity, and may indemnify any person who was or is a party or is threatened to be made a party to such an action, suit or proceeding by reason of the fact that he or she is or was or has agreed to become an employee or agent of the Corporation, or is or was serving or has agreed to serve at the request of the Corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including an employee benefit plan, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her or on his or her behalf in connection with such action, suit or proceeding and any appeal therefrom, if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding had no reasonable cause to believe his or her conduct was unlawful; except that in the case of an action or suit by or in the right of the Corporation to procure a judgment in its favor (a) such indemnification shall be limited to expenses (including attorneys' fees) actually and reasonably incurred by such person in the defense or settlement of such action or suit, and (b) no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Delaware Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Delaware Court of Chancery or such other court shall deem proper.

The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful.

SECTION 2. Successful Defense. To the extent that a director, officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 1 of this ARTICLE VII or in defense of any claim, issue or matter therein, he or she shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him or her in connection therewith.

SECTION 3. Determination That Indemnification Is Proper. Any indemnification of a director or officer of the Corporation under Section 1 of this ARTICLE VII (unless ordered bya court) shall be made by the Corporation unless a determination is made that indemnification of the director or officer is not proper in the circumstances because he or she has not met the applicable standard of conduct set forth in Section 1 of this ARTICLE VII. Any indemnification of an employee or agent of the Corporation under Section I of this ARTICLE VII (unless ordered by a court) may be made by the Corporation upon a determination that indemnification of the employee or agent is proper in the circumstances because he or she has met the applicable standard of conduct set forth in Section 1 of this ARTICLE VII. Any such determination shall be made (a) by a majority vote of the directors who are not parties to such

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action, suit or proceeding, even though less than a quorum, or (b) by a committee of such directors designated by majority vote of such directors, even though less than a quorum, or (c) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (d) by the stockholders.

SECTION 4. Advance Payment of Expenses. Expenses (including attorneys' fees) incurred by a current or former director or officer in defending any civil, criminal, administrative or investigative action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the current or former director or officer to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the Corporation as authorized in this ARTICLE VII. Such expenses (including attorneys' fees) incurred by other current or former employees and agents may be so paid upon such terms and conditions, if any, as the Board deems appropriate. The Board may authorize the Corporation's counsel to represent such director, officer, employee or agent in any action, suit or proceeding, whether or not the Corporation is a party to such action, suit or proceeding.

SECTION 5. Procedure for Indemnification of Directors and Officers. Any indemnification of a director or officer of the Corporation under Section 1 of this ARTICLE VII, or advance of costs, charges and expenses to a director or officer under Section 4 of this ARTICLE VII, shall be made promptly, and in any event within thirty (30) days, upon the written request of the director or officer. If a determination by the Corporation that the director or officer is entitled to indemnification pursuant to this ARTICLE VII is required, and the Corporation fails to respond within sixty (60) days to a written request for indemnity, the Corporation shall be deemed to have approved such request. If the Corporation denies a written request for indemnity or advancement of expenses, in whole or in part, or if payment in full pursuant to such request is not made within thirty (30) days, the right to indemnification or advances as granted by this ARTICLE VII shall be enforceable by the director or officer in any court of competent jurisdiction. Such person's costs and expenses incurred in connection with successfully establishing his or her right to indemnification, in whole or in part, in any such action shall also be indemnified by the Corporation. It shall be a defense to any such action (other than an action brought to enforce a claim for the advance of costs, charges and expenses under Section 4 of this ARTICLE VII where the required undertaking, if any, has been received by the Corporation) that the claimant has not met the standard of conduct set forth in Section 1 of this ARTICLE VII, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board, its independent legal counsel, and its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in Section 1 of this ARTICLE VII, nor the fact that there has been an actual determination by the Corporation (including its Board, its independent legal counsel, and its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct.

