WHEREAS , Employee shall not participate in the MICP during the Company’s fiscal year that will end on January 31, 2007; and

WHEREAS , the Company and Employee have agreed with respect to certain future obligations of Employee to the Company, including his activities during the Transition Period, confidentiality, non-competition and cooperation; and

WHEREAS , Employee and S&S desire to avoid the expense, delay, and uncertainty attendant to any claims that may arise from Employee’s service with and termination from his positions and employment with S&S; and

WHEREAS , Employee desires to release S&S, its predecessors and successors in interest, and its employees, officers, directors, shareholders, agents and representatives, past and present, and, except to the extent specifically provided herein, all employee benefit plans sponsored by S&S (collectively, the “ S&S Parties ” and each individually, an “ S&S Party ”), individually and collectively, from all claims and causes of action and damages, if any, he has or may have against S&S and/or any of the S&S Parties; and

WHEREAS , S&S desires to release Employee from all claims or causes of action, if any, it may have against Employee; and

WHEREAS , Employee and S&S therefore desire to establish their respective rights and obligations for the future.

NOW, THEREFORE, in consideration of the following mutual covenants and promises, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Employee and S&S hereby agree as follows:

1.                                       RESIGNATION:   Employee hereby resigns from his positions as Senior Vice President, Chief Financial Officer and Treasurer of the Company. Employee and S&S agree, however, that he shall continue to be an employee of the Company at his current salary rate to and through the Separation Date at which time his employment shall automatically terminate. Employee acknowledges and agrees that he has no authority to and will not act for any of the S&S Parties in any capacity on or after the Separation Date and will no longer be in charge of the Company’s financial affairs after the date hereof. Employee further acknowledges and agrees that S&S has to date fully paid his regular salary as it has become payable to date, less customary withholding for taxes and applicable deductions, and that such payment is in full satisfaction of all wages (other than vacation pay) owed him by S&S as of the date hereof.

2.                                       CONSIDERATION:  In consideration for Employee’s termination pursuant to this Agreement and his other promises made herein and in full satisfaction of all (i) all amounts applicable to payment for the non-competition agreements of Employee contained in Section 6 of this Agreement, and (ii) all amounts owed and earned by reason of Employee’s contribution to the Company in the management of the affairs of the Company and in the Company’s successful efforts leading to the pending sale of the Divisions to Ansary, the Company agrees to pay Employee the aggregate amount of $974,000 (the “ Additional Compensation ”).

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The payment of the Additional Compensation is subject to the following conditions having been met and the Additional Compensation will not be made unless such conditions are satisfied:

a.                                        the closing of the sale of the Divisions (the “ Closing ”) shall have occurred prior to January 31, 2006; and

b.                                       Employee shall have carried out his duties and responsibilities during the Transition Period in good faith and with appropriate care and attention as reasonably directed by the Company’s President and Chief Executive Officer;

c.                                        Employee shall have satisfied his cooperation obligations specified in Section 13; and

d.                                       a Change in Control shall have occurred by December 31, 2006.

The Additional Compensation shall be paid to Employee on the later of (1) the day following the date that is six months from the date of his separation from service from the Company (within the meaning of Section 409A of the Internal Revenue Code of 1986, as amended (the “ Code ”)) or (2) the date of the Change in Control.

The payment of the Additional Compensation shall be net of customary withholding for taxes and applicable deductions imposed by law or permissible elections made by Employee.

For purposes of this Section 2, the term “ Change in Control ” means:

(I)                                     The acquisition by any Person of beneficial ownership within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”) of 35% or more of either (A) the then-outstanding shares of common stock of the Company (the “ Outstanding Company Common Stock ”) or (B) the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of director (the “Outstanding Company Voting Securities”); provided, however, that, for purposes of this Section 2, the following acquisitions shall not constitute a Change in Control:  (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any of its Affiliates or (iv) any acquisition by any corporation pursuant to a transaction that complies with clauses (III)(A), (III)(B) and (III)(C);

(II)                                 The individuals who, as of the date hereof, constitute the Board of Directors of the Company (the “ Incumbent Board ”) cease for any reason to constitute at least a majority of the Board of Directors of the Company; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company’s stockholders, was approved by a vote of at lease two thirds (2/3) of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of Person other than the Board of Directors of the Company; or

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(III)                             The consummation of a reorganization, merger, statutory share exchange or consolidation or similar corporate transaction involving the Company or any of its subsidiaries, a sale or other disposition of all or substantially all of the assets of the Company, or the acquisition of assets or stock of another entity by the Company or any of its subsidiaries (each, a “ Business Combination ”), in each case unless, following such Business Combination, (A) all or substantially all of the individuals and entities that were the beneficial owners of the Outstanding Company Stock and the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of the then-outstanding shares of common stock and the combined voting power of the then-outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation that, as a result of such transaction, owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership immediately prior to such Business Combination of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 35% or more of, respectively, the then-outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then-outstanding voting securities of such corporation, except to the extent that such ownership existed prior to the Business Combination, and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement or of the action of the Board of Directors of the Company providing for such Business Combination; or

(IV)                             The approval by the stockholders of a complete liquidation or dissolution of the Company.

For purposes of this Section 2, the term “ Person ” shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (1) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company; and “ Affiliate ” shall have the meaning set forth in Rule 12-b-2 promulgated under Section 12 of the Exchange Act;

3.                                       ACCRUED SALARY AND VACATION PAY:  In addition, S&S agrees to pay to Employee, within 30 days of the Separation Date, any accrued but unpaid salary (at the rate currently in effect) through the Separation Date and the accrued unpaid vacation due him under the S&S vacation policy through the Separation Date.