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SECTION 6. Survival; Preservation of Other Rights. The foregoing indemnification and advancement of expenses provisions shall be deemed to be a contract between the Corporation and each director, officer, employee and agent who serves in any such capacity at any time while these provisions as well as the relevant provisions of the General Corporation Law of the State of Delaware are in effect, and any repeal or modification thereof shall not affect any right or obligation then existing with respect to any state of facts then or previously existing or any action, suit or proceeding previously or thereafter brought or threatened based in whole or in part upon any such state of facts. Such a "contract right" becomes vested at the time the director, officer, employee or agent begins to serve in such position, and may not be modified retroactively without the consent of such director, officer, employee or agent.

The indemnification and advancement of expenses provided by this ARTICLE VII shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any by-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person.

SECTION 7. Insurance. The Corporation shall purchase and maintain insurance on behalf of any person who is or was or has agreed to become a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, including an employee benefit plan, against any liability asserted against him or her and incurred by him or her or on his or her behalf in any such capacity, or arising out of his or her status as such, whether or not the Corporation would have the power to indemnify him or her against such liability under the provisions of this ARTICLE VII.

SECTION 8. Severability. If this Article or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each director or officer and may indemnify each employee or agent of the Corporation as to costs, charges and expenses (including attorneys' fees), judgments, fines and amounts paid in settlement with respect to any action, suit or proceeding, whether civil, criminal, administrative or investigative, including an action by or in the right of the Corporation, to the fullest extent permitted by any applicable portion of this ARTICLE VII that shall not have been invalidated and to the fullest extent permitted by applicable law.

ARTICLE VIII

GENERAL PROVISIONS; DIVIDENDS

SECTION 1. Dividends. Subject to the provisions of the Amended and Restated Certificate of Incorporation relating thereto, if any, dividends may be declared by the Board at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property or in

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shares of the capital stock, subject to any provisions of the Amended and Restated Certificate of Incorporation. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve fund to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purpose as the directors shall think conducive to the interest of the Corporation, and the directors may modify or abolish any such reserve in the manner in which it was created.

SECTION 2. Checks. All checks, drafts, bills, demands for money and notes of the Corporation or other orders or payment of money shall be signed by such officer or officers or such other person or persons as the Board may from time to time designate and, in the absence of such designation, such checks, drafts, bills, demands for money and notes of the Corporation or other orders or payment of money shall be signed by the Chief Executive Officer, President, Chief Financial Officer or any Vice President of the Corporation.

SECTION 3. Fiscal Year. The fiscal year of the Corporation shall be fixed by resolution of the Board.

SECTION 4. Seal. The corporate seal shall have inscribed thereon the name of the Corporation and the words "Corporate Seal, Delaware" and the date of incorporation. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any manner reproduced.

SECTION 5. General and Special Bank Accounts. The Board may authorize from time to time the opening and keeping of general and special bank accounts with such banks, trust companies or other depositories as the Board may designate or as may be designated by any officer or officers of the Corporation to whom such power of designation may be delegated by the Board from time to time. The Board may make such special rules and regulations with respect to such accounts, not inconsistent with the provisions of these By-laws, as it may deem expedient.

SECTION 6. Loans. Such of the officers of the Corporation as shall be designated from time to time by any resolution adopted by the Board of Directors and included in the minute book, and in the absence of any such designation, the Chief Executive Officer, President, Chief Financial Officer or any Vice President of the Corporation shall have the power, with such limitations thereon as may be fixed by the Board of Directors, to borrow money in the Corporation's behalf, to establish credit, to discount bills and papers, to pledge collateral and to execute such notes, bonds, debentures or other evidences of indebtedness, and such mortgages, trust indentures and other instruments in connection therewith.

SECTION 7. Execution of Documents. The Chief Executive Officer, President or any Vice President of the Corporation may, in the Corporation’s name, sign all deeds, leases, contracts or similar documents that may be authorized by the Board of Directors, unless

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otherwise directed by the Board of Directors, otherwise provided herein or in the Corporation's Amended and Restated Certificate of Incorporation, or as otherwise required by law.