4.                                       STOCK OPTIONS:  Any stock options in the name of Employee held on the Separation Date (the “ Stock Options ”) shall be governed by the terms of the applicable stock

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option agreement and stock option plan; provided, however, that it is specifically acknowledged that the Stewart & Stevenson Services, Inc. 1988 Nonstatutory Stock Option Plan permits, at the Compensation Committee’s discretion, (i) the acceleration of the vesting of the Stock Options, to the extent not previously vested, immediately upon the occurrence of the Separation Date and (ii) the exercise by Employee thereof at any time after the Separation Date and prior to 3:00 p.m. December 31, 2006. All agreements with respect to the Stock Options shall be amended as of the date hereof to provide to Employee the full benefits of such provisions of such Stock Option Plan and such discretionary action by the Compensation Committee upon, and subject to, the occurrence of the Closing. Said stock options and all rights or entitlement thereto are not released or waived by this Agreement.

5.                                       NON-DISCLOSURE:  S&S and Employee agree as follows:

a.                                        Employee acknowledges that he has held a position of trust and confidence with S&S and that S&S has provided him with Confidential Information, as defined in this section, through the Closing Date.

b.                                       Employee agrees that he shall not directly or indirectly disclose any Confidential Information unless such disclosure is (i) to an employee of S&S; or (ii) authorized in writing by S&S; or (iii) required by any court or administrative entity or (iv) to Ansary or his representatives or permitees after the Closing Date and which relates solely to the Divisions.

c.                                        Employee acknowledges and agrees that these non-disclosure agreements shall survive any termination of this Agreement or the completion of payments under this Agreement and shall be fully enforceable by S&S or its successor or assignee subsequent to the termination of Employee’s employment.

d.                                       For purposes of this Agreement, the term “Confidential Information” shall be defined as information in the possession of, prepared by, obtained by, or compiled by S&S that is not generally available to the public. “Confidential Information” as so defined shall include information pertaining to, but not limited to:  (i) financial information of S&S, including but not limited to information pertaining to product and asset cost data and projections, actual and expected revenues and expenses, asset valuations and liabilities, budgetary data, profit and expense margin data, existing and projected manufacturing and inventory capacities, company and personnel strengths and weaknesses, and other confidential and proprietary information related to the products or services of S&S, and the rights and obligations of S&S, and said information includes, but is not limited to, S&S’s proposals, plans, budgets and strategies with respect to its contracts with the U.S. Army as to the family of medium tactical vehicles and related matters; (ii) the identity of S&S’s suppliers, vendors, customers, clients, and prospects; (iii) the business, finances and special needs of S&S, their customers, clients, and prospects; (iv) S&S’s policies and procedures; (v) S&S’s personnel and compensation plans and employee benefits; (vi) confidential market studies; (vii) pricing studies, information and analyses; (viii) current and prospective business projections; (ix) business plans and strategies; (x) financial statements and information; (xi) special processes, procedures and services of S&S; and (xii) the trade secrets of S&S.

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e.                                        Employee acknowledges and agrees that this Confidential Information, if disclosed, would place S&S at a competitive disadvantage. Employee further agrees that S&S takes reasonable steps to maintain the confidentiality of this Confidential Information, and that the Confidential Information is in fact secret or substantially secret.

6.                                       NON-COMPETITION:

a.                                        Business Relationships, Goodwill and Confidential Information. Employee acknowledges and agrees that as an officer and representative of S&S, Employee is and has been responsible for building and maintaining business relationships and goodwill with current and future customers, clients and prospects on a personal level. Employee acknowledges and agrees that this responsibility has created a special relationship of trust and confidence between Employee and S&S and between Employee and the customers, clients and prospects of S&S. In addition, Employee acknowledges and agrees that S&S has disclosed to him on a regular basis the Confidential Information of S&S. As a result, there is a high risk and opportunity for Employee to misappropriate these relationships, the goodwill existing between S&S and such persons and entities and the Confidential Information of S&S. Employee acknowledges and agrees that it is fair and reasonable for S&S to take steps to protect itself from the risk of such misappropriation.

b.                                       Consideration. Employee acknowledges and agrees that S&S is hereby providing him with substantial, valuable consideration for the agreements set forth in this section, including compensation and benefits as described in this Agreement. Employee acknowledges and agrees that this constitutes fair, adequate and sufficient consideration for the agreements set forth in this section.

c.                                        Exclusion of Activities as to Divisions Business from Non-Competition Obligations. Notwithstanding any other provision hereof, Employee’s activities in respect of (i) Ansary after the Closing Date and (ii) his continued employment by Ansary or any successor thereof after the Separation Date, solely in both cases in respect of the business of the Divisions as they existed on the Closing Date, and solely in the case of clause (ii) to the extent he remains in the employ of Ansary or any successor thereof as to the Divisions, shall be excluded from the operation of the obligations otherwise applicable to Employee under this Section 6 of this Agreement.

d.                                       Scope of Non-Competition Obligation. In consideration for the valuable consideration described above and subject to the exclusion described above:

(i)                                      Employee acknowledges and agrees that during the Transition Period and for two years following the Separation Date, Employee will not solicit, contact, or communicate with any person, company, or business that was a client, customer, or prospect of S&S, and that S&S personally solicited, contacted, communicate