ARTICLE IX

AMENDMENTS OF BY-LAWS

The Board shall have the express power, without a vote of stockholders, to adopt any By-law, and to amend, alter or repeal the By-laws of the Corporation, except to the extent that the By-laws or the Amended and Restated Certificate of Incorporation otherwise provide. The Board may exercise such power upon the affirmative vote of a majority of the entire Board. Stockholders may adopt any By-law, or amend, alter or repeal the By-laws of the Corporation, upon the affirmative vote of the holders of at least a majority of the votes entitled to be cast by the holders of all then outstanding voting shares of the Corporation, voting together as a single class.

ARTICLE X

CONSTRUCTION

In the event of any conflict between the provisions of these By-laws as in effect from time to time and the provisions of the Amended and Restated Certificate of Incorporation of the Corporation as in effect from time to time, the provisions of such Amended and Restated Certificate of Incorporation shall be controlling.

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EX-10

Exhibit 10.23

FIRST AMENDMENT TO

ESI EXCESS PENSION PLAN, 2008 RESTATEMENT

This First Amendment to the ESI Excess Pension Plan, 2008 Restatement ("Plan") is adopted by ITT Educational Services, Inc. ("ITT ESI").

Recitals

A. ITT ESI originally established the Plan in June of 1998.

B. The Plan was restated in its entirety, effective as of January 1, 2008.

C. ITT ESI now wishes to amend the Plan further.

Amendment

Effective January 1, 2008, Section 4.02 of the Plan is amended as follows:

Section 4.02. Form and Timing of Payment.

(a)A Member's benefit will be paid in the form of a lump sum cash payment.

(b)Except as provided in Subsections (c) and (d), a Member's benefit under the Plan will be paid within sixty (60) days following the Member's Separation From Service.

(c)If a Member is a Specified Employee on the date of his Separation From Service, then except as provided in Section 4.03, the Member's benefit will be paid on the first day that is six (6) months after the date on which the Member's Separation From Service occurs.

(d)If a Member's Separation From Service occurred prior to January 1, 2008, and payment of the Member's benefit under the Plan did not occur or commence by December 31, 2007, then the Member's benefit under the Plan will be paid on April 1, 2009.

This First Amendment to ESI Excess Pension Plan, 2008 Restatement is executed on behalf of ITT Educational Services, Inc. by its duly authorized officer this 26th day of June, 2008.

ITT EDUCATIONAL SERVICES, INC.

By:	/s/ Nina Esbin
	(Signature)
	Nina Esbin
	(Printed)
	Sr. Vice President Human Resources
	(Title)

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EX-31

Exhibit 31.1

CERTIFICATION PURSUANT TO

RULE 13a–14(a)/15d–14(a) OF THE

SECURITIES EXCHANGE ACT OF 1934

I, Kevin M. Modany, certify that:

1. I have reviewed this quarterly report on Form 10-Q of ITT Educational Services, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)     Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)     Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)     Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)     All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)     Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: July 24, 2008

/s/ Kevin M. Modany

Chief Executive Officer

EX-31

Exhibit 31.2

CERTIFICATION PURSUANT TO

RULE 13a–14(a)/15d–14(a) OF THE

SECURITIES EXCHANGE ACT OF 1934

I, Daniel M. Fitzpatrick, certify that:

1. I have reviewed this quarterly report on Form 10-Q of ITT Educational Services, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)     Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)     Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)     Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)     All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b)     Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: July 24, 2008

/s/ Daniel M. Fitzpatrick

Chief Financial Officer

EX-32

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of ITT Educational Services, Inc. (the "Company") on Form 10-Q for the period ending June 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Kevin M. Modany, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Kevin M. Modany

Chief Executive Officer

July 24, 2008

EX-32

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of ITT Educational Services, Inc. (the "Company") on Form 10-Q for the period ending June 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Daniel M. Fitzpatrick, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Daniel M. Fitzpatrick

Chief Financial Officer

July 24, 2008